All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

Does Positioning Data Suggest A Dollar Rally?

Last updated 1/18/2010 3:13 AM ET (GMT -5) 13 Comments

• Share this:

Boris Schlossberg

Director of Currency Research, GFT

According to the latest CFCT Commitment of traders data short positions in the US dollar increased by factor of six last week to 67,500 rising to their highest level in a month. The positioning suggests that speculators are anticipating further dollar weakness in the week ahead, but their short bias may be subject to a squeeze if risk aversion flows reappear.

With the exception of Australia which reported very strong labor data last week, economic new from the rest of G-20 block was generally disappointing.  In UK Manufacturing and Industrial Production reports missed expecations, in Eurozone the Trade Balance printed weaker than expected as higher currency rates finally took their toll on trade and in US the Retail Sales numbers shocked to the downside at -0.3%  versus 0.4%. Meanwhile equities appear to have stalled at the 10,700 level for the DJIA despite strong earnings data from financials and high tech sectors as the index tumbled more than 100 points on Friday.

This week the economic calendar is relatively light once again, but there are several key reports that could impact the market. In UK the claimant count and retail sales numbers will be key to setting the tone in the pound. In EU the flash PMI data for January will offer the latest evidence of strength or weakness of  the recovery in the 16 member union and in US the weekly jobless numbers could be key in determining whether the improvement in labor markets has ended. If the economic news this week surprises to the downside triggering further profit taking in equities,  the greenback could see a rally on safe haven flows as specs are forced to unwind their freshly laid dollar shorts.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

• Share this:

Comments (13)

schultzz.at

January 18, 2010 at 04:27 AM ET

I fully support your arguments.
Futures traders have cut their EuroFx short position by half from around 36K to 18K (contracts) in the week trough 01/12 flooding the market with buy orders worth around $1 billion. They seem to have panicked after the NFP miss. They may even have continued to cover after the weak retail sales number. EUR/USD nevertheless closed basically unchanged for the week.

Long positions in CAD reached 48.6K (4.7 bill. USD) and 59.4K (6.5 bill. USD) in AUD. Short positions in 10yr Treasury notes reached 190K and long positions in Nymex crude reached 135K.

I prefer to use these numbers as a contra-indicator. Traders have become complacent that abundant liquidity will continue to support 'risk assets' and an accelerating economic recovery will push long-term rates higher.

However, the recent 'sell the news' reaction of stock traders selling Intel and JPM shares after the 'better than expected' earnings releases suggests that an increasing number of risk traders wants to watch the action from the sidelines.

I personally view the EUR/USD as the 'most fragile link' in the current scenario. Any news, e.g. the discussion who will succeed ECB vice president Papademos, may be interpreted as Euro negative.
Tom Schultz.

bschlossberg

January 18, 2010 at 06:41 AM ET

Thanks Tom for your views - the one danger to short euro trades is surprisingly buoyant PMI data later this week which would assuage a lot of the "recovery stall' fears. Aside from that the path of least resistance is down.

Semaj

January 18, 2010 at 08:53 AM ET

I think monthly charts are deserving of some analysis here. We seem to be @ significant retracements and S&R levels which suggest dollar strength for Q1 at least. Not just in forex but in the dow ans s&p as well. Any thoughts?

FXDragon

January 18, 2010 at 11:20 AM ET

Mybe but sometime in future there has to be a major correction. Theres a bearish channel on treasury yields since 1980s. DJ Industrial is showing a head and shoulders with suffiicient volume. And a double top on SP500 completed with the recent crisis. My monte carlo simulation also supports this. Ofcourse not 100% dont sell your stocks bec. of me!

Cliff Wachtel

January 19, 2010 at 12:53 AM ET

As always, a worthy article. However, readers should beware. The COTpositioning is a concern. However, as I've noted often in my recent posts (seekingalpha.com, forexfactory.com, etc) There are 4 kinds of events that move the dollar:

The First Two: Events That Boost USD Fundamentals Because They Improve Prospects for Stimulus Withdrawal and/or Rising Interest Rates: These include:

1. US jobs and spending data: These are the key metrics the Fed is watching to decide the pace and extent of stimulus withdrawal and interest rate increases. Rising yields or falling US dollar supply are the prime fundamental movers of the dollar. Any increase in expectations for these fundamental drivers of US dollar demand will boost the dollar, and vice versa. Current prospects: Low as all such data has disappointed after great numbers in the prior month

2. Falling Demand For US Treasury Debt: That too would bring higher yields and boosts US dollar demand. No signs of this happening yet, though there is concern that foreign demand has dropped, which has forced the US to buy its own bonds to keep up appearances and keep down yields, in order to protect the banking sector from intolerably high default rates and needs for more bailouts. Long term this could kill off a US recovery, but would boost the dollar in the short term. Current Prospects: Low because bond auctions have shown demand, though it’s unclear if this is from genuine private buyers or the Fed itself buying through other parties in order to keep rates down. Eventually, this will become known.

