Sunday 18/12/2011 10 AM GMT 11AM CET

Currency speculators increased U.S. Dollar long positions in the latest week, according to the Net Traders positions from the Commodity Futures Trading Commission but are we due further strength in the dollar or will we see a break? Let's look at two currencies, the Euro and the Aussie dollar and see where they may go next. 

The value of the dollar's net long position rose to $16.32 billion in the week ended Dec. 13, from $14.59 billion the previous week. The above info is from the summary from Reuters and on it's own its no help to us in deciding where a currency may go next – its the commercial movements relative, to large speculators which we need to study.

Commercial traders, own the cash so there not trying to make money – their simply hedging and will only move their hedges, when prices are moving to far from fair value. This is not a timing tool because the commercials hedged, they are not affected by price spikes as speculators are but their movements can give us indications of a trend change or short covering rallies within existing trends. Let's look at speculative and commercial movements in the Euro and Aussie Dollar.

Euro

The Euro has been battered in recent months and speculators continue to ramp up shorts while the commercials have now come in and started to buy into the decline. Speculators now hold 4 times as many shorts, as longs and commercials hold twice as many longs as shorts. The positions below are of course realized on Friday BUT are the positions calculated on the Tuesday of last week. The price action since Tuesday, shows that some short covering is already taking place – but will it continue? Let's look at the positions and then, where we think the Euro could go next:

EURO FX - CHICAGO MERCANTILE EXCHANGE                                Code-099741
FUTURES ONLY POSITIONS AS OF 12/13/11                         |
--------------------------------------------------------------| NONREPORTABLE
NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF EUR 125,000)                           OPEN INTEREST:      327,740
COMMITMENTS
35,507  151,964   15,081  244,941  101,015  295,529  268,060   32,211   59,680
CHANGES FROM 12/06/11 (CHANGE IN OPEN INTEREST:     44,431)
986   21,629   11,745   28,960    8,777   41,691   42,151    2,740    2,280

The short covering rally we are seeing now not a trend change but due to the extreme bearishness of the market and speculators are simply being taken out on stop. We remain short of the Euro and have been following the trend down all the way from 1.42.

Now we need a close below 1.30 to set up a further decline and we have bounced from this level now. In our view the rally is already on borrowed time but we could pop up to test 1.32 (the gap lower) before the rally runs steam and if it does manage to get up above this level, we see it hitting a brick wall at the mid Bollinger Band which at present lines up around 1.33.

Look either to sell the rally on a divergence of momentum or wait for a close below 1.30. If we close below 1.30, expect the Euro to trade down to the 1.20 level.

Australian Dollar

The large speculative funds love the Aussie Dollar and we sold it months ago on the pop up to 1.080 and made great profits on the downside as we traded below par. We are short again and taking any opportunity to hit the short side. Let's look at the positions and where the Aussie Dollar may go next:

AUSTRALIAN DOLLAR - CHICAGO MERCANTILE EXCHANGE                      Code-232741
FUTURES ONLY POSITIONS AS OF 12/13/11                         |
--------------------------------------------------------------| NONREPORTABLE
NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF AUD 100,000)                           OPEN INTEREST:      153,296
COMMITMENTS
60,132   25,703    3,963   70,313  106,719  134,408  136,385   18,888   16,911
CHANGES FROM 12/06/11 (CHANGE IN OPEN INTEREST:     10,489)
6,479    1,874    1,008    2,028    7,480    9,515   10,362      974      127

The large funds were in buying last week and hold over twice as many longs as shorts and the commercials started to fade the rally adding to their short position. Again this is not an extreme but the higher the Aussie goes the more the commercials will sell and the sucker speculators will buy. In recent months, the speculators have bought rallies and commercials have sold them. Speculators keep getting stopped out. So where will the Aussie go from here?

We are at the 1.000 level and this is a key level to watch if we can push up from here we should see a run at 1.020 – if we hold below this level on Monday, the down trend will be cemented and we see a move down as far as 80.00 in the New Year. The Aussie dollar has fallen nicely for us from 1.080 as we expected it to do and a close below 1.000, will set up a far bigger decline.

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