Yen Net Positioning Flips from Short to Long

US Dollar Index: Implied net positioning was up for the second week in a row. With speculative positioning improving from oversold levels, we continue to favor the idea that a multi-month rally is underway. That idea goes out the window of course if 79.96 gives way.

EUR: As the dollar index has bottomed, the euro has topped. The sentiment extreme (based on the percentile of net speculative positioning over the last 52 weeks) was registered in late April at 1.3679 and net longs have steadily decreased since then. COT data helps warn of turns at extremes and the trend of positioning moves with the trend of price. Since the trend in positioning has been down since late April, the trend in price may be catching up. However, commercial longs are at the highest levels since mid-June. High commercial demand tends to occur before strong rallies. The euro may be best played from the long side on the crosses.

GBP: Speculative longs declined for the 5th consecutive week. Continue to favor the new trend towards GBP selling, especially against the euro and the US dollar (which both appear bullish individually).

CHF: The trend remains towards CHF buying following the sentiment extreme registered in June. Although CHF selling took place last week, speculative positioning is close to flipping from short to long, which is a longer term bullish CHF signal.

JPY: Speculative positioning is not net long after being net short since June 2006. The previous flip from short to long was in May 2006 but that was a false signal. Signals prior to that in October 2004 and August 2003 preceded declines of 600 and and 1,200 pips in the USDJPY (JPY strength). The percentile indicator is at 100 but the initial touch of 100 often signals that beginning of a larger move. The last touch of 100 did lead to a reversal but the previous 100 touch occurred at 111.92 in September 2003. The decline continued until February 2004.

CAD: Traders continue to liquidate CAD longs following the record week for long positions (week that ended 7/27). The trend is towards CAD selling (much like the GBP). Last week, we saw an increase in CAD shorts and a decrease in CAD longs. Fresh selling indicates that CAD weakness is not simply a product of short covering.

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%). Short positions have doubled, from 8808 to 19221, which is more in % terms but less in absolute terms of contracts. 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.