EURUSD has put in for its third test of support around 1.5350; and retail traders are clearly expecting this formation to turn into a triple bottom. The euro pair’s Speculative Sentiment Index ratio rose from parity last week to a reading of 1.50 today with nearly 60% of the speculative community holding long positions. This is a remarkable reading from the positioning gauge as the market hasn’t seen such a positive bias since October of 2006.
• EURUSD – SSI Offers Strongest Breakout Reading For Dollar Since 2006
• GBPUSD – Pound Range Holds Though Positioning Tests Another Extreme
• USDJPY – A Directional Break Leads USDJPY SSI To Extreme
• USDCHF – USDCHF Positioning Hovers Near Parity As Range Holds
• USDCAD – USDCAD SSI Flips For The First Time In A Year And A Half
While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in DailyFX-Plus!
The SSI sought a EURUSD rally since 1.26 and was signaling a reversal around 1.60. Find our more in the DailyFX Forum.
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* Negative ratio indicates net short
Historical Charts of Speculative Positioning
EURUSD – EURUSD has put in for its third test of support around 1.5350; and retail traders are clearly expecting this formation to turn into a triple bottom. The euro pair’s Speculative Sentiment Index ratio rose from parity last week to a reading of 1.50 today with nearly 60% of the speculative community holding long positions. This is a remarkable reading from the positioning gauge as the market hasn’t seen such a positive bias since October of 2006. Since mid-April, when EURUSD pulled back from its record high, traders have grown more comfortable in playing the boundaries of the consolidation area seen between 1.5300 and 1.5800. Complacency and confidence is often at its greatest among the retail community right before a major break out. The indicator’s details highlight the shift. Long positions are 8% higher than yesterday and 23.7% greater than last week. At the same time, shorts dropped 10.2% from Wednesday and 33.9% over the week. And, despite the directionless price action, open interest was only 3.8% lower on the week and 2.1% above the monthly average.
GBPUSD – Range conditions have persisted for yet another week in GBPUSD price action. Recently, the pair fell back towards the floor in the pair’s five-month old, broad wedge formation seen around 1.9400/50; and positioning reveals that much like the EURUSD, retail traders are growing more comfortable with the well worn range. In fact, the pair’s SSI ratio stood at 1.66 with 62% of the pool long – the most extreme bullish skew since the beginning of January. As a contrarian gauge, such a bias heightens the probability of a break to the downside, which would quickly bring speculators’ successful range trading strategy to an end. Looking into the breakdown of the sentiment report, there has been a considerable change in positioning over the past week. From yesterday long traders surged 31% higher which in turn left positions 15.7% above last week’s levels. Shorts dropped 15.2% on the day and 12.2% from last Thursday. Overall, net interest in the pair has eased 1.2% from last week and is 3.2% above the monthly average.
USDJPY – Positioning has grown more extreme for USDJPY over the past week and for good reason. Early this week, the pair crossed above a year-old falling trendline that was hovering around 106 at the time. And, though the dollar has reversed course against its yen counterpart since the mid-March swing low, this represented another milestone for a developing bull advance. As would be expected with the building strength behind the pair, the retail group has upped its effort to find the prevailing trend. The USDJPY Sentiment ratio stood at -1.93 with nearly 66% of the client pool in short trades. This week’s reading happens to be the most extreme in nearly a year and follows a general trend of growing intensity with a -1.80 figure last week and -1.61 the period before that. In detail, long trades have fallen 8.5% since yesterday and are 7.2% weaker than last week. Trying to fade the pair’s strength, short positions grew 8.7% from Wednesday and are 11.3% above last week’s level. Clear direction hasn’t attracted additional attention from the market as open interest has edged 0.6% lower on the week and is overall 3.2% above the monthly average.
USDCHF – The correlation between USDJPY and USDCHF continues to breakdown. While the former has developed a very distinct, dollar-based rising trend, the franc-based pair has yielded to a closing wedge that has defined price action since the beginning of the year. Technically, USDCHF resembles EURUSD with the dollar testing firm resistance. However, unlike its euro counterpart, USDCHF has maintained a relatively neutral sentiment reading. The SSI stood at -1.14 today with 53% of the surveyed group holding short positions. This weak reading maintains the steady trend in the ratio towards parity after having peaked in the beginning of May. Details reveal little volatility among positioning. Long trades were a mere 0.6% lower than yesterday and 1.8% weaker than last week. At the same time, short positions slipped 2.4% from Wednesday, though they were 9.1% greater on the week. Overall, open interest was a modest 2.2% greater on the week and 3.0% below the monthly average. As a contrarian indicator, the USDCHF SSI is giving a restrained projection for an advance.
USDCAD – It has finally happened. USDCAD’s Speculative Sentiment ratio finally flipped to a net negative reading for the first time since November of 2006. The flip occurred early this morning; and though the sentiment gauge had not maintained the negative figure into the afternoon, the milestone was nonetheless marked. Standing at 1.06 during the US session, the sentiment gauge reflected a modest skew with only 51% of traders holding long positions. This relative extreme for the long-positive USDCAD sentiment gauge comes as underlying price action has tested a range high of 1.0350 for the third time in five months, suggesting yet another dollar-favorable breakout may be developing. The indicator’s details show that, despite the ratio’s move towards a flip, there have been only modest changes to positioning. Long positions have eased 0.4% since yesterday and are 8.4% lower on the week. Short positions were unchanged since yesterday and 8.6% higher from last Thursday. Despite the retail communities proclivity for range trading, open interest is actually 3.2% lower on the week and 6.7% below the monthly average.
How to 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 comments or questions on this or other articles authored by John? E-mail him at <[email protected]>.
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