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The Most Extreme Euro SSI Reading This Year Flags A Possible 1.60 Break

Thursday, 03 July 2008 10:26:59 GMT

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Written by John Kicklighter, Currency Analyst

Retail EURUSD positioning is once again pressing extremes; but unlike the readings of two weeks ago, these extremes actually see speculators once again fighting an extension to new record highs. The euro’s Speculative Sentiment Index ratio fell to - 2.48 this week with nearly 71% of the retail crowd betting record highs would hold. Looking at the dramatic change in sentiment over the past few weeks, it is clear that traders have grown very confident in range conditions between 1.60 and 1.53.

  • EURUSD – The Most Extreme Euro SSI Reading This Year Flags A Possible 1.60 Break
  • GBPUSD – Last Week’s Range Break Leads To SSI Readings Not Seen Since November
  • USDJPY – A Flip In USDJPY Positioning Suggests The Rally May Be Coming To An End
  • USDCHF – USDCHF Open Interest Surges 30% As Positioning Flips To Longs
  • USDCAD – Retailers Hold Their USDCAD Longs As The Pair Falls Back Into Its Range


While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in DailyFX-Plus!

The SSI sought a EURUSD rally since 1.26 and was signaling a reversal around 1.60.  Find our more in the DailyFX Forum.


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Historical Charts of Speculative Positioning
 
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EURUSD – Retail EURUSD positioning is once again pressing extremes; but unlike the readings of two weeks ago, these extremes actually see speculators once again fighting an extension to new record highs. The euro’s Speculative Sentiment Index ratio fell to - 2.48 this week with nearly 71% of the retail crowd betting record highs would hold. Looking at the dramatic change in sentiment over the past few weeks, it is clear that traders have grown very confident in range conditions between 1.60 and 1.53. In fact, over the previous two weeks since support held the pair up for a triple bottom, the positioning gauge fell from 1.34 to -1.52 and then to today’s reading. This is a particularly excessive reading considering not only the presence of technical resistance but event risk as well. The unusual combination of an ECB rate decision and non-farm payroll release significantly increases the potential for volatility and breakouts. Perhaps reflecting some concern about the presence of this data, the indicator’s details show that there has been little trading even though EURUSD pushed through significant resistance at 1.58. Long positions were only 0.1% weaker than yesterday and 12.8% lower than a week ago. At the same time, shorts rose 0.7% from Wednesday and 19.8% from last week. On the other hand, open interest jumped 9.0% from last week, lifting it 9.7% above the monthly average.




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GBPUSD – Range conditions finally failed the GBPUSD after last week’s breakout from a seven-month old descending wedge formation; and traders were clearly on the wrong side of the market when the move occurred. This week, the speculative positioning gauge pushed to its most extreme negative reading since November – notably when GBPUSD made its final push to 2.09. Today, the ratio pulled was slightly off its recent high-level mark, yet still stands at -2.05 with nearly 67% of the market holding short positions. Surprisingly, the report’s details characterize little of the significant change in market conditions we’ve seen over the past week. The breakdown shows long trades have edged 0.5% lower from yesterday though the week has produced a 25.2% jump as many traders were apparently ready for the breakout. On the other side of the trade, shorts are unchanged from yesterday and only 4.3% weaker than last week’s levels. Overall, net positioning is actually up 11.8% on the week and 11.6% above the month’s average.




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USDJPY – Like its euro and pound-denominated counterparts, USDJPY has seen a significant change in speculative sentiment over the past few weeks. The steady, net negative readings from the USDJPY positioning indicator since the beginning of April have finally shown a confirmed flip back above parity after the underlying pair fell back from 108 resistance to once again test the mettle of the still-young bullish trend. Today, the SSI gauge stood at 1.21 with 55% of the market holding long dollar positions. This is a considerable shift from the -1.48 reading from last week and -1.66 from the period before that. Even more interesting was the lack of volatility in trading seen within the details of the report. Bullish trades grew a mere 0.7% from yesterday and were a modest 7.0% greater than last week. Showing a similar lack of trader activity shorts rose 1.1% from yesterday and only 1.2% from the same time a week ago. As it is still debatable whether the three-and-a-half month long bullish trend channel has been broken or not, traders are seemingly hesitant in trading USDJPY. Open interest for the pair rose only 5.5% and was 4.8% above the monthly average. However, as a contrarian indicator, the flip suggests the pair may soon confirm a bearish turn.



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USDCHF – Similar to conditions for the yen-based major, retail speculative positioning for USDCHF has put in for a significant flip as an immature bullish trend continues to break down. Unlike its more liquid counterpart, however, the flip from the USDCHF sentiment indicator comes after a steady trend towards positive holdings. In fact, since peaking with an extreme short-side reading back in late April, the reading stepped up with incredible consistency to the eventual flip late last week. Today, the gauge stands at 1.69 – the most extreme reading since the end of February – with nearly 63% of the community holding a long position on the hopes of a rebound. The details from this pair were also more noteworthy than those from USDJPY. With the flip in positioning, open interest has surged 29.5% - bringing the reading to 26.1% above the monthly average. Almost all of these new positions went into fighting the pair’s decline with longs up only 0.2% from yesterday but a hearty 28.2% higher than last week. At the same time, the rather sharp pull back from 105 hasn’t encouraged much short interest with bearish positions rising a mere 0.3% from yesterday and actually contracting 0.2% from last week.




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USDCAD – The frequent black sheep of the majors, USDCAD was once again lacking in price action and positioning this past week. While many other majors were setting up for major breakouts – or had already produced such moves – USDCAD dropped back into the middle of its range. As would be expected with the persistent congestive price action, there was little change in retail positioning over the week. The SSI ratio stood at 1.79 (a very reserved reading considering the levels from May and those from last year) with nearly 64% of the market bullish. Ultimately, this was a modest change for a typically volatile gauge with today’s reading slightly off last week’s 1.82 figure and the previous reading of 1.47. True to form, the lack of activity in the underlying has generated little volatility in trading. Long positions were a slight 0.4% higher than yesterday and 4.8% weaker than last week. Shorts on the other hand slipped 0.9% from Wednesday and dropped 13.5% on the week. What’s more, with breakout potential greater in other pairs, net positioning in USDCAD actually dropped 7.4% on the week – leaving open interest 7.1% below the monthly average.






How to Interpret the SSI? The FXCM SSI is based on proprietary customer flow information and is designed to recognize price trend breaks and reversals in the four most popularly traded currency pairs. The absolute number of the ratio itself represents the amount by which longs exceed shorts or vice versa. For example if the EURUSD ratio is 2.55, long customer orders exceed short orders by a ratio of 2.55 to 1. Conceptually similar to contrarian analyses using the CFTC IMM open position data or COT Report, the SSI provides an alternative approach that is both more timely and accurate in forecasting currency price movement. The SSI is a contrarian indicator that tells you how the market is weighted and where the trend may head. More long positions don't necessary suggest more confidence in the direction of the current trend. In general, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull market the more dangerous is to take additional shorts because many of those traders who just entered the markets are also leaving their protective stop losses just above the current price action.


Have comments or questions on this or other articles authored by John? E-mail him at jkicklighter@dailyfx.com.


For information on an FXCM Managed Account that takes advantage of the SSI, please review our Sentiment Program at:  http://www.fxcmmanagedfunds.com/ or call +1 646-432-2968.

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