Today FX markets seem to be
driven by technical analysis and news flow. Our approach has been to analyze what investors have
been doing, rather than what they say they are doing. To accomplish this, we compare the Euro currency
against data taken from the Commitments of Traders (COT) reports. The first chart shows the Euro (EC) as
the black line compared against the net speculative long open interest
(EC_NCPLA-EC_NCPSA) in the blue line.
The next chart below depicts the
Euro (black line) against the net speculative long open interest of COT
reported data. Note that we’ve
converted the net speculative long data into a 50 day (blue line) and 200 day
(red line) simple moving average (SMA) as well. This COT data essentially reflects how the hedge fund and
active investor universe is positioned. Several things stand out here. First, there is a strong
correlation between these two data series. Second, by our lead/lag analysis the net speculative long
series typically leads the price of the Euro by 20-40 days. As of January 12, 2012 the net
speculative long series has declined to a significant low and since that time
traders have barely made a move to change their negative bias. The color coded
histogram shows a longer term perspective of the net speculative data, and
represents the difference between the 50 and 200 day SMA. At present, the 50 day SMA is
2.37 standard deviations below the 200 day SMA as compared to it’s average over
the past few years.
This implies that in the short
term traders remain extremely short the Euro, and leaves room for further
upside in the coming weeks.
Back-testing our analysis through moving average cross-over statistics
adds conviction to our thesis.
When the 50 day moving average crosses above the 200 day moving average
for the net speculative long open interest series, performance on average for
the Euro has been a positive 11.29% until the moving average crosses back
down. Conversely, when the
50 day moving average crosses below the 200 day moving average, performance of
the Euro during this same period averaged -8.18%. The result is that in the short term traders remain
extremely short the Euro, and this leaves them vulnerable to further short covering
the the coming weeks. We
would be cautious on becoming too negative toward the Euro at this point, until
we have seen traders cover more of their shorts.