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Prepared by Andy Waldock

(September 18, 2014) Today's Scottish secession vote takes a 300-year-old issue and covers it with 21st century journalism. There's hardly any angle that hasn't been talked to death. Surprisingly, I've found something of major importance leading up to the vote that isn't being discussed anywhere. The commercial traders in the Commodity Futures Trading Commission's weekly Commitment of Traders report are making a clear point that they collectively feel that the currency markets are about to tighten, rather than continuing to widen as they have for the last month or so.

Since mid-May, we've seen declines in the Euro currency and British Pound of 8% and 6.5% respectively. Meanwhile, the U.S. Dollar Index has rallied more than 7%. Commercial traders have decisive positions against this movement in all three markets. We've posted the three currency charts with their collective declines as well as the size of the commercial trader bets being placed. We've seen buying in the Euro and Pound in 8 out of the last 10 weeks and 11 out of the last 13 weeks respectively while the U.S. Dollar has been sold in 9 out of the last 10 weeks.

The size of the commercial trader position is worth noting as well. Commercial traders in the Euro currency are the most bullish they've been since June of 2012 while the British Pound is the most bullish since last November and was trading near the current level. Meanwhile, the US Dollar Index is showing the most bearish commercial trader position since June of last year. There are two points to be made here. First of all, the net commercial trader positions are clearly at odds with the recent market movement. Secondly, the size of their positions while rapidly increasing, are still mid range in historical terms. Therefore, the commercial traders still have the potential to add to their growing positions considerably.

One last point to address before heading into the final analysis is that a good part of the recent currency moves are also tied to the European Union's new form of Quantitative Easing and the interest rate differentials this created between the currency cross pairs. We were fortunate to have been ahead of the curve on this one when we published, "Hand Quantitative Easing to Germany." We clearly state the intentions of the Mario Draghi led ECB along with the advantages this proposal provides to the U.S. Dollar. "Currently, the process has come full circle and now that the stock market is at all-time highs, it appears that the hot potato balancing act between stimulus and inflation is being handed off to Germany. This is probably not a good sign." If you haven't read the previous piece in its entirety, I highly suggest doing so as background information for today's trade.

The trade setup is actually very simple. Think of it simply as, "buy the rumor, sell the fact." Given the recent consolidation in these currency markets, I fully expect them to add another extension to their current move. However, I expect this to be short-lived and highly volatile. Small traders and index traders will quickly find that their anxiousness to push the Dollar higher and the Pound and Euro lower will be met by commercial traders willing to take the other side at each tick. The technical pattern for what is developing looks like its going to be a spike and ledge. This is characterized by consolidation near an extreme price level followed by a large and failing extension. Once the market moves back through its consolidation, the stop orders begin to get hit and speculators begin to exit the market.

This week's piece is short but timely. Once again, I highly suggest looking at the charts and reading the German QE piece from a couple weeks ago. Most importantly, if you've been riding the recent currency moves, lock in some profit. The commercial traders do an excellent job of trapping the small speculators and index traders at market extremes. We've illustrated this several times. Most recently in July when we saw the metals attempting to rally and we said it wouldn't continue in, "False Breakout in Gold and Silver." Don't let yourself get caught.

September 18, 2014
Andy Waldock
Commodity & Derivative Advisors, LLC
P.O. Box 484 Sandusky OH

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