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Euro & US Dollar: Currencies Follow Up at Trader’s Narrative

Euro & US Dollar: Currencies Follow Up

About two months ago I wrote about the extreme sentiment in both the Euro and the US dollar, suggesting that the two important reserve currencies were at an inflection point: Fading Iran’s Central Bank.

Unloved Euro
Sentiment, as measured by the Daily Sentiment Index was extremely poor for the Euro with only 2% of retail investors saying that they would go long the currency. As well, another sign was the panic from the Iranian Central Bank.

Here is a recent chart of the Euro index showing how it recovered from the lows in early June 2010:

Euro currency index follow up Jul 2010

The first arrow points to mid-May when the DSI hit 2%. This was incredibly lower than the previous low of 6% which it hit bank in late 2005 - an important multi-year low. The second green arrow points to early June, around the time I highlighted the Iranian Central bank’s reaction to the weakening Euro.

Sentiment isn’t a perfect market timing tool but here, once again, we see the power it has in pointing out important inflection points. The Euro did fall lower after the DSI’s abysmal showing but it was short lived and in comparison to the ensuing rally, the incremental decline was quite small.

Turning to the US dollar, it looks like the same chart, just turned upside down:

US dollar index follow up Jul 2010

In early June 2010, the DSI for the US dollar hit 98% - an unquestionable extreme, even higher than the sentiment levels reached in early 2009: “Anything But Euros” Pushes Dollar Sentiment To Extreme.

And once again, contrarian analysis of sentiment proved its mettle with the US dollar currently down significantly from the early June 2010 highs.

If it helps, think of sentiment as a compass pointing you in the general direction. You still have to pick your way through the underbrush. Many people who fail to grasp its power demand too much of it (to extend the analogy, they think it is a GPS system).

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3 Responses to “Euro & US Dollar: Currencies Follow Up”  

  1. 1 Bill Fawell

    I’m just an old commodity AE/chartist and I think what you’ve said is well and good but tells me little about tomorrow which is all most traders think about. Having said that, I’d like to talk about tomorrow and the dollar. It is one wound up chart. It reminds me of a twisted spring that is dying to let loose. I wish you would have put your current contrarian figures up, but it is suffice to say that the RSI is around 30. The MACD is as close as I’ve seen it narrowing in since June. The point of which is ‘tomorrow’. I don’t know if you’ve been observing the effects of the dollar upon the stock market indices here in the United States but they have seemingly traveled hand in hand,… even moreso as of late. For me on the practical side, I’ve shorted the index’s on this recent rally in anticipation of this dollar chart letting go which is where I have placed my educated bet. I’m certain your one smart dude and I like what you’ve got to say, but you’ve got to put it out there my friend, because all the brains in the world don’t add unless your making good trades and ultimately, that’s all anyone really wants to know. I’m not putting you in a catagory, but few economist will put themselves out there like that because they hate to be wrong. Just remember it’s ok to be either wrong or right all the time. What you want to avoid is being right half the time and wrong the other half. That is worthless. Thanks for listening and maybe pass this along, cause I think the trade is shorting the greater market as long as the dollar travels north,… and I think it’s going to be quick and far.

  2. 2 PEJ

    Yes, very good calls Babak. I’ve used your sentiment chart to position myself on both up and down legs of the EUR.USD.
    But the most beautiful contrarian bet was when Robert Prechter during an interview mentioned that Euro sentiment was at 2%, and then he insisted he would NOT TOUCH the Euro

    At that moment, I knew I had a load a whole truck of them.

  3. 3 Babak

    Yes, I remember that interview. That’s why it is so important to think for yourself. Go ahead and read/listen to others but keep the gears turning up there. Glad you found the charts/ideas fruitful.

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