Speculative US Dollar Short Positions Remain Elevated, Suggest Turn

[DailyFx]

Latest CFTC Release Dated July 31, 2007:





US Dollar Index: Implied net positioning turned up slightly from its lowest level since June 2006. The commercial index remains high, at above 90 (93 this week and 100 the last two weeks). Withs speculators extremely short and commercial hedgers, conditions are perfect for a bottom and reversal. We are expecting the dollar to begin at least a multi week rally soon.


EUR: Upside potential remains for the euro as the recent decline occurred without a sentiment extreme (which we define as JPercentile at or close to 100). However, since the euro consists of nearly 60% of the USD index (which shows bullish readings), we do not wish to remain bullish the EURUSD. We did mention last week that "the euro appears more attractive on the crosses, especially the EURGBP (since the sentiment extreme in the Pound suggests that the GBP will underperform)." The EURGBP has turned higher and we expect this to continue.


GBP: Speculative longs has declined from extreme levels along with price. It is likely that the Pound will continue to fall as reversals from sentiment extremes last longer than a few weeks (these declines usually last a few months).


CHF: The trend remains towards CHF buying following the sentiment extreme registered in June. This signals that the CHF should strengthen for an extended period. Sentiment is improving and the outlook for the CHF remains bullish, especially on the crosses.


JPY: On June 25th, we wrote "short positions are in the extreme range that has historically created tops in the USDJPY. Additional JPY losses (USDJPY gains) are possible but the psychological backdrop (extreme pessimism towards Yen) favors a turn and sizeable decline in the USDJPY". The USDJPY hit a nearly 5 wave year high that week and has sinced declined almost 700 pips. The trend remains towards JPY buying and probably will until a sentiment extreme is registered on the other side of the market.


CAD: The CAD is in the same position as the GBP. That is, it too is making a major turn. The percentile indicator had been at 100 for weeks and speculative longs remain at record levels. The CAD is most likely in the early stages of a significant reversal.


AUD: Net positioning in the Aussie declined significantly last week. We have not been looking for a major top in the Aussie because sentiment was not extreme (similar to the euro). However, with positioning declining significantly, the potential for more losses in price remains front and center.