This article is dedicated to four currency markets: the EURUSD, USDCHF and GBPUSD currency rates and the USD index, which indicates the USD value relatively to six major currencies (EUR, CHF, GBP, CAD, SEK, and JPY). In this article I would like to bring to your attention events occurred in past weeks in these four markets, explain how they are connected with each other and provide detailed forecasts.
The analysis and forecasts are based on the Commitments of Traders (COT) data, inter-market, and technical analyses. In the end of the article you can find specifications of discussed indicators.
The USDX market
After 7 week long COT data provided signal and a 7 week flat trend in the USD index market (for details see my previous review), the Index finally hit the roof and breached the weekly resistance level at 80.20.
According to last COT data published on Friday 9th, despite the increase from 80 to 81 (see Figure 1), all market participants still indicate that the USDX is undervalued. For a trader it is an indication that the current uptrend observed in the USDX market is very strong.
Looking in more detail at the Commitments of Traders data, the hedger COT index is equal to 90%, -8 basis points comparing to the previous week. It indicates that hedgers still believe the USDX is strongly undervalued. The William Commercial Index is also within 80-100% bounds and is equal to 84% (-12 basis points).
Despite an obvious uptrend, many large speculators keep on holding short positions, as a result the large speculator COT index is equal to 13% (+11 basis points) indicating a buy signal in the USDX market, while the small trader COT index is equal to 0% (-12 basis points). Small traders are staking everything against the uptrend. Finally, the open interest is record low, 37968. Last week the open interest COT index reached 0% indicating another buy signal.
Collecting puzzle, it is clear that the USDX was and is highly undervalued and current increase is just the beginning of the uptrend.
Figure 1: USDX futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
Since the earlier formed triangle formed by two trend lines (a long-term downward sloping and a short-term upward sloping, see Figure 2) was broken through from the top, the uptrend has started. After the weekly resistance at 80.20 was tested for the third time, the USD index broke it through and yet no correction in a daily time frame has been observed.
The most probable scenario is that a correction will be observed this week in the market. Another still highly probable scenario is that the USDX will jump to the daily resistance at 81.82.
Looking more forward, the USDX will reach the daily resistance at 81.82, a correction will occur around this area. The USD rally will stop in several weeks at the level of 83-84.
Figure 2: USDX, daily candlesticks. History: from Dec 2011 to Nov 2012.
The EURUSD market
The EURUSD exchange rate plays a major role in the USD index behaviour. As a result, if an uptrend observed in the USDX market, a downtrend is observed in the EURUSD market. This time is not an exclusion of the rule and a fall of the EURUSD rate is observed in the market in a daily timeframe.
From the Commitments of Traders point of view, it is clear that the EURUSD market plays a major role but is not the only currency affecting the USD index value. While in the USDX market all indicators are providing strong buy signals (open interest dropped even lower since the uptrend start), in the EURUSD market traders are switching their positions to the opposite sides. It is indicated by the COT indices based on the net positions of small traders, large speculators and hedgers. Currently, the hedger COT index is equal to 13% (+6 basis points), while the Williams Commercial Index is equal to 28% (+9 basis points). The large speculator COT index is equal to 90% (-6 basis points) but the little speculator COT index is equal to only 72% (-6 basis point). Small traders reacted in a fast way on the downtrend and one by one have been switching to an opposite side. Finally, the only conflicting indicator is open interest: the COT index is equal to 6%. However, the open interest was very low for the past 8 weeks; therefore, it is not an indication of current downtrend soon reversal.
Figure 3: EURUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
Next day (3rd of November) after the USDX breached the weekly resistance at 80.20 (see Figure 2), the EURUSD pair breached the weekly support at 1.28 (see Figure 4). After more than 2 month long signal from the Commitment of Traders data and the same length flat trend, the EURUSD rate started decreasing.
Currently, the exchange rate is far from strong visible levels which can stop the EURUSD to decrease. However, the volatility in past days is quite low what creates doubts regarding the fast continuation of the downtrend. During this week we will probably observe a fluctuation of the rate around the same level as it closed on Friday 9th. A long-term forecast is the following: a fall up to 1.21, while further decrease is limited by a support at 1.2050.
Figure 4: EURUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
The USDCHF market
The USDCHF exchange rate behaviour is quite similar to the one of USD index. On 2nd of November, a large Japanese candle was observed in the market which breached the daily resistance at 93.92. During the next days the USDCHF pair continued to grow (see Figure 6).
According to the COT data the hedger COT index is equal to 19% (+17 basis points), while the Williams Commercial Index is equal to 31% (+28 basis points). The large speculator COT index is equal to 93% (-7 basis points) but the little speculator COT index is equal to only 66% (-27 basis point). As in case of the EURUSD pair, small traders are faster to react on the downtrend than large traders. Finally and again, the only conflicting indicator is open interest: the COT index is equal to 9% (+5 basis points). However, as in case of the EURUSD market, the open interest was very low for the past 8 weeks; therefore, it is not an indication of current downtrend soon reversal.
Figure 5: CHFUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
The USDCHF forex rate has been fluctuating between the weekly resistance at 0.9440 and the weekly support at 0.9240 for almost 8 weeks but an uptrend started in the early beginning of November.
The CHFUSD rate will jump around the weekly resistance at 0.9435 this week, while potentially uptrend can continue till the monthly resistance at 0.9960-1.0000. On the way to the monthly resistance there is a daily resistance at 0.9637 (see Figure 6). It can stop the trend for a while but not completely.
Figure 6: CHFUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
The GBPUSD market
While the EURUSD, USDCHF, and USDX markets were in flat trends, a slow but consistent downtrend was observed in the GBPUSD market. In the end of the last week, another supporting line was broken through.
According to the last Commitment of Traders report, despite a consistent downtrend since the end of September/ the beginning of October, the British Pound is still quite overvalued relatively to the USD. The hedger COT index is equal to 24% (+6 basis points), while the Williams Commercial Index is equal to 20% (+6 basis points). The large speculator COT index is equal to 83% (-6 basis points) but the little speculator COT index is equal to only 67% (-6 basis point). The open interest COT index is equal to 68% (+2 basis points) indicating a relatively average level of open interest in market. Despite several key indicators, for example the hedger COT index, do not provide sell signals in the market, it does not mean the downtrend will stop soon. For instance, hedgers are still concerned about the GBPUSD rate and many of them believe the GBP is overvalued. It is indicated by quite low level of the COT index, it is equal to only 24%.
Figure 7: GBPUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
As it was mentioned above, in the end of the last week the GBPUSD rate breached another daily supporting line. This means that this week we will observe a slow but continuation of a downtrend, which will change to a correction in the end of this week or beginning of the next one.
The long-term target stays on the same level of 1.55 to where the rate can easily drop. Of course, it is a long way for the exchange rate to decrease but there is no serious supporting line in front, the nearest weekly supporting line is at 1.54.
Figure 8: GBPUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
Summarizing, long period of time predicted uptrends in the USDX and CHFUSD markets and downtrends in the GBPUSD and EURUSD markets have finally started. According to the Commitments of Traders data there is a lot of potential for these trends to continue because the USDX traders consider the USD still undervalued relatively to other major currencies. The EUR, GBP and CHF traders have the same opinion about USD. Depending on the market a slow trend continuation or a correction will be observed during this week. For those who has not entered the markets yet it is a good time to open a position or get prepared to open positions in these markets in the nearest future.
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 on the Commodity Futures Trading Commission’s website www.cftc.gov.
Information regarding the interest rates mentioned in this article can be found on the ECB and BoE official websites.
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.
