This article is dedicated to four currency markets: EURUSD, USDCHF, GBPUSD, and the USD index which indicate the USD value relatively to six currencies (EUR, CHF, GBP, CAD, SEK, and JPY). This time I would like to make a forecast for longer time period because my next article with market analysis based on the inter-market connections, the Commitments of Traders data, and the technical figures will be published only in two weeks.
At the end of the article you can find specifications of discussed indicators.
The USDX market
As long as, the USD index says a lot about other currency markets’ future, I would like to draw to your attention to this market first. The COT data shows that currently all indicators reached their extreme values because comparing to the mid-July the USDX value is 5-6% lower (see Figure 2).
According to the last Commitments of Traders report published on 26th of October 2012, hedgers expect the US dollar to increase in value relatively to EUR, GBP, CHF, CAD, JPY, and SEK. The hedger COT index is equal to 100% (+1 percent point) and the William Commercial Index is equal to 100% (+3 percent points). Large speculator keep on holding record low net position: the last time large speculator net positions were negative in the USDX market was September 6, 2011. As a result, the large speculator COT index is equal to 0% (-1 percent point) indicating a buy signal in the USDX market, while the small trader COT index is equal to 13% (+2 percent points). Finally, the open interest COT index is equal to 6% indicating a critically low level of open interest and providing another buy signal. Altogether, for already 6 weeks market participants have been indicating that the USDX is undervalued but it is not surprising…
Figure 1: USDX futures and options data, the COT indicators. History: from Apr 2012 to Oct 2012.
It is not surprising because after the USDX fell from 84 to 79, its value has not significantly increased. For the same 6 weeks the USDX value has not exceeded the weekly resistance at 80.20. Since the mid-September the USDX market is in a flat trend with a slow progression towards the uptrend. The standard deviation is quite stable, as well. However, a small increase in volatility was observed last week.
The triangle formed by two trend lines (a long-term downward sloping and a short-term upward sloping) was broken through from the top and reached the weekly resistance at 80.20. If during the next week the USDX value will moves beyond the trading corridor limited by the weekly resistance at 80.20, I would expect the value to reach the daily resistance at 81.82 in two weeks. However, it is important to look at the EURUSD market.
Figure 2: USDX, daily candlesticks. History: from Dec 2011 to Oct 2012.
The EURUSD market
One of the key currencies affecting the USDX is the euro, it accounts for more than 57.6% of the index value, and therefore situations in the USDX and EURUSD markets normally are very similar. Hedgers, large speculators, and small traders indicate the USD to be undervalued relatively to EUR. All three COT indices and the William’s Commercial indices are in the critical areas of 0-20% and 80-100% providing “sell signals” in the market. However, the open interest keeps on falling; currently it is equal to 260,177 which is a record low for more than a year. As a result, the open interest COT index is equal to 0% and is providing a „buy” signal, controversial to indications of other indices. Collecting the puzzle together, since the beginning of September 2012 there has been an indication of the euro being overvalued relatively to USD but the EURUSD exchange rate is very stable.
Figure 3: EURUSD futures and options data, the COT indicators. History: from Apr 2012 to Oct 2012.
Since 11th of September (see Figure 4) the EURUSD exchange rate has been fluctuating between two weekly levels: the weekly resistance at 1.3180 and the weekly support at 1.2800. As in the USDX market, a triangle figure formed in a daily time-frame was broken through. However, if the USDX value tested a weekly resistance level, the EURUSD exchange rate is quite far from the weekly support at 1.28. I am afraid that if the euro is not going beyond the weekly support at 1.28, we will not see an uptrend in the USDX market. On the other hand, if the USDX continues increasing during the next week, it will indicate that the EURUSD rate will finally start decreasing.
Figure 4: EURUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
The USDCHF market
If there was a concern that the USDCHF exchange rate might drop lower, today it is clear that USDCHF stays within a channel formed by the weekly resistance at 0.9440 and the weekly support at 0.9240. As in the EUR market, hedgers expect USD to appreciate against the Swiss Franc. It is not a surprise knowing the trader position data in the USDX and EUR markets. Both the hedger COT and the Williams Commercial indices are equal to 0%, while the small trader and large trader COT indices are equal to 97% and 100% respectively. As in the EURUSD market, the open interest is on a very low level, the COT index is equal to 3%. Remember that the COT data is reported for the CHFUSD market, reverse to USDCHF. The Swiss Franc is not a leading market; therefore trends in this market mostly depend on the EURUSD market.
Figure 5: CHFUSD futures and options data, the COT indicators. History: from Apr 2012 to Oct 2012.
As I have mentioned above, the USDCHF Forex rate has been fluctuating between the weekly resistance at 0.9440 and the weekly support at 0.9240. Considering exclusively the technical situation in the market, the earlier formed triangle was broken through from the top as in the USDX market. However, the Forex rate is still limited by a strong resistance at 0.9440; it leaves a lot of place for speculation regarding the future of this market. The size of Japanese candles gives a hint that the most probable scenario for the next week is a downward sloping correction of the USDCHF rate because the strength of the uptrend we saw during the week has weakened.
Figure 6: CHFUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
The GBPUSD market
The last currency market I would like to draw your attention to is GBPUSD. For 5 weeks we have observed a “sell” signal in the market which disappeared according to the last Commitments of Traders report. The hedger COT is equal to 29%, while the Williams Commercial index (WILLCO) is equal to 24%, both +16 percent points. The large speculator COT index is still within 80-100% critical area and is equal to 80% (-1 percent point) but the small trader COT index fell to 58% (-46 percent points). The open interest in on its average level what is indicated by a value of 57% of the open interest COT index.
However, you have to be careful interpreting the Commitments of Traders data. The COT report published on Friday contains position data collected on Tuesday…
Figure 7: GBPUSD futures and options data, the COT indicators. History: from Apr 2012 to Oct 2012.
…On Tuesday the GBPUSD exchange rate was much lower than now, it dropped to 1.5915 where a new daily support was formed. Such a drop motivated the market participants to react but Friday closing exchange rate is higher than the previous week one. If you have a short position in the market, I would recommend holding it. The fact that the COT signal disappeared does not mean the trend has stopped; it means that the exchange rate has significantly decreased. Finally, a breakthrough of the daily supporting line at 1.5915 will confirm a continuation of the downtrend. The GBPUSD exchange rate decrease up to the weekly supporting line at 1.54 is still a realistic forecast. Further decrease is problematic because by the time the GBPUSD rate drops to 1.54, the trend power will be quite low and not enough to get through the weekly support. In two weeks I expect the GBPUSD rate to be around 1.57.
Figure 8: GBPUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
Generally, the situation in the currency markets did not change significantly comparing to the previous week. While the GBPUSD rate is step-by-step decreasing, flat trends are observed in the USDCHF, USDX, and EURUSD markets. Trends in the USDCHF market mainly depend on events in the EURUSD market.
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.