The Second Two: Events That Feed Demand For The Dollar As A Safe Haven.

3. General Fear-Inducing Events: Given the dollar’s low yield, there is no reason to hold it when markets believe better times are coming sooner than expected, because traders can find higher yielding currencies that will appreciate too if times are improving. By default, that makes the dollar a classic safe-haven currency that rises only in times of fear, on any news that causes reduced expectations for economic recovery. Fear events include anything that dampens optimism, like a poor earnings season, rising geopolitical tensions, new news about sovereign debt troubles, etc. Prospects for this are by their very nature unpredictable, though there are plenty of potential time bombs out there, most in some way or another connected to either:

• Risk of credit default on an international, national, or regional level. For example, the US will be seeing the largest wave of mortgage rate resets ever in 2010-2011. The last big wave in 2007 brought about the sub-prime crisis, and the coming numbers of resets are far larger, and the jobs situation is much worse.

• Risk of significant pullback in stocks and other risk assets on valuation or other concerns

4. Any News That Undermines Euro Demand: Because the EUR/USD comprises about 30% of all forex trade, that means for every euro sold or bought, a US dollar is used and vice versa, thus the two are almost forced to move in opposite directions. Again, the most likely such event is more bad news about credit defaults from the economically weaker Euro-zone governments. This problem will linger for some time and its power to undermine the euro is the perhaps the leading support. The Greek sovereign debt situation continued to deteriorate.


Until one or more of these types of events occurs, trader positioning, even if extreme, will merely represent latent potential, like a compressed spring.Once one of these events unleashes this energy, then the more one sided the positioning, the stronger the counter move from the resulting dollar short squeeze.

Cliff Wachtel

January 19, 2010 at 12:58 AM ET

Addendum to last comment: in point #4, I said:

....This problem will linger for some time and its power to undermine the euro is the perhaps the leading support [add: 'for the US Dollar]

Consider adding a feature so that we can edit our comments when finding typos after posting. Thanks, Cliff

schultzz.at

January 19, 2010 at 02:08 AM ET

Thank you for this comprehensive summary. I think many readers will find your post valuable.

I just want to add that the news are flowing almost continuously and there is a lot of ambiguity in any release. If positioning is at extreme levels even a news release which is 'unambiguously' positive for a particular asset may lead to a 'paradoxical' result.
Tom Schultz.

alexjbrandt

January 19, 2010 at 02:56 AM ET

Maybe my logic is different, but how does this: "short positions in the US dollar increased by factor of six last week to 67,500 rising to their highest level in a month" equate to a dollar rally?

bschlossberg

January 19, 2010 at 03:08 AM ET

its a contrarian indicator

alexjbrandt

January 19, 2010 at 03:40 AM ET

hmm, interesting. I've had a theory that the liquidity providers try to push a currency pair past a support/resistance level to blow stops out on their client's account (cause they can see the stop levels grouped there). Otherwise why else does price bust through a resistance/support level only to reverse a hour later or so? IDK.

schultzz.at

January 19, 2010 at 03:57 AM ET

I agree that stop hunting is a common practice among dealers, but the COT report refers to the positioning of speculators and commercial traders at futures exchanges (most are part of the CME group I think) regulated by the CFTC.
Tom Schultz.

alexjbrandt

January 19, 2010 at 04:16 AM ET

I know, I got a little off topic :P

NeoFX

January 19, 2010 at 02:33 PM ET

WOW!! i don't know how you guys find the time for all this but interesting nevertheless. EUR/USD is headed DOWN!! this coincides with everything going on in Europe and US at moment and near future (be it political and/or socio-economic reasons)

EUR/USD will fall into the 1.38 region pretty soon.

R

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.