RCIS Index Trading
This method of using bespoke FX indexes to compare the strength of multiple currencies aims to find trading opportunities that can sometimes get lost in the noise and distortions of charting using individual currency pairs. Reasonably well correlated with key dollar pairs as a result of the index weighting but often significantly different, we are able to trade divergences between the index charts and the major dollar pairs. All of the indices have positive polarity, meaning that when the Yen strengthens for example, the JPY% index chart will rise. You can also purchase these indexes for NinjaTrader from the link at the bottom of this analysis.
Outlook
Over the weekend we had the results of the ECB’s bank stress tests and they were less pessimistic than feared, even if some of the criteria were a little iffy in regards the rigour of the tests. The market was reasonably prepped going into the weekend after a draft document was leaked suggesting 25 banks fell short of the capital requirements although nearly all of those have now made up the shortfall, which in the scheme of things could be slightly positive for the Euro. Last week’s COT showed that futures traders were still increasing their bets in favour of the dollar in all of the majors except vs the Yen which saw quite a large short squeeze. It is worth noting though that this is measured from before the bounce in stocks and USDJPY so may not be wholly reflective of the current short exposure for the Yen. This week will all be about the FOMC though and how Yellen and co react to the inflation issue in America along with the recent patchy performance of some US economic indicators. This should also the be the month that they signal an end to the asset purchase program. Of increased importance will be how the market reads the language used by Yellen with regards the next logical step; interest rate hikes.
This week’s economic highlights will be as follows:
Mon Oct 27
9:00am EUR German Ifo Business Climate
2:00pm USD Pending Home Sales m/m
11:50pm JPY Retail Sales y/y
Tue Oct 28
12:30pm USD Core Durable Goods Orders m/m
2:00pm USD CB Consumer Confidence
11:50pm JPY Prelim Industrial Production m/m
Wed Oct 29
6:00pm USD FOMC Statement
6:00pm USD Federal Funds Rate
Thu Oct 30
All Day EUR German Prelim CPI m/m
8:00am EUR Spanish Flash CPI y/y
8:00am EUR Spanish Flash GDP q/q
8:55am EUR German Unemployment Change
12:30pm USD Advance GDP q/q
12:30pm USD Unemployment Claims
12:30pm USD Advance GDP Price Index q/q
1:00pm USD Fed Chair Yellen Speaks
11:30pm JPY Tokyo Core CPI y/y
Fri Oct 31
Tentative JPY Monetary Policy Statement
6:00am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference
7:00am EUR German Retail Sales m/m
7:45am EUR French Consumer Spending m/m
10:00am EUR CPI Flash Estimate y/y
10:00am EUR Unemployment Rate
12:30pm USD Core PCE Price Index m/m
12:30pm USD Employment Cost Index q/q
1:45pm USD Chicago PMI
1:55pm USD Revised UoM Consumer Sentiment
Sat Nov 1
1:00am CNY Manufacturing PMI
All times London time (GMT)
If you have any questions or comments then feel free to tweet me @LFXMark
USD% Index
We spent last week pushing higher once again for the dollar although the pattern still seems like a corrective consolidation pattern with a reasonably wide range. If true this places a EURUSD range of 1.2600 to 1.2900 as the current acceptable range and a break outside of these levels should be considered a continuation or reversal. Taking only price action into consideration, a break to the upside seems the most likely outcome for the dollar and this week’s FOMC could well be the catalyst for that so long as Yellen is hawkish enough to not spook the dollar bulls. Advance GDP will also be a very significant number for the dollar. Of note though is the expectation of some Euro short position squaring as a result of the stress test results, so it seems that this should weigh on the dollar at the start of the week. I am bullish USD% although preferably from 1.2800 for EURUSD
USD% Index Resistance (EURUSD support): EURUSD 1.2632, 1.2600
USD% Index Support (EURUSD support): EURUSD 1.2713, 1.2800, 1.2850, 1.2900
EUR% Index
Technically this may look rather neat if we do see a bounce from this support level for the Euro as a result of reduced stress test fears seeing some short positions unwind. 1.2725 for EURUSD is the EUR% index 200 hour moving average which if broken could signal a push higher, although it seems unlikely given the fundamental picture and also the technical picture that we will break the strong bearish trend line showing EURUSD 1.2930 as a key level. To the downside we have bullish channel support at 1.2633 and 1.2500 as major hurdles to reject of break. I am bullish EUR% in the short term, bearish longer term
EUR% Index Resistance: EURUSD
EUR% Index Support: EURUSD
JPY% Index
I’m conflicted in my opinion of the Yen currently and there are a lot of mixed signals on this chart. Starting with the JPY% index chart, we have broken the 400 hour moving average to the downside. The much more bullish Yen COT results last week were measured from the top of the first retracement of this most recent move lower so the Yen was still quite strong at that point which may explain the large drop in Yen shorts seen in the COT. In contrast, the Nikkei 225 chart at the bottom seems to be struggling to break through the ichimoku kumo resistance and as such a failure to break through there would result in another messy push higher for the Yen towards key 104.00 resistance (USDJPY support). I am neutral / bullish JPY%
JPY% Index Resistance (USDJPY Support): USDJPY 107.74, 107.00
JPY% Index Support (USDJPY Resistance): USDJPY 108.61, 110.50
GBP% Index
This chart has been a bit of a mess lately too, although the overall trend remains bearish until GBPUSD is above 1.6250. It also seems like a real possibility that we may test that level before we attempt a move lower. The fundamental picture for the pound is certainly deteriorating so this view of short term upside followed by long term downside would be replaced with a short term bearish view if the support trend line in the 1.6018 region was broken. EURGBP remains bearish which is the only reason to suspect a bullish GBP% index until resistance but EURGBP will likely meet channel support at the same time in that event so we can switch both outlooks at the same time. I am bullish GBP% short term, bearish long term
GBP% Index Resistance: GBPUSD 1.6127, 1.6178, 1.6200, 1.6250
GBP% Index Support: GBPUSD 1.6018, 1.5977, 1.5931, 1.5791
AUD% Index
A brief drop in the Aussie seems from here like a fake-out ahead of the beginning of a rally, but it is still too early to feel smug about calling Goldman’s bluff, suggesting a bullish outlook in opposition of their recently instigated bearish view. We have still not broken the diamond formation to the upside and we are hardly soaring higher at this point. If everything is going to the dogs once again in Europe then this makes the fundamental picture for Australia seem much less serious and also very geographically isolated from the mess, not to mention the favourable real interest rate differential with most of the majors. I am bullish AUD%
AUD% Index Resistance: AUDUSD 0.8837, 0.8919
AUD% Index Support: AUDUSD 0.8767, 0.8700
CHF% Index
Very highly correlated to the EUR% index still as a result of the almost static EURCHF cross. We remain above support and any dollar weakness from here will be well reflected in the Franc. Without the SNB actively preventing the EURCHF cross from pushing lower then there is every reason to expect the upside to outpace the EUR% index if we see it, which would then bring the 1.2050 support into play for EURCHF and perhaps attract some bids to dampen the CHF outlook slightly. I am bearish CHF% from resistance
CHF% Index Resistance (USDCHF support): USDCHF 0.9500, 0.9468, 0.9431
CHF% Index Support (USDCHF resistance): USDCHF 0.9542, 0.9577, 0.9626