Analytical reviews by Nikita Kabanovs: discussions and questions to the author

[Nikita Kabanovs]

Dear MT5 forumers,

In this thread you are welcome to discuss analytical reviews and forecasts prepared by InstaForex analyst Nikita Kabanovs. I will be glad to answer all your questions.

The Analytical reviews and forecasts will be based on Commitments of Traders (COT) data.

I hope you will derive much pleasure and helpful information from communication in this forum thread.

With kind regards,

Nikita Kabanovs

[Nikita Kabanovs]

In this article I would like to bring to your notice the hedger, large speculator and small trader sentiments which will be used to predict the direction of the fundamental trends for the next weeks in several currency markets: USDX, EUR, GBP, CHF and CAD. Below you will find charts with daily candlesticks and weekly COT (Commitments of Traders) indices data which is further described and interpreted below.

US Dollar Index (USDX)

The first market I recommend to take a note of is the US Dollar Index (USDX). USD index represents the strength of the USD relatively to the major currencies and since the year 2007 is a key indicator of main trends in European currencies (EUR, GBP, CHF) and Canadian dollar. It is also useful to review the situation in this market for other cross-market connection regarding the global trends in commodities, especially gold and oil and stock indices.

Fundamental analysis
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Figure 1: USDX, daily candlesticks. History: from 26.09.11 till 3.08.2012
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Figure 2: USDX, the COT based indicators, weekly data. History: from 13.01.11 till 3.08.2012

Since 10th of July (Report was published on 13th of July) there was forming a signal for trend reversion in the US Dollar index, based on the COT data hedgers and large speculators accumulated extreme net positions. The first report containing the signal from the hedgers’ net positions was published on 13.7.2012. The COT index: hedgers was equal to 20% and hedgers were expecting the depreciation of the US dollar against major currencies (CAD/JPY/EUR/GBP/CHF and SEK). Moreover the fundamental “signal” has been strengthening during the next three weeks and on 27.7.2012 the COT index: hedgers dropped to 8%.

During the same time period, large speculators tried to push the trend further upwards by accumulating very high net positions and on the preceding week (30th of July) the COT index: large speculators reached a top value of 89%.

Only the small traders were not giving any signal during the past 4 weeks. However they also were not giving the opposite one. It makes the entire fundamental signal obtained from the market participants consistent and strong. In addition, there was a stable growth of the open interest in the USDX market which shows that it was getting into the overbought phase. The growth of Open interest is indicated by the increase in the COT index: open interest values from 57% to 70%. Finally, WILLCO indicator which combines both open interest and hedgers’ net positions was supporting the trend reversion signals and even in the last report on 3rd of August stayed within the extreme quintile of 0-20%.

Currently market participants react to a trend change which is indicated by index values’ exits from the extreme quintiles of 0-20% and 80-100%. For example, the smartest speculators have accepted the new downtrend which is indicated by a net positions decrease from 48064 to 42114 (index dropped from 89% to 75%). Also the hedgers are not holding as low net positions (index grew up to 25%) as they had during the preceding week. Finally, open interest decreased by 4.8%. All this is an effect of the downward sloping trend which started on 25.7.2012 after the USDX reached a peak at 84.10. The peak is indicated by an arrow in the Figures 1 and 3.

Technical analysis
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Figure 3: USDX, daily candlesticks. History: from 26.09.11 till 3.08.2012

As you can see in the Figure 3 the downtrend is getting started. The potential decrease is limited at the level of 78 or 75 by the weekly supporting lines. Usually the trends identified with a help of the COT data continue for several weeks and are stopped at weekly and monthly support or resistance levels. The weekly support at 81.18 is too close to the beginning of the trend and is not going to stop it. This place might be a good point to open or increase your short position. By the time USDX index value will drop to the level of 75-78, the trend will lose its power and thus can stop at one of these two supports. What you should always consider is the effect of USD depreciation on other currencies.

Before we move on to other currencies, I would like to draw a short conclusion. There was a fundamental signal for a trend reversion in the USDX market. During the last week, technical (graphical) analysis supported the fundamental signal and now we observe a start of a downward sloping trend. Therefore you should consider making additional technical analysis to identify exact points for entrance into and exit from the USDX market.

