In a number of markets (USD Index, AUD/USD, Gold,) we have observed a serious volatility jump. Thus, today the questions to be answered are not only regarding the mid-term trends predicted by the Commitments of Traders (further – COT) data but also what is going to happen next week. Should we expect a price correction or price trend continuation?
USD Index, EUR/USD and USD/CHF
Currently, in the US dollar index market the hedger COT index is equal to 47% (+3BPS). Large speculator net positions continued dropping and the COT index dropped to 59% (-2BPS). Although, small traders are often described as less informed, they follow the trend and are fast in changing their positions. As a result, on 7.08.2012 most of them jumped on the downtrend in the USDX market and continued getting the benefits of their positions.
Figure 1: USDX, weekly candlesticks and COT indicators. History: from Jul 2011 to Aug 2012.
A low value of the small trader COT index (0% for the 2nd week in a row) in the USDX indicates a soon trend reversal to an uptrend. However, it is the only index which indicates a change of the current trend in the market. The open interest COT index indicates an average value of the open interest relatively to the 26 historical maximums and minimums. Summarizing, there is no sign for an uptrend; however, situation in other currencies should be considered.
Figure 2: EUR Futures, the COT indicators. History: from Jul 2011 to Aug 2012.
Figure 3: CHF Futures, the COT indicators. History: from Jan 2012 to Aug 2012.
Figure 4: CAD Futures, the COT indicators. History: from Jul 2011 to Aug 2012.
Today, EURUSD, USDCHF and USDCAD market participants do indicate the trend reversals. The COT indices reached their critical values. Hedgers are aggressively fighting against USD appreciation: the hedger COT index is equal to 17% in the EUR/USD Futures and Options, to 15% in the CAD/USD Futures and Options and to 0% in the CHF/USD Futures and Options. All these indices demonstrate critically low net positions in the past 26 weeks. Speculators (large, small or both) also indicate that current trends soon will reverse and a deprecation of these three currencies against USD will be observed. Currently, there is no fundamental signal in the British pound market.
Figure 5: USDX, daily candlesticks, ATR. History: from October 2011 to September 2012
Since 23rd of August a very thin channel (flat trend) was observed in the USDX market: USD index value varied approximately from 81.00 to 81.80. Low volatility level was also indicated by quite low values of Average True Range indicator. But on Friday, a breakthrough happened: volatility jumped and USDX value breached the weekly support at 81.15-81.20 and closed at 1 point lower than the supporting line!
Summarizing, there are signs of USD appreciation in the nearest future. However, it is a bold decision to expect uptrend starting next week. The most probable scenario is a continuation of the observed downtrend in the USDX market till the next weekly supporting line at 78.00. Hence,there is no reason to expect major changes in the discussed above currency markets
AUD/USD and NZD/USD exchange rates are going down?
While the Commitments of Traders reports published on 7th of September indicate hedgers, large speculators and small traders give sings for USD appreciation, the AUD/USD futures and option traders also believe it is getting closer to the bottom but it is still far enough.
Figure 6: AUD/USD, weekly candlesticks and the COT indicators. History: from Jul 2011 to Aug 2012.
The last Commitments of Traders report contains data on 4th of September when the exchange rate was equal to 1.0215 (significantly lower than closing rate on Friday). The hedger COT index is still in the critical area and is equal to 19%, the large speculator index is equal to 82% and only the small trader index is equal to 77%. The open interest is still record high: the open interest COT index is equal to 100% which indicates an “overbought” phase of the market.
Figure 7: NZD/USD, the COT indicators. History: from Jul 2011 to Aug 2012.
Although, there is a strong downtrend signal in the AUD/USD exchange rate, the NZD/USD market participants are so sure about it. All COT indices came out of the critical areas, and detailed information can be observed in the Figure 7. Remember, it does not mean that the downtrend stopped, but it raises concerns on how long it will continue.
Figure 8: AUD/USD, daily candlesticks, ATR. History: from October 2011 to September 2012
AUD/ USD exchange rate continued to drop in the first half of the week but recovered the most of the fall in the second half (market with a red circle in Figure 7). When AUD/USD exchange rate reached a daily supporting line at 1.0175, the volatility jumped and AUD/USD rate increased approximately from 1.0175 to 1.0385!
To sum it up, probably a high level of volatility will be observed in the market during the next week. Yet, there is no sign for a trend change, therefore, the downtrend continuation is expected during the next weeks. Target is still at 1.0000 and a more optimistic one at 0.9700-0.9800.
USD/JPY exchange rate is flat
The market participants continue holding extreme positions in JPY/USD Futures and Options markets indicating that USD will be appreciated against JPY. Currently, the hedger COT index is equal to 2% (-7BPS), the small trader COT index increased from 93% to 100% and the large speculator COT index increased by 3 basis points to 94%.
Remember, the indicators and positions are reported for the JPY/USD futures and options markets but in the InstaForex Terminal orders are executed in the USD/JPY Forex rate.
Figure 9: JPY/USD futures and options, weekly candlesticks and COT indicators. History: from Jul 2011 to Aug 2012.
After a false start of the uptrend in the USD/JPY market, the exchange rate returned into the channel limited by the support level at 77.90 and the resistance level at 79.10 (can be observed in the Figure 10). The supporting level at 77.90 was tested on Friday when the volatility also increased and the exchange rate dropped to 78.01.
Figure 10: USD/JPY, daily candlesticks, ATR. History: from October 2011 to September 2012
The uptrend in USD/JPY is still expected. But only a breach of the resistance level at 79.10 can be considered an uptrend starting point.
At the end of this report I would like to draw your attention to a general conclusion regarding the situation in the currency markets. More and more fundamental signals indicating USD appreciation against the number of currencies. The first was the USD/JPY market, next the COT signals were identified in EUR/USD, CHF/USD, and CAD/USD market. Although, there are fundamental signals, the technical (graphical) analysis shows that during the next couple of week the most probable scenario is a continuation of the current trends in USDX, EUR/USD, CHF/USD, and CAD/USD markets. There is also a high probability that an uptrend in the USD/JPY exchange rate will start with an uptrend in the USDX market.
AUD/USD exchange rate deserves a separate discussion. Most probably, a high level of volatility will be observed in the market during the next week. Yet there is no sign for a trend change to an uptrend or a flat one, therefore, a continuation of the downtrend is expected during the next weeks.
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.
