USD and CAD Approach Sentiment Extremes

Latest CFTC Release Dated October 2, 2007:

The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over the last 52 weeks. A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming. The readings are for the actual currency, not the currency pair. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).
Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes. The last 4 weeks of the COT Index are shown because it is just as important to know where the index is coming from. For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.
Explanation of Charts:
Difference between Net Non-Commercial and Net Commercial (green): referred to as COTDiff, net commercial subtracted from net non-commercial, extremely net long at tops and extremely net short at bottoms
Open Interest (black): total number of contracts currently open, the most number of contracts are often open at significant market tops and bottoms
COT Index (bottom blue): see description just below the COT Index table

US Dollar Index: COTDiff is in extreme territory, indicating a high probability that the US dollar will form a multi-week bottom soon. In fact, with positioning turning slightly in the greenback?s favor last week, a bottom may already be in place.

EUR: 261,080 is the record for COTDiff. This extreme was registered near the May peak. The current reading at 208,002 is close to the extreme reading. A week or two more of Euro strength could very well lead to the extreme sentiment reading seen in May and lead to at least a correction lower.

GBP: With the COT index bouncing off of 0, favor the upside. Open interest has increased the last two weeks as Cable has rallied, signaling fresh buying. With the US Dollar in extreme territory, long Pounds may be a better option on the crosses.

CHF: It has been our contention that the CHF is reaching a top (USDCHF bottom). COTDiff was recently the highest since June of 2006. The USDCHF rallied from 1.1920 to 1.2768 in the 5 month period that followed. Conditions from a sentiment perspective are ripe for a prolonged period of CHF weakness.

JPY: The reversal following extreme net short positioning in late June led to extreme net long positioning. We would like to see open interest begin to rise as the JPY strengthens before proclaiming a new bull market in JPY. Some additional selling may be needed in order to more fully correct the quick JPY rally that occurred in late June-mid-August.

CAD: COTDiff is close to an all-time record high at 154,458. Sentiment is extremely CAD bullish, which makes the probability of a reversal towards CAD weakness a high one.

AUD: Speculators remain net long and open interest has been increasing along with the rally in the AUDUSD, indicating that fresh buying is driving the move. The longer term Aussie bull market remains healthy.