US Dollar Forecast to Drop Against Euro and Japanese Yen on Extreme Sentiment

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

EURUSD - Currency trading crowds have recently gone heavily net-short the Euro against the US Dollar, giving a strong contrarian signal to buy the Euro/US Dollar pair. Indeed, the EUR/USD SSI ratio currently stands at -1.63 as 62 percent of traders are currently short. This was a fairly pronounced shift from yesterday, as short positions surged 62.4 percent on the Euro’s test of clear resistance. Typically such shifts signal that a currency pair is likely to break out of its range, and indeed our SSI-based trading signals went long the Euro/US dollar across three separate trading strategies. The heavily net-short SSI ratio gives a continued contrarian signal to buy the Euro/US Dollar.

USDJPY - Forex trading crowds continue to buy into US Dollar/Japanese Yen declines, and our contrarian SSI has given a steady contrarian signal to sell the USD/JPY. The ratio of long to short positions in the USD/JPY stands at a whopping 2.11 as nearly 68% of traders are long. Yesterday, the ratio was at 1.30 as 56% of open positions were long. The increasingly extreme positioning on the forex pair suggests that “the crowd” has not given up hope of a reversal, and typically we have seen that the USD/JPY will continue its trend until the crowd capitulates. The SSI is a contrarian indicator and signals more USDJPY losses. Monitor our SSI-based USD/JPY trading strategies on DailyFX+.

GBPUSD - British Pound speculators continue to bet that the GBP/USD will bounce through short-term trade, but sentiment is thus far not giving us a clear forecast of what to expect through upcoming price action. The ratio of long to short positions in the GBP/USD stands at 1.24, as 55 percent of traders are currently long the British Pound against the US Dollar. Though this shows that the trading crowd maintains a bullish bias, sentiment is thus far not extreme enough to give us a clear contrarian signal to go short the GBP/USD. In fact, sentiment is thus far unchanged from yesterday when the same ratio stood at an identical 1.24. Discuss the British Pound with other traders in our forex forum.

USDCHF - Forex trader sentiment has recently turned bullish the US dollar against the Swiss Franc—giving a clear contrarian signal to sell the USD/CHF pair. In fact, trading crowds had remained net-short the USD/CHF for a nearly-uninterrupted 8-month stretch before flipping their bias through recent price action. The ratio of long to short positions in the USD/CHF stands at a nearly-neutral 1.06, as 51 percent of traders are long. Typically this is not enough of an extreme bias to warrant attention, but the clear shift in positioning does favor USD/CHF weakness. In fact, yesterday’s ratio was at -1.74 as 63% of open positions were short. The SSI is a contrarian indicator and signals more USDCHF losses. Our SSI-based trading signals accordingly sold the USD/CHF at 1.2048 and 1.1949.

USDCAD -  The ratio of long to short positions in the USDCAD stands at 1.07 as nearly 52% of traders are long. Yesterday, the ratio was at -1.05 as 51% of open positions were short. In detail, long positions are 1.7% higher than yesterday and 50.6% weaker since last week. Short positions are 8.9% lower than yesterday and 11.1% stronger since last week. Open interest is 3.7% weaker than yesterday and 56.7% below its monthly average. The SSI is a contrarian indicator and signals more USDCAD losses. 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.

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