FX.co ★ Thanks to Draghi, the EUR/USD will drop to 1.30

While after Mario Draghi’s speech on Feburary 7 the EUR/USD exchange rate returned below the monthly level at 1.35, the USD index returned to the daily resistance at 80.15. However, according to the Commitments of Traders reports, while a downtrend continuation is expected in the EUR/USD market, the USD index is expected to stay within the 79-81.15 range.

The USDX market

The USD market performed in a differed way comparing to the expectations. While a flat trend was expected, a strong uptrend and volatility increase were observed in the USDX market: the index returned and slightly went over the daily resistance at 80.15.

According to the Commitments of Traders report published on February 9, 2013, hedgers do not consider the USD to be highly undervalued relatively to the major currencies, however the hedger cot index value increased from 58% to 72%, and there is a potential for the growth continuation because the index value change was driven by the hedger net position significant increase (see Figure 2). At the same time, the Williams’ commercial index increased from 46% to 64% (+18 percent points). The net positions of hedgers returned to 0. The last two times when hedger net positions became positive, uptrends were observed. These moments were marked in the Figure 3, a daily timeframe chart.

The large speculator and small trader COT indices also move towards the buy signal zone of 0-20%. Currently, the large speculator index is equal to 31% (-12 percent points) and the small trader COT index is equal to 10% (-18 percent points). The open interest also increased but stopped on its half-year average: the cot index is equal 54%.

Summarizing, none of the three categories of traders or the open interest indicate that the USD index is under- or overvalued. However considering the trends in the net positions and the COT indices, it is possible that the uptrend will start next week or has already started.

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 2011 to Feb 2013

Currently, the market is testing the daily resistance at 80.15. If it is broken through, traders should expect the growth continuation up to 81-81.50, otherwise they should expect USDX correction back to 79-79.50. Considering the trends in the net positions, COT indices and similar to the second half of September and the mid-December 2012 price levels, it is possible that the uptrend will start next week or has already started.

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

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

According to the Commitments of Traders, hedgers who are operating in the EUR/USD market consider it to be overvalued: the hedger COT index has been equal to 0% for a month (see Figure 4) and the net positions hit new record lows. In the last article I mentioned that the hedger net positions reached lows of July 2011 when soon after a major downtrend was observed in the market. The large speculator and small trader COT indices are equal to 100% and 86% (-7 percent points comparing to the previous week) respectively also indicating that the EUR is seriously overvalued relatively to the USD.

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

After Mario Draghi, President of the European Central Bank, mentioned the issues regarding a strong euro during the press conference following the meeting of the Governing Council in Frankfurt on February 7, 2013, the EUR/USD exchange rate has returned below monthly resistance at 1.35 and a strong Fibonacci level 38.2 which was drawn in the monthly timeframe too. Although Mario Draghi’s announcements cannot define fundamental trends, they definitely may define short-term varitions in the market. His previous announcement led to the increase from 1.30 to 1.37, therefore current announcement may lead to a decline back to 1.30-1.32.

The EUR/USD exchange rate decline during the last week may push the USD index up, however other exchange rates behavior is also important.

Figure 5: EUR/USD daily candlesticks. History: from Mar 2012 to Feb 2013

Starting from this week, market participants consider the GBP/USD undervalued: after a highly volatile variation around the Fibonacci level 23.6, the COT indices moved into the critical areas. It took some time for market participants to adjust their positions but another buy signal in the market is not surprising due to a significant drop of the exchange rate from 1.63 to 1.57. The hedger COT and WILLCO indices increased to 100% (+28 percent points comparing to the previous week) and 97% (+35 percent points), respectively. The large speculator and small trader (investor) COT indices are equal to 23% and 0%, respectively. Small traders were the fastest to adjust their positions, but large speculators still need some time. However the open interest continued growing during the week and the COT index increased to 85%, which may be an indication that a downtrend may be observed in the market.

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

Although a large volatility increase was observed in the market, the exchange rate has not moved much comparing to the closing rate on Monday, January 28. Currently, the exchange rate is varying close to the weekly support at 1.58 and Fibonacci level at 23.6 formed in a monthly timeframe. If at the beginning of the next week the Fibonacci level is broken through, the exchange rate will continue declining to 1.55 or even 1.53. But it seems that traders will observe a flat trend with decreasing volatility in the market during the next week and later a growth up to the level at 1.63.

Figure 7: GBP/USD, daily candlesticks. History: from Mar 2012 to Feb 2013

According to the COT reports published on Friday, February 8, market participants consider the Swiss franc overvalued relatively to the USD: the hedger COT index and William Commercial index are equal to 16% (-20 percent points) and 14% (-21 percent points), while the large speculator and small trader COT indices increased significantly, for instance small traders adjusted their positions in a fast way. As a result, the small trader index is equal to 92% (+42 percent points increase!), while the large speculator index is equal to 72%. Finally, the open interest is on its 26 week average, which is indicated by the COT index value of 45%. Summarizing, there is a weak but yet buy signal in the CHF/USD market. However a technical picture should be considered prior to opening any positions.

Figure 8: CHF/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013

The exchange rate has tested the weekly support at 0.9100 and after reaching the monthly support at 0.9000 has returned back to 0.91. On February 7, an uptrend was observed which was driven by Mario Draghi’s announcement. There is a potential for the growth in the market up to 0.94 where a monthly Fibonacci level 50.0 is situated, however the trend will start after one or two weeks.

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

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 positions 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.