Recent Japanese Yen and Canadian Dollar losses buck their longer-term seasonal trends, as both currencies tend to appreciate against the US dollar in the month of August. A study from 1999-2007 shows that the US dollar/Japanese Yen pair dropped an average of 208 pips in August while the US Dollar/Canadian Dollar pair lost a smaller 102 pips through that time frame. We forecast that the Canadian dollar and Japanese Yen may appreciate against the US dollar through the remainder of the month of August.
In fact, a closer study of changes in the Canadian Dollar and Japanese Yen through the past 8 years of trading shows that both currencies gained in 7 out of 8 months of August. One has to subsequently wonder whether seasonal effects will be enough to push the USDCAD and USDJPY lower through the second half of August. Our Senior Strategist Jamie Saettele predicts that the Japanese Yen will appreciate against the US dollar in his USDJPY Technical Outlook, and a moderation in our FXCM Speculative Sentiment Forex Positioning index likewise suggests that the USDJPY may pull back through the short term.
Forex Positioning in the USDJPY
The most recent reading of FXCM’s forex positioning on the USDJPY shows that the ratio of long to short positions in the USDJPY stands at -1.34 as nearly 57% of traders are short. This is typically a contrarian signal and tends to predict gains in the USDJPY. Yet we see that short positions have actually fallen a whopping 27 percent since last week, and the crowd is turning less and less bearish the USDJPY by the day. If we see the USDJPY SSI reading flip to net-long territory, this would be a signal to short the USDJPY as this typically precedes drops in a currency pair.
Forex Positioning in the USDCAD
In the USDCAD, we actually see that our forex positioning measures show traders recently flipped to net-long the US dollar—a historically bearish signal for the currency pair. The ratio of long to short positions in the USDCAD stands at 1.34 as nearly 57% of traders are long. In a single day, we see that long orders climbed by 2.9 percent while short orders actually tumbled by a whopping 13.1 percent. If this continues, we could see the USDCAD fall in line with its seasonal trends and decline for the remainder of the month of August. This is consistent with our Senior Strategist’s bearish technical outlook for the US dollar against the Canadian dollar.
Written by David Rodriguez, Quantitative Analyst for DailyFX.com
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