· Retracing Dollar Shorts Improve Outlook on Greenback
US Dollar Index: After plummeting to 7-month highs on last week reports, Dollar implied net shorts recovered and coincided with a small-scale greenback retracement. Given that turns tend to happen upon recoveries from extreme positioning, current COT data suggests that we can expect the dollar to continue stronger if net shorts continue to fall in the short term. Suffice to say, however, this shift was also likely a matter of closing out year-end profits and does not necessarily reflect a true turn in dollar weakness. We shall watch the upcoming COT data for confirmations/rejections of such a theory.
EUR: Euro positioning remained extreme, but slightly less so than seen in last weeks COT report. This likewise coincided with a small-scale retrace in the EURUSD, and may mark a short-term trend for the coming weeks. If, as in we saw in August, net longs continue off of recent extremes, we could see a further drop in the EURUSD. To put things into context, the EURUSD dropped approximately 300 points in the weeks that followed net longs at considerably extended levels.
GBP: Pound positioning remains extreme (100th percentile). Unlike last weeks report, however, the currency has retraced off of recent highs upon this extreme positioning. It will be important to see whether we will see a pullback in net longs on this coming Fridays data, but the outlook remains much the same in the Pound as for the Euro; a contraction in net longs could be a function of closing out profits and could only lead to short-term weakness in the currency. Suffice to say, we will likely have to see positioning retrace from these extremes so that the Pound can continue rally in the medium term.
CHF: Swiss Franc net speculative positioning remains negative, but a continued shrinking of net shorts implies that we may see the CHF strengthen in the short term. Given that Non-commercials are typically very good trend-followers, a flipping of net open interest into positive territory could spell a further uptrend in the Swiss Franc. We have already seen this in recent weeks, with a drastic fall in short positions coinciding with sizeable gains for the Swissie across the board.
JPY: Unlike the CHF, Yen positioning significantly worsened through the past week, with net shorts recovering to post a 33k drop within the course of 7 days. This suggests that our previous calls for a turn in the JPY may have been short-sighted, with a clear reluctance to pile into JPY longs in the short term. In order to call a true bullish turn in the Yen, we must see consistently stronger long positioning, with trend-following speculators flipping positions on pure momentum plays.
CAD: Speculators continued to increase their net CAD shorts, with positioning at extreme percentiles as compared to the past 52 weeks. As we see in many currencies and time frames, this extended positioning suggests that we could see a turn in CAD strength in the short term. Of course, positioning can remain extreme for a long time, so we should wait for true confirmation to begin to expect CAD strength (USDCAD weakness).
AUD: Net positioning scarcely moved from previous extremes, with their highest levels since early November. Though the momentum that has led to this exceedingly net long positioning is inherently bullish, continued highs suggest that the AUD may have some room to fall in the short term. If we look to a previous spike high in March, 2005, we can see that tops are formed when net non-commercial interest reaches extremes. We will look to the coming data, with a pullback to suggest a short-term retrace in AUD-denominated pairs.
