The Forex Year In Review: COT Report

The Year That Was…

2016 got off to a bang the BOJ shocked markets by announcing the first move into negative rates in Japan’s history. Despite the historic move, JPY actually began trading higher after the meeting as investor scepticism regarding the ability of the bank to combat deflation took hold. In March the ECB meeting saw the ECB extending QE and further slashing interest rates. However, the Euro surged higher following the meeting as ECB President Draghi seemed to indicate during the post-meeting press conference that there would be no more cuts. The ECB was followed by the FED who kept rates on hold once again and saw the US Dollar tumble as they revised lower their 2016 dot plot forecasts from the initial December 2015 projections.  Following the RBNZ’s cut in March, markets were widely expecting the bank to announce further cuts. An unchanged decision by the RBNZ disappointed markets and saw NZD rallying consequently. Expectations for further easing were riding high ahead of the April BOJ meeting. However, again markets were left disappointed as the bank remained on hold causing a sharp rally in JPY. RBA took markets by surprise by announcing a 25bps rate cut. Only around 1/3 of analysts polled by Reuters ahead of the meeting were expecting the move which the bank noted was to target persistent low inflation.

Sterling collapsed by over 20% as markets were left totally shocked when the results of the UK’s EU membership referendum yielded a surprise victory for the “Leave” campaign. In the days prior to the vote Polls and bookmakers pegged “Remain” as the strong favourite. The re-election of Japanese PM Shinzo Abe to the Upper House saw a brief decline in JPY as markets reacted to the news which created the anticipation of further easing to come. The BOE disappointed markets in July when they failed to ease following the shock Brexit vote. The bank had warned ahead of the referendum that they would cushion markets in the event of Brexit and investors were bemused by the bank’s decision to remain on hold. The BOE fully delivered on easing expectations and announced a rate cut of 25bps alongside an expansion of QE. Easing across all four channels saw GBP sold heavily alongside forward guidance of further easing to come. RBNZ cut rates by a further 25bps to a record low of 2% to combat continued low inflation. Despite the move, NZD continued higher as a 25bps cut was heavily priced in and left markets slightly disappointed that no greater action was taken.

Investors were left disappointed when the ECB failed to announce further stimulus measures fuelling a sell-off in European equities. The bank had warned ahead of the Brexit vote that they stood ready to act and markets were widely expecting a move. OPEC unexpectedly announced that they had made a provisional agreement to enact a production freeze, the first since 2008. Oil markets and commodities surged in response to the news. Once again easing expectations were highly elevated ahead of the September ECB meeting which investors expected would see the bank finally ease after remaining on hold over the summer. However, once again the bank remained on hold but gave a firm signal that they would be announcing further measures at the December meeting. The BOE took markets by surprise when they went against previous guidance and refrained from easing at the November meeting citing resilient UK data and an improved inflation outlook. Indeed, the bank signalled that they were no longer adopting an easing bias to future policy meetings and would be neutral going forward.

Markets were once again taken by surprise as Republican Candidate Donald Trump unexpectedly won the US Presidential Election. Despite great concern ahead of the election, the US Dollar rallied strongly in response to the result as markets began upgrading their US growth and inflation outlooks. The official OPEC talks saw the confirmation of the proposed output cessation deal which saw all OPEC member countries co-operating to confirm a reduction of 1.2m barrels per day with Russia also agreeing to reduce by 300k barrels a day. The ECB delivered on their guidance at the October meeting and announced an extension of QE which will now run until at least December 2017, from the prior March 2017 end date. The bank did however announce that whilst QE would be extended it would be reduced ins scale to run at 60bln Euros a month from 80bln Euros a month prior. The move saw EURUSD heavily sold. Euro selling increased into year end as the FOMC delivered on the much anticipated end of year rate increase.

COT Trade Overview

EURUSD

COT Indicators helped traders navigate the consolidation witnessed most of this year, the strength element of the indicator maintained a short bias through the year and provided some excellent profit making positions especially when combined with Order Flow trader to help time entries to catch some of the downdrafts especially in February, May, October and November offering the opportunity capture over 1500pips in potential profit.

euro

GBPUSD

COT Indicators helped traders navigate a momentous year in GBPUSD with two significant declines witnessed post Brexit and the notorious flash crash. Once again strength readings kept traders orientated towards short positions. playing the shorter term Momentum and Index readings that confirmed the broader trend, timing entries with Order Flow trader allowed traders to benefit from Cables 20% decline this year. A particularly profitable period saw a quick 1500pips of potential profit during September and October.

cable

USDJPY

COT Indicators did an excellent job of aligning traders with the downdraft witnessed early, mid 2016. Using Order Flow trader to assist in timing entries to the trend traders could have captured over 1500 pips in potential profit. It is worth noting that the Strength element of the indicator has flipped long in December allowing trader to gain long exposure ahead of the FOMC decision capturing the 300pip pop higher.

yen

USDCHF

Swissy has been in sideways consolidation for the majority of 2016 making trading tricky, that said, the COT strength, index and momentum did a nice job of identifying the end of year updraft allowing traders to position on the long side and ride the top side expansion form the consolidation riding the 500pip move higher from October onwards.

swissy

AUDUSD

COT Indicators were on trend with the Aussie as the year opened traders were alerted to taking long positions into the January low and rode the wave higher into mid April allowing traders to capture the meat of the 1000pip squeeze higher. We then witnessed a prolonged period of consolidation in a relatively tight 400pip range, COT indicators did a decent job on keeping traders on the right side of the range bound swings.

 

aussie

USDCAD

After 2015’s trend expansion, short term COT Indicators did a nice job of putting traders in touch with the trend correction south, once again timing entries with Order Flow trader allowed traders to ride the move with multiple entries capturing a large percentage of the 1200pips of potential profit available in the first half of the year. The second half of the witnessed a prolonged consolidation with COT indicators doing a nice job a aligning traders with the range swings.

 

loonie