With Japan’s fiscal year end now passed, we can begin to focus with more confidence on the COT index for the Japanese yen.   However, as always we need to bear in mind that the COT index must be viewed as a sentiment indicator and not a timing indicator and cannot always be correlated with the spot market.   All the index is telling us at present is that the commercials are continuing to build long futures positions in the Japanese Yen and that this will translate into Yen strength at some point in the spot forex market.

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The COT data for this week shows an increase in the cot index which is now starting to climb away from the extreme lows of the last few weeks, suggesting that we are now seeing the long awaited reversal in the Australian dollar, a move which is reflected in the spot market against many other currencies, of which the US dollar is typical. A look at the weekly chart for the Aussie dollar, reveals a double bottom over the last 6 months, with a breakout from this trading range now imminent, and with a wide spread up bar, the AUD/USD pair are poised to break through the resistance level at 0.7090.   However as always we need to bear in mind that the COT index is a direction indicator only, and not a timing indicator, and should only be used to reinforce or support our view of the spot market.

All the latest fundamental news is now available on the economic calendar, and if you are looking for the latest live price for the AUD/USD currency pair, then just follow the appropriate link. Finally, if you are looking for a good ECN broker I have provided some details on what to look for when choosing your broker.

Everything I say may appear slightly contrarian when viewed using the COT index as an indicator but the British Pound is a good example at present which I hope will make the point with a little explanation.  At present the Commercial futures holders are net long and have been for some time even whilst the pound has been falling heavily in the spot market which may seem odd at first glance.  However, if we stop and think for a moment about the nature of the commercial holders, these are institutions with very deep pockets who are taking long term view of the market and are therefore building their positions by buying at what they consider to be a low price with a view to selling the contracts in the 12 to 18 months once the pound has recovered.

All of the above merely highlights the timeframes one is dealing with when viewing the COT index; it is not a timing indicator as such but much more a sentiment and direction indicator for the longer term.  The extremes of the chart, whether zero or 100 are the points at which the sentiment shifts in the commercial holders and at which point we may expect to see a change in price direction in the spot market in the following period.

The Canadian Dollar continues to remain a long term buy despite last week’s temporary reduction in both long and short positions but still leaving the Commercials with a net long view of this currency.   A look at the monthly usd to cad candle charts would tend to support this bullish view of the Canadian dollar where this month’s candle will be a very long legged doji preceded by a series of tweezer tops.  Again I have to stress that the COT index is a long term sentiment indicator and wont always necessarily support the spot market picture.

The most meaningful aspect of the COT index for the Japanese Yen was the shift 3 weeks ago by commercial contract holders from being net short at the point to the current situation where they are net long by some significant margin.   However, as this has happened towards the end of Japan’s fiscal year (ie 31st March) we should really wait a few more weeks to see if this sentiment is likely to continue.  In the spot market there is an increasing struggle at the moment with the 98.50 level providing strong resistance to any move higher by the dollar.

The Australian Dollar Cot data is very interesting this week as there appears to have been a major transfer of future contracts by the commercial holders who are now net short.  This is not unprecedented and happened at the end of last year.  This does not necessarily signal a long term change in sentiment, merely a response to current market conditions and does not alter my bullish long term of the Aussie Dollar, confirmed to some extent by the weekly chart which is now showing a double bottom. However, in the short term we may see prices continue to fall this week following the shooting star of last week.

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For completeness I have included the COT Index for the New Zealand although one has to exercise caution when viewing this data.  The prime reason is that  liquidity in the New Zealand Dollar is relatively low given that its primary attraction for currency traders was in the carry trade and in particular against the Japanese Yen.  A quick look at the New Zealand Yen pair shows a clear correlation between a major turn in the index and the start of the “great unwind” of the carry trade.   This is not shown on the current chart as it occurred outside the 52 week period under consideration and since then an extreme of 95 to 100 has not been achieved hence the peak of the chart is currently only displaying as 60 at the moment. Recent price moves in the New Zealand Yen pair would suggest that we may be seeing a resurgence in the New Zealand in the next few months especially as it did not take out the low of 42.47 last posted in late 2000.

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The COT index for the British Pound shows the important turn back in week 32 when the pound stopped rising against the US dollar and started to reverse.  The most recent data would seem to suggest that the British Pound has not stopped falling despite it taking a breather in the last few weeks and we may need to wait a while longer before the index can provide us with more meaningful signals when compared with the fx spot market.    We should also be aware that the index can also be distorted by the physical number of contracts being traded which are significantly lower since last year – the details of which I will be adding later.  It may also be useful to look at this data on a shorter time frame – say 13 weeks and will produce a chart at a later date.

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The COT data for the Swiss Franc is relatively interesting inasmuch that it is rare that it reaches the extremes of 90 and above.  Also I tend to look at this data when trading the euro Swiss and not the Dollar Swiss.  Up until 2 weeks ago when the Swiss National Bank announced that it would actively intervene in the markets we could have used this data with more confidence.  In addition the FED’s decision last week to buy Treasuries and mortgage backed securities which prompted a massive fall in the US dollar has also clouded the picture and in order to draw some meaningful conclusions from the COT for the Swiss Franc we may need to wait a few more weeks for the picture to become clearer once again.

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The COT index for the Canadian Dollar is extremely interesting on several levels and in particular teaches us an important aspect of the patience required when interpreting the chart.  A quick comparison between the COT data and the spot market chart for the usd/cad highlights the fact that for the last 3 to 4 months we have seen sideways consolidation in the spot market with futures positions being built up at an extreme of the index.  It is clear from the COT chart that we are going to see a strengthening of the Canadian Dollar at some point but what is less clear is the actual timing of this event and as we can see we have had to wait several weeks for this view to emerge.  With the data now rising and seeming to build away from the extreme of the last 2 to 3 months we may finally be seeing the strengthening of the Canadian Dollar that has been threatening to take hold for some time.  In the spot market this has been translated into several failed attempts by the US dollar to penetrate the 1.3 region and more recently this has been coupled with a series of bearish signals.  So combining our spot market analysis with the COT index confirms the view that longer term we will see US dollar weakness and Canadian Dollar strength return.

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