Speculators Return to Yen Selling

Latest CFTC Release Dated September 4, 2007:

US Dollar Index: Implied net positioning was little changed last week. However, given the increase in net positioning from close to historic bearish levels in July, risk of a violent reversal remains high. Unless we see speculative selling pick up, it will be difficult to favor the bear side at such low levels (longer term).

EUR: The trend has been towards Euro selling since May but the EURUSD has traded sideways since then. Given the outlook, for the dollar, one would have to favor the downside in the EUR/USD (longer term). A test of 1.4000 may be in order first as the previously crowded market was corrected by the sharp drop in July/August.

GBP: The British Pound is in a similar situation (compared to the Euro). There is little to say about British Pound positioning other than that the trend has been towards selling since July. The drop to 1.9651 appears to have corrected what was a crowded market (too many bulls), therefore the Pound may resume its advance.

CHF: Since early August, speculators have sold CHF futures yet the CHF has rallied, especially against the USD. Still, the more significant development was the bearish sentiment extreme registered in June. With this in mind, continue to favor the upside until a bullish extreme is registered.

JPY: Long speculative positioning fell and short speculative positioning increased last week. The trend is clearly towards Yen buying but the market may be a bit crowded. In other words, the JPY may gone a little too far too fast. Sharp pullbacks in JPY crosses are always a risk, so be careful.

CAD: Speculators increased long positions last week but not by much. Since the sentiment extreme registered in July (all-time record for speculative net longs), the risk of a reversal towards CAD weakness has been high and this continues to be the case.

AUD: The bulk of the movement in recent weeks has been due to liquidation of longs. Since the week that the AUDUSD topped at .8870, speculative long positionis have decreased from 75,651 to 24,197 (68%). Additionally, commercial longs are the highest since March, which is just before the AUDUSD skyrocketed over 1,000 pips. Strong commercial demand often precedes large bull moves. The AUD should strengthen, especially on the crosses. Look for a bullish opportunity in the AUDCAD (long term).

Written by Jamie Saettele, Technical Currency Strategist of DailyFX.com