British pound, Euro and Swiss Franc are staying silent

Yet there is no supporting signal in any of the European currency markets. Keep in mind that although there is a signal for a downward sloping trend in USDX, it doesn’t mean that you will observe an appreciation of all currencies against the USD. And even if you observe such trends, the trends may start on slightly different dates and also be present for different time periods. For example, although we could observe a rally in the USDX market in the past 8 weeks, the Australian and New Zealand Dollars were appreciating against USD, Euro was depreciating against USD but there was a flat trend in the British pound market. If you observe Figures 4, 5 and 6, you can find that yet hedgers, speculators and small traders are not exhibiting any opinion about the discussed currency markets.
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Figure 4: EUR, the COT based indicators, weekly data. History: from 13.01.11 till 3.08.2012
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Figure 5: GBP, the COT based indicators, weekly data. History: from 13.01.11 till 3.08.2012

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Figure 6: CHF, the COT based indicators, weekly data. History: from 13.01.11 till 3.08.2012

Thus, you should wait for a fundamental signal in a particular market from the COT data. You can also search for it using other data, for example Daily Bulletin.
As mention above, there is another currency tightly connected with the USD – Canadian dollar. In this market (CAD/USD) a downtrend was observed (USD was depreciating against CAD) for several weeks which was also supported for 2 weeks by the COT data. However this week the fundamental signal disappeared and it makes the situation in the discussed currency markets unclear. Below, in Figure 7 you can observe the COT indices for the CAD/USD (NB! Opposite to USD/CAD) exchange rate.

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Figure 7: CAD/USD, the COT based indicators, weekly data. History: from 13.01.11 till 3.08.2012

Finalizing this review, I would like to point out that there are signs of trends reversion in GBP, EUR and USDX markets. However, yet only in the USDX market both technical and fundamental signals converged. The best decision for this week is to search for additional supporting signals of the trend reversal in the USDX market and to carefully consider getting into a short position. Other markets should be monitored and will be commented next week when the situation is clarified, new COT and price data is provided.

P.S. I recommend to check the situation in USD/JPY market. Good luck in trading.

Information about the analytical review

The fundamental analysis is based on the Commitments of Traders data published by the CFTC and cross-market connections. The technical analysis is based on support and resistance levels. COT Indices are calculated using 26 week historical data.

More information regarding the COT data can be requested from the author of this review or found at cftc.gov.

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.

[Nikita Kabanovs]

If the last week COT (Commitments of Traders) data indicated a possible depreciation of the US dollar against the World major currencies, today we have a completely different picture. Though it does not mean there is nothing to trade!

Below you will find the COT and price charts which are interpreted and discussed in detail.

US Dollar Index (USDX)

chart usdx.png
Figure 1: USDX, weekly candlesticks and COT indicators. History: from Jan 11 to Aug 2012.

The “COT index: small traders” (red line) is the only index in the critical area identifying that public bet on the depreciation of the USD in the short term horizon. The small trader behaviour is indicating that we should consider buying not selling. Such behaviour of the public is not a surprise as long as we have been observing a downtrend in the market for the last three weeks.

Other indicators are not in the critical zones and yet we cannot consider that midterm downtrend has started. Current situation in the USD index (USDX) market looks more like a correction of the main uptrend. If you hurried up last week and opened a short position as the one you can observe in the Figure 2, you better delete the sell stop order because there are no signs of a downtrend anymore. USD will plummet but not tomorrow.
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Figure 2: USDX, daily candlesticks. History: from 30.09.11 to 10.08.2012

European currencies

European currencies are strongly interconnected between each other and highly depend on the USD value. Thus observing the situation in these currencies is important not only for the analysis of the particular market but also to understand the fundamental picture in the USD-European currencies relation and USDX particularly.

The market participants in the EUR, CHF and GBP markets are not expecting any trend changes.
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Figure 3: EUR/USD, COT indicators. History: from Jan 12 to Aug 2012.

All indicators are in non-critical area which means that neither hedgers nor speculator, nor small traders are expecting significant changes in the exchange rate trends. The fundamental situation in the EUR/USD exchange rate is not very unique. Approximately the same situation can be observed in other European currencies.
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Figure 4: GBP/USD, COT indicators. History: from Jan 12 to Aug 2012.

