Euro Longs at New Record Has Reversal Implications

Latest CFTC Release Dated May 15th , 2007:

The charts used to interpret the Commitment of Traders data now include both net positioning (12 week average in red) and the percentile indicator (blue). The percentile indicator value is a 4 week average of 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 10 indicates 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 fell slightly last week but the large decrease in short positions two weeks ago is the more important development. Big picture, positioning has increased from levels where the index has historically bottomed. A multi-month bottom may be in place at 81.25.

EUR: Euro net longs are at yet another record. 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 (and a violenty one) is the highest that it has ever been (a multi-month top may be in place at 1.3680).

GBP: Net longs continue to fall and positioning below 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: Speculators continue to sell CHF as net positioning is below its 12 week average (CHF bearish and USDCHF bullish). The Percentile indicator is falling as well. The trend is towards CHF selling and likely will be until a bearish extreme is reached.

JPY: Net short positions increased last week. The trend remains towards JPY selling as positioning is below the 12 week average. However, JPY weakness is getting stretched. Short JPY positions are close to the October 2006 level, 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. 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 slightly for the second consecutive week. Positioning remains above the 12 week average. However, the trend in positioning since January has been towards AUD selling (see percentile blue line), indicating that sentiment peaked early in the year.