The extreme in speculative retail positioning seen last week was quickly dampened by fleeting liquidity and a steadfast range. Looking back to last Thursday, the EURUSD Speculative Sentiment Index showed the most extreme short bias in positioning since November of 2006 as traders built up positions before a heavy mix of event risk. Not only was the perennial, top market-moving non-farm payrolls release due, but an ECB rate decision was expected to end with quarter-point hike. However, despite the potential for severe volatility, 71% of the retail community was short with the belief that spot would be unable to overtake 1.60. That presumption would ultimately pay off.
[ul]
[li]EURUSD – Fallout From Last Week’s Volatility Still Sees SSI Pointing To EURUSD Upside [/li][li]GBPUSD – Retail Pound Traders Continue To Bet On Restrained Volatility Mature Ranges [/li][li]USDJPY – Positioning In USDJPY Falls Back To Parity As Speculators Await A Breakout [/li][li]USDCHF – Range Support Leads USDCHF Towards Parity, Open Interest Plunging [/li][li]USDCAD – Long USDCAD Bias Most Extreme Since Market Tumble Through May [/li][/ul] [I]
While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in [/I]DailyFX-Plus![I]
The SSI sought a EURUSD rally since 1.26 and was signaling a reversal around 1.60. Find our more in the [/I]DailyFX Forum.
[B]Historical Charts of Speculative Positioning
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EURUSD – The extreme in speculative retail positioning seen last week was quickly dampened by fleeting liquidity and a steadfast range. Looking back to last Thursday, the EURUSD Speculative Sentiment Index showed the most extreme short bias in positioning since November of 2006 as traders built up positions before a heavy mix of event risk. Not only was the perennial, top market-moving non-farm payrolls release due, but an ECB rate decision was expected to end with quarter-point hike. However, despite the potential for severe volatility, 71% of the retail community was short with the belief that spot would be unable to overtake 1.60. That presumption would ultimately pay off. This week, price action has stabilized; and the drop in volatility and pull back from technical barriers has led positioning to retreat as well. The euro pair’s SSI ratio stood at -1.71 (compared to -2.48 from last week) with nearly 63% of the market group short. Looking into the details, it is obvious that there is still considerable confidence in range conditions. Long positions edged 0.1% lower since yesterday but were a significant 33.7% weaker than last Thursday. On the other side of the trade, shorts rose a moderate 0.8% and grew 20% on the week. Conversely, the strength of the range and drop in volatility has also led open interest to drop 7.9% - leaving net positioning 0.1% below the one-month moving average.
GBPUSD – Their dependence on steady congestive price action failed speculative GBPUSD traders two weeks ago when the pair drove through 1.98. However, the retail group was persistent in its calls for the sterling-based currency pair to keep in line with the sideways price action across the majors; and shorts surged when spot approached the psychologically significant 2.00 figure. Last week, just before Thursday’s wave of event risk swept over the markets, the pound’s SSI ratio stood at -2.05 – the highest weekly reading since November. Today, the gauge is holding at -1.75 and with nearly 65% of the retail market short. And it seems with the speculative community trading against 2.00, their confidence in enduring range conditions seems unflappable. Indeed, the report’s breakdown reveals long positions have dipped 0.9% from yesterday and 8.8% over the week. At the same time, shorts have grown 1.3% from Wednesday and 17.7% since last Thursday. Overall, open interest is 1.1% higher on the week and 9.1% above the average.
USDJPY – Much like the rest of the dollar-denominated majors, USDJPY has been consigned to range trading. However, unlike EURUSD and GBPUSD, the yen-based pair is building up considerable pressure in a rising trend channel that has met substantial resistance in 108.50. Now, with little more than 200-points of room to work with, a breakout seems like a very realistic threat. In fact, the potential seems so great that even speculative traders seem to be aware of the risk. The USDJPY Speculative Sentiment Index ratio was just off of parity at 1.01 as spot was recently seen hovering in the middle of its quickly dwindling range. It is interesting to note that positioning trends have been steadily heading to this split since the pair failed to push through 108.50 back in mid-June. The breakdown shows long positions are 0.7% higher than yesterday and 14.3% stronger on the week. Alternatively, shorts eased back 1% from Wednesday and dropped 7.8% from last week. Despite the lack of a consistent forecast for the eventual USDJPY breakout however, traders are not shy about placing their bets with open interest actually up 0.5% on the week and 2.9% above the monthly average. Though a new leg of a major trend seems near, retail positioning gives us little clue as to its direction.
USDCHF – Much like its yen-based counterpart, USDCHF has worked itself into a tight range which has in turn left retail positioning rather split. Just last week, price action in the underlying pair was consolidating just above support read at 1.0100 with the promise of a burst of volatility threatening to usher in multi-month lows. Despite this danger, speculative positioning had still flipped to its most potent, positive bias in three months. In the end, the dollar would rally after the economic battering and lead the retail crowd to quickly take profit and fight the unfolding advance. Today, the USDCHF SSI is holding very close to parity at -1.07 with 52% of the pool short as spot hovers near the middle of a wide range that has been carved out of 1.0500 and 1.0100. The shift in expected price action has been notable with long positions having edged 0.2% higher from yesterday but dropping a significant 19.2% from last Thursday. Shorts on the other hand slipped 0.7% from Wednesday and 8% week over week. More remarkable was the sharp 26.1% drop in open interest after last week’s surge that left net positioning 8.1% below the monthly average.
USDCAD – While most of the majors have fallen into ranges, none of the pairs have been contained by congestive price action quiet as long as the USDCAD. Working on its eighth month of restrained rallies and rebuffed selloffs, retail positioning behind the pair is still relatively muted as the speculative community struggles to call turning points in an otherwise choppy range. Recently, there has been a notable trend behind a growing, positive bias in sentiment since the flip after June 10th’s reversal. This week, the sentiment ratio rose to a 2.13 reading from 1.79 with nearly 68% of the pool holding long positions. We have seen retail traders consistently fight the trend; and quickly cut positions when price action finally reverses in their direction; and it looks like traders are doing the same thing this time around. In detail, long positions are a modest 0.3% higher since yesterday and a sharp 21.1% higher on the week. On the other side of the trade, shorts rose 0.5% and contracted 23% from last week’s levels. On the whole, net interest grew a meager 4.1% and was 2.1% below 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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