In the GBP/USD market the open interest is on a very low level which is indicated by the value of the “Index COT: Open Interest” equal to 5% (black line). Small traders (red line) are betting on the downside trend and WILLCO indicator (orange line) is showing that hedgers are expecting the appreciation of British pound against the US dollar. Although in the GBP/USD market three indicators are in the critical zones of 0-20% and 80-100% and all of them indicate that we should expect a growth of the GBP/USD exchange rate, it is important to understand that hedgers and speculators are the most informed market participants. Open interest is an additional indicator and WILLCO is a supportive indicator of the “COT index: hedgers” signals. As long as there is no signal from hedgers and large speculators, we cannot believe that there is a strong signal of the uptrend in the nearest future.
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Figure 5: CHF/USD, COT indicators. History: from Jan 12 to Aug 2012.

Finally, in the CHF/USD exchange rate market none of the indicators is giving a trend reversal signal meaning that yet market participants do not expect any changes in the market.

To sum up, market participants in the USDX market and European currencies (EUR, GBP and CHF) are not indicating trend reversals in the nearest future (August.) The most probable scenario for the next couple of weeks is a continuation of the observed trends in the discussed above markets.

Australian dollar and New Zealand dollar

While European currency markets stay silent and follow the trends, the South-East Asian currencies futures and options market participants are expecting the trend reversals in Australian dollar and Japanese Yen.

In the AUD/USD exchange rate analysis it is important to look at the behaviour of market participants in the NZD/USD market because Australian and New Zealand economies are interconnected at various economic levels. Usually the same or similar trends are observed in these markets.
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Figure 6: AUD/USD, weekly candlesticks and COT indicators. History: from Jul 11 to Aug 2012.

Since the beginning of June a strong uptrend was observed in the AUD/USD market. And the last COT data shows that hedgers expect the trend reversal. The “COT index: hedgers” value lowered down to 20% which indicates relatively low level of net positions. Large speculators are trying to move the trend forward up and small traders are following them betting on the continuation of the growth in the AUD/USD market. The signal is still “fresh” and needs to hold for at least one more week to be considered.

In the NZD/USD market yet there is no sign from the market participants. Though there is also no opposite sign of the uptrend.

Most likely the exchange rate will continue growing and will reach the resistance level at 1.08-1.09. By the time rate will reach this level (1.08-1.09) I expect the signal to strengthen. The position at 1.08-1.09 is a good point to enter the market and catch the most of new downtrend.
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Figure 7: AUD/USD, daily candlesticks. History: from 30.09.11 to 10.08.2012.

Another interesting observation is that the COT signals appear in the AUD/USD market on a regular basis. Normally the signal is realized in 2 weeks. The vertical lines in the Figure 7 indicate moments when previous COT signals appeared. Since October 2011 the AUD/USD exchange rate is fluctuating in a diapason from 0.97 to 1.09, thus I would not expect to see a fall of the exchange rate below the supporting line at 0.97.

Japanese Yen

The last market I would like to bring your attention to is the JPY/USD market. Last week market participants indicated a soon trend reversal in this market. This week the signal got stronger indicating that no doubt you should monitor and pay attention to this market.
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Figure 8: JPY/USD, weekly candlesticks and COT indicators. History: from Jul 11 to Aug 2012.

Hedgers, small traders and large speculators are indicating that we should expect a depreciation of JPY against USD. Keep in mind that in the Figure 8 you observe the JPY/USD exchange rate. In the InstaForex trading terminal the USD/JPY exchange rate is traded, thus you should expect an uptrend not a dowtrend.

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Figure 9: USD/JPY, daily candlesticks. History: from 30.09.11 to 10.08.2012.

Since 19th of July the exchange rate has stayed in between two levels: weekly support at 77.90 (78.00) and daily resistance at 78.80. It is a good place to get in the new uptrend. If the exchange rate will break through the daily resistance, it will be a technical signal of the uptrend in this market.

Information about the analytical review

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.

[Nikita Kabanovs]

Following the previous week signals from hedgers, investment funds (large speculators) and general public (small traders), we are observing the starts of new trends in the USD/JPY and the AUD/USD exchange rates' markets.

AUDUSD and NZDUSD exchange rates

The last COT data supports the previous week signal from futures and options market participants indicating a soon downfall in the Chicago Mercantile Exchange (CME) traded Australian dollar futures and AUD/USD Forex rate.

