The situation in the USD index, EUR/USD and GBP/USD markets is almost a twin of what we observed in the markets in the mid-September when the previous rallies started. According to the Commitments of Traders report published on Friday 21, traders again expect the USDX and USD/CHF to go up, but EUR/USD and GBP/USD markets to decline.
The USDX market
The first market I would like to bring to your attention to is the USD index. After its value returned to the mid-September value of 79.50, according to the last COT report hedgers again consider it highly undervalued: both the hedger COT and William Commercial indices are equal to 100% (+22 and +31 percent points, respectively). The large speculator COT index dropped by 23 percent point and reached its bottom 0%! Small traders followed large speculators and their net position also declined moving the index down by 23 percent points to 1%.
Figure 1: USDX futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.
Despite a consistent increase of interest in the USDX market since the beginning of December, it fell this week and the COT index dropped to 21%, almost but not in the critical zone. But looking more into details, you can notice (see Figure 2) that the interest returned to the mid-September level when the previous Buy signal was formed in the Commitments of Traders reports, the uptrend started at 79 and continued till 81.50.
Figure 2: USDX open interest. History: from Jun 2012 to Dec 2012.
Despite the fact that a triangle, formed in a daily timeframe, was broken through from below, the USD index did not reach the monthly support at 78.60, as expected. The downtrend was stopped by the weekly support at 79.10 and a price consolidation was observed in the second part of the week.
Probably during the week starting on Monday 24th the price will continue varying between 79 and 80 moving in the direction of the monthly support.
Figure 3: USDX, daily candlesticks. History: from Jan 2012 to Dec 2012.
The EUR/USD market
While in the USDX market a decline till the weekly support was observed, the EUR/USD rate tested the weekly resistance at 1.3260. Notice that hedgers’ net position continued decreasing, while large speculator and small trader net positions continued increasing. As a result, none of the net position based indicators changed their values as compared to the previous week. Clearly, the EUR is overvalued relatively to the USD, which is indicated by all three categories of traders.
Remember that the COT data provides information regarding traders’ expectations about the market. Hedgers do consider the USD being undervalued relatively to the EUR, but the “fiscal cliff” and vacation period postpones the downtrend in the market.
Figure 4: EUR/USD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.
Moving to the technical analysis… As usual, when the USDX value was decreasing, an uptrend was observed in the EUR/USD exchange rate. As forecasted in the previous report, the exchange rate broke through the weekly resistance at 1.3130 and reached the weekly resistance at 1.3260.
Probably during the week starting on Monday 24 the price will continue varying between 1.31 and 1.33 with a small downward direction because a correction in the market is expected after such a sharp increase in the past 10 trading days.
Figure 5: EUR/USD, daily candlesticks. History: from Jan 2012 to Dec 2012.
The GBP/USD market
The GBP is considered to be overvalued relatively to the USD since December 4 when the rate was 1.61. It is not surprising that the uptrend stopped after reaching the monthly resistance at 1.6250.
According to the last Commitment of Traders data, the hedger COT index is equal to 6% (-2 percent points), while the Williams Commercial Index (WILLCO) is equal to 8% (+1 percent points) meaning 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 93% and 94% respectively. The open interest COT index has been equal to 100% three weeks in a row (see Figure 5) indicating the market is overheating.
Figure 6: GBP/USD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.
While in the EUR/USD and the USDX markets we could observe a consequent volatility decrease, an opposite observation can be made in the GBP/USD market. The British pound was increasing in value relatively to the USD since the middle of November. But after the exchange rate returned to its mid-September values, a large descending Japanese candle was formed on Friday 21st.
I expect a sharp decline in the rate at the beginning of the week starting on Monday 24. However I expect the rate to return to the Friday 21 closing level by the end of the week.
Figure 7: GBP/USD, daily candlesticks. History: from Jan 2012 to Dec 2012.
The USD/CHF market
Despite the fact that the Swiss franc has already been considered highly undervalued relatively to the USD on November 27 at the level of 0.9300, the downtrend continued and almost reached the monthly support at 0.9000. Not surprising, the COT Buy signal strengthened: hedgers continue accumulation increasingly low net positions. The hedger COT index has been equal to 100% for the second week in a row (notice that the report is collected for the inverted exchange rate of CHF/USD, not USD/CHF), while the WILLCO dropped to 0%, as well.
Both large speculator and small trader COT indices are equal to 100%. The interest dropped moving the index from 46% to 29%. Altogether, 4 out of 5 indicators provide a Buy signal for the USD/CHF market.
Figure 8: CHF/USD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.
Currently the currency is highly undervalued, however there is not a sign that the downtrend stopped completely. Probably the exchange rate will return back to the weekly support by the end of the next week.
Figure 9: USD/CHF, daily candlesticks. History: from Jan 2012 to Dec 2012.
After the USD index and the British Pound returned to their previous mid-September levels, the EUR/USD returned and exceeded its previous September maximum, and the USD/CHF dropped below its mid-September level, traders started indicating we should expect rallies in these markets. But do not be in a hurry: due to the vacation period and the upcoming US Congress decision regarding the “US fiscal cliff” markets will stay relatively calm. Moreover, there is no confirmation from the technical analysis that for example, uptrends in the EUR/USD and the GBP/USD and downtrends in the USDX and the USD/CHF markets have stopped. Therefore it is too early to jump into the markets but you should be ready to do it at the beginning of January.
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 careful consideration. The additional analysis is needed to identify the points to enter and exit 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.
