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Sentiment towards major currencies is extremely important this week after the buck roared higher in early week trading and continued last Friday’s ascent. Now is a great time to check out how traders feel about some of the commodity related currencies, as they look for contrarian trading signals via sentiment readings.
Trading sentiment is most effective when retail traders are running counter trend, meaning that they are heavily leaning against established market trends and in increasingly large numbers. Additionally, once big sentiment skews build it can be a powerful sign that the retail crowd are being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent is considered to be at an extreme level, while market sentiment readings over 80 to 95 percent is often a strong indication that the trade could be topping or about to reverse at any time.
I will now look at some the strongest sentiment bias amongst the retail crowd right now. Some of the sentiment skews suggest that current price trends in FX, stocks, and precious metals are breaking point and big moves may be nearing.
NZDUSD – Too bullish
According to the ActivTrader Market Sentiment tool the majority of traders are still very bullish towards the NZDUSD, which comes as a surprise considering the big reversal in the US dollar index.
The ActivTrader Market Sentiment tool shows that 83 percent of traders are expecting more upside in the NZDUSD pair. Given that the bullish bias is extreme it is possible we will soon see a bearish correction.
It should be noted that sentiment towards the greenback is very important for the entire currency market due to the US dollars position as the world’s reserve currency.
AUDUSD – Worrying sentiment
The ActivTrader market sentiment tool shows that 84 percent of traders are bullish towards the AUDUSD pair, following the recent strong reversal from the 110.00 support level in the US dollar index.
The recent strong jobs report and losses in the commodity sector could be very bearish for the AUDUSD pair dollar. I also think that China plays a huge role in the AUDUSD pair due to its demand for the Australian commodities.
I think we are not yet at the end of the down move in long to medium-term horizon given the state of the Chinese economy. With this is mind we should probably expect more losses in this pair.
USDCAD – Bear bias
Market sentiment is still very bearish towards the USDCAD pair, which is not very surprising if we consider that breakout in oil price since the last OPEC+ meeting.
The ActivTrader market sentiment tool showing that some 79 percent of traders currently bearish towards the USDCAD which is probably meaning that retail is starting to experience less pain than recently.
I think it is worth noting that the sentiment bias is very overstretched, which certainly makes me suspicious that we might need to see more USDCAD upside this week.
