Our recent forex seasonality report made an argument for a substantial reversal in the Canadian dollar and Japanese Yen through the month of August, but we have yet to see any major moves in either the USDJPY or USDCAD. We forecasted that both the Canadian and Japanese Yen would appreciate through the past week of trade, and both forex pairs have gone almost nowhere through that stretch. Yet it seems that the USDJPY and USDCAD may be due for a correction in strength through the near term; our forex positioning measures support Canadian Dollar gains, while our technical analyst’s USDCAD forecast likewise calls for short-term declines.
A study of changes in the Canadian Dollar and Japanese Yen shows that the USDCAD has fallen in 8 out of the past 10 months of August, while the USDJPY has actually lost 9 times in that same stretch. One has to subsequently wonder whether seasonal effects will be enough to push the USDCAD and USDJPY lower through subsequent weeks of trade. Our odds show an above-average probability that the USDCAD will pull back after continued advances, but outlook for the Japanese Yen is somewhat less clear.
Snapshot of Forex Positioning in the USDCAD
Our Forex Sentiment indicator accurately predicted a USDCAD breakout, as the number of traders short the USDCAD exceeded the number of longs for the first time in over two years. Given that our SSI indicator is a contrarian signal, this gave clear indication that traders should anticipate USDCAD rallies. More recently, that same ratio has actually flipped back into net-long territory. Such an occurrence seems to support the notion that the USDCAD may see a noteworthy reversal in strength through short-term currency trading. Discuss Forex Sentiment, Positioning, and the intricacies of the FXCM SSI in our Forex Forum.
Snapshot of Forex Positioning in the USDJPY
Forex positioning in the USDJPY actually signals US dollar strength through the near term—directly opposed to our long-term forex seasonality study. We nonetheless see that the ratio of long to short positions in the USDJPY is very nearly neutral, as 53 percent of traders are currently short the US Dollar versus the Japanese Yen. If we in fact see a flip from short to long in the USDJPY SSI, we may see an outcome similar to what we saw in early July. Namely, the short-term change in sentiment positioning accurately predicted an almost-200 point decline in the USDJPY. Have a different opinion on the USDJPY? Discuss your views with other forex traders and DailyFX Analysts on our Forex Forum.
Written by David Rodríguez, Quantitative Analyst for DailyFX.com
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