According to the most recent COT numbers, US dollar bullish sentiment is at an extreme, which makes the buck vulnerable to a sharp decline in the weeks ahead. Notably, the difference between speculative and commercial positions for the British Pound is the greatest it has ever been. This is the kind of dynamic we would expect to see at a turning point.
Latest CFTC Release Dated August 19, 2008:
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The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13). 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. 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.
EUR: The index remains at 2. The composite COT is at -41,861, close to the -45,820 that we saw at the May low. The lowest composite COT has reached was -52,266 at the July 2005 low. A roughly 700 pips rally took place over the next 2 months.
Implications: bottoming / bottomed?
GBP: The 52 week COT index is at 0 after having been at 0 the week before. This reading indicates a bearish sentiment extreme and potential for a low to form. Also, at -102,891, composite COT is the lowest ever! The previous low was -92,119 in July 1999. Cable was in a longer term downtrend at that point but rallied nearly 1,400 pips in less than 3 months following the extreme July 1999 reading.
Implications: bottoming
CHF: The 13 week index is at 6, after being at 8 last week. Speculators remain extremely short the CHF when compared with the last 52 weeks but unlike the EUR and GBP, CHF composite COT is nowhere near historical extremes.
Implications: neutral
JPY: The index is at 4 after having been at 6 last week. The implications are the same for the JPY as for the CHF. That is, speculators remain bearish but positioning is not close to historical extremes. This is suggestive of weakness relative to the Euro and GBP.
Implications: neutral
CAD: We wrote last week that “the 52 week index is at 0, indicating potential for a CAD bottom of sorts to form.” The CAD has strengthened as expected. With the index remaining at 0, there is no reason to change out opinion.
Implications: bullish
AUD: The AUD index is now also at 0, which warns of a bearish sentiment extreme. Bulls should begin looking for a bottom.
Implications: Bearish
NZD: The NZD index is at 4, having increased from 0. We wrote last week that “speculators are net short the largest amount of NZD that we have on record (the record only goes back a few years though). Given the lack of historical positioning data for NZD, there is little confidence in the numbers.” Despite our reservations, the NZDUSD has rallied. Expect the rally to continue.
Implications: bullish
Jamie Saettele writes Forex Technicals: The Day Ahead, Monday-Thursday (published at 6 pm EST), Daily Technicals every weekday morning (9 am EST), COT analysis (published Monday mornings), and analysis of currency crosses throughout the week. He is also the author of Sentiment in the Forex Market.
Contact at [email protected]
US Dollar Index: The 52 week index remains at 100. The difference between speculators and commercials is its largest since late 2005, when the USD formed a top. History does not repeat in exact form but the psychology is perfect for a sizeable countertrend USD decline.
Implications: topping / topped?
