Japanese Yen Short Positions Increase 22% and Other Currency News

03/27/2009 10:44 am EST

Focus: FOREX

Higher-yielding currencies have been rallying against the Japanese yen on speculation the recent recovery in stocks will trigger a shift in investor sentiment towards more risk taking. However, according to the FXCM SSI, which measures the positioning of thousands of traders, retail investors have a different opinion. In fact, USD/JPY short positions are up by 22.3% since last week and retail traders have been betting that the recent gains on stocks and high-yielding currencies will be short-lived and possibly reverse ahead of the next G20 meeting.

EUR/USD - The ratio of long to short positions in the EUR/USD stands at -1.02 as nearly 51% of traders are short, according to the FXCM SSI, which measures the positioning of thousands of retail traders. Last week, the ratio was at -1.15 as 53% of open positions were short. Retail traders have been buying the EUR/USD and long positions are up by 17.6% since last week.

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 EUR/USD 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 necessarily 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 it 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.

USD/JPY – Higher-yielding currencies have been rallying against the Japanese yen on speculation the recent recovery in stocks will trigger a shift in investor’s sentiment towards more risk taking. However, according to the FXCM SSI, which measures the positioning of thousands of traders, retail investors have a different opinion. In fact, USD/JPY short positions are up by 22.3% since last week and retail traders are betting that the recent gains on stocks and high yielding currencies will be short-lived.

GBP/USD - The ratio of long to short positions in the GBP/USD stands at 1.09 as nearly 52% of traders are long. Yesterday, the ratio was at 1.31 as 57% of open positions were long. In detail, long positions are 7.6% lower than yesterday and 15.9% stronger since last week. Short positions are 11.0% higher than yesterday and 1.5% weaker since last week. Open interest is 0.4% stronger than yesterday and 1.8% below its monthly average. The SSI is a contrarian indicator and signals more GBP/USD losses.

USD/CHF - The ratio of long to short positions in the USD/CHF stands at 1.34 as nearly 57% of traders are long. Yesterday, the ratio was at 1.75 as 64% of open positions were long. In detail, long positions are 13.3% lower than yesterday and 15.5% stronger since last week. Short positions are 13.5% higher than yesterday and 28.8% stronger since last week. Open interest is 3.5% weaker than yesterday and 19.4% above its monthly average. The SSI is a contrarian indicator and signals more USD/CHF losses.

USD/CAD - The ratio of long to short positions in the USD/CAD stands at 1.17 as nearly 54% of traders are long. Yesterday, the ratio was at 1.06 as 52% of open positions were long. In detail, long positions are 2.5% higher than yesterday and 17.3% stronger since last week. Short positions are 6.8% lower than yesterday and 5.6% weaker since last week. Open interest is 2.0% weaker than yesterday and 5.9% below its monthly average. The SSI is a contrarian indicator and signals more USD/CAD losses.

By Antonio Sousa, Chief Strategist, DailyFX.com

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