The past week showed that although the Commitments of Traders data and European Central Bank decisions consistently indicate the USD dollar appreciation relatively to European and other World major currencies, there is no real trend on the market. The COT reports published on 19th of October show the market participants’ expectations regarding the exchange rates. As well as, the flat trends observed in the daily and weekly time-frames are discussed and projection made regarding the USDCHF and GBPUSD markets.
The USDX market
Although, in my last article I mentioned that it is time for USD to start appreciating against major currencies, there is still a flat trend observed on the USDX market. A fundamental COT signal formed 18th of September 2012 (the COT report was published on 21st of September) is still observed on the USDX market and probably will not disappear until the dollar increases.
USDX market hedgers still expect the US dollar to increase in value relatively to EUR, GBP, CHF, CAD, and SEK. The hedger COT index is equal to 99% and the William Commercial Index is equal to 97%. The large speculator COT index is equal to 97% indicating a buy signal on the USDX market and the small trader COT index is equal to 11%. Finally, the open interest COT index is equal to 13% indicating a low level of open interest in the past 26 weeks and providing another buy signal. Performance of these COT indices on the USDX market can be observed in Figure 1.
Figure 1: USDX futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
In addition to the fact that since mid-September the USDX market is in a flat trend, the standard deviation is also very stable varying around the value of 0.3. Currently, a new daily support was formed at 78.95 and it is also possible to observe a triangle figure on the market (see Figure 2). The triangle got to the stage when it must be broken from one of the sides, probably from the top. However, it is still a question if a real uptrend is observed in a daily time frame because the USDX value is also limited by a weekly resistance.
A breakthrough of the weekly resistance at 80.20 will be a technical signal for a strong uptrend which can continue up to the monthly resistance at 84 (see Figure 2).
Figure 2: USDX futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
The EURUSD market
The graph of the EURUSD exchange rate in the 4 hour and daily time frames looks like an inverse USDX one (see Figure 4). The Commitments of Traders report shows that the fundamental signal is still strong: hedgers, large speculators, and small traders indicate a downtrend on the EURUSD market. The hedger, large speculator, small trader, and the William’s Commercial Indices stay in the critical areas of 0-20% and 80-100% and provide a strong sell signal on the market. Only the open interest stays on its record low level: it dropped (again) from 267,868 to 262,421. As a result the COT index is equal to 0% and is providing a buy signal. Again, the recent European Central Bank decision to leave the short-term interest rate on the previous level supports the sell signal but markets are waiting.
Figure 3: EURUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
The EURUSD exchange rate continues fluctuating between two weekly levels: the weekly resistance at 1.3190 and the weekly support at 1.2800. As on the USDX market, a triangle figure is formed in daily and weekly time frames and I believe only a breakthrough of the weekly support at 1.28 will confirm a downtrend signal; the EURUSD exchange rate can fall till the monthly support at 1.2050.
Figure 4: EURUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
The USDCHF market
As on the EUR market, the market participant behaviour indicates the USD appreciation against the Swiss Franc. Both the hedger COT and the Williams Commercial indices returned to its minimum value of 0%, while the small trader and large trader COT indices increased to 100% and 97%, respectively. In other words, hedgers are desperately hedging against potential increase on the USDCHF market but large speculators tend to believe there is a potential for an uptrend. The fact that almost all large speculators and small traders jumped on the downtrend and we observe for quite a while a flat trend, it is a reason to consider USD undervalued relatively to the Swiss Franc.
Figure 5: CHFUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
If the USDX and EUR markets had not shown any real performance in terms of daily and weekly time frames for the past month, the USDCHF exchange rate would have reached a lower level of 0.9214 (previous lowest value since May 17th was 0.9237) and have tested the weekly support at 0.9240.
Yet it is not clear whether the weekly support is only tested or a downtrend is observed on the USDCHF market, as the rate returned into the channel from 0.9240 to 0.9441 at the moment. If a downfall of the USDCHF rate starts, we will observe a decrease up to the next weekly support at 0.9000. But if the uptrend predicted based on the COT data starts, we will observe an increase up to the resistance level at 0.9970-1.0000.
Figure 6: CHFUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
The GBPUSD market
As long as the GBPUSD rate did not significantly increase or decrease, hedgers did not change their opinion regarding the market: the hedger COT and the Williams Commercial indices are equal to their previous week values of 13% and 8%, respectively. On the contrary, other COT indices did change their value. The large speculator COT index dropped to 81% (- 7 per cent points) but the small trader COT index increased by 9 per cent points (from 85% to 94%). The open interest slightly increased, from 170252 to 173661, it moved the open interest COT index up by 4 per cent points to 65%. Generally, all these indicators predict a continuation of the downtrend.
Figure 7: GBPUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
Since the middle of September the GBPUSD exchange rate dropped from 1.63 to 1.60 and during the last week we could observe a small correction on the market. A breakthrough of the daily supporting line at 1.5970 will confirm a continuation of the downtrend. The GBPUSDX exchange rate decrease up to the weekly supporting line at 1.54 is quite realistic. 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.
Figure 8: GBPUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
The GBPUSD market is the only place where we could observe not only a flat trend. Although, market participants behaviour indicates that the EURUSD exchange rate should decrease and uptrend should be observed on the USDX and USDCHF markets, markets are quite static. Situation on the USDCHF market raises concerns regarding potential downtrend, while the GBPUSD exchange rate breakthrough of the daily support at 1.5970 will give us hopes to see the USDX appreciation against other European currencies, as well.
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 at 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.
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