Speculative USD long positions increased significantly this past week (as indicated by the most recent COT report). From a contrarian’s point of view, this is bearish for the USD in the short term. In other words, at least a short term USD decline would correct the widespread USD bullishness that has gripped the FX market.
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The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over the last 13 weeks. 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 Index:[/B] The index is at 100 and the composite COT is the highest since the end of October 2006 (the USD then fell throughout the remainder of 2006). USD bullish sentiment is extreme, which increases the likelihood of weakness.
[B]Implications: [/B]Bearish
[B]EUR: [/B]The index is at 8 and nearing a bearish extreme. There is the possibility that a bearish extreme is reached and that the Euro continues to fall (markets can remain extreme for weeks) but selling at the current level opens the trader up to substantial risk.
[B]Implications: [/B]Bottoming?
[B]GBP[/B]: The index is at 75 and declining from a bullish extreme that was registered a few weeks back. This is bearish. Expect weakness.
[B]Implications: [/B]Neutral
[B]CHF:[/B] The 13 week index is at 33, after being at 75 last week. Speculators have piled on CHF short positions (USDCHF long). Markets rarely reward the majority of its participants. Expect a setback in the USDCHF (CHF advance) near term before the CHF weaknes further.
[B]Implications: [/B]Bearish
[B]JPY: [/B] The index is at 8 and has steadily decreased for weeks now. A bearish extreme should form over the next several weeks and give way to the next leg of Yen strength.
[B]Implications: [/B]Neutral
[B]CAD: [/B]The 13 wek index is at 33, declining from 58 a week ago. The index is pointing down, which is bearish. We’ll look for a CAD bottom (USDCAD top) when the index reached 0 again.
[B]Implications: [/B]Bearish
[B]AUD:[/B] The index is at 8 afte being at 58 last week. The AUD analysis is similar to the CHF analysis. That is, speculators have piled on bearish positions in a short period of time so expect a short term advance in the AUD to correct the overly bearish conditions.
[B]Implications: [/B]Bearish
[B]NZD:[/B] The index is at 8 afte being at 75 last week. The NZD analysis is the same as the AUD analysis. That is, speculators have piled on bearish positions in a short period of time so expect a short term advance in the NZD to correct the overly bearish conditions.