During the previous week corrections were observed in the number of markets. However, volatility was low which supports the opinion that it is a deep breath before the plunge in the major currency markets.

The COT reports published on 28st of September (contain data on 25^th of September) provide an updated information regarding the market participant behavior and hedger expectations in the USDX, Euro FX, British Pound, Swiss Franc and other markets.

If last week reports showed that hedgers expected the trend to reverse to an uptrend soon in the USDX market (it was indicated by the hedger COT index increase from 52% to 100%), this week hedgers did not change their mind and continued holding extremely high net positions: they increased them by around 10 thousand, from -5076 to 4207. Other COT indices support the uptrend signal. The open interest COT index is equal to 19%, William Commercial index (WILLCO) is equal to 0%, the large speculator COT index is equal to 0% and the small trader COT index is equal to 0%, as well (see Figure 1). Moreover, investment funds’ and general public’s net positions are also getting more extreme. Small traders and large speculators are holding record low net positions.

Figure 1: USDX futures and options, the COT indicators. History: from Mar 2012 to Sep 2012.

In comparison to the previous week, on all major (and some minor) currency markets trader net positions got more extreme whichmoved the COT indices’ values to their edges.  On the EURO FX Futures and Options markets traders continue to expect the depreciation of the EURUSD exchange rate. Since 31^th of August, we have been observing all three COT indices in the critical areas of 0-20% and 80-100% and since 18^th of September the hedger COT index is equal to 0%. The Williams Commercial index dropped by 6 basis points from 6% to 0% in comparison to the previous week, supporting the fundamental signal provided by the hedger COT index.

The only indicator which is in conflict with the COT indices and WILLCO signals is the Open Interest COT index: it is equal to 0%. The open interest in the EURUSD market dropped from 373921 on 11^th of September to 271670 on 25^th of September. Despite it is a conflicting signal, we can ignore it because normally open interest drops in financial markets in September, December, March and June. It is associated with the fact that there is a soon expiration of the contract and market participants are forced to close their positions.

Figure 2: EURUSD futures and options, the COT indicators. History: from Mar 2012 to Sep 2012.

While we were observing a flat trend in the GBPUSD market, the fundamental COT signal have also strengthened. Hedgers strongly indicate a trend reversal towards the USD appreciation and downfall of the GBPUSD exchange rate. If, according to the previous Commitments of Traders reports, the hedger COT index was equal to 14%, last report shows that hedger net positions dropped from -35596 to -52335. Such a drop in hedgers’ net positions moved the hedger COT index deeper into the 0-20% critical area; currently, the hedger COT index is equal to 0%. The large speculator COT index also moved to the critical area, now it is equal to 100%(+23 basis points). The small trader COT index is equal to 100%, as well.

The only indicator which does not give any signal is the open interest COT index. However, the open interest has been constantly increasing in the past two weeks. Considering the fact that in the beginning of the month traders were forced to close their positions due to technical reasons, a future increase of the open interest in the British Pound market is a very likely scenario.

Figure 3: GBPUSD futures and options, the COT indicators. History: from Mar 2012 to Sep 2012.

The last currency market I would like to bring to your attention in details is the Swiss franc market. Here, the fundamental picture is very similar to the one discussed in the euro FX market. Currently, the hedger COT index is equal to 0% indicating this category of traders is expecting a downfall of the exchange rate. The supporting indicator WILLCO is also equal to 0%, its minimal value.

Large speculators are trying to push the market up and small traders tend to believe that speculators will manage to do that. Therefore, both trader groups have been increasing their net position since the middle of August: large speculators’ net positions increased from -18854 to -852 and small traders’ net positions increased from -10612 to +5295. As a result, the large speculator and small trader COT indices are equal to 100% two weeks in a row.

Again, the only indicator with an opposite (buy) signal is the open interest COT index which is equal to 0%. But as previously mentioned, the open interest drop is associated with technical specifics of futures and options markets, not market participant sentiment.

Figure 4: CHFUSD futures and options, the COT indicators. History: from Mar 2012 to Sep 2012.

To sum it up, market participants indicate that we should expect an appreciation of USD against other currencies. Such a pattern can be observed not only in the currency markets discussed above, but also in the minor currencies, for example the Canadian dollar, the Australian dollar, the New Zealand dollar, the Japanese yen and even the Mexican peso. All these markets can be analysed in detail using one of the websites offering the COT data or using the Commitments of Trader Legacy reports published on the Commodity Futures Trading Commission website cftc.gov.

The technical picture says it is a deep breath before the plunge.

After the downtrend started on 24^th of September, we observe a correction in the USDX market. The previously formed 4-hour supporting line at 79.70 was substituted by the daily support line at 80.00 (see Figure 5). A breakthrough of a daily resistance is a strong confirmation of an uptrend start predicted by the COT data. A suspicion for a deep breath before the plunge in the market is a volatility drop indicated both by the Average True Range (ATR, blue line below, see Figure 5) and the Standard Deviation (green line below, see Figure 5). In addition, USDX value was very stable in the end of the week which is indicated by the red circle in Figure 5.

Figure 5: USDX, daily candlesticks. History: from Nov 2011 to Sep 2012.

Another red circle can be found in Figure 6, where the EURUSD exchange rate was also stable during the last 3 days. Yet, there is no daily supporting line but another 4 hour line at 1.2828. Regarding the potential drop, the forecast has not changed since the previous report: exchange rate can fall to the monthly supporting line at 1.2050.

Figure 6: EURUSD, daily candlesticks. History: from Nov 2011 to Sep 2012.

The volatility slightly increased in the GBPUSD market (see red circle in Figure 7) and the daily supporting line at 1.62 was tested several times. The exchange rate has been varying between the monthly resistance at 1.63 and a daily support at 1.62 since 14^th of September. Again, the forecast has not changed since the previous report:

“Since September 2011 the exchange rate have been limited by the 2 monthly levels: support at 1.52 and resistance at 1.63, therefore it can drop till 1.54 where a weekly support is situated or even drop lower to 1.52-1.53. Further fall is less probable and will be considered when new information is available.”

Figure 7: GBPUSD, daily candlesticks. History: from Nov 2011 to Sep 2012.

The USDCHF market technical picture can be described similarly to the one in the USDX market: a 4-hour resistance line was substituted by the daily resistance at 0.9415. The exchange rate was also quite stable in the last three days. The 10 day Average True Range reached its lowest values in past 12 months.

Figure 8: USDCHF, daily candlesticks. History: from Nov 2011 to Sep 2012.

Summarizing, the births of new trends are coming closer, it is a deep breath before the plunge in the currency markets. From a technical analysis perspective, yet there is no confirmation of the uptrend in the USDX and USDCHF markets and downtrends in the EURUSD and GBPUSD exchange rates.

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.

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.