Sentiment Extreme Leads to Dollar Reversal

Latest CFTC Release Dated July 24, 2007:

[B]US Dollar Index[/B]: Implied net positioning is its lowest since June 2006. The dollar bottomed then and rallied, albeit correctively. We mentioned last week that “our commercial interest index is at 100, which is extremely bullish. We are expecting the dollar to begin at least a multi week rally in the next few weeks.” It appears that the dollar rally has started. A significant bottom may be in place.

[B]EUR[/B]: Upside potential remains for the euro as the recent decline occurred without a sentiment extreme (which we define as JPercentile at or close to 100). However, since the euro consists of nearly 60% of the USD index (which shows bullish readings), we do not wish to remain bullish the EURUSD. The euro appears more attractive on the crosses, especially the EURGBP (since the sentiment extreme in the Pound suggests that the GBP will underperform).

[B]GBP[/B]: Speculative longs remain close to record levels and the sentiment extreme remains in place, indicating a high probability that the GBPUSD will continue to decline. At the least, we expect the decline to continue until the market is no longer one-sided.

[B]CHF[/B]: The trend remains towards CHF buying following the sentiment extreme registered in June. This signals that the CHF should strengthen for an extended period. Sentiment is improving and the outlook for the CHF remains bullish, especially on the crosses.

[B]JPY[/B]: We wrote last week that “the psychological backdrop is ripe for a reversal again so be on the lookout for a top in the JPY crosses, especially the GBPJPY and CADJPY.” The USDJPY fell hard and the crosses fell harder. There is no reason to alter out outlook. We continue to favor JPY strength.

[B]CAD[/B]: The CAD is in the same position as the GBP and the CAD. That is, it too is making a major turn. The percentile indicator has been at 100 for weeks and speculative longs remain at record levels. The CAD is most likely in the early stages of a significant reversal.

[B]AUD[/B]: Net positioning in the Aussie is little changed. We have not been looking for a top in the Aussie because sentiment was not extreme (similar to the euro). With sentiment not extreme, we have to follow the trend of positioning, which has been towards Aussie selling since longs were at a record in December 2006. Given the oulook for a stronger dollar, the reversal should be respected.