Index Trading: Commodity Currencies Bounce But USD Still In Charge

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

After the strong bullish reaction to the more hawkish than expected FOMC, the poor German CPI numbers and better than expected US GDP headline numbers failed to really have an impact. We did move higher for the dollar, although this was mostly via USDJPY which continues to look very bullish, but in contrast to the reasonable attempt at a bounce for the European currencies and a quite impressive fight against the dollar from the commodity currencies.

There was much talk about the GDP number being a bit of a dud due to the component breakdown of the increases being largely defence spending, which does not reflect the economy at all and is in fact a bit of a sign of weakness in the economy when the government props up the numbers. There is a presidential election soon though so the numbers may need to be carefully manicured or at least the big spending done at a helpful time.

Friday’s only real risk is the European CPI number which is not expected to be great after seeing the poor German number although the forecast is seemingly a little ambitions so the risk of a below par print there too is increased.

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USD% Index

usd index thu 30 oct 14
We retraced lower to test the recently broken resistance turned support and we expect the upside to continue, although at a slower pace than we are used to. We have now redrawn the bullish channel to include the whole of the summer bull trend so now have clearly defined and tested extremes of this trend. New Zealand dollar was the biggest mover relative to ATR once again, highlighting quite how well the commodity currencies have bounced from their deep retracements. I am bullish USD%

USD% Index Resistance (EURUSD support): EURUSD 1.2550, 1.2500
USD% Index Support (EURUSD support): EURUSD 1.2622, 1.2700

EUR% Index

eur index thu 30 oct 14
A good bounce from the support level in the 1.2544 region for EURUSD although trend remains bearish. We are gravitating back towards the 1.2500 level once again although now it has increased significance since we will now likely meet the green bullish trend line at the same time which is a major long term level and perfectly aligns with what could be a medium timeframe double bottom (if it holds). I’m not expecting it to hold but I don’t think it will be a clean break so the chop may continue around these big levels. I am bearish EUR%

EUR% Index Resistance: EURUSD 1.2686, 1.2750
EUR% Index Support: EURUSD 1.2600, 1.2500

JPY% Index

jpy index thu 30 oct 14
Continued downside for the Yen with the Nikkei 225 rallying to almost the top of the Kumo. JPY% index RSI is now low so the combination of factors may make the nearby support a good profit target zone, although it will take data or news to break this support level in the 110.55 region on the first attempts. Trend remains bearish but the risk of a bounce within this bear trend is increasing. I am bearish JPY%

JPY% Index Resistance (USDJPY Support): USDJPY 108.59, 108.00
JPY% Index Support (USDJPY Resistance): USDJPY 109.67, 110.16, 110.55

GBP% Index

gbp index thu 30 oct 14
The pound remains quite well supported above the key level and EURGBP remains with a bearish bias so the downside of the current GBP% index move may be slowed, perhaps even moving to a range bound scenario for this further bout of dollar strength. If we rally up to 1.6075 for GBPUSD then this will likely attract bears to enter, but there seems no shortage of bulls around the 1.5975 level either. A break of support opens up the next level down, at the 1.5792 level for GBPUSD. I am bearish GBP%

GBP% Index Resistance: GBPUSD 1.6075, 1.6100
GBP% Index Support: GBPUSD 1.5975, 1.5880, 1.5792

AUD% Index

aud index thu 30 oct 14
All of the commodity currencies did well on Thursday, recovering a good amount of the drop that the FOMC has created. Gold on the other hand is dropping quickly as a result of the end of QE and the reduced expectations of further QE. The 100 hour moving average is now acting as support for AUDUSD although the 0.8900 hurdle may take some breaking and currently seems like we may reject the level if tested, at least in the short term. I am bullish AUD%

AUD% Index Resistance: AUDUSD 0.8900, 0.9000
AUD% Index Support: AUDUSD 0.8800, 0.8992, 0.9750

CHF% Index

chf index thu 30 oct 14
EURCHF edges ever closer to key support and the referendum in Switzerland really has the potential to cause the SNB some issues. There is an increased possibility that we may test the resolve of the EURCHF 1.2000 floor soon although this may remain a good chance to enter a trade with the SNB as backup to help it along. With all of this poor European news though, there is no reason for EURCHF to rally without central bank manipulation. I am bearish CHF%

CHF% Index Resistance (USDCHF support): USDCHF 0.9514, 0.9482
CHF% Index Support (USDCHF resistance): USDCHF 0.9569, 0.9600, 0.9627

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.

Get RCIS Indicator here