British Pound Trend Change as Speculators Liquidate Longs

Latest CFTC Release Dated May 8th , 2007:

The charts used to interpret the Commitment of Traders data now include both net positioning and the percentile indicator. The percentile indicator value is the current net positioning as a percentile when measured against the last 52 weeks. A reading above 90 indicates extreme bullishness and a reading below 0 extreme bearishness. Market turns occur at extreme levels of optimism and pessimism (bottoms at pessimism and tops at optimism). Therefore, readings close to 100% and 0% indicate increased potential for a top / bottom. Speculative interest (this week?s percentile reading adjusted in order to fit between -100% and 100%) is plotted below for each currency.

US Dollar Index: Implied dollar short positioning increased slightly last week but the large decrease in short positions the week prior is the more important development. Big picture, positioning has increased from levels where the index has historically bottomed. A multi-month bottom may already be in place at 81.25.

EUR: Euro net longs slipped for the second week but the market remains extremely long. As mentioned last week, this action looks like a blowoff top, similar to the ones that occurred in December and May 2006. With sentiment one-sided, the risk of a reversal is the highest that it has ever been (and a top may be in place at 1.3680).

GBP: Net longs fell significantly and positioning is right at its 12 week average. The percentile indicator has also declined below 50, which is additional bearish evidence. A trend towards GBP selling is underway.

CHF: Recently, speculators have sold CHF in droves and bought back shorts slowly, suggesting that the larger trend is towards CHF weakness (USDCHF strength). Positioning is back below the 12 week average, which is CHF bearish (USDCHF bullish).

JPY: Net short positions fell slightly last week following the large selling that took place one week before. The trend remains towards JPY selling as positioning is below the 12 week average. However, JPY weakness may be a bit stretched. Short JPY positions are close to the October 2006 level (arrow), when USDJPY topped just below 120. A week or two more of JPY weakness would potentially see JPY shorts increase to the October 2006 level, after which the probability of a reversal would be high.

CAD: Speculators continue to build longs in the CAD as positioning is now positive for the second week in a row (longs > shorts). This is longer term CAD bullish. The CAD should continue to gain until speculators are extremely long CAD, after which a top in CAD (USDCAD bottom) will occur.

AUD: Net long positions increased following two declining weeks. Positioning is back above the 12 week average, which is AUD bullish. Still, the trend in positioning since January has been towards AUD selling (see red line), indicating that sentiment peaked early in the year. If this is the case, then the AUD shouldn?t be far behind.