While the USD index is trying to reach the daily resistance at 82.90, the EURUSD is testing the weekly supporting level at 1.3000 and is heading towards the 1.2700 where there are another weekly support level and a monthly Fibonacci 23.6 level. At the same time the GBPUSD is heading towards 1.46-1.47 and the USDCHF is moving in the direction of 0.9500.
The USDX market
According to the Commitments of Traders report published on March 1, 2013 the hedger COT index value dropped to 20% (-25 percent points) which is a result of hedger reaction on significant USD strengthening from 81.50 to 82.50. From fundamental point of view, hedgers consider the market to be overvalued. At the same time, the open interest increased by 38% (!!!) in one week what moved the open interest COT index by 55 percent points to 95%. It shows that the market is overheating and this uptrend is in its last stage. As a result of hedger net position decrease and open interest increase, the Williams’ Commercial index (WILLCO) declined to 21% (-11 percent points). The index is still outside the critical area of 0-20% telling the market in the last stage but not in the end of the uptrend.
Finally, the large speculator COT index increased to 73%, while small trader COT index stayed at the 100% level. Summarizing, comparing to the previous week three out of five indicators show the market is overbought. However, this is only the first week we receive this sell signal meaning there is space for the uptrend continuation towards 83.00.
Figure 1: USDX futures and options data, the COT indicators. History: from Jul. 2012 to Jan. 2013
After outreaching the weekly resistance at 81.50, the USD index reached a level of 82.50, where a monthly Fibonacci 23.6 is situated, according to the level of volume which slightly increased traders lost interest in the recent impulse. In addition according to the Delta Volume, there are short traders prevailing in the market meaning there is a downside pressure in the USD index. Most probably we will observe a correction in the market during the week, while there is a potential for the growth till 82.90 where a daily resistance is situated. Traders should be ready to go short but also should not be in a hurry considering the trend in the EURUSD and GBPUSD markets.
Figure 2: USDX, daily candlesticks. History: from Mar. 2012 to Feb. 2013
The EURUSD, GBPUSD, and USDCHF markets
According to the Commitments of Traders reports, despite the fact that the EURUSD exchange rate has significantly declined (from 1.37 to 1.30) hedgers still believe the EUR quite overvalued relatively to the USD. It is indicated by the hedger COT index value of 19% and the Williams’ Commercial Index value of 21%. The open interest COT index increased from 38% to 50% meaning the market is has not yet been overheating and so far panicking traders have not moved the market below its fundamentals.
The large speculator and small trader COT indices are equal to 74% and 94%, respectively indicating large speculators are slowly switching their short positions to long ones but small traders are still going short. Summarizing, there is still a sell signal in the EURUSD exchange rate meaning the market may continue declining and reach 1.27.
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Figure 3: EURUSD futures and options data, the COT indicators. History: from Jul. 2012 to Jan. 2013
On February 25, the EURUSD exchange rate declined from 1.3300 to 1.3000 (by almost 300! points) and during the next part of the week a correction towards a monthly Fibonacci level of 38.2 was observed. The exchange rate consolidated between 1.3000 and 1.3150 and on Friday tested the weekly support at 1.3000.
During the last three days of the week a consolidation was followed by quite high though lower than Feb. 25 volume levels. It is more important that buyers prevailed in the market, which explains why traders observed a correction in the market. However, the trend in the Delta Volume indicator is towards a weakening of buyers.
A highly possible scenario is a downtrend in the EURUSD market in the end of the week, which will be followed by high volume and large volatility levels. The market may reach the next support level at 1.2700 where another Fibonacci level is situated. However, a final confirmation of the short-term downtrend in the EURUSD will be confirmed by a breakthrough of the weekly support at 1.3000.
Figure 4: EURUSD, daily candlesticks. History: from Mar. 2012 to Feb. 2013
Quite a similar situation is observed in the GBPUSD market except according to the COT reports traders indicate the British Pound is significantly undervalued relatively to the USD. Both the hedger COT and WILLCO indices are equal to 100% third week in a row. Both the large speculator and small trader COT indices are equal to 0% also indicating the GBPUSD exchange rate is below its fundamentals. However, the open interest continued increasing: this week again by approximately 13%. As a result the open interest COT index is equal to 100%.
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Figure 5: GBPUSD futures and options data, the COT indicators. History: from Jul. 2012 to Jan. 2013
Fundamentally the GBPUSD market is undervalued, however, there is a potential for the short-term speculative downtrend. After the market touched 1.5000 a correction started in the market which was supported by a stable high level of volume. Moreover, since February 14 there are more buyers in the market meaning an upside pressure is increasing. The GBPUSD exchange rate may drop to 1.47, where a weekly Fibonacci level of 161.8 is situated. However, a confirmation should be a breakthrough of the 1.5000 level, otherwise traders should be ready for the uptrend in the market. A confirmation for the uptrend start will be a breakthrough of a monthly level at 1.5200.
Figure 6: GBPUSD, daily candlesticks. History: from Mar. 2012 to Feb. 2013
The last currency market I would like to bring your attention to is the USDCHF exchange rate, which according to the COT reports published on Friday 1, the Swiss franc is not considered by hedgers to be highly overvalued relatively to the USD. The hedger COT index is equal to 74% (+31 percent point) and the WILLCO also to 72%. They indicate that the traders observe the last of the uptrend. The open interest is still close to its average level: the open interest COT index is equal to 61%. At the same time, small trader and large speculator COT indices are equal to 42% and 18%, respectively: large speculators were the first to indicate the market is overvalued. Only one category of traders provides a sell signal in the USDCHF market.
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Figure 7: CHFUSD futures and options data, the COT indicators. History: from Jul. 2012 to Jan. 2013
During the week the USDCHF exchange rate has increased from 0.9300 to almost 0.95000 and has broken through the weekly resistance at 0.9400. There is a high volume in the market indicating traders are interested in the market and the uptrend is led by buyers (see Volume Delta). There is a strength in the current uptrend, thus traders should be ready the market to reach 0.95 or even move higher towards 0.96.
Figure 8: USDCHF, daily candlesticks. History: from Mar. 2012 to Feb. 2013
The forecast wrap-up is the following:
· The USD index increased to 83.00.
· The EURUSD rate decreased to 1.27-1.28.
· The GBPUSD rate declined to 1.4700.
· The USDCHF increased to 0.9500 or even 0.9600.
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. The volume indicator takes into account volume in the most liquid futures market. For example, for the EURUSD it is the EURUSD Futures traded on CME Group exchanges. The Delta Volume indicator shows a difference between volumes of orders based on ASK and BID prices.
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.
