The Italian referendum vote was the final news event impeding a Swiss Franc reversal higher near 1.03 to the U.S. Dollar. The growing imbalance between the speculative and commercial traders should end the 6.5% sell-off that began in earnest following the U.S. election high.
The Swiss Franc trading environment has changed considerably since its decoupling from the Euro Currency in January of 2015. The main changes affected how the commercial and speculative traders interact within the Swiss Franc futures market. We now see the commercial traders come and go in lower volume but with greater authority than in the past. Apparently, much of their hedging needs had been met through the use of Euro Currency and Dollar Index futures in the past. Now that the Swiss Franc is on its own, we've spotted a pattern among the market's participants that we believe is set up to push this market back towards $1.03 to the Dollar.
The current situation in the Swiss Franc leaves the commercial and speculative traders on relatively even footing. In fact, since the Swiss decoupling from the Euro, the large speculator total position has been, on average, bigger than the commercial position. The smaller commercial total position size has created a previously unknown nimbleness in their abilities. Fortunately, much of what we're seeing matches our trading thesis; commercial traders tend to be the best predictors of future prices.
Let's see how this plays out using the included chart. First, an appraisal of the technical situation shows the sell-off from the election through the current bottom. Also, notice that the commercial buying began in October around $1.01 to the Dollar and well ahead of our election. Conversely, speculators began to sell ahead of the election and have continued to press their position, even in the face of recently diminishing returns as the market has found support at $.98 to the Dollar. It appears that parity provides psychological support if not, coincidental technical support. The spread in the net position between the commercial buying and speculators selling is the widest it has been since decoupling from the Euro.
Perhaps, even more telling, than the large speculators' short position is the fact that this is the biggest short position the small speculators have had in more than a year. The one statement that holds true more than any other in Commitments of Traders' research is that the small speculators will undoubtedly have their largest position on at the most inopportune moment. In other words, the market hands out small speculators reality on a regular basis, and that is exactly what we're expecting, here.
The commercial trader total position is threatening to surpass the large speculative position. Once the commercial position takes control, this has led to an average move of more than 5% in the direction they're predicting, in this case, higher. Our Discretionary COT Signals email service published a buy signal for trading on 12/3, along with a protective sell stop at the recent swing low of $.9808. Based on the interaction between the trading groups, we believe this reversal higher is just picking up steam.
