Currency Market Sentiment - Usually the Trend Is Your Friend, Until That Trend Becomes Overcrowded

When investing, in-depth knowledge of the current sentiment is a very valuable tool. Market sentiment is simply the overall mood or feeling of investors towards a specific market. The greater the mood or feeling in one direction, such as 90% of investors are long or have bought a specific market, then the greater the market sentiment significance.

When market sentiment is near or at extremes this has historically been a powerful indicator of market reversals and trend changes. For example, if 95% of investors are buying gold and gold has been rising in value, then this is an early warning that Gold should experience a pullback, and a downward trend is near.
The currency markets are one of the best markets to take advantage of market sentiment as a contrarian indicator because of their trending and volatile nature.

You should focus on market sentiment when it is nearing or at extremes, because this is the signal for you to either decrease your position in that market, or take the opposing view (contrarian) and bet against the trend. You can also use sentiment measures as indicators of market bubbles, helping you avoid the inevitable pop.

We Use Two Powerful Tools for Gauging Currency Sentiment:

SSI- This measure is called the speculative sentiment index. As its name implies, it is an index that tracks the current sentiment of a market. The SSI uses broker order flows, and is updated usually twice per week, giving investors/traders a constantly updating measure, percentage, of how many investors/traders are buying or selling a certain currency.

COT- This report, Commitment Of Traders, is published every Friday by the C.F.T.C. The COT measures the net long and short positions taken by traders in the futures markets. It is a great resource to gauge sentiment of the very large market speculators or investors including banks, hedge funds, financial institutions, and companies.  Due to their large positions they are required to report to the government, which then compiles this reporting into the COT.

Most Recent SSI:

EURUSD - The ratio of long to short positions in the EURUSD stands at 1.74 as nearly 63% of traders are long. Yesterday, the ratio was at 1.82 as 65% of open positions were long. In detail, long positions are 5.2% lower than yesterday and 98.6% stronger since last week. Short positions are 0.5% lower than yesterday and 33.1% weaker since last week. Open interest is 3.5% weaker than yesterday and 11.5% above its monthly average. The SSI signals more EURUSD losses, or Dollar strengh against the EURO.

GBPUSD - The ratio of long to short positions in the GBPUSD stands at 2.01 as nearly 67% of traders are long. Yesterday, the ratio was at 2.11 as 68% of open positions were long. In detail, long positions are 3.0% lower than yesterday and 65.1% stronger since last week. Short positions are 2.0% higher than yesterday and 51.9% weaker since last week. Open interest is 1.4% weaker than yesterday and 3.7% below its monthly average. The SSI signals more GBPUSD losses, or Dollar strength against the British Pound.

GBPJPY - The ratio of long to short positions in the GBPJPY stands at 2.07 as nearly 67% of traders are long. Yesterday, the ratio was at 1.76 as 64% of open positions were long. In detail, long positions are 8.9% higher than yesterday and 30.0% stronger since last week. Short positions are 7.4% lower than yesterday and 25.7% weaker since last week. Open interest is 3.0% stronger than yesterday and 5.5% above its monthly average. The SSI signals more GBPJPY losses, or Japanese Yen strength against the British Pound.

USDJPY - The ratio of long to short positions in the USDJPY stands at 2.70 as nearly 73% of traders are long. Yesterday, the ratio was at 2.31 as 70% of open positions were long. In detail, long positions are 5.9% higher than yesterday and 11.0% weaker since last week. Short positions are 9.7% lower than yesterday and 17.5% weaker since last week. Open interest is 1.1% stronger than yesterday and 13.6% below its monthly average. The SSI signals more USDJPY losses, or Japanese Yen strength against the U.S. Dollar.

