US Dollar Range Trading Likely to Continue

01/22/2010 12:01 am EST

Focus: FOREX

Recently choppy US dollar price action has made for similarly directionless shifts in forex sentiment, and we believe that the US dollar is likely to continue range trading against the euro. Strong rallies in the British pound, on the other hand, seem likely to continue given strongly one-sided crowd positioning, which gives us reason to believe that the GBP will continue to gain against the USD and Japanese yen.

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We see similarly extreme crowd sentiment in the Canadian dollar, and accordingly, call for further CAD strength against its US namesake (USD/CAD losses), while forecasts likewise point to further Swiss franc rallies against the euro and US dollar.

However, a strong US dollar rally against the euro and other key currencies has been met with similarly aggressive crowd buying, giving a contrarian signal to buy into USD strength (sell EUR/USD).

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The ratio of long-to-short positions in the EUR/USD stands at 1.50, as nearly 60% of traders are long. Yesterday, the ratio was at 1.87 with 65% of open positions being long. In detail, long positions are 8.2% lower than yesterday, but an impressive 28.2% stronger since last week.

Short positions are 14.8% higher than yesterday and 13.9% weaker since last week. Open interest is 0.2% weaker than yesterday and 11.6% above its monthly average. The SSI is a contrarian indicator and signals more EUR/USD losses. Indeed, three of our six automated trading strategies have sold the fast-falling pair.

By David Rodriguez of

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