After two week’s of the EURUSD’s Speculative Sentiment Index holding below parity, retail traders once again find themselves net long euros. This rebound in positioning comes in conjunction with spot’s failure to retest record highs around 1.60 and the subsequent 300-plus point sell off from the monthly high set earlier this week. The lower highs in spot and volatility in retail positioning are both characteristic signs of a market that is turning from a trend to consolidation and potentially a reversal.
• EURUSD – Euro SSI Suggests Records Highs Are Out Of Reach
• GBPUSD – Pound Positioning Still Eyeing 2.00 As Retailers Bet On The Range
• USDJPY – USDJPY Positioning Takes A Bias, Points To Upside Breakout
• USDCHF – Traders Increasing Their Shorts As USDCHF Approaches Resistance
• USDCAD – USDCAD Positioning The Most Extreme Since The October Reversal
[I]While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in DailyFX-Plus!
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The SSI sought a EURUSD rally since 1.26 and was signaling a reversal around 1.60. Find our more in the DailyFX Forum.
* Negative ratio indicates net short
Historical Charts of Speculative Positioning
EURUSD – After two week’s of the EURUSD’s Speculative Sentiment Index holding below parity, retail traders once again find themselves net long euros. This rebound in positioning comes in conjunction with spot’s failure to retest record highs around 1.60 and the subsequent 300-plus point sell off from the monthly high set earlier this week. The lower highs in spot and volatility in retail positioning are both characteristic signs of a market that is turning from a trend to consolidation and potentially a reversal. However, a SSI ratio of 1.29 is still far from extreme by historical standards; and therefore further flips from the sentiment gauge are possible. The considerable trading activity seen among retailers over the past week supports this theory. Long positions have grown 11.4% from yesterday and are 24.8% above last week’s levels. Despite the euro’s steep selloff over the last few days, shorts have been culled 6% from Wednesday and are 9.2% weaker than last week. It is also noteworthy that open interest is 6.8% higher than last week and 9.2% above the monthly average - indicating that retail traders are likely growing more confident in range conditions.
GBPUSD – Weekly flips in GBPUSD positioning now appear to be a thing of past as the pair’s sentiment reading has reported its second consecutive net negative reading with this week’s -1.49 figure. With nearly 60% of retail trades short the pound, it seems speculative traders are putting considerable faith in ongoing range conditions. Looking at GBPUSD price action, has turned from a strong rally last week to congestion between 1.9850 and 1.97 which is further set within a larger descending wedge formation. However, despite the proximity of resistance, positioning on both sides of the market has changed little. Long positions actually grew 5.2% since Wednesday and are 1.1% stronger than a week ago. At the same time, shorts dropped 7.1% from yesterday, though they are 5.1% greater than last week’s levels. Overall, total positioning has changed little as traders await direction. Open interest is 1.8% higher than last week but 5.5% below the monthly average. As a contrarian indicator, the SSI points to further GBPUSD upside, but the persistence of range conditions could dull the efficacy of the indicator.
USDJPY – The bearish bias in USDJPY speculative positioning has increased over this past week as the pair tests the upper boundary of a month-long range. However, the market may be heading for a breakout this time around as momentum in underlying spot builds and the SSI reading drops to its most extreme level in nearly a year. In fact, the ratio’s -1.61 reading, with nearly 62% of traders short, reflects the most bearish sentiment among the speculative retail group since June 21st, 2007. Looking into the details, traders are attempting to trade the range as positioning has shifted considerably yet open interest changed little. Long trades dropped 12.1% from yesterday and were 11.6% weaker than the same period a week ago. A lot of this lost interest went directly to the opposite side of the market as shorts rose 8.5% from Wednesday and 20.2% over the week. And, during all this activity, net positioning slipped only 3.1% through the week and was 7.3% below the monthly average. Considering the relative extreme of the USDJPY’s SSI, the contrarian indicator is pointing to a breakout to the upside and an extended rebound from March’s swing low.
USDCHF – Though the USDCHF Speculative Sentiment Indicator is far from the extremes of a month ago, the indicator has still seen a definite shift in the bias of retail traders. The pair’s SSI ratio rose from last week’s near parity level of -1.02 to -1.35. Compared to its close counterpart USDJPY, positioning in the Swissie-based major is still relatively mild and ultimately maintains the general trend towards parity that the sentiment indicator has experienced since hitting its recent extreme back on April 25th. This divergence is understandable considering underlying spot has yet to reach significant technical resistance like USDJPY has. At the same time, details from the report further reveal trading activity is relatively muted. Long positions eased 3.4% from yesterday, but were a considerable 15.4% lower than last week. On the other hand, shorts edged 1.2% higher from Wednesday and were 7.8% stronger than last week. Overall, open interest was 4.1% lower on the week, but a noteworthy 21.1% below the monthly average.
USDCAD – Once again, as speculative interest among other majors holds relatively neutral, USDCAD positioning has grown more extreme. Today, the pair’s SSI ratio stood at 4.05 with nearly 80% of the retail trading pool holding long trades. This is the most extreme reading for this pair since the beginning of November and extends a general trend that has seen the indicator slowly building to more one-sided markets. Such a trend is very suspect considering USDCAD price action has been relegated to a large range since the sharp reversal in the currency pair seven months ago. To be sure, trading activity is growing more robust as the SSI reading grows more extreme and USDCAD approaches the bottom of its wide range. Long positions have grown 7.3% from yesterday and are 4.5% higher than the previous week. Offering more bustle, shorts have dropped 13.3% from Wednesday and are 9.5% weaker than a week ago. And, despite the more aggressive declines in the short-side of the market, open interest is still trending higher with a 1.7% increase for the week and a level that is generally 3.0% above 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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