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Yen Bullish Extreme Favors a USDJPY Rally

Speculative long positions on Yen futures are at their highest level since February 2004, when the USDJPY bottomed near 105.00.  Positioning argues for a multi-week Yen decline (Yen crosses rally).

Latest CFTC Release Dated March 4, 2008:

 

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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.    

US Dollar Index: The 52 week COT index is at 75, indicating that plenty more selling is possible.  However, the 13 week index is at 8 and just turned up from 0, which warns of a bearish sentiment extreme and potential turn.  Conditions remain bearish but the USD is probably a few weeks at most from a significant bottom.  Watch for signs of a reversal.  

 

Signal: Bearish but forming a bottom

EUR: Interestingly, positioning regarding the Euro does not mirror that of the USD.  The 52 wek and 13 week indexes are at 14 and 58, which suggests that the Euro could continue to gain for weeks, but not necessarily against the dollar.  We wrote last week to “look for longs in the EUR / commodity crosses.”  These trades should continue to work.

 

Signal: Bullish

GBP: At 92, the 13 week index is nearing the bullish extreme point of 100.  Probability of a major turn is increased but not probable from a sentiment perspective.    

 

Signal: Bullish

CHF: The 52 and 13 week COT indexes are at 71 and 42 and trending up.  Favor CHF strength until a bullish sentiment extreme is reached (likely in the next few weeks).

 

Signal: Bullish

JPY:  The 52 and 13 week COT indexes are at 98 and 92, indicating that a bullish exrtreme has been reached.  The JPY should put In a high that lasts at least a few weeks soon.

 

Signal: Bearish

CAD:  The 52 and 13 week COT indexes are at 49 and 92.  The 13 week index warns of a bullish extreme indicating that the CAD could decline significantly going forward. 

                      

Signal: Bearish

AUD:  The 52 and 13 week COT indexes are at 47 and 83 and have rolled over (slope is now negative).  We wrote last week that “bulls should be careful here because the 13 week index is close to 100, indicating that the bullish  boat is beginning to get a bit too crowded.”  The 52 week index suggests that the Aussie could continue gaining while the 13 week index is suggestive of a top.  Until things clear up, we will calssify conditions as neutral.   

 

Signal: Neutral

NZD:  The 52 and 13 week COT indexes are at 33 and 42.  The reading is the same as for the AUD.  Bulls should be careful here because the 13 week index has turned over from 100, indicating that the bullish  boat is beginning to get a bit too crowded.   

 

 

Signal: Neutral