After last week’s carnage in the commodity market the plight of the euro is once again centre stage as weekend rumours that Greece was looking to restructure its debt and possibly even leave the euro has helped to bolster the recent rally in the US dollar. However, such a move is at variance with the latest CFTC data which showed that currency speculators have, in fact, taken their short bets against the US dollar to the highest level this month with the largest long position in the euro since 2007. This apparent paradox is not difficult to explain: first the data only deals with contracts as at 3rd May, in other words, the day before the great correction in the commodity market. Because of this reporting pattern the CFTC (or COT) data can only ever be taken as a lagging sentiment indicator. However, despite this drawback the fact that net longs in the EuroFX contract had reached levels not seen 2007 as well as a failure of the eurodollar to breach the 1.50 level could also be taken as signs for a possible reversal in the pair. The fall in commodities simply accelerated the pullback which ensued.
The question now is whether the overwhelming weight of the euro longs will take control once again and we will not know this until this Friday when the CFTC releases last week’s data. However, from a technical perspective yesterday’s hammer on the daily eur usd chart suggests an imminent reversal in the recent sharp move lower with today’s price action appearing to replicate the positive sentiment and with the dollar index also confirming this view with a shooting star, again on the daily chart. Indeed, the dollar index appears to have run out of steam in the 75 area and now appears to be re-establishing its longer term downwards trend.
From a fundamental perspective we could say this morning’s Chinese trade balance figures, which came in much better expected, appear to have injected a degree of bullish sentiment back into the market with equities rising as a result. Naturally, the resulting weaker dollar should help to stem the fall in commodities.