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Judging by the sharp dollar selloff that took place at the beginning of this week, it looks like forex traders are starting to book profits and gearing up for a potential market correction. Are the strong forex trends way overdone?

As discussed in the School of Pipsology lesson on Market Sentiment, the CFTC’s Commitments of Traders Report can be used to gauge biases and pinpoint potential reversals. Here’s how the figures are lookin’ for the period ending September 30, 2014:

CFTC COT Positioning (Sept. 30, 2014)
CFTC COT Positioning (Sept. 30, 2014)

As you can see from the table above, traders stayed net short on the Japanese yen, Swiss franc, and the euro while staying net long on the New Zealand dollar. Non-commercial traders shifted their biases for the British pound and the Australian and Canadian dollars.

In addition, there have been considerable changes in positioning for the Japanese yen and the Australian dollar, as seen in the last column of the table. Traders grew increasingly short-biased on the yen and flipped to a bearish outlook for the Aussie, possibly in anticipation of dovish remarks for this week’s BOJ and RBA rate statements after seeing relatively weak economic figures from both Japan and Australia.

All in all, it looks like market sentiment still strongly favors the U.S. dollar for now, except against GBP and NZD, although the latter is seeing a waning bullish bias. Net long dollar contracts are at 238,000 and approaching the record high of 311,000 in 2012, and the upcoming release of the FOMC minutes might determine whether or not this sentiment could carry on.

Feel free to share your thoughts on the most recent COT Report below in the comments section.  If you’re looking for further discussion, community member ForExchange has a lively thread, Trading based on Market Sentiment, in the forums awaiting your participation.