On the 1st of October, Ben Bernanke had another speech at the Economic Club of Indiana, Indianapolis where he defended his work in improving economic situation in the United States in past years, as well as made some hints regarding the Fed’s future steps.
In this article the Commitments of Traders data published on 5th of October is discussed to see if there is any change in market participant opinions regarding the currency market after Ben Bernanke’s speech. Moreover, to improve the precision of the Commitments of Traders signals observed in recent weeks, the decisions made by the Reserve Bank of Australia, the Bank of England and the European Central Bank (ECB) are considered.
Ben’s 5 answers and the USD index performance
The Financial Crisis of 2007-2008 motivated monetary policy makers to be inventive and find alternative ways to combat economic downturn. On 1st of October, in his speech, Mr Bernanke mentioned two methods the Fed has used and will use to push the country out of the recession to a stable growth: long-term security purchases on the open market and negotiations about their future actions.
His motivation to start the QE3 was explained in the following way:
“Though the economy has been growing since mid-2009 and we expect it to continue to expand, it simply has not been growing fast enough recently to make significant progress in bringing down unemployment.“
“If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else. “
If needed the Fed knows two instruments it can use to improve economic situation in the United States without lowering down already low short-term interest rates which are the ones most affecting the demand for the USD. It means that even with further expansionary monetary policy USD can increase in value relatively to other currencies which will be represented by the USDX growth.
Although there was a (small) growth in the USDX value (see Figure 6) hedgers’ and investment funds’ net positions continued getting more extreme, only general public’s net positions stopped decreasing which is indicated by the growth of the small trader COT index from 0 to 3%. The hedger COT index and William Commercial index (WILLCO) are still equal to 100%, the large speculator COT index is equal to 0% but the small trader COT index is equal to 3%. If open interest considered, it continued to drop: a decrease from 48784 to 46035. As a result, a strong fundamental “buy” is observed in the USDX market.
Figure 1: USDX futures and options, the COT indicators. History: from Apr 2012 to Aug 2012.
While the COT indices continue indicating a decrease of the EURUSD exchange rate in the nearest future, the European Central Bank decided to leave the short-term interest rate at the previous level of 0.75%.
Since 31th of August values of three COT indices have stayed in the critical areas of 0-20% and 80-100%. The last COT data revealed that hedger COT index and William Commercial index (WILLCO) increased by 1 percent point from 0% to 1% comparing to the previous week, while the small trader COT index dropped by 2 percent points from 100% to 98% and the large speculator COT index stayed at the previous week level. The open interest in the market is still low, although slightly increased. Overall, there is still a strong signal of the downtrend in the EURUSD market. The ECB decision to keep the interest rate on the same level means that there is no new barrier for EUR to drop relatively to USD. EURUSD technical analysis is conducted and discussed further in detail.
Figure 2: EURUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
The situation on other currency markets is not significantly different from the previous week; market participant behaviour is similar to the ones observed in the EURUSD market. For instance, on the Swiss Franc market there is no change in the values of the Commitments of Traders data based indicators: the large speculator and the small trader COT indices are equal to 100%, the hedger COT index, the WILLCO and the open interest COT index are equal to 0%.
Figure 3: CHFUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
Although a continuing drop is observed in the GBPUSD market (see Figure 9), the updated Commitments of Traders report shows that the fundamental signal has strengthened. While the large speculator, small trader, hedger COT indices and the William’s Commercial Index stay in the critical areas of 0-20% and 80-100% (all sell signals), the open interest COT index increased by 6 percent points from 76% to 82%. The open interest increased from 183 thousand to 189 thousand.
In addition, on October 4th the Bank of England (BoE) committee members agreed to keep the interest at the previous level of 0.50%. It will keep the currency less attractive for the short-term investors who seek higher rates. This decision supports the opinion regarding the market: currently we observe a beginning of the downtrend in the GBPUSD market.
Figure 4: GBPUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
The last currency market I would to draw your attention to is the AUDUSD exchange rate where the Reserve Bank of Australia (RBA) decided to drop the short-term interest rate by 25 basis points from 3.50% to 3.25%. The decision was made on 2nd of October. If the COT data is considered, the COT indices are still within the critical areas, however, they have shifted to critical area borders: the large speculator COT index dropped to 80% and the small trader COT index dropped to 96%, while the hedger COT index and Willco increased to 17% and 14%, respectively. Such fast trader position moves in the opposite directions have two reasons. First, the AUDUSD exchange rate has dropped significantly in recent weeks. Second, the decision of the RBA to decrease the interest rate will make the Australian dollar a less attractive currency which might stabilize the current exchange rate and I would not except as significant drop of the currency value relatively to USD as it is expected in the European currency markets.
Figure 5: AUDUSD futures and options, the COT indicators. History: from Apr 2012 to Oct 2012.
The USDX, EURUSD, CHFUSD and GBP USD technical analysis
I believe that currently a beginning of the uptrend can be observed in the USDX market. A potential growth can be limited by a strong monthly resistance line at 83.50-84.00 which was formed in August 2010 and was tested twice in 2012.
Figure 6: USDX, daily candlesticks. History: from Dec 2011 to Oct 2012.
While in the USDX market an uptrend is observed, a downtrend is presented within the EURUSD market: the exchange rate dropped from 1.3170 to 1.2830 where was formed a daily supporting line. A potential drop of the EURUSD exchange rate is possible up to the monthly support at 1.2050.
Figure 7: EURUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
In the CHFUSD market a technical picture is similar to the USDX market: an uptrend has started and a potential increase is limited only by the resistance line at 0.9970-1.0000. Though the volatility is still low; it is indicated by the ATR value of 0.0059.
Figure 8: CHFUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
Finally, in the GBPUSD market a downtrend is observed and the volatility has slightly increased comparing to the previous weeks. Again, the fall is limited by the weekly supporting line at 1.54 and the monthly line at approximately 1.5240.
Figure 9: GBPUSD, daily candlesticks. History: from Dec 2011 to Oct 2012.
To sum it up, a number of important events have happened last week. The decisions made by the European central banks give another reason to consider current short-term trends in the markets to be the beginnings of the mid-term trends and not the corrections of previously observed tendencies in August and September. Trades in the AUDUSD market must be carefully re-evaluated because the short-term interest rate drop by the RBA may stop a further decrease of the exchange rate.
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 Ben Bernanke’s speech and the interest rates mention in this article at the Fed, 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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