FX.co ★ Barack Obama win will not bring relief to the markets

With 332 versus 206 (for Romney) electoral votes, Barack Obama secured a confident victory in the presidential race. Some traders believe Barack Obama’s win in the race for the presidential chair will bring relief to investors and will strengthen the US dollar. This theory was supported by growth in the USDX in the beginning of the week (see Figure 3), however the question is whether there is a big difference between two candidates and whether the growth in the USD index means a start of new uptrend in the market… You better doubt.

First, even those who did not like Obama did not like old and conservative Romney even more. Therefore, Obama’s win was expected by the markets, it is proven by quite low volatility in the USD index (see Figure 3). Second, as Barack Obama stays in his post, there will be no change in the current monetary and fiscal policies (and would not be with Romney). Thus, there is no reason for markets to react very positively to the victory of Obama.

The USDX market

The US Congress anyway has to seize monetary and fiscal stimulation programmes which will decrease the access to the US dollar and push the USDX up in the long run. However there is still no clarity regarding the US economy and the USD because real decisions have not been made yet.

According to the Commitments of Traders reports, hedgers do not expect growth in the market anymore, which is indicated by both a significant drop in their net positions (see Figure 2) and the hedger COT index drop to 67%. At the same time Williams’ commercial index is equal to 54%. The large speculator and small trader COT indices are equal to 32% and 45%, respectively. Finally, the open interest slightly increased moving the COT index to 30% (see Figure 1). Currently, there are five indicators telling us the USD is not undervalued anymore and their values not changed significantly comparing to the previous week, which is not surprising looking at the price (see Figure 3).

Figure 1: USDX futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013.

Figure 2: Net positions of hedgers, large speculators and small traders in the USDX market. History: from Jan 2012 to Jan 2013.

On 14th of January, the USD index reached its short-term bottom, later forming a daily support at 79.35. Currently the index is going towards a daily resistance at 80.50 where it will most probably stop. There is no fundamental reason for the USD to become significantly stronger in relatiion to other currencies, and the growth in the market in the past five days is mainly associated with emotional optimism due to Obama's win and a correction after a significant drop on 10th of January. The most probable scenario for this week is a variation between 79.50 and 80.50. The USDX will continue varying between 81.30 and 79.35 for the rest of this month.

Figure 3: USDX, daily candlesticks. History: from Feb 2012 to Jan 2013.

The EUR/USD, GBP/USD and USD/CHF markets

Although in the USDX market there is no sign for significant growth in the next weeks, according to the last Commitments of Traders reports, hedgers who are operating in EUR, GBP and CHF currency market expect these currencies to depreciate significantly relatively to the USD. For example, hedger COT index in the EUR market dropped to 0% (see Figure 4) after the EUR/USD rate increased from 1.31 to 1.34 (see Figure 5), while British pound and Swiss Franc hedgers consider the currencies to be overvalued relatively to the USD despite their depreciation.

Figure 4: EUR/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013

Figure 5: GBP/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013

Figure 6: CHF/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013

After the uptrend, mainly driven by Mario Draghi’s speech, observed in the end of the week before last in the EUR/USD stopped, a flat trend with low volatility is observed in the market. The most probable scenario for this and next week is a decline to 1.32.

Figure 7: EUR/USD, daily candlesticks. History: from Feb 2012 to Jan 2013.

As expected in the last review, the GPB/USD rate continued declining to 1.59 where it stopped. A significant drop in the end of the last week is mainly driven by the events in the United States. This decline is also statistically “normal”: last time market participants provided a signal that the British Pound is overvalued relatively to the USD, the exchange rate declined to the weekly support of 1.5840. Most probably the GBP/USD will continue varying between the weekly support at 1.5840 and the monthly resistance at 1.6280. I expect an upward sloping correction in the market at the end of this week.

Figure 8: GBP/USD, daily candlesticks. History: from Feb 2012 to Jan 2013.

As in the case of the British pound market, the Swiss Franc continued depreciating relatively to the USD, and since the 14th of January it has grown from 0.92 to 0.93. Currently a flat trend is observed in one hour and four hour time frames. The most probable scenario for this week is a correction back to 0.92. Despite the increase in the USDCHF market, driven by a positive tone in the speech of the ECB President and negligeable USD strengthening, there is no strong sign of this uptrend continuation. Though in the short term, there is possibility for Swiss Franc value adjustment and increase to 0.95, however further growth is still limited.

Figure 9: USD/CHF, daily candlesticks. History: from Feb 2012 to Jan 2013.

I would like to repeat that future mid- and long-term trends will be determined by the news regarding the US budget, and yet there is no solution found for curing Uncle Sam. Also keep in mind that trends in the European markets are determined by the Eurozone, therefore do not expect uptrend in the USD/CHF and downtrend in the GBP/USD if there is no downtrend in the EUR/USD market. Yes, there is a possible short-term deviation from a common trend, but not mid- or long-term.

I do not recommend you going short in the GBP/USD market because there is a high probability of upside correction. At the same time be ready for a slight decline in the EUR/USD and CHF/USD markets. Continuing debates in the US Congress mean worries for investors and flat trends in the future.

Wrap-up of the short-term forecasts: the GBP/USD growth to 1.60, the EUR/USD return to 1.31-1.32, a decline in the CHF/USD market to 0.9250 (alternatively, growth to 0.95) and the USDX uptrend to 80.50.

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 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. The author is providing the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.