If on 7.08.2012 (reported on 10.08.2012) the COT indicators had just gotten into the critical areas (hedgers were 20%, large speculators were 80% and small traders aka little speculators were 81%), the last week signal (reported on 17.08.2012) have gotten stronger. Hedgers even more expect the trend to reverse which is indicated by the hedgers COT index value of 11%. At the same time large and small speculators also give us stronger signals for the uptrend reversal to a downtrend: the large speculators COT index is equal to 91% (increased by 11 percent points) and little speculators COT index to 84% (increased by 3 percent points). It means that even the slowest and the least successful large speculators have already gotten in the market altogether large speculators are trying to push the exchange rate forward. Less informed small traders are following the large speculators and a major trend observed in the market.

As a matter of fact, it is important to mention that last week a downward sloping trend line could be drawn in a H1 and H4 time frames. Although the AUD/USD exchange rate started to go down, we see a stronger signal from the market participants. It is a good sign proving that signal is strong and indicators did not get into the critical areas by an accident or some data dropout from the 26 week period.

The last indicator I recommend to look at is the level of Open Interest. If you observe a black line which the Open Interest COT index in the Figure 1, you can find that it is going towards a critical area of 80-100% indicating that Open Interest is on a quite high level for the past 26 weeks.

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Figure 1: AUD/USD, weekly candlesticks and COT indicators. History: from Jul 11 to Aug 2012.

Finally, if you observe the situation in the New Zealand market, the futures and options market participants are also considering that this currency is overvalued relatively to the USD. If you follow not the values of indicators but the indicator lines, they are also moving towards the critical areas. Such a behavior of the index values is driven by the positions of hedgers, speculators and small traders.


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Figure 2: NZD/USD, weekly candlesticks and COT indicators. History: from Jul 11 to Aug 2012.

Summarizing, there is a signal in the AUD/USD exchange rate downfall for the two consequent weeks. In additional the signal is provided from all three groups of market participants and it have become stronger.

As it was mentioned in the last analytical review of the AUD/USD exchange rate, the potential drop of the rate is up to the resistance level at 1.08-1.09. Current situation in the market is a good point to enter this new downtrend.
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Figure 3: AUD/USD, daily candlesticks. History: from 30.09.11 to 10.08.2012

USD/JPY Forex rate

The AUD/USD market is not the only currency market where we observe a trend reversal signal. In there was a signal for a growth in the USD/JPY exchange rate which started realizing already during the last week. Initially signal appeared on 31.7.2012 and continued to strengthen during the next weeks. The last COT data (published on 14.08.2012) indicated that large speculators followed by small traders were actively trying to push the market further down but hedgers were strongly hedging against the growth of the uptrend. It is important to mention that the last COT report contains information about the positions on 14.08.2012 and does not indicate the reaction of market participants on the growth in the end of the last week.

Again, take into account that indicators and positions are reported for JPY/USD futures and options market but in the InstaForex Terminal traders are opened in the USD/JPY Forex rate.
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Figure 4: JPY/USD futures and options, weekly candlesticks and COT indicators. History: from Jul 11 to Aug 2012.

The technical picture did not change much comparing to the previous week and the uptrend can continue up to the level of 81.00 - 82.00. Since 19th of July the exchange rate has stayed in between two levels: weekly support at 77.90 (78.00) and daily resistance at 78.80, and last week an uptrend has started.
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Figure 5: USD/JPY, daily candlesticks. History: from 30.09.11 to 10.08.2012
European major currencies

I would like to bring to your attention the situation in the major currency markets. We have to await and monitor USDCAD, EURUSD, GBPUSD, USDCHF and USDX markets for fundamental COT signals. Yet we observe trends in USDJPY and AUDUSD markets, where currencies are weakening against the USD. Although, I do not like to make very long-term predictions, my experience and knowledge of the markets say that most probably a depreciation of the USD against major European currencies and Canadian dollar will be observed only after the newborn trends in JPY and AUD markets will lose its power.

Regarding the USDJPY and AUDUSD exchange rate particularly, during the past years AUD/USD and JPY/USD markets are well read using the COT data. Continuously positive signals are obtained from the observation of the market participant positions and open interest in these markets. Yet everything says that the tradition will be continued and the signals we obtained couple of week ago are going to be realized in the nearest future.

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.

