Euro/US Dollar Cross: Retail FX Traders Shift Positions

Earlier in the month I suggested that between the dejected US dollar and the euphoric Euro, it was the greenback’s turn to lead in the forex waltz.

The US dollar did try to rally and the Euro did correct but they are both back to their normal pattern of trading. As an update, here’s a chart of the retail forex traders’ position with reference to the Euro/US dollar cross, otherwise known as the Speculative Sentiment Index:


Source: DailyFX

The data of retail forex traders position from DailyFX shows that nearly 65% of their traders are net short the Euro/US Dollar cross. But the recent drop has demonstrated a significant shift away from short positions, towards long positions.

Forex trading crowds have remained heavily net-short the Euro against the US Dollar since the pair traded near the 1.3000 mark, giving strong contrarian signal to stay long into rallies. Yet the most recent turn lower has elicited a noteworthy week-over-week drop in short positions and similarly pronounced jump in long positions. The shift in crowd sentiment gives early warning that the tide may have turned in the US Dollar’s favor, and indeed one of our SSI-based trading strategies has gone short from approximately the 1.3900 mark.

The ratio of long to short positions in the EURUSD stands at -1.85 as nearly 65% of traders are short. Yesterday, the ratio was at -1.71 as 63% of open positions were short. In detail, long positions are 5.5% lower than yesterday and 19.7% stronger since last week. Short positions are 2.0% higher than yesterday and 10.6% weaker since last week. Open interest is 0.8% weaker than yesterday and 0.8% below its monthly average. The SSI is a contrarian indicator and the most recent shift suggests the Euro may continue lower.

As well, an aggregate look at the sentiment surveys for the Euro and the US dollar shows that if anything, pessimism towards the US dollar has gone even lower and the euphoria for the Euro has gained (every so slightly).

So it looks like I’m early once again but the sentiment outlook is unmistakable in clarity. I have no idea what will be the trigger or if there will be one but I expect the US dollar to start a rally soon.

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2 Responses to Euro/US Dollar Cross: Retail FX Traders Shift Positions

  1. PEJ says:

    I can’t understand what this SSI is nor how to get the signals, but I’m a bit concerned when I read that the retail herd was short the EUR long the USD for the past few months. Is that believable?

  2. PEJ says:

    We’ve both early on this one Babak, but it looks like Jim Rogers is betting the house on the USD rally: http://realitylenses.blogspot.com/2011/03/jim-rogers-buying-dollar-with-target-of.html

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