The CFTC's new – and revised - reduced leverage in forex will be in place this month.

The impact of reduced leverage in the forex markets has been received as less of a thud and more of a sigh. The new rules have been met with mixed reactions, but are a bit less of a blow to the foreign exchange futures industry than initially expected.

On August 30, the Commodity Futures Trading Commission (CFTC) released its final regulations concerning off-exchange retail foreign currency transactions. Going into effect on October 18, the rules provide the CFTC with broad authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail foreign exchange (forex) transactions.

Most importantly, the rules will limit leverage available to retail forex traders to 50-1 on major currency pairs and 20-1 for all others. The final rules will go into effect on Oct. 18 as proscribed by the Dodd-Frank Act, Consumer Protection Act and the Food, Conservation, and Energy Act of 2008.

Proposed Rules vs. Reality

The CFTC alarmed the forex community in January when their rule proposal for retail forex transactions included limiting leverage to 10-1. This incited a flood of letters of protest as retail brokerages and traders said limiting leverage to 10-1 would kill the market, or send it overseas. The new rule by the CFTC allows a leverage of up to 50:1 on major pairs, and 20:1 on minors. Also in Japan, the limit is 50:1, and will be reduced to 25:1 next year. This is less than the classic 100:1 leverage that is common to forex trading, and less than the NFA limit of 100:1.

The new rules also require the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), and sets requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital and other business conduct and operational standards.

"These rules of the road will help protect the American public in the largest area of retail fraud that the CFTC oversees: retail foreign exchange," CFTC Chairman Gary Gensler said in a press release on the organization's website. "All CFTC registrants involved in soliciting and selling retail forex contracts to consumers will now have to comply with rules to protect the investing public. This is also the first final rule that the Commission has published to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. We look forward to publishing additional rules to protect the American public."

In reaction to Gensler's statements, one forex broker in an online community commented, "If Mr. Gensler thinks that making the US forex industry uncompetitive is making the American public safer then let's see where the US money will be deposited from now on," commented one forex broker online. "I bet that most of it will go offshore."

Questions or Comments on This Article

We are looking to sell the EUR/USD. The EUR/USD has started to trend down and it looks like it is going to break the support level at 1.3813 (green arrow). If the EUR/USD candlestick closes below the 1.3813 (green arrow) level you should enter a short position. Place a stop loss at 1.4018 (yellow arrow). We would start taking profits at the Fibonacci Levels (blue arrows).

If you would like to receive some of my short-term and day trade recommendations in the currency markets feel free to contact me at 312-373-5881 or jshelton@rjofutures.com.

At the midpoint of Tuesday's trading session, December Comex Gold, GCZ10, is trading at 13355, down roughly $36 for the day. A sharp morning spike in US dollar strength prompted what is probably a necessary selloff in most commodities, especially metals.

Longer-term sentiment remains strongly bullish in nature, and the over-bought gold contracts were due for a correction. This drawback presents an opportunity to reenter the December contract at a significantly lower level and entrench for the corresponding upside movement.

Pay close attention to US Dollar-related fundamentals to safely gauge the duration of this correction. This may be a short spike to the downside or signify the substantial reversal foreseen by certain industry "experts."

If you'd like to learn more about futures trading or the metals market specifically, please contact RJO Futures Trading Consultant John Kennedy at 866-397-8194 or jkennedy@rjofutures.com.

This week's comment finds sugar in solid territory in terms of both technical and fundamental information. At the time of this writing sugar was up 66 points in the face of a commodity-crushing short covering rally in the dollar index which was up more than 100 points. Jawboning from China regarding early sale of some of their reserves helped to pressure the market for a few hours on Monday October 18th. The effect was short-lived and the market closed up almost 50 points for the day. So it goes in sugar these days. Even in the face of outside market pressure, political pressure, or technical weakness, sugar finds support and continues to rally. The trade views the potential for weather-inspired supply trouble in Brazil, the leading sugar exporter, as the lead fundamental. The focus also remains on China and her apparently insatiable appetite for all things commodity. It is difficult to see what could stop this market testing the highs from early 2010. Trend followers have stops in the 2350 and 2150 area basis the March contract. At this point it would take significant weakness to force a large-scale fund trader to exit from their rather sizeable, 187 thousand contracts or so, long position. We look for continued choppy range bound trade as the only way for those stops to be dragged up in the next few weeks.