[Nikita Kabanovs]

The last Commitment of Traders data and the monitoring of the price behavior in the USDX market have revealed two important observations. First, the USD/JPY earlier forecasted uptrend may not happen in the nearest future and second, the USDX value can drop to the level of 78.00!

AUDUSD and NZDUSD exchange rates

In the Commitments of Traders reports published on 24th of August, as in the one week earlier published reports, we can observe that hedgers, large speculators and small traders are indicating a soon downfall in the Chicago Mercantile Exchange (CME) traded Australian dollar futures and AUD/USD Forex rate.

Moreover, while the exchange rate was fluctuating in the channel (you can observe it in the Figure 2), the fundamental COT signal became stronger. Now, the COT hedger index is equal to 0% (comparing to the previous value of 11%), the large speculator COT index reached a value of 100% and the small trader COT index peaked to 91% (from the previous value of 84%). Less informed small traders continue following the large speculators and a major trend observed in the market. Small traders believe the current decrease in the AUDUSD exchange (which can be observed in the Figure 2) is just a correction of the major uptrend not a start of a downtrend.

Other supporting indicators’, the William’s Commercial Index (WILLCO) and the COT Open Interest index, signals also indicate an upcoming AUDUSD exchange rate decrease. Last week, the COT Open Interest index was indicating a high level of open interest but it was still outside of the critical area of 80%-100%. On 21st of August, the Open Interest reached a level of 209343 contracts. This is a record value for a much longer period than 26 weeks. As a result the COT Open

Interest index is equal to 100% and the level of open interest is clearly indicating the market overheating and “overbought” faze.

Summarizing, although the AUD/USD exchange rate stayed on the same level during the week, the COT signal has strengthened. Even increased open interest which is a result of new opened positions in the market did not result in a growth of the exchange rate.
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Figure 1: AUD/USD, weekly candlesticks and COT indicators. History: from Jul 2011 to Aug 2012.
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Figure 2: AUD/USD, daily candlesticks. History: from 18.10.11 to 24.08.2012

If based on the COT report published on 17th of August the values of indicators were still outside the critical areas, the updated COT report shows that the market participants are expecting a devaluation of the NZD relatively to the USD. The hedger COT index is equal to 19%, meaning market insiders are hedging themselves from the NZD/USD exchange rate decrease, the small trader COT index peaked to 94% but the large speculator COT index is still outside of the critical zone of 80-100% and is equal to 79%. The Open Interest in the NZDUSD market is also on a very high level which is indicated by the Open Interest COT index value of 86%.
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Figure 3: NZD/USD, COT indicators. History: from Jul 2011 to Aug 2012.

Summarizing, today there is a strong signal for traders to expect both the AUD/USD and the NZD/USD exchange rates’ decrease. Market participants in both markets behave similarly because they face the same market risks.
As it was mentioned in the previous reviews of the AUD/USD exchange rate, the forecast stays unchanged: AUD/USD decrease up to 1.08-1.09 level.

USD/JPY Forex rate

If the situation in the AUD/USD market did not significantly change, the market participants in the USD/JPY market brought a small surprise to the Commitments of Traders data followers. After a relatively small USD/JPY exchange rate increase to 79.65 JPY for 1 USD, the new COT data shows that market participants are not anymore so critical about the market and there is no more indication of the uptrend in the market. The hedger COT index is equal to 25%, the small trader COT index dropped from 87% to 58% but the large speculator COT index is just on the edge of the critical of 80-100% and is equal to 80%.

Although, the disappearance of the COT signal does not mean a cancelation of an uptrend, it can be postponed. Traders should be careful during the next week and wait for a new COT data published on 31st of August.

Again, I believe it is important to remind you that the indicators and positions are reported for JPY/USD futures and options market but in the InstaForex Terminal trades are opened in the USD/JPY Forex rate.
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Figure 4: JPY/USD futures and options, weekly candlesticks and COT indicators. History: from Jul 2011 to Aug 2012.

Yet, it is difficult to make forecast for the future behaviour of the USD/JPY exchange rate in the nearest future but the possible growth is still limited by the weekly resistance at 81.00-82.00.
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Figure 5: USD/JPY, daily candlesticks. History: from 18.10.11 to 24.08.2012
USDX and Major European currencies

Although in the last review I mentioned that the COT signal for a downtrend in the USD index market disappeared fast and there is no sign for a downtrend continuation, I must change my forecast. We observe a decrease of the USDX index values and currently its value stopped at the weekly supporting line at 81.00. In addition, there is a long-term trend line in front of the downtrend which raises concerns for a continuation of the downtrend. If the USDX value will drop below the weekly supporting line, I believe decrease can continue till weekly support at 78.00.

