Interesting post Alfa, though I find most of that hard to imagine... if it's 30% overvalued, wouldn't that mean that it should be around 1.10 (sorry ahead of time if my math is wrong). It hasn't been at that level since 2003. The other issue that I have is that US rates were higher than the EZ's from late 2004 until late 2007, so I don't think that we can give carry traders the credit for the rise of the Euro.

PPP is an interesting concept, though bear in mind that its a theory based on a totally efficient market, and as we know, that's certainly not the term many would use to describe the world economy.

As to if the ECB will lower rates in the next meeting, I STRONGLY doubt it. Unlike Bernanke, who can do basically whatever he wants, Trichet and his buddies have to target inflation above all else. The charter of the ECB, laid out in the Maastricht treaty, mandates that the focus be on inflation. Otherwise, I doubt that they would have hiked rates last time (most of Europe was crying about the decision at the time as they feared for the possibility of weakened growth). Hence, I can't imagine that they would cut rates... they essentially don't have that option as inflation is still above the mandated target (I think 2%).

Though the ECB is quite unlikely to move rates, I think that the Fed is in a similar position. Therefore any fluctuations in the next few months will be due to the market running its course without much fundamental interference. It will be interesting to monitor the path of the EURUSD in the coming months... will it continue in the range between 1.5 and 1.6? Or will it break out (seemingly continuing its multi-year trend going northward)? I'd love to hear thoughts!

So now that it seems were firmly entrenched in a range-bound market, I'm wondering if people out there have specific strategies that they think will be more useful. I personally prefer to just short the USD and hold it for awhile (with protective stops placed), but since pairs such as EURUSD, GBPUSD, and EURGBP are all in ranges right now, that's not as solid a strategy.

Trading the trend is much easier, but there are certainly ways to make money during times like these. Does anyone have any tips on what they look for and base their moves on?

Hi TJACK,
I read your post and I like it because it made me think for a while. I agree to a certain point with you. I strongly believe that ECB is thinking for the growth as well. If US economy starts to rebound by the end of year they will have no choice but to lower the rates. The articles i read had as a time frame January- February 2009 for the dollar move. For the short term view you did a good job explain the situation.

Some sectors of the US economy will rebound faster that you think as exports are increasing. If you go to the feds website and look for the next month or so to the indicator that shows the money inflow from outside investors in US markets it will be higher and higher. Its now the time to buy assets in US dont forget that.......to buy assets in US you need the green.
My broker in Florida told me that an investor from Norway had bought 16 condos in Naples in Florida....(its possible with prices down 30-40 % )

I put up the new weekly SSI report on DailyFX this morning. Interesting stuff.

Since I wrote the report late last night, the GBPUSD's extreme negative reading has almost completely dissipated and now stands just off parity - not surprising giving the steep selloff this morning. Can't wait to see what happens after tomorrow's GDP numbers.

Elsewhere, a number of dollar-denominated majors are coming up to significant levels of dollar resistance (EURUSD, USDJPY, USDCHF, AUDUSD), so watching how the retail group is positioning will be increasingly important. Of course speculative retail traders will bet on anything that looks like a range (because of the easy placement for entry, stop and profit levels). With the greenback broadly range bound (a long-term bottoming before a major trend reversal perhaps?) the retail group has been doing relatively well - though their wide stops and quick profit taking is still curbing any cumulative profits. But, when the break finally happens, be assured that they will feed the momentum by offering liquidity on dollar buyers and will likely do so for some time despite the unfolding of a new trend.

To clarify... the member nations of the ECB are more concerned about growth, especially as it has been grinding to a halt recently. However, what I want to clarify is that its not, quite frankly, that important whether Trichet and his buddies are worried about. THEY HAVE TO TARGET INFLATION FIRST AND FOREMOST. They can certainly pursue growth policies, but that comes second.

Also, to say "if the economy rebounds by the end of the year" is - in my opinion - a bit of a stretch. Aside from the USD in the past week (and hence, the price of oil), there hasn't been much good news. Even though the USD rally is encouraging, remember that we are in a range bound market. Sometimes we go up, sometimes we go down, and as we haven't breached that range yet, the USD is certainly not out of the woods yet.

