Currently, corrections are observed in the major European exchange rates. In addition, flat trends are observed in the Australian dollar, the New Zealand dollar and the Japanese yen markets. The question is whether new trends are arisen and we should expect USD appreciation against major currencies or there will be a forward depreciation of USD driven by the Federal Reserve actions and announcements.
The data published on 21st of September (contains data on 18th of September, 2012) shows that hedgers have significantly increased their net positions in the US dollar index futures and options markets: from -35327 to -5076. The effect on the 26 week based COT index was tremendous: it jumped from 52% to 100%! A similar situation can be observed in large speculator net positions and the index based on them: the large speculator COT index dropped from 57% to 0%. Small traders keep on holding record low net positions hoping for a continuation of a downtrend we observed during the past weeks in the USDX market (see Figure 1). Open Interest also gives a “signal” that USD is undervalued relatively to the major European currencies: the Open Interest COT index dropped to 0%, which means that market participants panicked and the market moved the USD price lower than its fundamental value. Another supporting indicator, WILLCO, is also within the critical area of 0-20% and is confirming the buy signal from the hedger COT index. Fundamentally, we have received a buy signal in the USDX market, however other markets’ participants and technical analysis must be considered.
Figure 1: USDX futures and options, weekly candlesticks and the COT indicators. History: from Jan 2012 to Sep 2012.
In the EURO FX Futures and Options Chicago Mercantile Exchange markets traders have been expecting the depreciation of the EURUSD exchange rate. Since 31th of August we observe all three COT indicators in the critical areas of 0-20% and 80-100%. Currently, the hedger COT index dropped to 0%, -8 basis points (BPS) comparing to the previous week. Hedgers believe there is a high probability of a trend reversal in the EURUSD market and the US dollar appreciation relatively to the euro. The large speculator COT index increased by 12 BPS to 100%: almost all speculators jumped on the uptrend and there is not many left to push the market further up. Since 7th of September the small traders COT index have been staying at the level of 100% meaning general public follows the large speculators hoping investment funds will push the EURUSD market further up.
Figure 2: EURUSD futures and options, the COT indicators. History: from Sep 2012 to Sep 2012.
In the previous review I mentioned that the only market where the participants had not indicated a trend reversal towards the USD appreciation was the GBPUSD exchange rate. This week, in all major European currencies market participants indicated trend reversal and hedgers expect USD appreciation against EUR and CHF (since 31st of August) and the British pound. In addition, in AUDUSD, NZDUSD, USDJPY, and USDCAD exchange rates the behaviour of market participants indicates that we should expect USD appreciation against these currencies too.
Figure 3: CHFUSD futures and options, the COT indicators. History: from Sep 2012 to Sep 2012.
I would like to draw your attention to the GBP market, where hedgers COT index dropped to 14% (see Figure 4). Yet not all large speculators jumped on the uptrend in the GBPUSD forex rate, thus the COT index is equal only to 77%, close but not in the critical area of 80-100%. But small traders do hope for the uptrend continuation, the small trader COT index is currently equal to 98%. Therefore, we should consider the trend in the British pound market to be in its final phase and can plummet in any moment.
Figure 4: GBPUSD futures and options, the COT indicators. History: from Sep 2012 to Sep 2012.
For example, in the CAD Futures and Options markets (CADUSD) the hedger COT index stays at record low level of 0%, their net positions dropped to -139333. But the large speculator and small trader COT indices are in the area of 80-100%, which also supports the signal. The open interest has reached its maximum value comparing to the 26 week history and the open interest COT index is equal to 100% second week in a row. If USD to CAD relation is reflected in the USDX value, the Australian dollar, the New Zealand dollar and the Japanese yen are the currencies which are affected by other factors then European and North American ones. The fact that Asian currency traders have the same expectations as the European currency traders and the fundamental signals strengthen every week, the USDX uptrend start is coming closer.
Figure 5: CADUSD futures and options, the COT indicators. History: from Sep 2012 to Sep 2012.
Taking into account previously examined data, the QE3 start announcement made by Ben Bernanke at Jackson Hole, Wyoming must be also considered. It could provoke market participants to depreciate USD to the levels of its fundamental values. However, I will repeat again, the fact that commodity or currency is undervalued does not mean it cannot be undervalued even more. Thus, it is important to examine the technical situation in the markets on a daily time frame and identify possible movements in the following days and weeks.
Currently, in the USDX market we observe a correction after a significant drop started on 24th of September. The main question is whether it is really a correction of a major downtrend or a start of the uptrend market insiders are hedging against. Only a 4 hour resistance line was formed, but only a breakthrough of daily or weekly levels is a strong confirmation of the COT signals. Therefore, I recommend waiting, it will be a pity to get in the trend too early and to be thrown out of the market with a false stop loss when there is a potential for growth up to the previous levels at 83.00-83.50.
Figure 6: USDX, daily candlesticks. History: from Jul 2011 to Aug 2012.
While the USDX is appreciating, a very similar pattern can be observed in other markets. For example, in the EURUSD market a depreciation of EUR relatively to USD is observed and a support line was formed at 4 hour time frame. The potential drop is up to the monthly support line at 1.2050.
Figure 7: EURUSD, daily candlesticks. History: from Jul 2011 to Aug 2012.
If the GBPUSD exchange rate considered, currently there is a good picture from a graphical analysis position. The exchange rate has been varying between the monthly resistance at 1.63 and a daily support at 1.62 for the past 7 days. Since September, 2011 the exchange rate have been limited by 2 monthly levels: support at 1.52 and resistance at 1.63, therefore, it can drop till 1.54 where a weekly support is situated or even drop lower to 1.52-1.53. Further fall is less probable and will be considered when new information is available.
Figure 8: GBPUSD, daily candlesticks. History: from Jul 2011 to Aug 2012.
In the USDCAD market a daily supporting line was formed and the exchange rate varies between 0.963 and 0.982. An entrance position can be considered if your technical analysis supports the fundamental signal. In all four currency markets, ATR indicator, which shows the volatility in the market, has slightly decreased what can be a sign of the deep breath before the plunge.
Figure 9: USDCAD, daily candlesticks. History: from Jul 2011 to Aug 2012.
Summarizing, the trends reversals are getting closer. Probably, we are already observing their starts; however, it is not wise to be in a hurry. Before entering into position, please be sure that the COT fundamental signals are confirmed by the technical analysis.
Information about the analytical review and forecasts
The fundamental analysis is based on the Commitments of Traders (COT) data published by the Commodity Futures Trading Commission (CFTC) and the cross-market connections. The technical analysis is based on support and resistance levels.
More information regarding the COT data can be requested from the author of this review or found at the Commodity Futures Trading Commission’s website www.cftc.gov.
The COT Indices used in this review are calculated using 26 week historical data.
Open or close your position only after a careful consideration. The additional analysis is needed to identify the points for the entrance into and exit from the markets bearing in mind your own money management strategy. Author is providing the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.