Currently, in the USDX market the hedger COT index is equal to 36%, meaning that hedger net positions are neither high nor low. The same statement is strong for large speculator positions which are equal to 38059 and relatively to the past 26 weeks are on a quite average level (the large speculator COT index is equal to 65%). Small traders have jumped on the downtrend in the USDX market and indicate for a trend reversal to an uptrend.
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Figure 6: USDX, daily candlesticks. History: from 18.10.11 to 24.08.2012

In the USDCAD, EURUSD, GBPUSD, USDCHF market participants do not indicate any major trend reversal. The COT indices show that yet hedgers are not aggressively hedging against certain trends, open interests are on relatively average levels and speculators also do not identify last phases of the current trends in the mentioned exchange rate markets. Thus it is difficult to bet on a major trend reversal in a certain European currency market.

Summarizing, there is a downgrade possibility of the USD against major European currencies and Canadian dollar. However traders should be careful and find strong indications of the downtrend continuation using alternative fundamental and/or technical analysis.

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.

[Borhan]

Maximum trader depand by fundamental news. It is very importent for all forex trader. Good analysis is importent for all trader.

[Nikita Kabanovs]

I agree with you Borhan. WIthout any fundamental analysis there is only modeling left but even models have to adjusted based on fundamental data. Pure Modeling without trader judgement doesn't work well, a well know example is the LTCM case.

[Nikita Kabanovs]

In this review I would like to bring to you attention not only the last Commitment of Traders data published on 31st of August 2012 but also Ben Bernanke’s recent speech at Jackson Hole, Wyoming.

Ben Bernanke claims a deep pocket and acknowledged problems in the US Economy

Since the Financial crisis of 2007-2008, the US Economy (and not only US) is experiencing problems and on 31st of August Mr. Bernanke claimed Fed is ready to act if it is needed.

"Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

It means that if some banks need more cash, Fed printer will start working again which as a result will drop the market interest rates.

Such a comment might make happy the US equity market for a couple of days but it also means that if there is a need, Ben can make new injections of cheap money. If it will be done, the market interest rates will get lower, there will be less interest in converting capital into the USD. As a result, the demand for the USD is going to drop and the USD will depreciate against the major currencies. However…it is not done (yet).

If you look at the Commitments of Traders data which was published last Friday on 31st of September, it seems that large market participants either expected another talk from Ben or believe injections will not happen soon. (The COT reports published on 31st of September contain position information on 28th of September, prior to Ben Bernanke’s speech in Wyoming).
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Figure 1: USDX futures, weekly candlesticks and the COT indicators. History: from Jul 2011 to Aug 2012.
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Figure 2: EURUSD futures, weekly candlesticks and the COT indicators. History: from Jul 2011 to Aug 2012.
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Figure 3: CADUSD futures, weekly candlesticks and the COT indicators. History: from Jul 2011 to Aug 2012.
The EUR/USD, the USD/CAD and the USD/CHF traders reported their positions on 28th of September and the current values of the COT indices are indicating that we should expect the USD to become stronger in the nearest future. For example, the Index COT: Hedgers based on the hedger positions in the EUR Futures and Options markets dropped from 31% to 18% meaning hedgers expect a depreciation of the EUR against the USD. Other traders’ categories: large speculators and small traders also give us signals to expect a trend reversal to the downtrend in a couple of weeks. Large and small speculator behaviour is indicated by the large speculator and little speculator COT indices’ values which have moved into the critical zone of 80-100%. They are equal to 81% and 84%, respectively.
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Figure 4: CHFUSD futures, weekly candlesticks and the COT indicators. History: from Jul 2011 to Aug 2012.
Another European currency, Swiss Franc’s, traders are also indicating a trend reversal to a downtrend (in CHF/USD). The market insiders, hedgers, accumulated extremely low net positions moving the COT index into the critical area of 0-20%. Their signal is supported by extremely high values of the large speculator and small trader indices, 84% and 82%, respectively. Moreover another indicator, the Williams Commercial index is equal to 0%, indicating that hedgers’ low net positions are very low taking into account the level of open interest in the market.