The one way that I think the economy could begin to recover with 6-12 months is if the USD continues to strengthen, past the 1.5 level and maybe toward 1.45 or so. In order for that to happen though I think it's likely that we would need to see both rate hikes in the US and rate cuts in the EZ. Of course, there's no guarantee of that happening.

Also, you make a good point about exports, but be warned that the stronger USD will hurt US exports...

Hello everyone,

There are some useful Sentiment indicators based on FX Options trading activity and US Yeild Curve analysis. I follow them everyday and I can share with you. I find them very useful in my daily trading activity.

Just to start a discussion...

As of 07/25/08, US Options Markets Open Interest Ratio was:

EUR/USD 1.13 Neutral
GBP/USD 1.85 Bearish
USD/CHF 3.59 Bearish
USD/JPY 0.83 Bullish
AUD/USD 0.35 Bullish

US Yield Curve is shifting upward, my reading for 10Yr Yield / 2Yr Yield Ratio is -1.57% at a close on 07/25/08 - Bullish for US Dollar..

Let me know what you think.

Interesting stuff. Whose options data are you using; and how are you calculating open interest into a ratio (is that puts:calls)?

Thanks. I calculate daily put/call for majors as well as open interest put/call (useful long term view), also I calculate and trend 10yr/2yr yields ratio as a Sentiment Indicator. These 3 combined plus my proprietary Trend+Momentum technique, have been very effective predicting majors' movement. If you noticed, options traders were overly bearish on EUR/USD and Aussie yesterday - right on! I have no problem posting this data daily. Not many people understand these ratios though, so I can post some explanations, answer questions if you support me as moderator. Let's do it together, could be interesting discussion. Thank you.

EUR/USD gave "Overly Bullish" signal yesterday 0.18, right after "Overly Bearish" 11.7 Put/Call reading on 07/28/08: Options traders have been united on the directional decisions for the past two days..

AUD/USD CONTINUED WITH STRONG BEARISH SENTIMENT FOR THE THIRD DAY IN A ROW (1.52). OPTIONS FOLKS CONTINUED TO BET ON THE AUSSIES FALL!

However, Gold and Oil are currently Oversold, ready for the rally!

US Yield Curve Sentiment signaled -0.75%, Bullish for USD (Curve Flattened).

EUR/USD gave "Overly Bullish" signal yesterday 0.18, right after "Overly Bearish" 11.7 Put/Call reading on 07/28/08: Options traders have been united on the directional decisions for the past two days..

AUD/USD CONTINUED WITH STRONG BEARISH SENTIMENT FOR THE THIRD DAY IN A ROW (1.52). OPTIONS FOLKS CONTINUED TO BET ON THE AUSSIES FALL!

However, Gold and Oil are currently Oversold, ready for the rally!

US Yield Curve Sentiment signaled -0.75%, Bullish for USD (Curve Flattened).

why my messages have not been approved yet to become visible to people? why am I restricted to post a new thread?

Hello InterMarketA,

Your posts are visible to everyone.

We try to keep our threads to specific groups since many new threads usually find little interest from the public since they need to be searched out specifically. I think that your options work fits perfectly into the sentiment thread though.

I trade options on a variety of instruments. I'm interested as to where you find your open interest levels from. Since this is a very decentralized market, options on FX need to have a good sample size (or retail and institutional deals) for accuracy - would you say? Of course, retail OI alone would give a good contrarian reading; but it would be even more valuable if that retail extreme accompanied a institutional extreme in the opposite direction.

I've been having a difficult time getting any real use out of USDJPY Risk Reversals. Historically, the USDJPY has performed quite poorly when 25-Delta Risk Reversals on 3-month options have fallen below -2 percent, but recently we see that the number is closer to -4 percent and the USDJPY is remaining relatively afloat. Thoughts?

Attached Images

 

On the topic of trader sentiment and positioning, 4 of 5 of our SSI signals suggest we may see further dollar rallies through the near term:

Forex Traders Signal US Dollar Rallies

Thoughts?

Hey all,

I've been getting a lot of questions about our SSI trading signals on DailyFX.com , and I always ask readers to ask me questions on the forum so that all may see the responses. So really, if you have any questions about our Speculative Sentiment Index, I would definitely be willing to answer your questions. So again, ask away.

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David Rodriguez is the author of Forex Trading Signals and Forex Trading Weekly Forecast on DailyFX.com.