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Euro Likely to Rally vs US Dollar on Clear Shift in Forex Sentiment

Thursday, 08 January 2009 14:41:48 GMT  |  David Rodri­guez, Quantitative Analyst and Antonio Sousa, Chief Strategist

EURUSD – Euro Likely to Rally vs US Dollar on Clear Shift in Forex Sentiment
USDJPY – US Dollar Forecast to Lose Further Against Japanese Yen

GBPUSD – British Pound Predicted to Rally Further vs US Dollar
USDCHF – Forex Sentiment Gives Little US Dollar/Swiss Franc Bias
USDCAD – Canadian Dollar Forecast Unclear Against US Dollar

While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in DailyFX Plus Forex Intraday Trading Signals

The SSI sought a EURUSD rally since 1.26 and was signaling a reversal around 1.60.  Find our more in the DailyFX Forex Forum

Historical Charts of Speculative Forex Trading Positioning

 

EURUSD – Forex trader positioning in the Euro/US Dollar has remained volatile, and speculators have recently flipped to net-short the EUR/USD through recent trade. The ratio of long to short positions in the EURUSD stands at -1.12 as nearly 53% of traders are short. This stands in contrast to yesterday when the ratio was at 1.22 as 55% of open positions were long. Short positions have gained significantly on the day—up 27.5 percent since yesterday and 14.8 percent increased since last week. The sudden jump in forex crowd short positions gives us a contrarian view that the Euro/US Dollar may continue to gain through the near term. Yet our SSI-based forex trading signals are currently flat the Euro/US Dollar after selling the pair aggressively through past weeks of price action.

 

USDJPY – Our sentiment-based forex trading strategies continue to aggressively sell the US Dollar/Japanese Yen currency pair, as a clear shift in forex positioning signals further USD/JPY losses are likely. The ratio of long to short positions in the USDJPY stands at 1.36 as nearly 58% of traders are long. Yesterday, the ratio was at 1.04 as 51% of open positions were long. In detail, long positions are 25.9% higher than yesterday and 24.7% weaker since last week. Short positions are 4.0% lower than yesterday and 28.2% weaker since last week. The SSI is a contrarian indicator and signals more USDJPY losses.

 

GBPUSD – Our forex trading strategies remain aggressively long the British Pound against the US Dollar, and recent shifts forex sentiment support further GBP/USD strength. The ratio of long to short positions in the GBPUSD stands at 1.07 as nearly 52% of traders are long. Yet short positions have surged 42.9% overnight and remain 33.9 percent stronger since last week. The forex trading crowd’s sudden shift towards short positions gives us a contrarian indicator that the GBP/USD may in fact continue to rally. Discuss the British Pound with other traders in our forex forum.

 

USDCHF – Outlook for the US Dollar against the Swiss Franc remains unclear due to sharp drops in trader open interest. The ratio of long to short positions in the USDCHF stands at 1.06 as nearly 51% of traders are long. Yesterday, the ratio was at 1.07 as 52% of open positions were long. In detail, long positions are 12.2% higher than yesterday and 5.5% stronger since last week. Short positions are 13.0% higher than yesterday and 42.6% weaker since last week. Yet overall trader open interest remains 47.9% below its monthly average. The SSI is a contrarian indicator and signals more USDCHF losses, but trader indecision gives us little confidence in said forecasts. All the same, our forex trading signals remain net-short the USD/CHF through recent trade.

 

USDCAD – Outlook for the US Dollar against the Canadian Dollar remains unclear on a sharp drop in trader open interest. The ratio of long to short positions in the USDCAD stands at 1.08 as nearly 52% of traders are long. Yesterday, the ratio was at 1.36 as 58% of open positions were long. In detail, long positions are 8.6% lower than yesterday and 60.6% weaker since last week. Short positions are 15.7% higher than yesterday and 31.9% weaker since last week. Open interest is 1.7% stronger than yesterday and 62.3% below its monthly average. The SSI is a contrarian indicator and signals more USDCAD losses, but extremely low open interest gives us little confidence in said forecasts. Tell us and other traders what you think in our forex forum.



How do we interpret the SSI? The FXCM SSI is based on proprietary customer flow information and is designed to recognize price trend breaks and reversals in the four most popularly traded currency pairs. The absolute number of the ratio itself represents the amount by which longs exceed shorts or vice versa. For example if the EURUSD ratio is 2.55, long customer orders exceed short orders by a ratio of 2.55 to 1. Conceptually similar to contrarian analyses using the CFTC IMM open position data or COT Report, the SSI provides an alternative approach that is both more timely and accurate in forecasting currency price movement. The SSI is a contrarian indicator that tells you how the market is weighted and where the trend may head. More long positions don't necessary suggest more confidence in the direction of the current trend. In general, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull market the more dangerous is to take additional shorts because many of those traders who just entered the markets are also leaving their protective stop losses just above the current price action.

Have any further questions about the SSI and forex positioning data? Ask the author David Rodríguez on our forex forum.

We love getting feedback on our reports. Tell us how we’re doing: E-mail the author of this report at drodriguez@dailyfx.com.

For information on an FXCM Managed Account that takes advantage of the SSI , please review our Sentiment Program at:  http://www.fxcmmanagedaccounts.com/ or call +1 646-432-2968.

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