Recent Barack Obama’s confident victory in the presidential race and the ECB president’s announcements with positive notes set short-term trends in the USD index and EUR markets. We also observed realization of a sell signal in the GBP/USD market and a buy signal in the USD/CHF market. However, the question is whether these trends will become mid-term ones or it is just a bluff.
The USDX market
While debates continue in the US Congress, the US dollar index kept varying within the 79.70-80.20 bounds during the last week (see Figure 3). However, market participants indicate the USDX is not under- or overvalued: according to the Commitments of Traders report, hedgers do not expect growth in the market which is indicated by the hedger COT index drop to 61% (-6 percent points) and the Williams’ commercial index drop to 47% (-7 percent points). Indicators’ values decline is driven by relatively low net positions in the market (see Figure 2) which continued declining and reached -9617.
The large speculator and small trader COT indices are equal to 39% (+7 percent points) and 40% (+5 percent points), respectively. The only indicator which indicates that the market is below its fundamental values is the open interest COT index which is equal to 19%.
Summarizing, none of the three categories of traders indicates that the USD index is under- or overvalued. It is not surprising because there is still no clarity regarding the US economy and the USD. The only indicator providing a buy signal is the open interest; however it is not enough to think about opening the long positions in the market.
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.
For the last 8 days, the USDX varied in a very thin diapason from 79.70 to 80.20. The volatility indicated by the Standard Deviation was also very low. There is no fundamental reason for the USD to become significantly stronger relatively to other currencies, but growth may happen because it might be just the continuation of the uptrend started on December 20, 2012. Although it seems that the uptrend has already finished reaching the level of 80.87, it is also possible that only the first wave was observed in the market and the uptrend will reach the weekly resistance at 81.50. The most probable scenario for the upcoming is a volatility increase; however it is hard to predict whether the downtrend or uptrend will be observed in the USD index.
Figure 3: USDX, daily candlesticks. History: from Feb 2012 to Jan 2013.
The EUR/USD, GBP/USD and USD/CHF markets
Although it is not clear whether we should expect growth or decline in the USDX market, the situation may be clarified if other currency markets are analyzed.
According to the Commitments of Traders reports published on Friday 25, hedgers who are operating in the EUR market expect it to depreciate significantly against the USD: the hedger COT index has been equal to 0% for two weeks (see Figure 4) and the net positions continue declining. At the same time, the large speculator and small trader COT indices are equal to 100% and 97%, respectively indicating that the EUR is seriously overvalued.
Figure 4: EUR/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
It is not surprising because despite the fact the EUR/USD has been overvalued since November 27, a strong uptrend has been observed in the market. Currently the exchange rate has moved close to the monthly resistance at 1.35 which may be the final destination.
The last two week uptrend was supported by Mario Draghi’s speeches, thus there is a high probably of a downtrend during upcoming weeks. If this is the case, it will drive the USD index up, even to 81.50.
Figure 5: EUR/USD, daily candlesticks. History: from Feb 2012 to Jan 2013.
Looking into GBP market, it is easy to notice that it behaves differently compared to the EUR which may be another sign of EUR/USD uptrend driven by Draghi’s speeches.
Currently market participants do not consider the GBP/USD overvalued which is not surprising after such a significant drop in the exchange rate - from 1.63 to 1.58. The hedger COT and WILLCO indices are equal to 45% and 36%, respectively. The large speculator and small trader (investor) COT indices are equal to 59% and 50%, respectively. Of course, fundamentally, it does not mean that the downtrend has to stop, however…
Figure 6: GBP/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
Currently the exchange rate has reached the daily support at 1.5750 and has broken through the weekly support at 1.5830 (see Figure 6). This decline is also statistically “normal”: the last time market participants provided a signal that the British pound is overvalued relatively to the USD, the exchange rate declined to the weekly support of 1.5840. According to the COT reports and technical analysis, it is less likely that the downtrend will continue because in the past 6 days the volatility significantly dropped.
I expect an upward sloping correction in the market at the end of this week. Though I take into account that a weekly support was broken through meaning the market may decline even more: to 1.5650.
Figure 7: GBP/USD, daily candlesticks. History: from Feb 2012 to Jan 2013.
Finally, looking into CHF market, I cannot be 100% sure that the uptrend stopped. Although there is no buy signal in the market anymore, after the exchange rate increased to 0.94, traders still consider the Swiss franc quite overvalued relatively to the USD. As a result, there is a high possibility for the uptrend continuation in this market.
Figure 8: CHF/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
Figure 9: USD/CHF, daily candlesticks. History: from Feb 2012 to Jan 2013.
A wrap-up of the short-term expectations in the currency markets: the EUR/USD decline which will drive the USDX growth, a downtrend phase-out in the GBP/USD market and uptrend continuation in the CHF/USD market to 0.95.
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 the last 5 days.
Open or close your position only after careful consideration. The additional analysis is needed to identify the points for entrance into and exit from the markets bearing in mind your own money management strategy. The author provides key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.
