FX.co ★ Happy Trends in the New Year 2013

Despite the fact that many traders are having vacations now, most of the markets are open and trades continue. In this review I would like to mention future of the currency markets, major trend direction, and potential take profit positions.

The USDX market

Comparing to the previous week exchange rates have not changed much in the major currency markets, however the Commitments of Traders data shows that positions are changed by the market insiders. Manufacturers, investment banks and even general public regularly open new positions in the currency markets.
It is clear that the United States accumulated their debt since the Cold War and is not able to continue stimulation policy. In addition, United States private entities and banks are in debt, as well.
“By way of background, the dollar liabilities of foreign banks have grown rapidly in the past two decades and now stand at about $8 trillion, roughly on par with those of U.S. banks,” Governor Jeremy C. Stein, the Global Research Forum, Frankfurt am Main, Germany said.
Despite the hard economic times, the United States will have to seize monetary and fiscal stimulation programs which will decrease the access to the US dollar and push the USDX up. Hedgers agree with me and hold record high net positions in the past year. It was spring 2011, when hedgers’ net positions were so high.
After its value returned to the mid-September value of 79.50 both the hedger COT and William Commercial indices are equal to 100%. The large speculator COT index dropped to 0%, while small traders followed large speculators and their net position also declined significantly moving the index down to 1%. Finally, the open interest in also very low in the market: the COT index is equal to 20% (see Figure 1) meaning there are five indicators telling us the USD is undervalued.

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

Figure 2: Net positions of hedgers, large speculators and small traders in the USDX market. History: from Jul 2010 to Dec 2012.

After the USDX dropped to the weekly support, it returned back to the downward sloping trend line and daily support at 79.60. The USD index has not reached the monthly support at 78.60, so there is still a possibility of a downtrend in the market for the next 1-2 weeks. However, the fact that soon (just a matter of hours) the end of the “cheap dollar era” financed by the increasing U.S. debt will be over, an increase in the USDX is expected. Finally, the volatility is extremely low (See STDEV, Figure 3), therefore I expect a significant volatility increase and upside direction impulse.

The last time hedger net position were so high the USDX jumped from 72 to 76. The last time a buy signal was formed in the USDX market in September, the USDX increased from 79 to 81.3. Considering this information, I would expect an increase at least till the monthly resistance at 81.30 and potential growth till 83-84.

Figure 3: USDX, daily candlesticks. History: from Feb 2012 to Dec 2012.

The EURUSD market

The moment X is coming and traders around the world are waiting for it: the EURUSD exchange rate stayed still for the past 2 weeks. As during the last week, hedgers, large speculators and small traders hold extreme positions indicating that the EUR is overvalued relatively to USD. Hedger net positions dropped below 0 and large speculator positions increased over it for the first time since August 2011.

According to the cot indices, all three categories of traders expect USD increase in value relatively to EUR and the only questions is left when is it going to happen and where should we get in the market.

Figure 4: EURUSD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.

Figure 5: Net positions of hedgers, large speculators and small traders in the EURUSD market. History: from Sep 2011 to Dec 2012

Clearly, traders are waiting for the announcement by the Congress what changes are coming in 2013. While they are packing presents for us, as forecasted in the previous report, the EURUSD rate is nicely varying between two weekly resistances at 1.3130 and 1.3260. The last time the net positions of traders were on current levels the EURUSD pair declined from 1.45 to 1.31. This time we expect a similar scenario: a decline from 1.31 till the monthly support at 1.22.

Figure 6: EURUSD, daily candlesticks. History: from Feb 2012 to Dec 2012.

The GBPUSD and USDCHF markets

Not only the EUR traders expect USD to increase in value but also GBP and CHF traders consider these currencies being overvalued relatively to USD.

According to the last Commitment of Traders data, the hedger COT index and the Williams Commercial Index (WILLCO) are equal to 0% both in the GBPUSD and CHFUSD markets (notice that the COT report is formed for the CHFUSD not USDCHF) meaning that hedgers believe the exchange rates will adjust. Both large speculator and small trader net positions based COT indices support signals received from hedgers in the GBP and CHF markets. Finally, the open interest is very high in GBPUSD market indicating the market is overheating.

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

It was October 2011 when hedger net positions were so low in the GBPUSD market. The last time a buy signal was formed in the USDX market in September, the USDX increased from 79 to 81.3.

Figure 8: Net positions of hedgers, large speculators and small traders in the GBPUSD market. History: from Apr 2011 to Dec 2012

Figure 9: CHFUSD futures and options data, the COT indicators. History: from Jun 2012 to Dec 2012.

Both GBPUSD and USDCHF exchange rates were consolidating during the past week (see Figures 6 and 7). There is a storm coming and I recommend you to be ready. While the USDCHF pair may jump to 0.9600 or even 1.0000, the GBPUSD pair may decline to 1.54 or even lower because the last time traders’ net positions were so extreme the exchange rate dropped from 1.61 to 1.52.

Figure 10: GBPUSD, daily candlesticks. History: from Feb 2012 to Dec 2012.

Figure 11: USDCHF, daily candlesticks. History: from Feb 2012 to Dec 2012.

While I am pressing refresh button on the websites of Reuters and Bloomberg, the currency markets are in the side trends. I expect high volatility after the announcement by the U.S. Congress which will bring certain relief to the markets and recommend you to set buy and sell stop orders. It is a great place and time to enter the markets when such a low volatility is observed and supports and resistances are formed in a daily time frame. To close up this article, I wish you the best year 2013, happy trends and more profitable trades.

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.