The weekly chart below shows what happened the last time the sugar market ran up to 30. It is tough business to try and pick a top in a market demonstrating such a strong uptrend. We trust momentum traders will continue to get rewarded for buying weakness on the rare occasion it should occur. But for those of us with less risk capital, buying out of the money puts might be the way to go. For example a 2100 March sugar put can be had as of this writing for 50 points (50 x 11.20 = $560.00). Astute options traders will immediately look at the delta on that option, which is -.10, and wonder how that could be a good idea. A delta of -.10 indicates that the option price will appreciate 10% for every one point move in the underlying futures. If sugar drops 100 points the value of the option will only increase by 10 points. The break from the early Jan high 30.40 down to 20 took six weeks. Even if our delta remained at -.10 (which of course it won’t; the delta will go up if the market comes down), a move of that magnitude would provide a nice return on what we paid for the option. The point of this highly theoretical and incomplete exercise is to show that sometimes, in markets like sugar that can and do move dramatically, it can make sense to purchase out of the money options. It takes patience (the March options expire in 119 days) and risk capital to attempt such strategies. It is wise for risk management purposes to understand the fundamental situation may not change in the 119 days before the option expires. It is also helpful to note that about 20 days out from expiration time value begins to decay rather quickly. Should China and other emerging markets continue to gobble up sugar like an American grade-schooler or should supply issues persist in the face of this demand then our options will expire worthless. One way to avoid owning options that are worth next to nothing is to exit when the value of the option is half what we paid for it. This would allow us to theoretically attempt to cap our risk at 25 points on an option that we paid 50 points for. If sugar should continue up to 30 there may be opportunities for traders with patience and the appropriate risk capital to position for an eventual break.

If you'd like to learn more about futures trading or the sugar market specifically, please contact RJO Futures Senior Trading Broker Joe Nikruto at 800-453-4494 or jnikruto@rjofutures.com.

Sugar, Weekly

Source: CQG

After a limit-down day on October 15th, the market appears to be finding some support in the 10987 / 10857, the latter reached on the 12th. Looking at the weekly chart, support appears to come in around 9531, but risking to those levels is roughly $8300 (from current levels). With such a hard pill to swallow a fella (or gal) can find themselves buying 11300 December calls for roughly $2,100 apiece. If you want to get cute and spread it up, a 11300/12000 December call spread can be bought for roughly $1,000 a piece, maxing out your potential profit of $3500, should cotton settle above 12000 by November 12th.

Fundamentally speaking, a Bloomberg article stated: "Prices soared after demand in China, the world's biggest consumer, climbed, while inventories plunged in the US, the largest exporter. China is forecast to import 13 million bales in the season that began Aug. 1, up 19 percent from last year, the US Department of Agriculture said Oct. 8. A bale weighs 480 pounds, or 218 kilograms." http://www.bloomberg.com/news/2010-10-15/cotton-futures-decline-from-record-as-dollar-rebounds-commodities-fall.html

The above strategy is suggested for the bulls in the crowd, while the bears might look at some March 8300 puts at 60 ($300). It is possible you won't get filled on it today but your RJO broker would be happy to work it GTC in the pit for you.

If you'd like to learn more about futures trading or the cotton market specifically, please contact RJO Futures Trading Consultant Mike Rataj at 800-453-4494 or mrataj@rjofutures.com.

Weekly December Cotton

Source RJO Vantage

Brazil and Vietnam are expecting large increases from this season's crops, which appears to have put continued pressure on December coffee. The Hightower Group has also reported that due to recent heavy rains, "Columbia may see a decline from what was expected to be a much larger crop last season". December coffee was able to garner solid support at the 171.00 level and has since rallied strongly but failed to break the corrective high of 190.90 from September 28th. It will be interesting to see if we can break through this critical area of resistance.

If you'd like to learn more about futures trading or the coffee market specifically, please contact RJO Futures Trading Consultant Adam Tuiaana at 800-453-4494 or atuiaana@rjofutures.com.

The million dollar question every morning is the dollar index chart. As of this writing, As of this writing, the dollar index is sharply higher and if ever there was a morning that soybeans and soybean meal could be sharply lower it would be today. Instead right after the 9:30 am opening, soybeans and soybean meal find buyers at lower levels and trade higher for the day. You have to be impressed with this price action. Chinese soy demand is extraordinary. A good soaking rain in Brazil and its major soy areas can be the start of some weakness in soybeans.

Corn is a phenomenal story and a phenomenal market. With every third bushel of corn we produce going to ethanol, we need 5 to 6 million more acres of corn planted next year. Goldman Sachs says corn is going to rise to $6 and stay above there. We are cautious in the corn market - you have to feed a bull market every day. Given the funds' large net long position, there is a risk of profit taking at any time. We think corn can fill the gap at 5280; we just do not know when. We wonder if corn can fill the gap at 5024. Corn is perhaps the best market for filling gaps. Also the weakness in the wheat market can drag corn lower. Keep a close eye on export sales every week to see if the corn price discovery is rationing demand.

November options expire Friday with largest open interest around $5.60 strike in corn and $12 strike in beans. Bottom line, the long-term fundamentals remain positive in the grain markets. However, in the absence of any new developments in the near term, the grain markets are subject to any hiccups of financial markets, which for today are clearly caught off guard with Beijing's resolve to slow economic growth in the People's Republic of China.

If you'd like to learn more about futures trading or the agricultural market specifically, please contact RJO Futures Senior Trading Broker Stephen Davis at 800-367-7181 or sdavis@rjofutures.com.

