One way to judge whether an asset has declined or increased enough is to look at the positions of large investors. Let's look at the USD. If institutional traders hold large short positions, then the normal logic is to think that the sentiment at the USD remains negative and the decrease is likely to continue. On the other hand, if large institutional traders hold a large amount of long positions, we should think that the sentiment at USD is positive.
What is happening at the moment?
The Citigroup's Pain Index, which tracks the currency managers' profitability over currency returns, is quite useful in this respect. Looking at the chart, it is clear that the recent USD decline has been due to the closing of long positions by large institutional traders. However, the index is still above 0 and indicates that major traders and investors are optimistic about the dollar ... at least if we follow normal logic. Looking from the investment point of view, the negative returns of the big traders accumulated in recent months would have to make them close their long positions and thereby cause a deeper decline in the US currency. In the long run, Citi's Pain Index and CFTC reports indicate that net, big players are Long on USD, which means there is enough dollars in them, which if placed on the market will lead to a deeper adjustment of the US currency.
For comparison, the Citi Pain Index indicates that large investors are neutral to the EUR and negative to JPY.
Source: Bloomberg Pro Terminal
Jr Trader Petar Milanov
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