USDCAD - The ratio of long to short positions in the USDCAD stands at 1.42 as nearly 59% of traders are long. Yesterday, the ratio was at 1.08 as 52% of open positions were long. In detail, long positions are 9.7% higher than yesterday and 14.0% weaker since last week. Short positions are 16.6% lower than yesterday and 46.8% weaker since last week. Open interest is 3.0% weaker than yesterday and 12.0% below its monthly average. The SSI signals more USDCAD losses, or Canadian Loonie strength against the U.S. Dollar.

USDCHF - The ratio of long to short positions in the USDCHF stands at 1.02 as nearly 51% of traders are long. Yesterday, the ratio was at 1.12 as 53% of open positions were long. In detail, long positions are 4.1% lower than yesterday and 41.6% weaker since last week. Short positions are 5.3% higher than yesterday and 65.4% stronger since last week. Open interest is 0.3% stronger than yesterday and 11.2% below its monthly average. The SSI signals more USDCHF losses, or Swiss Franc strength against the U.S. Dollar.

AUDUSD - The ratio of long to short positions in the AUDUSD stands at 1.27 as nearly 56% of traders are long. Yesterday, the ratio was at 1.39 as 58% of open positions were long. In detail, long positions are 0.4% higher than yesterday and 52.8% stronger since last week. Short positions are 10.1% higher than yesterday and 14.4% weaker since last week. Open interest is 4.5% stronger than yesterday and 10.6% above its monthly average. The SSI signals more AUDUSD losses, or U.S. Dollar strength against the Australian Dollar.

NZDUSD - The ratio of long to short positions in the NZDUSD stands at 1.29 as nearly 56% of traders are long. Yesterday, the ratio was at 1.67 as 63% of open positions were long. In detail, long positions are 6.6% lower than yesterday and 8.2% weaker since last week. Short positions are 21.5% higher than yesterday and 5.4% weaker since last week. Open interest is 3.9% stronger than yesterday and 4.8% below its monthly average. The SSI signals more NZDUSD losses, or U.S. Dollar strength against the New Zealand Kiwi.

Interpreting the SSI:

The SSI is based on broker, proprietary, customer flow information and is a contrarian indicator designed to recognize price trend breaks and reversals in the four major 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.

Most Recent COT:

Speculators have started to cover US dollar short positions, or are basically closing out positions or bets on US dollar weakness.  This most recent COT data warns of a trend change towards US dollar strength.



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 in a specific currency. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar stength is close to a top, which means pairs such as the USDCAD or EURCAD are close to a bottom.

Readings of 95 and higher as well as 5 and lower are in boldfaced red type, indicating market sentiment extremes. When the COT for a specific currency reaches these extremes the risk of a reversal in the preceding trend increases dramatically.

So What Currency Pairs Should You Potentially Invest In Based On The Current Market Sentiment?

Overall, the current market sentiment suggests general dollar strength to come; however, there are a few currencies that the dollar is most likely to strengthen against based on the most recent sentiment measures.

Short GBP/USD - Based on the current market sentiment you should short the GBP/USD, because contrarian sentiment indicators suggest dollar strength against the British Pound. According to the SSI nearly 67% of traders are long this pair, and according to the COT report, British Pound strength has just reached an extreme top. Both of these sentiment measures are among the most extreme for the British Pound/US Dollar pair.

Short EUR/CHF- Crosses are basically multiples of base pairs, which means that the EUR/CHF is actually the EUR/USD times the USD/CHF. Both the SSI and COT report suggest further Dollar strength to come against the Euro, which mean the EUR/USD should drop. Also, both of these cotrarian sentiment indicators suggests Swiss Franc strength to come against the Dollar, which means the USD/CHF should drop. If both the EUR/USD and USD/CHF should drop, then consequentially the EUR/CHF will drop.

Keep in mind that these contrarian indicators should be utilized for short to medium-term investments, and you should always implement prudent risk management such as stop-losses and leverage control. You can invest in the above mentioned currency pairs through either the spot (OTC) markets, or futures markets.

If you would like any more information on this subject and would like some guidance as to exactly how you can take positions based on the above suggestions then please call me at 262-939-8885.