Dollar Unwinds Oversold Condition; Yen Negative Sentiment Finally Reverses

Includes: FXA, FXC, FXE, FXY, UDN, UUP
by: Peter Ruud

US dollar rallies across the board on the back of stronger than expected jobs number, easing oversold conditions.

Yen sentiment finally improves as the USD/JPY briefly tests critical 100 level.

Nasdaq 100 & S&P 500 futures speculators become more skeptical.

The US dollar's prayers were finally answered, rallying across-the-board vs. major foreign currencies amid a stronger than anticipated US Non-farm payrolls number. The greenback managed to unwind severely oversold conditions vs. the (FX) majors even though sentiment eased back for the most part, according to the latest COT (Commitment of Traders) report (as of August 1st). The most significant move in the FX market was with the Japanese yen, as the percentage of long (futures) positions of speculators improved dramatically for the first time in 7 weeks. This enabled the net percentage to move back up to a paltry 20%, highlighting an improvement off a 2-year low. The number of gross short positions (vs. the yen), fell for the 2nd straight week, allowing for the net (position total) to increase by another 9K.

According to retail trader data provided by Oanda Corporation, the retail population continues to fade yen strength, pushing the overall percentage of bulls down to 36%. While this is near the year's low in yen (retail) optimism, the previous two times the percentage reached these levels, the yen moved higher the subsequent few weeks. Moreover, while Friday's non-farm beat produced a marginal breakout for dollar bulls, the technicals for the USD/JPY continue to highlight a potential double top formation. Look for the USD/JPY to test the mid-108 region while the 112 handle caps to the upside.

The net long tally for euro (futures) speculators dropped again for the 2nd straight week, despite reaching another fresh 18-month high vs. the US dollar. The gross long position edged lower off the recent record high, allowing for the net percentage (64% long) to drop, suggesting a potential ceiling may have developed in (speculative) optimism for the euro. That said, according to the latest data from Oanda, retail traders remain rather unwilling to commit to the euro's recent rise. As such, continued retail pessimism should induce a move towards the 1.2140 region (EUR/USD) once overbought technical readings have fully unwound.

British pound futures fell back this week after a strong start, as a dovish BOE and a strong US jobs report provided a 1-2 punch to the GBP/USD to end the week. The Pound's recent push towards net speculative (futures positions) parity had been already stalling, according to the latest data from the CFTC. Gross long position's gain were once again outpaced by the pick-up in gross shorts, allowing for the net long percentage to steady at 40% for the 2nd straight week.

According to recent data provided by Oanda Corporation, retail traders remain relatively pessimistic towards Sterling, as the percentage of longs fell back to 42% on Friday. That said, with speculative optimism to have seemingly stalled and 20-day moving average support potentially compromised on the back of Friday's price-action, the GBP/USD could test 1.2930 region before re-establishing momentum towards the key 1.3285-1.3500 region.

The Australian dollar sentiment vs. the greenback continues to show steady improvement despite the AUD/USD's struggles to clear the psychological 80 cent threshold. Speculators continue to grow net longs, allowing for the net long percentage to tick back up to 78% as last week's large increase in gross shorts was relatively unchanged for the week. With large speculator's at already elevated (bullish sentiment) levels, if price-action were to cleanly break below .7835 (AUD/USD), the anticipated move (up) towards the mid-81 cent region would be pushed-out even further and could re-focus the 77 cent handle once again.

Canadian dollar futures speculators continued their recent trends in sentiment, with net (speculative) longs surging in both in net contracts and percentage for the 11th straight week. The USD/CAD, however, managed to rebound off a fresh 2-year low, finishing the latter portion of last week up nearly a percent.

Retail traders (according to recent data provided by Oanda Corporation) continue to be extremely pessimistic towards the loonie, with only 24% of outstanding contracts long. Moreover, with the recent trend in speculative sentiment having been one-sided and notably, retail traders are at extremes with regards to their pessimism towards the loonie, the USD/CAD could encounter some more corrective price-action until overstretched technicals fully unwind.

Gold futures sentiment continues to show improvement as both net positions by total and by percentage ticked up for the 3rd straight week. Gold's price-action suffered at the week's end on the back of the US dollar's recovery, delaying a potential monthly chart breakout of a 6-year bear trendline.

According to recent Oanda Corporation data, retail traders stopped selling gold going into Friday's US employment report, allowing for the persistent move down in optimism to stall at 56%. If retail traders begin to buy into gold futures, however, this would likely further delay an (upside) attempt to re-test key resistance in the 1300 region. Moreover, a sustained loss of the 1248 zone would also hint of a deeper (downward) move towards 1230, where the 200-day moving average currently lies.

Crude oil futures continued short-covering by speculators has allowed price-action to hover around the 50 handle . According to the latest COT data, gross long positions spiked while gross shorts dipped by 4K, lifting the net percentage of longs to 76% and the net total to over 486K. Crude oil's price-action continues to flirt with weekly trendline resistance that has capped since February. If cleanly broken to the topside, Crude futures should re-test the 52 to 55 region in the near-term once again.

E-mini S&P 500 futures consolidated the recent run-up to all-time high, trading sideways over the past week. According to the latest COT data, however, large speculator's grew more pessimistic as gross longs fell slightly and gross shorts edged higher. Although, gross shorts continue to hover near the low-end of the year, the trend looks to have changed. Moreover, with short-covering induced strength to have seemingly stalled, while (daily) technical momentum is starting to abate, S&P 500 futures look ripe for a sizeable correction lower. If, however, price-action is able to quickly renew bull momentum and were clear current highs, then a move up to 2500 could quickly materialize.

Nasdaq 100 futures speculators covered more (gross) short positions but were essentially unchanged in gross longs. Although, this allowed the net long percentage to inch up to 66%, the key take-away is the reluctance of speculators to buy in the face of record high prices. Moreover, the technical picture looks a bit susceptible as well. The reaction of Nasdaq 100 futures after reaching marginal new highs recently suggests that bulls may have exhausted and could be entering a period of corrective price-action of perhaps 5% or more.

Speculators made a bearish statement in US 10-year futures prior to last week's US employment report, according to the most recent COT report. Gross long positions decreased by 23K as gross shorts surged, allowing for the net long percentage to dip to 57%. While, the technical base that formed in US 10-year futures at 124.80 has buoyed price-action since July, last week's (bearish) rejection near 126.37 could highlight a technical ceiling that could merit a move back towards the key 124.80 region.

US 30-year futures speculators pulled back on recent bullish sentiment as the net (LONG) percentage nudged down to 57% from 59% the prior week. Gross longs continued to hover near their highest level since the Financial Crisis in 2008, while gross shorts surged by 13K. The bearish move in sentiment coupled with latest topside rejection in the 155 region, suggests US 30-year futures could veer back towards the July lows near the 152 handle.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.