Last week’s FXCM forex positioning report proved exactly accurate in forecasting a EURUSD breakdown, as the ratio of traders long to short the euro reached its most extreme in two years-a perfectly timed contrarian trading signal. Since then, ratio of long to short positions in the EURUSD shrunk to a much more neutral1.25 as nearly 56% of traders are currently long. Such a moderation in forex trader buying pressure coincided with a similar slowdown in Euro losses, and we may have to wait until positioning once again grows extreme to expect further dollar gains.
[I][B]• EURUSD – Forex Traders Accurately Predicted breakout, Now Signal Consolidation
• GBPUSD – British Pound Trading Suggests Further Short-term Bounce Likely
• USDJPY – Currency Traders Signal USDJPY May Decline Before Further Gains
• USDCHF – Trading Signals Prove Accurate with FXCM SSI
• USDCAD – Canadian Dollar Traders Perfectly Predict USDCAD Breakout, Pullback
[/B][/I]
While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in DailyFX Plus Forex Intraday Analysis
The SSI sought a EURUSD rally since 1.26 and was signaling a reversal around 1.60. Find our more in the DailyFX Forex Forum
* Negative ratio indicates net short
Historical Charts of Speculative Positioning
EURUSD – Last week’s FXCM forex positioning report proved exactly accurate in forecasting a EURUSD breakdown, as the ratio of traders long to short the euro reached its most extreme in two years—a perfectly timed contrarian trading signal. Since then, ratio of long to short positions in the EURUSD shrunk to a much more neutral1.25 as nearly 56% of traders are currently long. Such a moderation in forex trader buying pressure coincided with a similar slowdown in Euro losses, and we may have to wait until positioning once again grows extreme to expect any big moves. Long positions are still 146.9 percent higher than the beginning of last week, but they nonetheless continue to drop and fell 9.7 percent overnight. The EURUSD SSI currently gives us a modestly bearish bias, but a relatively neutral SSI ratio suggests that we may see Rangebound price action through short-term forex trading. View our Euro Technical Outlook for more insight.
GBPUSD – Our previous Speculative Sentiment Index report was similarly prescient in predicting a GBPUSD breakdown, as FXCM forex traders had reached their most extreme in net-long positions in at least 2 years. Yet buying pressures have since moderated, and the GBPUSD SSI ratio currently stands at a much more neutral 1.21 as 55 percent of traders are currently long the currency pair. Typically the SSI gives its strongest signal to go long or short a given currency pair when the ratio is above 2.00 or below -2.00, and the virtually neutral reading presently indicates that we may see Rangebound price action in the days ahead. In detail, long positions are 18.4% lower than yesterday and 54.6% stronger since last week. Short positions are 7.5% higher than yesterday and 33.8% weaker since last week. Open interest is 8.4% weaker than yesterday and 8.2% below its monthly average. The SSI is a contrarian indicator and continues to signal medium term declines in the GBPUSD, but selling pressure is likely to dissipate until we see more extremes in our forex positioning SSI ratio. Our technical forecast for the GBPUSD is almost entirely consistent with this assessment.
USDJPY – The ratio of long to short positions in the USDJPY stands at -1.27 as nearly 56% of traders are short. This stands in stark contrast to last week’s report, at which point long positions in the USDJPY outnumbered short positions by a much more lopsided 1.81 to 1. Long USDJPY positions have fallen 21.8 percent since the beginning of last week, while short orders have actually climbed by 17.8 percent. Yet the number of forex positions short the USDJPY have more recently fallen sharply—down 10.6 percent overnight. The Speculative Sentiment Index works as a contrarian indicator in trending markets, and the fact that traders have pulled back short trades suggests that we may see further short term drops in the USDJPY before it resumes its advance. Discuss your own forecasts for the USDJPY in our forex forum.
USDCHF – Forex traders continue to position themselves similarly in the USDCHF and the USDJPY—making our assessment on the Swiss Franc similar to that of the Japanese Yen. The ratio of long to short positions in the USDCHF stands at -1.36 as nearly 58% of traders are short; in last week’s report, short positions actually outnumbered longs by 1.6:1. Such a drop in selling pressure has coincided with a moderation in USDCHF rallies, and recent forex trader positioning changes suggests we may see further Rangebound USDCHF price action before any major moves. Open interest is 3.7% stronger than yesterday, but it is currently 9.1% below its monthly average. Such a drop in aggregate positioning suggests that traders lack conviction in their USDCHF trades. On balance, the net-short SSI ratio implies that we may see further USDCHF advances, but the shorter-term is likely to produce more moderate currency price moves until we see further extremes in positioning. Our technical analyst had accurate forecasts for the USDCHF.
USDCAD – Our forex market sentiment indicator has arguably performed best in the USDCAD as of late, as flips from long to short and vice versa have accurately forecasted price moves in the Canadian currency pair. The ratio of long to short positions in the USDCAD currently rests at a nearly-neutral 1.25 as only 56 percent of traders are long. Yet last week we actually saw that traders became net short the USDCAD for the first time in nearly two years—perfect signal to go long the USDCAD. What happened next was nothing short of impressive, as the currency pair very clearly broke out to the topside. More recently, traders once again grew net-long the USDCAD, and the USDCAD saw a noteworthy pullback. The fact that positioning stands very near neutral territory suggests that we may have to wait until further flips in our SSI ratio or greater extremes to have confidence in our USDCAD forecasts. The current SSI ratio nonetheless gives us a moderately bearish bias on the USDCAD forex pair. Such an assessment is consistent with our technical analyst’s prediction that the USDCAD could fall to 1.0445.
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 David? E-mail him at <[email protected]>.
For information on an FXCM Managed Account that takes advantage of the SSI, please review our Sentiment Program at: http://www.fxcmmanagedaccounts.com/ or call +1 646-432-2968.