USD Longs Were Cut Back Substantially

London markets are closed today for May Day while Japanese Markets are closed for Greenery Day.

The most recent IMM Commitment of Traders report shows that USD longs were cut back substantially. This suggests that traders are starting to turn dollar bearish which is in line with the recent improvements in risk appetite.

There is also an article in today’s NY Times that suggest better than expected results from stress tests based upon quotes from a “senior official.” Tests of Banks May Bring Hope More Than Fear.

The central question in the financial markets right now is whether the global recession is nearing an end. In addition to the U.S., improvements were also seen in the Chinese and the U.K. manufacturing sectors. The price action of the currency, equity and bond markets suggest investors believe that the worst is over. The U.S. Treasury yield curve is steepening, which means that longer term rates are rising. This is a reflection of the market’s optimistic outlook for the U.S. economy. However we are only cautiously optimistic because it is far too early to label the recent improvements a new trend.

Wad of Cash

One of the primary arguments for a recovery and further gains in equities is the wad of cash sitting on sidelines. According to JPMorgan, close to $700 billion is parked in bank accounts and money market funds in the U.S. alone and therefore deployment of these funds could pave the way for a stronger recovery in currencies and equities. If you remember, the recession was triggered by a crisis of confidence and if confidence is restored, the money sitting on the sidelines may move back into the markets. We will be watching closely to see if the recent stability can turn into sustainability here in the U.S. and abroad. In the meantime, it is encouraging to see currency, equity, commodities and bond traders all price in a greater chance of a recovery.

Graph: Deutsche Bank

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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