Index Trading: Further BOJ Fallout Expected

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

Last week’s shock additional QE from the BOJ has created a new market environment. One where we can expect Yen weakness to once again be a dominant driving force for the markets. It does seem like a rather desperate move from the BOJ though which ultimately is a little concerning. The policy divergence between he US and Japan was already a chasm due to Kuroda’s massive QE drive and the end of QE and possible tightening of rates in the US, but the BOJ have now widened that divergence considerably. As such it will likely be one way traffic for the Yen for some time.

A busy week fundamentally leading up to Friday’s NFP should see plenty of volatility although any strong numbers will likely see the best volatility against the Yen for obvious reasons. If US NFP is good, then USDJPY could really get going with some serious upside. The most significant events are as follows:

Mon Nov 3
1:00am CNY Non-Manufacturing PMI
1:45am CNY HSBC Final Manufacturing PMI
8:15am EUR Spanish Manufacturing PMI
8:45am EUR Italian Manufacturing PMI
9:30am GBP Manufacturing PMI
3:00pm USD ISM Manufacturing PMI

Tue Nov 4
12:30am AUD Retail Sales m/m
3:30am AUD Cash Rate & RBA Rate Statement
9:30am GBP Construction PMI
10:00am EUR EU Economic Forecasts
3:00pm USD Factory Orders m/m

Wed Nov 5
1:45am CNY HSBC Services PMI
2:30am JPY BOJ Gov Kuroda Speaks
8:15am EUR Spanish Services PMI
8:45am EUR Italian Services PMI
9:30am GBP Services PMI
10:00am EUR Retail Sales m/m
1:15pm USD ADP Non-Farm Employment Change
2:15pm USD FOMC Member Kocherlakota Speaks
3:00pm USD ISM Non-Manufacturing PMI
11:50pm JPY Monetary Policy Meeting Minutes

Thu Nov 6
12:30am AUD Employment Change & Unemployment Rate
7:00am EUR German Factory Orders m/m
9:30am GBP Manufacturing Production m/m
12:00pm GBP Official Bank Rate & Asset Purchase Facility
Tentative GBP MPC Rate Statement
12:45pm EUR Minimum Bid Rate
1:30pm EUR ECB Press Conference
1:30pm USD Unemployment Claims
3:00pm GBP NIESR GDP Estimate

Fri Nov 7
12:05am USD FOMC Member Mester Speaks
12:30am AUD RBA Monetary Policy Statement
7:45am EUR French Industrial Production m/m
9:30am GBP Trade Balance
1:30pm USD Non-Farm Employment Change
1:30pm USD Unemployment Rate

All times London time (GMT)

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USD% Index

usd index sun 2 nov 14
The huge Yen move last week has only served to accelerate the USD% index higher, although when you compare the volatility of USDJPY with the rest of the dollar pairs then it is clear that this dollar move is simply a USDJPY move. It’s hard to imagine a data scenario that could make the dollar sell right now, purely as a result of the massive USDJPY buying, so there is scope for even a poor NFP to be bought for USDJPY. This is one of those rare events where it really is one way trading and the only thing stopping USDJPY looking even more bullish is market inefficiency. We could even see some European upside, not due to EURUSD buying, but due to EURJPY, GBPJPY and CHFJPY upside bleeding though into the dollar pairs although this is not a high probability situation, just something to not bother raising eyebrows at if it happens. It may produce a EURUSD short opportunity though if it happens. While the Yen is such a market mover I have converted USD% index support and resistance levels from showing EURUSD to showing USDJPY. I am bullish USD%

USD% Index Resistance: USDJPY 115.19, 113.72
USD% Index Support : USDJPY 112.75, 112.46

EUR% Index

gbp index sun 2 nov 14
The Euro has tested key support for the EUR% index and as a result of possible EURJPY buying we could even see the index bounce from here into a neutral range bound situation until the Yen finds support. 1.2480 is a big level to break through and a push higher from here if we can make a higher high would represent a medium time-frame double bottom. This seems unlikely though due to ECB policy however the BOJ are now firmly in competition with the ECB in the race to the bottom. The key difference being that the BOJ are doing massive QE while the ECB are only talking about maybe doing QE (if Germany let them, which they wont). Even so, long EURJPY will be the least favourable of all the Yen shorts. I am neutral EUR%

EUR% Index Resistance: EURUSD 1.2527, 1.2588
EUR% Index Support: EURUSD 1.2480, 1.2440

JPY% Index

jpy index sun 2 nov 14
Wow. Total devastation of the Yen and Nikkei 225 futures have gone into orbit. RSI is off the scale and the bleeding seems like it has a long way to go before it will stop. Key support for me in the near term is the 115.00 resistance level for USDJPY. Buy any USDJPY dips. I am VERY bearish JPY%

JPY% Index Resistance (USDJPY Support): USDJPY 112.73, 111.50
JPY% Index Support (USDJPY Resistance): USDJPY 114.21, 115.00

GBP% Index

gbp index sun 2 nov 14
EURGBP is still selling well so we should remain quite well supported for the GBP% index, something displayed by the pound being the least volatile pair during the large USD% index gains on Friday. With the Yen taking all of the pain from the dollar gains we could see the pound stage a bit of a comeback once again and test the higher resistance levels of this messy range in the 1.6150 region for GBPUSD, again more as a function of GBPJPY buying supporting the pound than anything else although with the MPC this week too, further dissent will only fuel the flames for pound bulls who have taken quite a beating lately after a bout of poor UK data. I am bullish GBP%

GBP% Index Resistance: GBPUSD 1.6073, 1.6150, 1.6200
GBP% Index Support: GBPUSD 1.5933, 1.5828, 1.5750

AUD% Index

aud index sun 2 nov 14
The large gap lower at the open seems to be more about the risk of poor Chinese and Australian data at the start of the week than anything else although it’s worth noting that we have remained above the key support level in the AUDUSD 0.8734 region. Chinese HSBC manufacturing PMI if good will see that reverse and AUDJPY upside could support us in the AUD% index. We also have a slew of Australian data on Tuesday along with the RBA so the risk events for the Aussie will likely weigh on it. If we can get past those events without incident then we should return to upside. Poor results from those risk events and we should see 0.8500 for AUDUSD as a function of dollar strength. I am bullish AUD% after this week’s AUD and CNY risk events

AUD% Index Resistance: AUDUSD 0.8886, 0.9050
AUD% Index Support: AUDUSD 0.8750, 0.8700, 0.8566, 0.8500

CHF% Index

chf index sun 2 nov 14
This is starting to get interesting now as we once again test the 1.2050 level for EURCHF. This is not a level defended by the SNB although it has been used as key support for some time. The Swiss referendum may push us to test the resolve of the SNB once again which should prove to be a good EURCHF long opportunity for those willing to hold onto the trade for a long time. I am neutral CHF%

CHF% Index Resistance (USDCHF support): USDCHF 0.9619, 0.9588, 0.9525
CHF% Index Support (USDCHF resistance): USDCHF 0.9655, 0.9700, 0.9750

LittlefishFX Relative Currency Index Strength

All of the currency indexes used for this analysis are available as a NinjaTrader indicator from the link below. They are eight indexes, USD, EUR, JPY, GBP, AUD, CHF, CAD and NZD with each index made up of the remaining seven pairs, weighted in accordance with the distribution of global FX volume as measured by the Bank of International Settlements in their Triennial Survey.

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