While the United States congressmen continue debating about the cuts in various governmental programs, even small agreements between Republicans and Democrats give hope to the investors.
The USDX market
Due to raising concerns regarding the "fiscal cliff" in the United States, volatility is increasing in stock and currency markets. At the same time, the agreement, approved late on Tuesday by the Republican-led House of Representatives, regarding narrowly averted devastating tax hikes and spending cuts (© Reuters), brought a short-term relief to investors that moved the USD index up in the following days.
While the U.S. Congress will have to seize monetary and fiscal stimulation programs, which will decrease the access to the US dollar and push the USDX up in the long-term, there was a significant jump in the USDX market from 79.34 to 80.89 at the end of the week (see Figure 3).
Regarding the mid-term trends, hedgers expect growth in the market holding extremely high net positions comparing to the past 12 months levels. It was spring 2011, when hedgers’ net positions were that high.
Just before the USDX value jumped to 80.89 and closed at 80.50 on Friday, market participants adjusted their positions and the hedger COT and William Commercial indices were equal to 96% and 95%, respectively. The large speculator COT index slightly increased to 5%, while small traders’ net position again declined moving the index down to 0%. Finally, the open interest also decreased moving the COT index to 19% (see Figure 1). Currently, there are five indicators telling us the USD is undervalued, however do not be so optimistic for the upcoming week.
Figure 1: USDX futures and options data, the COT indicators. History: from Jul 2012 to Jan 2012.
Figure 2: Net positions of hedgers, large speculators and small traders in the USDX market. History: from Jul 2012 to Jan 2012.
Although according to the COT data, there is an uptrend ahead, the USDX rally started after Tuesday when the U.S. Congress had announced agreements on tax increase and after the market participant position had been copied to the COT report, as a result we do not know traders’ reaction on the USDX closing at 80.50. So far, the USD index has not reached the weekly resistance at 81.30 but considering the fact that normally it goes up only by 3.5-4 points the most probable place for the uptrend stop is this weekly resistance. Moreover, there are still debates in the U.S. Congress that raise worries for investors and may lead to flat trends in the future. Finally, the volatility increased significantly (See STDEV, Figure 3); therefore, there is high possibility for significant downside correction in the market.
There is a potential for growth till 83-84 but you must be very careful about it, especially considering high volatility.
Figure 3: USDX, daily candlesticks. History: from Feb 2012 to Jan 2012.
The EURUSD, GBPUSD, and USDCHF markets
According to the last Commitments of Traders reports, hedgers who are operating in all three currency markets expect them to depreciate relatively to the USD. The hedger COT indices and Williams Commercial indices are in critical areas of 0-20% meaning hedger net positions are very low relatively to the historical values and also low relatively to the current open interest levels in the markets.
Both large speculator and small trader net positions based on COT indices support signals received from hedgers in the EUR, GBP, and CHF markets. Finally, the open interest is very high in the GBPUSD market (index is equal to 88%) indicating the market is overheating. The fact that OI is low in EUR and CHF markets is driven by market participant number change and not trader sentiment.
Figure 4: EURUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2012.
Figure 5: GBPUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2012.
Figure 6: CHFUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2012.
Clearly, traders are waiting for the announcement by the U.S. Congress, and any restrictive monetary and fiscal policies will move the USD up against these currencies. It was July 2011, October 2011, and June 2011 when hedger net positions were that low in the EUR, GBP, and CHF markets, respectively. The euro declined from 1.45 to 1.31 in the following weeks, while GBP declined from 1.61 to 1.54, and CHF declined from 0.86 to 0.71. This time expect similar scenarios, for example, a decline from 1.31 till the monthly support at 1.22 in the EURUSD market. But beware, currently a very high volatility is observed in these markets.
Figure 7: Net positions of hedgers, large speculators and small traders in the EURUSD market. History: from Jan 2011 to Jan 2012
Figure 8: Net positions of hedgers, large speculators and small traders in the GBPUSD market. History: from Jan 2011 to Jan 2012
Figure 9: Net positions of hedgers, large speculators and small traders in the CHFUSD market. History: from Jan 2011 to Jan 2012
If in previous weeks EURUSD, GBPUSD, and USDCHF exchange rates were consolidating (see Figures 10, 11, and 12), this week the predicted in the last review “storm” has come in the markets. Volatility increased significantly at the end of week and significant exchange rate declines were observed in the EUR and GBP market and increase in CHF market. Remember it is driven by positive moves in the U.S. congressmen debates, however current moves in the markets are mainly dependent on what and when is going to be announced by the congressmen.
Figure 10: EURUSD, daily candlesticks. History: from Feb 2012 to Jan 2012.
Figure 11: GBPUSD, daily candlesticks. History: from Feb 2012 to Jan 2012.
Figure 12: USDCHF, daily candlesticks. History: from Feb 2012 to Jan 2012.
Keep in mind that there are possible both market corrections and trend continuations at the beginning of the next week. Therefore, I do not recommend you to enter the markets, unless you are afraid to lose most of the trend. However, any market move will have a correction you will be able to enter. Debates in the U.S. Congress also mean worries for investors and flat trends in the future.
Wrap-up of mid-term forecasts: the GBPUSD will decline to 1.57, the EURUSD will decline to 1.22, the CHFUSD exchange rate will increase to 0.95, and the USDX will grow maximum to 83-84. Also remember that if the USDX does not increase in value to 83-84, there will be not much potential for other markets reaching these targets.
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 at 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 entry and exit points bearing in mind your own money management strategy. The author provides the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.
