Despite the fact that the last Commitments of Traders report was published only on Monday 26th (due to holidays the CFTC has postponed the report publication), it is still interesting to see what are traders’ expectation regarding the currency markets.
Quite strong uptrend was observed both in the EURUSD and GBPUSD markets and strong downtrend in the USDX and USDCHF markets. The question I will try to answer in this article is the following: is it the end of the EURUSD downtrend or just a coffee break? To reach this goal, The Commitments of Traders (COT) data, inter-market and technical analyses are used in this article. At the end of the article you can find specifications of observed indicators.
The USDX market
According to the last COT report published on Friday 16th, most of the indicators are still providing a buy signal. The hedger COT index has not changed its value and is equal to 81%, meaning hedgers still consider the USDX to be strongly undervalued relatively to major currencies. The same is for the William Commercial Index which stayed on its previous level of 69% (+0 percent points). It is not surprising because the USDX value has not changed comparing from 13th to 20th of November. In other words, current COT data does not show market participant reaction on a significant drop in the market. It has to be considered in the analysis of other markets as well.
Other COT indices also have changed their values significantly. The large speculator COT index value is 20% (+1 percent point). It is another indication that USD is undervalued. The small trader COT index increased from 26 to 28% (only +2 percent points). The open interest increased a bit, from 39,519 to 40,328. As a result, the open interest COT index is equal to 5% (+1 percent point). Again, it is an indication that traders moved the USD index below its fundamentals, and on the level of 80.89 it is undervalued (closing price on 20th of November). Clearly current price of approximately 80 is too low.
Figure 1: USDX futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
As it was predicted in the last review, during the last week we observed a strong downtrend in the USDX market; the index dropped from 81.18 to 80.22. The volatility increased significantly (see Standard Deviation in Figure 2).
However, it is clear that this week the volatility has significantly dropped, which is an indication of a correction stop. Probably during the rest of the week we will observe low volatility which will increase during the next week when the uptrend will continue with new strength. The long-term forecast is still unchanged; the USD rally will stop in several weeks at the level of 83-84. The reason to keep the long-term forecast at the previous level is that despite a significant increase since mid-September, hedgers, large speculators, and open interest still indicate that the USD index is undervalued.
Figure 2: USDX, daily candlesticks. History: from Dec 2011 to Nov 2012.
The EURUSD market
Comparing to the previous week, the most of the COT indices do not more indicate that EUR is strongly overvalued relatively to USD. But remember that the data published in the COT report was collected on 20th of November.
The hedger COT index is currently equal to 25% (+5 percent points), while the Williams Commercial Index is equal to 57% (+12 percent points). The large speculator COT index is equal to 75% (-7 percent points) but the little speculator COT index is equal to 73% (-4 percent points). The open interest COT index is equal to 5% which indicates that the market is undervalued, a signal for uptrend. However, the open interest has been very low for the past 9 weeks, therefore it is not an indication of current downtrend soon reversal.
Figure 3: EURUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
Despite my expectation that the EURUSD exchange rate would more or less continue depreciating during the past week, a strong uptrend correction was observed. The rate increased from 1.2748 to 1.2974. As in the case of the USDX, this week a lower volatility is observed in the market. Probably next week we will see a continuation of the downtrend. Although according to the COT data, the indices exited the critical areas and do not indicate that EUR is overvalued relatively to USD, they are still very close to the critical areas. Considering the fact that the downtrend was observed for quite a long time, it is normal that indices step by step moved out of the critical areas of 0-20% and 80-100%.
A long-term forecast is the following: a fall up to 1.21-1.22, while further decrease is limited by a support at 1.2050.
Figure 4: EURUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
The GBPUSD market
According to the last Commitment of Traders report the British Pound is not overvalued relatively to USD. The hedger COT index is equal to 46% (+9 percent points), while the Williams Commercial Index is equal to 42% (+11 percent points). The large speculator COT index is equal to 47% (-14 percent points) and the little speculator COT index is equal to 62% (-4 percent points). The open interest COT index is equal to 53% (+2 percent points) indicating an average level of the open interest in the market. None of the indicators is currently indicating a downtrend in the market; however, the published COT report does not include a recent uptrend in the market (see Figure 6). Therefore, I recommend postponing important decision till the issue of the next Commitments of Traders report.
Figure 5: GBPUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
The GBPUSD exchange rate behaved similarly to EURUSD. During the week had increased from 1.5885 to 1.6050, currently low volatility is observed in the market.
Considering the fact the market participants do not consider GBPUSD overvalued anymore for 3 weeks and the indices are currently equal to average values, it is important to correct the long-term target from 1.55 to 1.56-1.57 where a daily support is situated.
Figure 6: GBPUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
The USDCHF market
According to the CHFUSD COT report published on 16th of November (notice that the report is collected for the inverted exchange rate, not USDCHF), the hedger COT index is equal to 38% (+2 percent points), while the Williams Commercial Index is equal to 58% (+5 percent points). The large speculator COT index is equal to 59% (-11 percent points) but the little speculator COT index is equal to 67% (+8 percent point). As in case of GBPUSD, there is no more indication of USD undervaluation relatively to CHF. However, it does not mean the uptrend is not going to continue. Finally and again, the only conflicting indicator is the open interest; the COT index is equal to 19% (-1 percent point). However, as in case of the EURUSD market, the open interest has been very low for the past 9 weeks, therefore it is not an indication of current downtrend soon reversal.
Figure 7: CHFUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
In the USDCHF market the strongest downtrend was observed. After a long uptrend observed since the mid-October, the exchange returned to its September-October values.
Again, considering the fact the COT indices are not in their critical areas of 0-20 and 80-100% for two weeks and are close to their average values, the long-term target should be corrected from 0.9960-1.0000 to 0.96. This market should be considered with caution and the best is to wait for updated COT report.
Figure 8: CHFUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
It is clear that current correction may be unexpected for many traders but are normal for any long-term trend. Therefore there is no need to panic, keep calm, and wait for the next Commitments of Trader report which will be published on Friday 30th. The next report will reveal market participant expectations regarding the exchange rates and provide the key information to make right decisions in the TOP 4 currency markets.
Also notice that I made corrections in the long-term targets due to several reasons. First, strong corrections were observed in the markets. Second, there is a Christmas and New Year coming which is normally a period of either unexpected market moves or flat trends.
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.
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
