Record Position Narrows US Dollar vs. Euro Currency

Something happened on the way to parity between the US Dollar and the Euro currency. Amidst the rhetoric of Mario Draghi and his Quantitative Easing forever platform, both the Dollar and the Euro have accumulated record positions among the commercial traders. Given the trend and considerable decline this seems reasonable until the data is actually absorbed consciously and it becomes clear that the record positions in both markets are opposite the trend and bode strongly for this spread to narrow.

The record positions in both markets were set during the last full week of March. Neither market has changed much as the markets have consolidated since then. This consolidation pattern in both markets has allowed technical patterns to build within the individual markets that support the indications of the commercial traders that this spread should be narrowing. Moving to the individual charts we’ll combine these two factors to see with your own eyes. When the media endlessly assaults the ears, a picture really can be worth a thousand words.

Commercial traders in the Euro currency have built up a record net long position in anticipation of higher prices ahead.
Commercial traders in the Euro currency have built up a record net long position in anticipation of higher prices ahead.

Commercial traders have clearly put a floor in the Euro currency market. Their original buying surge held the market above the 112 area through January and into February. The market’s recent move to 104.91 found even more spirited buying by the commercial traders. These recent commercial trader purchases have helped defend the year’s low at 104.91 as the market has only traded down to 105.29. The early beginnings of the bounce off this low are predictive of a bullish divergence technical low as seen by the much higher reading of 4, compared 26 on our proprietary short-term momentum indicator. This compares to the previously mentioned negligible price difference between the March and current lows.

Moving to the Dollar Index which is weighted to 57.6% of the Index’s value, we see the exact opposite play shaping up.

composition of the dollar index
The Japanese Yen and the Euro Currency are responsible for 70% of the movement in the U.S. Dollar Index.

Commercial traders in the US Dollar Index have accumulated a record net short position at the recent highs. Their defense of this high has created a much lower reading on our short-term momentum indicator relative to price. Leading to the obvious conclusion that should this pattern hold, it will create a bearish divergence technical top.

Bearish divergence along with a record net short position accumulated by the commercial traders.
Bearish divergence along with a record net short position accumulated by the commercial traders.

Commercial selling had capped the Dollar’s rally near the 96 level in the Index. However, as the market consolidated, commercial traders can be seen re-purchasing some of their short position only to redeploy it along with reinforcements at these new, higher levels.

I realize that there isn’t much of a story here and very little conjecture to debate. This is just good old-fashioned application of trading wisdom accrued through 20+ years of doing it. We’ll be actively looking for short selling opportunities in the Dollar Index along with buying opportunities in the euro currency like the ones sent out by COTSignals Tuesday night (04/14/2015). Just remember that trading the Euro and Dollar Index against each other increases leverage by a little more than half based on the Euro’s weighting in the Index. Risk is everything. Manage it well.

 


This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.