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FX: Stretched USD pessimism and EUR optimism point to reversal risk (P3)
EQUITIES: VIX SBI nearing lows; EM nears stretched optimism levels (P4/7)
COMMODITIES: Silver bounces from SBI lows; Cotton oversold (P15-16)
USD Index and EUR/USD sentiment points to reversal risk
Several sentiment threads are looking stretched in FX, with readings on CAD and EUR pointing to a stretched optimism condition, while speculators have also moved to an aggregate dollar net short position in the last couple of weeks (see p12-13). In terms of the dollar, the US Dollar Index SBI was below 3 by the end of the last week, at levels that have in the past 10Y been followed by a pick-up in the index over the next 30D on 78% of occasions (by average -0.7%). USD Index (DXY) is oversold on sentiment and well placed for a near-term contrarian rally.
On the other side of the FX divide, the EUR/USD SBI has moved above 98, to levels that have in the past 10Y been followed by a decline in the cross-rate over the next 30D on 68% of occasions, by an average -0.6% (an average -1% over 65D). At the same time, speculators’ EUR net long positioning is now extended. EUR/USD is facing a sentiment/positioning headwind as it nears key resistance around 1.15 (1.17 is next target after that). Increased likelihood of a near-term reversal in EUR/USD from an overbought sentiment condition. See charts p3.
Chart of the Week: In our last full Essentials we noted that speculators’ aggressive curve flattening bias left them vulnerable to any steepening in the US 30Y-2Y curve. While sentiment on the curve has moved back from stretched levels in the last couple of weeks, as of 11th July COT report curve positioning was little changed. Specs’ big conviction on US curve flattening is undiminished.
Multi-Asset: 1.6% QE-free Bund yields
Absolute Essentials is taking a short summer break, returning 17th July.
This snapshot provides current market sentiment highlights, including the most extreme Sentiment Barometer Indicators market readings on page 7.
Highlights: In the past week, optimism for equities continued to decline, whilst pessimism for bonds increased further. Optimism for major currencies is on the up (EUR and CAD became stretched), except for JPY that keeps weakening. In commodities, silver pessimism and wheat optimism became stretched whereas grains sentiment remained elevated.
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