Despite the fact that small relief was brought to the markets after U.S. congressmen moved forward regarding the fiscal cliff, there is still place for debates regarding the expense cuts and taxes…
The USDX market
Due to the agreement, approved late on Tuesday by the Republican-led House of Representatives, regarding narrowly averted devastating tax hikes and spending cuts (© Reuters), which brought a short-term relief to investors, the USD index went up to 80.87 but then returned back to the level of 80.56 (see Figure 2).
While the U.S. Congress has to seize monetary and fiscal stimulation programmes which will decrease the access to the US dollar and push the USDX up in the long-term, there is still no clarity regarding the US economy because real decisions have not been made and due to instability in the Global Markets, particularly European Union which is still the main trading partner of United States.
Hedgers do not expect growth in the market anymore what is indicated both a significant drop of their net positions (see Figure 2) and the hedger COT index drop from 96% to 69%. At the same time Williams commercial index fell to 56%. The large speculator COT index increased from 5% to 31%, while the small trader index reached a value of 36% (+36 percent point increase in one week). Finally, the open interest also increased moving the COT index to 24% (see Figure 1). Currently, there are five indicators telling us USD is not undervalued anymore.
Figure 1: USDX futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013.
Figure 2: Net positions of hedgers, large speculators and small traders in the USDX market. History: from Jan 2012 to Jan 2013.
After the USD index almost reached the weekly resistance at 81.30, it decreased in value and currently is equal to 79.61. Considering the fact that normally it goes up only by 3.5-4 points, it was expected that the USDX will not outreach the weekly resistance at 81.30. Moreover, current market situation suggests the same scenario: it is a period of vacation and flat trends. In addition, Europe and USA are not doing well in fixing economic downturns. The most probable scenario for this week is a fall till daily support at 79.10 with potential return to 78.60. Later there is a possibility for a new uptrend but the USDX will continue varying between 81.30 and 78.60 for the rest of this month and probably on February.
Figure 3: USDX, daily candlesticks. History: from Feb 2012 to Jan 2013.
The EURUSD, GBPUSD and USDCHF markets
According to the last Commitments of Traders reports, hedgers who are operating in all three currency markets do not expect them to depreciate significantly to USD. For example, hedger COT index in the EUR market jumped to 9% (see Figure 4) despite the exchange rate increase (see Figure 5), while after the depreciation of CHF and GBP hedgers also do not consider USD so undervalued relatively to the currencies (see Figures 5 and 6). Moreover, in the GBPUSD market the hedger COT index went out of the critical 0-20% area. The Williams Commercial indices behaved in a similar way to the hedger COT indices.
At the same time both large speculator and small trader net positions and COT indices decreased in the values weakening or canceling the signals.
Figure 4: EURUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
Figure 5: GBPUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
Figure 6: CHFUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
However, the reason why the sell signal weakened in the EUR market is because we see traders’ reaction when the EURUSD rate was around 1.31 and not current 1.3350 (see Figure 7). Notice that the uptrend observed an the end of the last week in the EURUSD pair was mainly driven by the Mario Draghi’s speech, where he claimed that despite EU is not doing well, everything is not so bad and by the end of the year it would be better even without ECB help. Therefore, the most probable scenario for the next two weeks is a potential increase till 1.3460 and a sure correction towards 1.31.
Figure 7: EURUSD, daily candlesticks. History: from Feb 2012 to Jan 2013.
Looking more into the GBP market, after the exchange rate fell to 1.60, the sell signal disappeared in the market. For example, the hedger COT index is equal to 22%, while the large speculator and small trader indices are equal to 75% and 79%, respectively. Such a strong market participant’s reaction on a relatively small downturn in the market suggests that no mid-term trend was set. There is a place for a decline till 1.59 but not further because the instability in the markets will stay till at least the end of January 2013 and the forex rate will continue varying between 1.59 and 1.63.
Figure 8: GBPUSD, daily candlesticks. History: from Feb 2012 to Jan 2013.
Despite a small increase in the USDCHF market, driven by positive tone in the speech of the ECB President, traders still believe the Swiss Franc is highly overvalued relatively to USD. Currently, the rate returned to its year end values and a flat trend. The most probable scenario is a flat trend from 0.91 to 0.92. Although there is a potential for growth till 0.9375, I believe it will happen only in February. Future trends will be determined by the news coming from the United States. Finally, trends in the European markets are determined by the Eurozone, therefore do not expect uptrend in the USDCHF pair if there is no downtrend in the EURUSD market.
Figure 9: USDCHF, daily candlesticks. History: from Feb 2012 to Jan 2013.
I do not recommend you to enter the markets right now because nothing except flat trends with changing volatility will be observed in January. Debates in the U.S. Congress mean worries for investors and flat trends in the future, as well.
Wrap-up of the short-term forecasts: the GBPUSD decline till 1.59 and return to 1.61 (next week), the EURUSD return to 1.31, a flat trend in the CHFUSD market and the USDX decline till 78.60-79.10.
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. 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.
