According to the Commitments of Traders reports the EURUSD and the GBPUSD should decrease while the USDX and the CHFUSD exchange rate should grow but opposite trends are observed in the markets. Is it a false signal from the COT data, are the markets are going crazy or there is an explanation to such FX rates behaviour?
The USDX market
The first market I would like to bring to your attention is the USD index. It represents the USD value relatively to the currencies of major countries the United States of America have traded with: EUR, GBP, CHF, CAD, SEK and JPY.
According to the last COT report the hedger COT index is equal to 78% meaning hedgers still consider the USDX to be quite undervalued relatively to major currencies. At the same time a downtrend is observed in the market and price is moving towards monthly support at 78.60 (see Figure 2). The William Commercial Index is equal to 69% (+3 percent points) which is an average level. The large speculator COT index value is 23% (-2 percent points) and the small trader COT index is equal to 24% (+16 percent points) meaning both small and large speculators believe more in downtrend continuation then uptrend.
More and more traders are concerned about the future of the USD: the open interest has increased since the previous week from 44461 to 49362 indicating more traders enter the market to hedge their positions (both long and short position of hedgers and large speculators increased comparing to the previous week). This open interest increase moved the COT index to 35% (+18 percent points) and I expect the open interest to grow during the second part of December.
Figure 1: USDX futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.
As I expected last week the USDX was not very volatile and continued to vary between the daily resistance and support at 80.50 and 79.60, respectively. A triangle is formed in a daily timeframe which seems to be broken through from below.
Figure 2: USDX, daily candlesticks. History: from Jan 2012 to Dec 2012.
According to the COT report, the USDX is undervalued at the level of 80. It is indicated by a number of indicators. However none of the COT data based indicators provide a buy signal. In addition, a “fiscal cliff” seen ahead makes people uncertain about the future. As a result, none is ready to act and push the market. Traders are waiting for the Congress decision which will determine a future trend. Considering the graphical analysis I would expect the USDX to drop to 78.60 where a monthly support is standing by the end of December/first week of January 2013.
The EURUSD market
While in the USDX market we observe a slow downtrend towards the monthly support at 78.60, in the EURUSD market a new rally started: the weekly resistance at 1.3130 may be broken through.
Comparing to the previous week results only two indicators changed their values: the small trader COT index increased from 97% to 100% and the open interest index grew from 10% to 11%. At the same time the hedger COT index and the Williams Commercial Index are equal to 0% and the large speculator index is equal to 100%. Currently, four out of five indices indicate a strong downtrend but we observe a strong uptrend in a daily time-frame: since 13th of November the EURUSD exchange rate increased from 1.2690 to 1.3160 (see Figure 4).
Remember that the COT data provides information regarding traders’ expectations about the market. They DO consider the USD to be undervalued relatively to the EUR but the “fiscal cliff” and vacation period postpones the downtrend in the market.
Figure 3: EURUSD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.
From mid-September to the beginning of November the EURUSD rate varied in the channel from 1.28 to 1.31. In the first half of November the exchange dropped below 1.18 but then returned back to the diapason from 1.28 to 1.31. I expect the exchange rate to reach the weekly resistance at 1.3260 and stay within the range 1.28-1.33 during the next 2 weeks.
I believe there is no need for long-term forecasts while there is no clarification regarding the “fiscal cliff” because this event can strongly affect the future mid- and long-term trends.
Figure 4: EURUSD, daily candlesticks. History: from Jan 2012 to Dec 2012.
The GBPUSD market
The situation in the GBPUSD market should not be analysed separately, as well. The uptrend observed in the market is mainly driven by the same reasons as in the EURUSD. Since the Commitment of Traders report published on 7th of December the British Pound is strongly overvalued relatively to the USD. It is not surprising considering the fact that the rate returned to October-early November levels at 1.6 when a previous sell signal was formed and currently is moving towards the monthly resistance at 1.6250.
The hedger COT index is equal to 8% (+4 percent points), while the Williams Commercial Index (WILLCO) is equal to 7% (+2 percent points). It means that hedgers believe the exchange rate of 1.62 is too high and expect the rate to decrease in the future. The large speculator and small trader COT indices are equal to 94% and 90%, respectively meaning speculators push the rate up as much as it is possible but not much place for the growth is left (you can also see the Figure 6 where the monthly resistance is indicated). The open interest COT index is equal to 100% two weeks in a row (see Figure 5) indicating an extremely high level of the open interest in the market.
Figure 5: GBPUSD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.
Current volatility is not very high comparing to the levels in May or even August what is not surprising considering the fact that apart from the vacation time there is a “fiscal cliff” issue in front. The rate is going towards the monthly resistance at 1.6250 which I do not believe will be broken through. During the week I expect a market correction in the 4 hour and daily time frames.
Figure 6: GBPUSD, daily candlesticks. History: from Jan 2012 to Dec 2012.
The USDCHF market
The last market I would like to during to your attention is the USDCHF exchange rate market where the scenario surprised many traders. While a new buy signal was formed in the COT reports, the exchange rate dropped to a new level and breached the weekly support at 0.9240.
Not surprisingly, hedgers are even more confident about the fact that the USD is undervalued relatively to the CHF. According to the COT reports (notice that the report is collected for the inverted exchange rate, not USDCHF) published on 14th of December the hedger COT index and the Williams Commercial Index are equal to 0% and 1%, respectively.
The large speculator and small trader COT indices are equal to 100% (+5 percent points) and 93% (+7 percent point), respectively. It means speculators pushed the rate down (USDCHF) as much as it is possible. The open interest increased moving the index from 18% to 46%.
Figure 7: CHFUSD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.
Despite the fact that the USD is undervalued and there will be a strong uptrend it is also important to understand that the fact that the currency is undervalued does not mean it cannot be undervalued even more. Therefore I expect the downtrend to continue during the week and to reach the monthly support at 0.9000 by the end of December.
Figure 8: USDCHF, daily candlesticks. History: from Jan 2012 to Dec 2012.
Although the long-term situation is not 100% clear, it is obvious that despite the COT signals we will observe opposite trends in the markets during December: the GBPUSD and the EURUSD rates will increase, while the USDX and the USDCHF will drop.
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.
Information regarding the interest rates mentioned in this article can be found at the ECB and BoE official websites.
The COT Indices used in this review are calculated using 26 week historical data. The Standard Deviation indicator takes into account volatility of last 5 days.
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.
