The Commitments of Traders data published on 12th of October shows the reaction of market participants on the Reserve Bank of Australia, the Bank of England, and the European Central Bank (ECB) decisions regarding the interest rates. As well as, traders’ exchange rate movement expectations on the currency markets.
The USDX market
Since 18th of September 2012 (a COT report was published on 21st of September) there is a fundamental COT signal on the USDX market. Yet, however, the signal has not been realized; since the beginning of October a flat trend has been observed. The daily resistance at 80.00 was tested several times while a daily supporting line was formed at 79.09 (see Figure 2).
The Commitments of Traders data shows that hedgers still believe USD is undervalued relatively to the major currencies. Thus, both the hedger COT index and the William Commercial index are equal to 100%, while the large speculator COT index and the small trader COT index are equal to 0% and 9%, respectively.
Figure 1: USDX futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
The open interest COT index is only 5% (-7 percent points comparing to the previous week), indicating a very low level of the open interest on the USDX market. After a significant drop in September, the open interest on the USDX market has not recovered. If on 11th of September it was equal to approximately 73 thousand, now it dropped to 43 thousand.
Earlier started uptrend on the USDX market has been postponed: the USDX value is fluctuating between two daily levels, a resistance at 80 and a support at 79. A potential growth can continue up to the monthly resistance at 83.50-84.00 which was formed in August 2010 and was tested twice in 2012.
Figure 2: USDX, daily candlesticks. History: from Dec 2011 to Oct 2012.
The EURUSD market
The updated Commitments of Traders legacy report shows that the fundamental signal has slightly weakened. However, the market insiders indicate we should continue betting on a downtrend on the EUR market. The large speculator, small trader and hedger COT indices, and the William’s Commercial Index stay in the critical areas of 0-20% and 80-100% (all sell signals) but the open interest COT index is equal to 0% and is providing a buy signal. Although, the open interest data conflicts with market participant position data, a general sell signal is provided by the COT data. A recent ECB decision to leave the short-term interest rate on the previous level supports the sell signal.
Figure 3: EURUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
While the USDX value is limited by daily supporting and resistance lines, a similar picture is observed on the EUR market, except not an uptrend but downtrend has changed to a flat one. Currently, the EURUSD exchange rate is fluctuating between the daily resistance at 1.3070 and the daily support at 1.2800. A downtrend in the EURUSD exchange rate can continue up to the monthly support at 1.2050.
Figure 4: EURUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
The USDCHF market
The market situation in the USDCHF market has not changed much comparing to the previous week. The exchange rate is fluctuating between the daily resistance at 0.9450 and the daily support at 0.9275.
The COT indices are not anymore equal to its maximum and minimum values; though, stay in the critical areas of 0-20% and 80-100%. The hedger COT index went up from 0 to 5%, while the Williams Commercial index grew from 0 to 9%. At the same time the small trader COT index decreased by 14 percent points, from 100 to 86% and only the large trader COT index stayed at its previous level of 100%. The large speculator net position grew from -909 to -306 and this is a record high value for a much longer period than 26 weeks.
Figure 5: CHFUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
A downfall of the USDCHF rate is limited by a number of graphical analysis elements; the daily support at 0.9275, the weekly support at 0.9240, and the long-term upward sloping trend line. So there is a number of reasons for the exchange rate to continue the growth up to the resistance level at 0.9970-1.0000.
Figure 6: CHFUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
The GBPUSD market
On the British pound market the Commitments of Traders data has been also indicating a downfall for several weeks. Out of all currency market discussed in this article, the most dynamic downtrend can be observed in the GBPUSD: since the middle of September the GBPUSD exchange rate dropped from 1.63 to 1.60.
Although, the Forex rate has slightly decreased, hedgers believe there is a place for a further downfall because the hedger COT index value is still within the critical area of 0-20%. Most of the indicators values are moving towards the exit from the critical areas of 0-20% and 80-100%. However, there is still a strong sell signal on the GBPUSD market. Only, open interest has dropped significantly which is indicated by the fall of the open interest COT index from 82% to 61%. The open interest decreased from 189 thousand to 170 thousand in one week.
Figure 7: GBPUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
On the 4 hour and daily time frame a small correction was observed at the end of the week. Yet everything indicates that there is no reason for the GBPUSD rate to stop depreciating. Thus, the drop up to the weekly supporting line at 1.54 is quite realistic. Finally, the Bank of England decision to keep the short-term interest on the previous level is an expected decision and will not prevent the rate decrease.
Figure 8: GBPUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
The recent decisions made by the European Central Bank and the Bank of England did not introduce anything new in the markets, the previous fundamental signals are still strong. Although, the currency markets (EUR, USDX, and CHF) stay calm and no real downtrend or uptrend is observed on the market, they cannot stay on their levels forever. All market participants indicate USD to appreciate against the major currencies and the GBPUSD exchange rate has already started depreciating. I believe other currencies soon will follow the British Pound.
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 at 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 provids the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.