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Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

2012-11-01 15:09:00
David Rodriguez, Head of Business Development
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FXCM Speculative Sentiment Index (SSI)

www.dailyfx.com

www.fxcm.com

drodriguez@dailyfx.com

By David Rodriguez, Quantitative Strategist,

Retail forex traders remain broadly long the US Dollar (ticker: USDOLLAR) against major counterparts, but a sharp pullback in positioning warns of potential reversals in key USD pairs.

It will be important to watch US Dollar reactions to tomorrow’s highly-anticipated US Nonfarm Payrolls data release. Current forex sentiment warn that the Greenback may be near a significant turning point against major counterparts.

Weekly retail forex sentiment summary:

Currency

Last Week

Present*

% Long

% Change inLong Positions

% Change in Short Positions

% Change in Total Positions

Signal

EURUSD

-1.50

-1.24

45.0%

17.2%

-3.7%

4.6%

Mixed

GBPUSD

-2.54

-2.68

27.0%

1.3%

7.0%

5.4%

Bullish

USDJPY

2.90

3.61

78.0%

-6.7%

-25.2%

-11.4%

Bearish

USDCHF

1.25

-1.14

47.0%

-14.6%

21.2%

1.3%

Bullish

USDCAD

1.76

2.05

67.0%

-0.9%

-14.7%

-5.9%

Bearish

GBPJPY

-1.93

-1.68

37.0%

4.3%

-8.9%

-4.4%

Bullish

US_Dollar_Forecast_Brightens_as_Sentiment_Shifts__body_Picture_7.png, Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

View our sentiment-based forecasts for major forex pairs below:

US_Dollar_Forecast_Brightens_as_Sentiment_Shifts__body_Picture_6.png, Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

EURUSD - Our Euro forecast versus the US Dollar (ticker: USDOLLAR) remains bullish, as our proprietary retail forex trading sentiment indicator shows the majority of traders remain short EURUSD. The ratio of long to short positions in the EURUSD stands at -1.24 as approximately 45% of traders are long. Yet it is important to note that long positions are 23.6% higher than yesterday and 17.2% above levels seen last week. Short positions are 5.2% lower than yesterday and 3.7% below levels seen last week.

We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the EURUSD may continue higher. Yet we’ve seen a noteworthy moderation in crowd sentiment, and the pullback gives a further mixed trading bias.

US_Dollar_Forecast_Brightens_as_Sentiment_Shifts__body_Picture_5.png, Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

GBPUSD – Retail forex traders have sold aggressively into recent British Pound strength versus the US Dollar (ticker: USDOLLAR), and a contrarian view of crowd sentiment leaves us in favor of further GBPUSD gains. The ratio of long to short positions in the GBPUSD stands at -2.68 as approximately 27% of traders are long.

In detail, long positions are 7.9% lower than yesterday and 1.3% above levels seen last week. Short positions are 11.9% higher than yesterday and 7.0% above levels seen last week

We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the GBPUSD may continue higher. Current SSI is lower than yesterday and lower from last week. The combination of current sentiment and recent changes gives a further bullish trading bias.

US_Dollar_Forecast_Brightens_as_Sentiment_Shifts__body_Picture_4.png, Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

USDJPY – Retail forex trading crowds remain long the US Dollar (ticker: USDOLLAR) versus the Japanese Yen, but a significant shift in positioning suggests that the USDJPY set a significant bottom through September. The ratio of long to short positions in the USDJPY stands at 3.61 as approximately 78% of traders are long. Yesterday Yet long positions are 2.3% lower overnight while short interest has gained 17.0 percent through the same stretch.

We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long would normally give us signal that the USDJPY may continue lower. Yet retail trading crowds were far more long just several weeks ago, and the substantial shift in sentiment gives us contrarian signal that the USDJPY likely set a significant bottom.

US_Dollar_Forecast_Brightens_as_Sentiment_Shifts__body_Picture_3.png, Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

USDCHF – Retail forex traders remain aggressively long US Dollar (ticker: USDOLLAR) against the Swiss Franc, and our contrarian view of crowd sentiment leaves us in favor of further losses. Crowds first turned net-long USDCHF when the pair traded below the SFr 0.95 mark, and the fact that most retail traders remain long gives us reason to expect continued USD weakness.

The ratio of long to short positions in the USDCHF stands at 2.05 as approximately 67% of traders are long. Yesterday the ratio was 2.30; 70% of open positions were long. In detail, long positions are 5.1% lower than yesterday and 0.9% below levels seen last week. Short positions are 6.6% higher than yesterday and 14.7% below levels seen last week.

We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long gives signal that the USDCHF may continue lower. Current SSI is lower than yesterday and higher from last week. The combination of current sentiment and recent changes gives a further mixed trading bias.

US_Dollar_Forecast_Brightens_as_Sentiment_Shifts__body_Picture_2.png, Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

USDCAD – An aggressive shift in forex retail crowd positioning warns that the US Dollar (ticker: USDOLLAR) may be staging a larger rally against the Canadian Dollar. The ratio of long to short positions in the USDCAD stands at -1.14 as approximately 47% of traders are long.

n detail, long positions are 0.5% lower than yesterday and 14.6% below levels seen last week. Short positions are 2.0% higher than yesterday and 21.2% above levels seen last week.

We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the USDCAD may continue higher.

US_Dollar_Forecast_Brightens_as_Sentiment_Shifts__body_Picture_1.png, Forex Analysis: US Dollar Forecast Brightens as Sentiment Shifts

GBPJPY – The ratio of long to short positions in the GBPJPY stands at -1.68 as approximately 37% of traders are long. Yesterday the ratio was -1.27; 44% of open positions were long. In detail, long positions are 10.1% lower than yesterday and 4.3% above levels seen last week. Short positions are 19.2% higher than yesterday and 8.9% below levels seen last week.

We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the GBPJPY may continue higher.

How do we interpret the SSI? Watch an FXCM Expo Presentation that explains the SSI.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To receive the SSI report and other research from this author, sign up for his e-mail Distribution List via this link.

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