Finally, the EUR Futures and Options market participants behave very similarly to the ones in the Euro, Swiss Franc and Canadian Dollar markets. As long as the behaviour of market participants in the currency markets of the economies closely connected with the USA is very similar, I would consider the fundamental Commitments of Traders signals to be not currency specific but related to the major trend in the USD.

Summarizing, today we know that there is a possibility to push the interest rates and USD index below its current values but yet there are signs for an uptrend in the USDX which is indicated by the EUR, CAD and CHF markets participants behaviour. If the weekly support on 81.00 will withstand the pressure, we will observe an uptrend soon. However, knowing the COT index specifics, the uptrend should be expected in approximately two weeks which leaves enough time for the USDX value drop to 78.00.

Moreover, the Commitments of Traders data is published once per week and the last report does not show the reaction of main market players on Fed Chairman’s speech in Wyoming. Finally, it is important to mention that in order to consider signals from the COT data strong, we should observe them for at least two consequent weeks, and yet it is not a case.

USD/JPY comeback

In the last review of the Commitments of Traders data I mentioned that the USD/JPY currency market brought a small surprise to the Commitments of Traders data followers:

“After a relatively small USD/JPY exchange rate increase to 79.65 JPY for 1 USD, the new COT data shows that market participants are not anymore so critical about the market and there is no more indication of the uptrend in the market. The hedger COT index is equal to 25%, the small trader COT index dropped from 87% to 58% but the large speculator COT index is just on the edge of the critical of 80-100% and is equal to 80%.”

After the USD/JPY exchange rate stayed in the narrow channel between 78.30 and 78.80, the market participants returned their net positions to the previous levels. Currently, the hedger COT index is equal to 9% indicating hedgers’ low net positions, the large speculator index peaked to 91% and the small trader COT index jumped from 58% to 93%.

Reminder: the indicators and positions are reported for the JPY/USD futures and options markets but in the InstaForex Terminal positions are opened in the USD/JPY Forex rate.
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Figure 5: JPYUSD futures, weekly candlesticks and the COT indicators. History: from Jul 2011 to Aug 2012.
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Figure 6: JPYUSD, 4H candlesticks. History: from Jul 2011 to Aug 2012.

AUDUSD and NZDUSD exchange rates

The last currency pair I would like to bring to your attention is the AUD/USD exchange rate. I follow the signal in the AUD/USD exchange rate since the middle of August 2012. Although, we can observe a downtrend in the AUD/USD market, the COT indices became even more extreme indicating that the fundamental signal we receive from the hedgers’, large speculators’ and small traders’ positions is very strong and you should expect a significant depreciation of the AUD against the USD: the AUD/USD Forex rate can easily drop to 0.97-0.98 and maybe further.

Other supporting indicators, the William’s Commercial Index (WILLCO) and the Open Interest COT index, indicate a continuation of the new AUDUSD exchange rate downtrend.
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Figure 7: AUDUSD futures and options, weekly candlesticks and the COT indicators. History: from Jul 2011 to Aug 2012.
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Figure 8: AUDUSD, daily candlesticks. History: from Jul 2011 to Aug 2012.

The New Zealand Dollar’s traders expect the same trends in the market as in the AUD/USD exchange rate. The Index COT: Hedgers dropped from 19% to 10%, the Index COT: Large spec increased by 10% and is in the critical zone of 80-100% indicating high level of net positions but the Index COT: Little speculators slightly dropped from 94% to 81%. All three traders’ categories are indicating a downtrend in the NZD/USD market.
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Figure 6: NZDUSD futures and options, weekly candlesticks and the COT indicators. History: from Jul 2011 to Aug 2012.

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.

[Nikita Kabanovs]

Have the USDX rally already started?

Currently, corrections are observed in the major European exchange rates. In addition, flat trends are observed in the Australian dollar, the New Zealand dollar and the Japanese yen markets. The question is whether new trends are arisen and we should expect USD appreciation against major currencies or there will be a forward depreciation of USD driven by the Federal Reserve actions and announcements.

Read full text: http://instaforex.com/forex_analysis/21062/

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.

[Nikita Kabanovs]

It is the deep breath before the plunge in currency markets
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 25th 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.

Read full text: http://instaforex.com/forex_analysis/21306/

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.