The answer might be found in the COT Report. The Commitment of Traders Report (COT Report) measures the net long and short positions of the market players. These players are the Commercials, Non-Commercials and Retail traders. A net position extreme reading suggests that a trend reversal is in the play. Before getting too excited about it, do not forget: the COT report is not a timing tool and it has to be confirmed with technical/fundamental analysis.
There is a reason of course why it makes sense to analyze the COT report for the NZD nowadays. It is important to mention that net position statistics for the currencies are always measured vs. USD. This means when NZD is observed in this article this means the situation particularly for the NZD/USD pair. It is possible to make the analysis for currency crosses but the results will be not as accurate as currencies vs. USD.
Guest post by Tamás Sziládi
The attached chart shows how the NZD/USD weekly chart (the COT Report comes out on a weekly basis so it makes sense to analyze it on a weekly chart) in comparison with net position readings of the last 3 years. It shows pretty accurately that a high correlation exists between the turning points of net positions and price reversals.
The green vertical lines show market bottoms and the red vertical lines show market tops. It can be observed that the last red line signal came a bit early which confirms the fact to enter the trade only when other technical indicators line up for a trend reversal. In the current market situation there can be a market bottom on the current readings.
Does this chart analysis mean we should go long on NZD/USD? I would not definitely suggest that setup as the USD economy is one of the strongest with an optimistic future outlook. The chart shows us though that the USD is ranging with NZD since a couple of months. Not too many currencies can hold themselves flat vs. the USD lately. This confirms that New Zealand’s economy is not doing bad, not even mentioning of having the best carry trade for the NZD among the main Forex currencies. If you plan to go long with NZD, it might make sense to choose a weaker counter currency than USD to increase your edge for a winning trade.