Dollar Index Continuation

Source CQG, Inc. (c) 2009. All rights reserved worldwide.

Corn, Daily Pit Session

Source CQG, Inc. (c) 2009. All rights reserved worldwide.

With US gasoline prices carrying a premium to ethanol prices for much of 2010, US refineries and terminal operators have been aggressively expanding blending of ethanol into their national distribution chain to remain price competitive and boost profitability. These economics helped push ethanol utilization into 83% of the US gasoline supply recently, but the recent jump in ethanol prices – due to corn's sharp advance after this month's sharply lower US corn production - could reduce the coming year's discretionary blending if ethanol prices continue to be higher than unleaded gasoline for an extended period.

This spring's and summer's gasoline premiums of 40 to 80 cents per gallon over alcohol, along with the 45 cent blending credit received by wholesalers, helped advance US ethanol output to over 1 billion gallons per month during the final half of corn's September to August crop year. This strong demand has likely produced 12.61 billion gallons of ethanol during corn's 2009/10 crop year; a 22% increase in output over the previous crop year.

Earlier this summer, the US Energy Department began releasing an average daily ethanol production number as a part of the weekly energy statistics. These production numbers have averaged about 2% below the official monthly output numbers for June and July, but the timeliness of these numbers in monitoring the activity of 35% of the US corn demand vs. having to wait 60 days before knowing a final monthly output have been much appreciated. With September's average daily production rate near August's strong level of 856,000 barrels per day, it appears that corn's ethanol demand is continuing to remain strong as we begin the 2010/11 crop year.

The US EPA also announced last week that it had approved the blending of up to 15% ethanol (E15) in fuels for cars 2007 or newer after extensive testing by the agency. This is not a mandate for consumers or gas retailers to produce or utilize this fuel, but this agency didn't find any problems in using this fuel in the newer portion of the US gasoline burning transportation fleet. However, the lack of specific pump labeling details, concern about car warranty issues, and the high cost of installing blender pumps at retail outlets to offer this product will probably eliminate any significant boost from this higher blending limit until next spring or summer at the earliest. With only about 18% of US cars and light trucks now eligible to use this fuel, most oil companies haven't signaled they will even offer the fuel until the EPA possibly approves US vehicles from 2001-2006 (34% of U.S. fleet) to use the higher blend later this year.

With ethanol's blending tax credit (Veetec) and importing tariff expiring at the end of 2010, numerous ideas from dropping both programs to extending both for five years have been floated, but it appears that one-year extension of both programs will likely be the compromise which will be passed after the upcoming fall elections. The USDA and some in the industry are proposing a lower Veetec level but using this money to help gas retailers install blender pumps and support the building of Midwest ethanol pipeline to the East Coast.

With gasoline below ethanol prices, some discretionary blending could decline in some areas of the US, but with Renewable Fuel Standard increasing to 12.6 billion gallons in 2011, ethanol's corn demand for 2010/11 crop years isn't likely to slip below this year's 4.55 billion bu. which was used to produce this crop year's 12.6 billion gallons of ethanol. Given some late-crop year E15 blending and other discretionary blending when gasoline returns to a premium to ethanol, the current 4.7 billion bu. USDA corn ethanol usage for 2010/11 seems very accurate.

Questions or Comments on This Article

While our earlier efforts to capitalize on un-kinking or banging out dents in the CBOE Volatility Index® (VIX®) Futures forward curve have succeeded, last issue's effort to capitalize on a flattening of that same curve has proven more elusive.

Each article, I state that the trading history for VIX Index futures is limited and dominated by the 2008-2009 period. Consequently historical relationships are likely to change as the trading and understanding of the volatility markets matures. In the last issue, published October 5th, 2010, I suggested a trade designed to capitalize on a potential flattening of the forward-curve as the difference between longer- dated VIX Index futures and shorter dated futures had expanded to a historic extreme.

Source CFE/CBOE, Differential Research, LLC

Source CFE/CBOE, Differential Research, LLC

The difference between the November and March future has widened from $4.60 to $6.25, the April-May difference from $4.75 to $6.45 and the May-November from $5.10 to $6.45.

Source CFE/CBOE, Differential Research, LLC

The thesis of the trade was and remains that should the market continue to rise, volatility is likely to fall across the spectrum, and if volatility rises, short-term VIX futures should rise more than longer-dated futures. For the moment I suggest staying the course, increasing the position if position size allows or establishing a new position at today's levels.

Source CFE/CBOE, Differential Research, LLC

As we navigate the development of the volatility markets in what appears to be a "new normal" post 2008-2009 world it is important to note that this trade so far has demonstrated negative correlation with the equity market, which has risen during the period.

Questions or Comments on This Article

Do you have any questions or comments on this issue of eView—or anything else you'd like to discuss with our brokers?

When it comes to futures trading, what do YOU want to learn more about? If we already have a resource, we'll personally provide you access to it. If not, we might make it the topic of our next trading resource project.