At the beginning of the outbreak of the epidemic in the northern hemisphere there was a significant reshuffle on the currency market. Then, in March, we observed above-average volatility, which appeared on currency pairs with the US dollar and on the entire USD index.
As a result, the beginning of the pandemic ended the trend of strengthening of the American currency, which lasted basically since 2008. From the end of the financial crisis to March 2020, the USD index grew by 45 percent, testing twice at 103.00. The first test took place as early as 2016, which could finally form a double top formation. What is more, the number of net long positions on futures contracts decreased with the increase of USD, according to the data of the CFTC data and Commitments of Traders reports.
We will now focus on this phenomenon, as it has the potential to determine both long-term and short-term market u-turns. It should be noted at the outset that COT reports are only a small part of the entire FX market, but we treat them as a survey, which is conducted on a small group of respondents, and conclusions are drawn for the whole society. Since March 2020, the dollar index has fallen by over 12% to its lowest level since April 2018. However, the largest number of contracts open for USD decline compared to those open for USD rise took place in late September. At that time, the number of net long positions was -9146 contracts with the USD index at 94.00, while at the beginning of December the index fell almost to 91.00 and the number of net long positions increased to -3075 contracts.
In other words, from September to December investors on USD index futures seemed to decrease their exposure to the fall in the value of the USD. This may mean that the new lows are more used to leave the trend that has been going on since March than to make further deals to weaken the USD at even lower prices. This, in turn, may lead at least to a medium-term u-turn on pairs with the U.S. dollar, at the turn of the year.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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