FX.co ★ Are the USDX and the EURUSD going to take a break in December?

According to the last Commitments of Traders data we should expect the EURUSD and GBPUSD markets to decrease; on the contrary, on the USDCHF market we should observe an uptrend. However, markets are calm in December. What should traders expect from these and the USDX market is discussed in detail in this review. New take profit targets are mentioned in this article.

The USDX market

Since the previous Commitments of Traders (futures and options) report published on Friday 30th hedgers as well as other market participants have not been indicating that the USDX is oversold. Although the indicators are close to the critical bounds, they are out of them. Thus, the growth on the USDX market is limited. The hedger COT index is equal to 78% (-1 percent point) meaning hedgers still consider the USDX to be quite undervalued relatively to major currencies. However, considering the drop back to the level of 80 (see Figure 2), it is doubtful the USDX will reach the level of 84.00 by the end of the year.

The William Commercial Index dropped to 66% (+4 percent points). The large speculator COT index value is 25% (+3 percent points) and the small trader COT index decreased from 27 to 8% (- 19 percent points). The open interest has increased since the previous week from 36,621 to 44,461 what moved the COT index to 17% (+17 percent points).

Summarizing, two COT indices based on the open interest and small traders net positions provide a buy signal meaning there is a place for growth on the market. Clearly, the USDX is undervalued at the level of 80. However, considering other fundamental data you should not be over optimistic about the growth in December.

Figure 1: USDX futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.

Although in the previous forecast I expected to see an uptrend during the week, objectively the USD index value stayed on the previous week level. However, at the end of the week an uptrend was observed which stopped in front of the earlier formed resistance at 80.50. The Standard Deviation which represents the volatility on the market increased by approximately 3 times to 0.3168 (see green line in Figure 2).

Hedgers, large speculators, small traders, and open interest still indicate that the USD index is undervalued. However, there is no strong buy signal and the markets are quite calm in December due to various vacations. Moreover, historically the USDX goes up by around 3 points since the COT data indicates a growth. The USDX has gone up from 78.60 to 81.30, it is almost 3 points. Therefore, my expectation is that probably the USDX will vary from 80 to 81.30 in December and only after the indicators will move back into the critical bounds or the index will breach the weekly resistance at 81.30 we can consider the next uptrend stage.

Figure 2: USDX, daily candlesticks. History: from Jan 2012 to Dec 2012.

The EURUSD market

After the COT indices return into the critical bounds of 0-20 and 80-100% in the previous COT report, according to the new report published on 7th of December the sell signal on the EURUSD market strengthened.

Currently, the hedger COT index and the Williams Commercial Index are equal to 0% (-11 and -31 percent points, respectively). Both large speculators and traders bet that current uptrend correction on the market is going to continue, as a result the large speculator and small trader COT indices are equal to 100% (+11 percent points) and 97% (+11 percent points), respectively. Due to increase of the open interest the COT index increased to 10%. Despite it the indicator stays within the bounds and provides a signal for uptrend. It is important to understand that despite it is a conflicting signal, the open interest was very low for the past months what can be explained by market structure change.

Figure 3: EURUSD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.

A significant volatility increase was observed on the EURUSD market, as well. The exchange rate value stayed on the previous week level. As long as a strong downtrend was observed at the end of the week, I expect it to continue during the first part of next week.

Summarizing, the major downtrend is also expected to continue due to both graphical analysis and the COT data. On the other hand, considering the inter-market analysis there is no sign from the USDX to grow a lot in December. Therefore, my long-term forecast is a fall up to 1.23 but it depends on scenarios we will see on other currency markets and especially the USD index.

Figure 4: EURUSD, daily candlesticks. History: from Jan 2012 to Dec 2012.

The GBPUSD market

According to the Commitment of Traders data the British pound is again strongly overvalued relatively to USD. It is not surprising considering the fact that the rate returned to October-early November levels at 1.6.

Currently, the hedger COT index is equal to 4% (-23 percent points), while the Williams Commercial Index (WILLCO) is equal to only 5% (-19 percent points). It means that hedgers believe exchange rate of 1.6 to be too high, and therefore expect a downtrend on the market. The large speculator and small trader COT indices are equal to 95% meaning speculators pushed the rate up as much as it was possible. The open interest COT index is equal to 100% (+37 percent points) indicating an extremely high level of the open interest on the market. It is interesting to notice how the open interest increased by 13% in one week.

Summarizing, if last week indication of downtrend continuation on the GBPUSD market, this week it strengthened significantly. Such an outstanding increase of the open interest additionally indicates the short-term increase we saw in past 2 weeks (see Figure 6) is just a correction.

Figure 5: GBPUSD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.

Comparing to the EURUSD and USDX markets, the GBPUSD exchange rate stayed very stable during the last week; the rate varied between daily resistance and support at 1.61 and 1.60, respectively.

The volatility was kept low; a Daily Standard Deviation (5) dropped to 0.0026. Historically (2010-2012) trends predicted by the COT data on the GBPUSD market are equal to around 600 points. Considering the fact that the downtrend started at 1.625, the target should be around 1.565 or 1.57, before the daily resistance.

Figure 6: GBPUSD, daily candlesticks. History: from Jan 2012 to Dec 2012.

The USDCHF market

A fresh (or repeating) buy signal formed in the last COT reports has strengthened during the week. According to the USDCHF COT reports (notice that the report is collected for the inverted exchange rate, not USDCHF) published on 7th of December the hedger COT index and the Williams Commercial Index are equal to 0% (-12 and -21 percent points, respectively. It indicates that hedgers are highly concerned with the current exchange rate and believe in nearest futures CHF will depreciate relatively to USD meaning the USDCHF rate is expected to go up.

The large speculator and small trader COT indices are equal to 95% (+11 percent points) and 100% (+10 percent point), respectively. It means speculators pushed the rate down (USDCHF) as much as it was possible. The only conflicting indicator is the open interest; the COT index is equal to 18% (+4 percent points). However, as in case of the EURUSD market, the open interest was very low for the past months, therefore it is not an indication of current downtrend soon reversal.

Figure 7: CHFUSD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.

During the week the USDCHF rate varied between resistance level at 0.9340 and resistance level at 0.9240. The long-term target is around 0.975-0.985, just before the first or the second daily resistance at 0.9800 and 0.9870, respectively. However, it is important to note that currently the EURUSD and USDCHF markets are just varying within wide bounds, in case of USDCHF: from 0.92 to 0.95. Therefore, I do not expect the exchange rate to increase higher than 0.95 this month.

Figure 8: CHFUSD, daily candlesticks. History: from Jan 2012 to Dec 2012.

Clearly, there are signs that parts of major have rends already passed, and according to both technical and fundamental indicators you should not be very optimistic about the trends’ strength in December. Probably we will observe small variation in all four markets but with slightly different scenarios. I believe that the GBPUSD rate can move close to or even reach the target at 1.57.

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.

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.