Speculative traders remain extremely short US dollars and long the Euro, Australian, New Zealand, Canadian dollars and Swiss Francs. This indicates a sentiment extreme, which favors a turn towards US dollar strength.
The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13). A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming. The readings are for the actual currency, not the currency pair. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).
Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes. For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.
[B]US Dollar[/B]
[B]US Dollar Index: [/B]The 13 week index is at 0, which indicates a bearish sentiment extreme. Sentiment extremes occur near bottoms so expect a bottom and reversal in the USD within the next few weeks.
[B]Implications:[/B] bullish
[B]Euro[/B]
[B]EUR: [/B]The 13 week index is at 100, which indicates a sentiment extreme (optimism extreme in this case). This is bearish for the euro (sentiment can remain extreme for a number of weeks though).
[B]Implications:[/B] bearish
[B]British Pound[/B]
[B]GBP: [/B]The 13 week index is at 58 and has not been extreme recently, which is neutral. There is no sentiment extreme from which to hold a contrarian view.
[B]Implications:[/B] neutral
[B]Australian Dollar[/B]
[B]AUD: [/B]The 13 week index is at 100. Tops occur when the index is at or close to 100, so expect a top within the next few weeks.
[B]Implications:[/B] bearish
[B]New Zealand Dollar[/B]
[B]NZD: [/B]The 13 week index is at 100. Tops occur when the index is at or close to 100, so favor the downside.
[B]Implications:[/B] bearish
[B]Japanese Yen[/B]
[B]JPY: [/B]The 13 week index has increased from 0. This indicates that commercials were the longest they had been in 13 weeks and speculators the shortest they had been in 13 weeks. This is bullish for the Yen. Once the index reaches 100, the risk of a reversal will be increased.
[B]Implications:[/B] bullish (bearish USDJPY)
[B]Canadian Dollar[/B]
[B]CAD: [/B]The 13 week index is at 0, which indicates a bearish sentiment extreme. Sentiment extremes occur near bottoms so expect a bottom and reversal in the USD within the next few weeks.
[B]Implications:[/B] bullish
[B]Swiss Franc[/B]
[B]CHF: [/B]The 13 week has rolled over from 100, which indicates a bullish sentiment extreme. Tops occur at bullish sentiment extremes, so favor a reversal towards CHF weakness (USDCHF strength).
[B]Implications:[/B]bearish (USDCHF bullish)
Jamie Saettele publishes Daily Technicals every weekday morning (930 am EST), COT analysis (published Monday mornings), technical analysis of currency crosses throughout the week (EUR on Tuesday, JPY on Wednesday, GBP on Thursday, AUD on Friday), and the DFX Trend Index every day after the NY close. He is also the author of Sentiment in the Forex Market.
Contact at <[email protected]>