After trends had started in a set of European and non-European currencies in the beginning of November we have seen strong impulses in the markets. However, during the previous week market consolidation was observed. Is it a correction or a sign that trends stopped and USD will depreciate again? The Commitments of Traders (COT) data, inter-market and technical analyses used in this article will help you to understand the markets and what to expect in the nearest future.
This article is dedicated to four currency markets: the USD index, EURUSD, GBPUSD and USDCHF. In this article I would like to bring to your attention events occurred in the past week in these four markets and explain how they are connected with each other and provide detailed forecasts.
In the end of the article you can find specifications of discussed indicators.
The USDX market
During the week from 5th to 7th of November a volatility increased and strong impulses were observed in the European currency markets. They announced a realization of the buy and sell signals predicted by the Commitments of Traders data in the first half of September. After a 7 week flat trend in the USD index market (for details see my previous reviews), the USD index finally hit the roof and breached the weekly resistance level at 80.20.
However, during the past week volatility has decreased, the USDX market was consolidating. According to last COT report published on Friday 16th most of the indicators are still providing a buy signal. The hedger COT index is equal to 81%, -9 percent points compared to the previous week, meaning hedgers still consider the USDX to be strongly undervalued. However, the William Commercial Index is not anymore within 80-100% bounds and is equal to 69% (-15 percent points). It is not surprising because the USDX increased quite significantly since the start of the current uptrend.
Although some large speculators changed their positions from short to long ones, most of them continue keeping short positions. It is indicated by the large speculator COT index value of 19% (+6 percent points). It is an indication that USD is undervalued. Small traders are a bit faster to react to the trend change, as a result the small trader COT index increased from 0 to 26%. Finally, the open interest also increased a bit, from 37,968 to 39,519. The open interest COT index is equal to 4%. It is still on quite a low level comparing to the historic maximums and minimums which is again an indication that traders moved the USD index below its fundamentals.
Altogether, despite the fact that the uptrend started most of the indicators are still within critical bounds. It gives a hint that the USDX rally is not going to finish soon.
Figure 1: USDX futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
Although last week I predicted that the USDX will reach the daily resistance at 81.82 and a correction will occur around this area, during whole week, except Friday, the volatility in the USDX was very low (see Standard Deviation in Figure 2). Only next week the USD index value is expected to reach the daily resistance at 81.82. Short-term forecast is based on the assumption that the volatility will increase too. The long-term forecast is unchanged: 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
As long as, the EURUSD exchange rate plays a major role in the USD index calculations, the Commitments of Traders legacy report for EUR Futures and Options market provides similar inside information to the COT report collected for the USDX market. While in the USDX market most indicators continue providing strong buy signals, the EURUSD traders’ position data indicates a continuation of the downtrend observed in the daily timeframe.
Currently, the hedger COT index is equal to 20% (+7 percent points), while the Williams Commercial Index is equal to 45% (+17 percent points). The large speculator COT index is equal to 81% (-9 percent points) but the little speculator COT index increased from 72% to 77%. The open interest COT index is equal to 5% which indicates that the market is undervalued, a signal for uptrend. However the open interest was very low for the past 8 weeks, therefore it is not an indication of current downtrend reversal soon.
Figure 3: EURUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
As expected, the EURUSD exchange rate continued fluctuating around the same level of 1.27-1.28. The weekly support at 1.28 worked as a resistance level. During the week from 19th to 23rd of November we will observe a continuation of the downtrend in the market. In case of a higher volatility the exchange rate can reach the daily supporting line at 1.2467 (see Figure 4).
Currently it is a good opportunity to enter the market if it has not been done before. 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 GBPUSD market
In the beginning of the week we saw the daily supporting line breakthrough confirmation in the GBPUSD exchange rate market. However, during the rest of the week the exchange rate was quite static, the volatility level dropped significantly (see Figure 6).
After a constant exchange rate had decreased for several weeks, according to the last Commitment of Traders report the British Pound is not anymore strongly overvalued relatively to USD. The hedger COT index is equal to 37% (+13 percent points), while the Williams Commercial Index is equal to 31% (+11 percent points). The large speculator COT index is equal to 61% (-22 percent points) and the little speculator COT index is equal to 66% (-1 basis point). The open interest COT index is equal to 51% ( -17 percent points) indicating an average level of the open interest in the market. None of the indicators is currently indicating a downtrend in the market; however, it is normal indicator behaviour when trend is observed for several weeks. To consider trend end either the COT indicators or the technical picture should provide a buy signal. Yet none is observed.
Figure 5: GBPUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
As in other currency markets, the GBPUSD exchange rate was not highly volatile during the week. After the breakthrough of the daily support at 1.5915 the exchange rate stayed in a very narrow range, which is a good place to enter this market. I expect the GBPUSD to reach the daily support during the next week and only later to continue a downtrend.
The long-term target stays on the same level of 1.55, 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 6: GBPUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
The USDCHF market
According to the CHFUSD COT report published on 16th of November (notice that the report is collected for the inverted exchange rate, not USDCHF), the hedger COT index is equal to 36% (+17 percent points), while the Williams Commercial Index is equal to 53% (+22 percent points). The large speculator COT index is equal to 70% (-23 percent points) but the little speculator COT index is equal to 59% (-7 percent point). As in case of GBPUSD, there is no more indication of USD undervaluation relatively to CHF, however, it does not mean the uptrend is not going to continue. Finally and again, the only conflicting indicator is the open interest: the COT index is equal to 20% (+11 percent 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 7: CHFUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
After the USDCHF rate has broken through the weekly resistance at 0.9440, a correction was observed in the market. The rate has slightly decreased by Thursday and on Friday; it closed at the level close to the one it reached a week before. As a result, a resistance was formed at 0.9515 (top of the circle in Figure 8).
If the volatility increases next week, the CHFUSD rate will jump to the weekly resistance at 0.9637, where probably the trend will stop for several days. Finally, the long-term uptrend can continue till the monthly resistance at 0.9960-1.0000. It will take several weeks to reach this level.
Figure 8: CHFUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
Summarizing, it is clear that current exchange rate fluctuations in the markets are related to each other. After volatility had increased in most of the currency markets in the beginning of November, the European currency rates started consolidation. I am stressing on European currencies because others, for example Japanese Yen and Australian dollar were very volatile during the week.
According to the Commitments of Traders data there is potential for these trends to continue because the USDX traders consider USD is still undervalued relatively to other major currencies. Quite average indicator values in the GBPUSD and USDCHF markets indicate that trends might be also in their middle stage. It means that you must be careful about the future movements in these markets because the trends may stop earlier than expected. In EUR, GBP, and CHF narrow ranges are observed, it is a good moment to make corrections in your positions on Monday.
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.
