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Euro Sentiment (You’re reading it wrong)

By Ashraf Laidi  |  07/03/2018 17:16

The escalation of trade war rhetoric from the US administration and threats of retaliatory action from Europe and China is clouding traders’ attention to the usual macro events, such as Thursday’s ECB press conference on monetary policy and Friday’s release of the US jobs report. As EUR/USD traders weigh up those events, here is a reminder on how to approach a popular metric in a different way.
You must all know the traders’ commitment reports provided by the US Commodity Futures Trading Commission. For EURUSD, the most popular report is that of speculative traders’ net longs (difference between long and short futures contracts in EUR vs USD). Traders/analysts hastily focus on the net longs report, compare it to the spot price of EUR/USD and draw their own conclusion. Many become contrarian experts after seeing net longs at or near all time or multi-year highs/lows. And many get it wrong.

Deconstructing the Ascent

One way to improve your reading of speculators’ sentiment is to analyse the gross number of longs (green graph) and shorts (red) in addition to the net longs (yellow). This way, you shed more valuable light on the forces behind the trend/shifts in net longs. Those who look only at the net longs would have erroneously concluded that the multi-year highs in net longs (2nd half of 2017) were nearing unsustainably high levels, implying that longs would have to unwind and EUR/USD to drop lower.
But taking a closer look at the data, you will observe that the 12-month run in net longs and EURUSD was helped by a persistent ascent in gross longs (green) and a decline in gross shorts (red). The relationship becomes more important in the 2nd half of 2017 when net longs (yellow) reach new record highs, tempting amateur contrarians to call the top. But proper use of gross longs and shorts highlights the breakout in net longs and simultaneous dwindling in gross shorts, both of which support the rising trend in net longs.

It Works the other way too

The converse case occurred in 2014 in the midst of the euro’s selloff and USD bull market. As we entered in Q4 2014, EURUSD collapsed 15% in the ensuing 4 months prompting the usual parity call from some and a rebound from others. Simply focusing on the net longs would have ended up being a guessing game due to multiple false bottoms in November 2014, February 2015 and ultimately the real bottom in April 2015.
Upon closer examination of the gross longs/shorts data, the April 2015 bottom in EUR/USD was accompanied by a notable top and subsequent reversal in net shorts (red) as well as gradual increase in gross longs (green). This is highlighted by the white rectangle (R1).

The Case Today

The latest report data on hand for speculative commitments in EUR/USD was released on Friday March 2nd for the 7-day period ending on the preceding Tuesday March 30th. It shows net longs at 138,000 contracts (238,000 gross longs and 100,000 gross shorts).
Gross shorts have not fallen further, but have not risen either. Meanwhile, gross longs continue to dwindle in their longest consolidation range on over five years.

Charting it

Charting these data into support and resistance trendlines also helps. Gross longs are clearly delineated by a rising trendline, while gross shorts are highlighted by the inability to break above their falling trendline resistance. A less obvious (and more development) is that net longs broke above their trendline before the spot EUR/USD (see red rectangle).
These data, made available on a weekly basis are not helpful for day traders looking to manoeuvre around Draghi’s comments or US jobs data. But if you’re looking for metrics helping you make conclusions about currency sentiment, then this helps, especially for EUR/USD -- the most heavily traded FX pair in the largest market in the world. Now imagine if you did the same analysis for USD/JPY, GBP/USD and USDX speculative commitments.
Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and GKFX accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.


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The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice.

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