Over the past few months, any trends that developed in GPBUSD positioning have been quickly broken as congestion has dominated underlying price action. This week, we have seen a flip in the pound sentiment indicator to -1.57 after two week’s of moderate positive readings. What’s more, the daily readings recorded this week are the most extreme we have seen (either net long or short) since January, which is likely a reflection of the rebound from 1.94 and recent break above a two-month falling trendline in the underlying.
[I][B]• EURUSD – Euro Positioning Flips, Offering Modest Support To Further Advance
• GBPUSD – Pound Sentiment Flips With Upside Potential Building
• USDJPY – USDJPY Open Interest Plunges As Pair Maintains Congestion
• USDCHF – USDCHF SSI Drops From Extreme To Parity As Trend Falters
• USDCAD – Retail USDCAD Traders Confident Range Conditions Will Hold
[/B][/I]
While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in 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 DailyFX Forum.
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* Negative ratio indicates net short
Historical Charts of Speculative Positioning
EURUSD – Speculative positioning in the euro was net short for the second week in a row with today’s reading. However, the Speculative Sentiment Index continues to hold closely to parity - suggesting the market is still unsure on the EURUSD’s long-term direction after the reversal from 1.60. Today, the pair’s SSI Index stood at -1.13 with 53 percent of retail traders short. This reading is only slightly more extreme than last Thursday’s -1.04, though it nonetheless supports the upside after two week’s of net long readings that accompanied the EURUSD’s initial tumble from 1.60. Looking into the details of the Sentiment report, there has actually been a considerable amount of trading activity within the retail group. Long positions jumped 23.1% from yesterday, though they have ultimately eased 8.0% over the week. On the other side of the market, the currency’s rally led shorts to drop by 14.2% while the week’s change seemed to absorb the decline in longs with an 8.0% increase. Despite this volatility though open interest is ultimately unchanged from yesterday and only 3.9% below last week’s levels. As a contrarian indicator, the SSI points to further upside for EURUSD - though without a more intense reading, the pair will likely lack direction with frequent flips in positioning.
GBPUSD – Over the past few months, any trends that developed in GPBUSD positioning have been quickly broken as congestion has dominated underlying price action. This week, we have seen a flip in the pound sentiment indicator to -1.57 after two week’s of moderate positive readings. What’s more, the daily readings recorded this week are the most extreme we have seen (either net long or short) since January, which is likely a reflection of the rebound from 1.94 and recent break above a two-month falling trendline in the underlying. Looking at retailers’ trading activity, longs have dropped 12.5% since yesterday and are a considerable 36.9% lower than last week. Showing the group’s penchant for fighting the trend, shorts have actually grown 7.2% from Wednesday and are up 13.1% for the week. Unlike the EURUSD, the increase in trading activity and price action have actually led GBPUSD open interest to fall 13.8% on the week with current levels 7.4% below the monthly average.
USDJPY – Retail speculative positioning in USDJPY continues to hover close to parity. However, not only are traders split on the direction of the yen-based pair; but net positioning has also tumbled as speculators have grown weary of the long period of congestion. Today, the USDJPY’s SSI reading stood at -1.03 after a steep drop in shorts pulled the indicator back from last week’s -1.18 level. From the details, we can see that long positions have slipped 15.7% from Wednesday and are 16.6% weaker than last week. Activity was just as elevated on the short side as traders added 8.6% yen-long positions to their portfolios, though this was not a large enough jump to compensate for the 26.1% drop from last week’s level. With the USDJPY having been range bound for four weeks now, retail traders are moving to the sidelines to wait for a clear sign for direction. Open interest has dropped 23.9% from last week and is 10.7% below the monthly average.
USDCHF – Similar to the yen-based pair, USDCHF positioning has both moved back towards parity and experienced a sharp drop in open interest. However, unlike its close counterpart, the USDCHF sentiment figures have actually pulled back from recent extremes. The pair’s index stood at -1.02 in the most recent reading which is far reduced from the -1.85 print last week and -1.97 figure from the period before that. At the same time, net positioning dove 32% on from last week and is now 21.9% below its monthly average. Looking at the activity on both sides of the market, it is clear where this decline in open interest has come from. Since yesterday, long traders have slipped only 5.1%, which has in turn led to a 3.8% decline on the week. However, short positions fell 4.3% from Wednesday and have contracted a massive 47.9% over the week. This significant reduction in shorts likely reflects traders taking profit on range trades that held 1.06 as resistance. Altogether, the SSI is giving a very weak upside outlook for USDCHF.
USDCAD – While positioning has grown less extreme for most of the other majors, the USDCAD’s Speculative Sentiment Index grows increasingly one-sided. Today, the pair’s gauge stood at 3.44 with nearly 77% of retail traders holding long positions. Just yesterday, the index stood at 3.83, which was the most extreme reading since the beginning of November - a sign that momentum is building for a further downside move. What’s more, the sentiment indicator has steadily built up to this week’s levels since April, further suggesting the recent decline in USDCAD is a stronger trend than anything we have seen in the past six months. From the report’s breakdown, the positioning of the retail group was somewhat mixed. Long trades slipped 1.2% from yesterday and were 5.7% below last Thursday’s levels. At the same time, shorts jumped 11.6% from Wednesday but declined a more aggressive 12.8% from last week. Showing a steadfast desire to fight the developing downside momentum (in contrast to GBPUSD, USDJPY and USDCHF), open interest was only 5.1% below last week’s levels and 3.1% under 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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