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.
The FOMC signalled, much as expected, that the mammoth QE experiment will end this month. They also cited continued improvement in the labour market with ‘solid job gains’ and lower unemployment as a key sign of recovery. They kept the much talked about “considerable time” line in though in relation to keeping the fed funds rate accommodative but were cautious regarding the currently problematic lack of inflation, although they added the caveat that low energy prices were currently a drag on inflation.
Thursday is all about the Advanced GDP and Yellen as the market will seek to confirm Wednesday’s dollar bullishness.
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A strong reaction to the FOMC from the dollar brings us right up to the critical resistance level that if breached will be seen as a continuation signal for further dollar upside. The NZDUSD was the biggest mover of the day relative to ATR, with Aussie lagging somewhat behind it’s neighbour. With WTI bouncing away from the critical 80 level, USDCAD was the least volatile pair, resisting the dollar strength quite well and even posting a slight rejection from the 100 hour moving average. We really need the Advance GDP to not be poor in order for this dollar trend to continue. Yellen will no doubt remind everyone that inflation is still very poor and do her best to quell the dollar bulls, but ultimately she will probably remain on course and not deviate from the FOMC sentiment too far for fear of market turmoil. From the USD% index point of view, EURUSD 1.2619 is a big level to break as is 1.2587 and 1.2500. I am bullish USD%
USD% Index Resistance (EURUSD support): EURUSD 1.2619, 1.2587, 1.2500
USD% Index Support (EURUSD support): EURUSD 1.2700, 1.2800
The EUR% index has rejected a minor trend line and returned to selling although we still need the GDP to confirm this move so we will more than likely wait for that before breaching the next support levels. 1.2600 is a big level to test as is 1.2500. A break of the 1.2500 level should signal a much longer term down trend as this is a key support level, not only psychologically, but technically for the EUR% index and USD% index charts. The Fundamentals are in place for that to happen but the break may take a bit of perseverance. I am bearish EUR%
EUR% Index Resistance: EURUSD 1.2686, 1.2750
EUR% Index Support: EURUSD 1.2600, 1.2500
Well we have finally broken into the kumo for the Nikkei 225 futures chart at the bottom of the screenshot and printed a fresh low for the JPY% index which means that we are now full steam ahead for a move down to the key JPY% index support level at 110.50 (USDJPY resistance). Quite what will happen when we get there is not really obvious, we could simply bounce along the key support level or we could breach the important level and carve out a steeper descent for the JPY% index. We’ll have to see how the fundamental and technical picture is when we get there. I am bearish JPY%
JPY% Index Resistance (USDJPY Support): USDJPY 108.60, 108.00
JPY% Index Support (USDJPY Resistance): USDJPY 109.38, 110.16, 110.50
The pound didn’t test our preferred level but we did get a breakout to the downside from the suggested trend line break. The downside was quite strong, perhaps as a result of the pound being towards the top of the bearish channel within a down trend as the FOMC volatility hit. We still have strong support to break to the downside at GBPUSD 1.5980, then 1.5800 so there are still plenty of hurdles to jump before we print a fresh low for this trend. EURGBP remains around the resistance levels without breaking to the upside, so a return to selling for the cross could support the GBP% index for the time being. Again, we need more time to assess the EURGBP price action, but currently it looks quite supported. I am bearish GBP%
GBP% Index Resistance: GBPUSD 1.6093, 1.6117, 1.6170
GBP% Index Support: GBPUSD 1.5980, 1.5900, 1.5800
AUDNZD rallied quite strongly during the FOMC news volatility which means that there are still some lingering buyers for the Australian dollar. Indeed, the AUD% index failed to even break the 200 hour moving average and has simply tested recently broken support. Sure enough the move lower is quite a bearish signal, but I would prefer to hold a cautious bullish bias until the AUD% index is below the green 200 hour moving average. Interestingly, the recent high for the index allows us to copy the bullish support trend line to a recent turning point and create a very mild bullish channel which may place more significance on the 0.8715 support level for AUDUSD, especially since we could have another wave of USD buying on Thursday to potentially push us there to test it. A breach of the level though and there is nothing below until we reach 0.8600 so stop reversal strategies may be best. I am bullish AUD% while above 0.8715
AUD% Index Resistance: AUDUSD 0.8816, 0.8912
AUD% Index Support: AUDUSD 0.8759, 0.8915, 0.8600
Not even a flicker from EURCHF so very similar again to the EUR% index. Support for the CHF% index comes in at 0.9566 (USDCHF resistance) followed by 0.9613. As such a breach of the first level could see us accelerate lower for the CHF% index. I am bearish CHF%
CHF% Index Resistance (USDCHF support): USDCHF 0.9521, 0.9475
CHF% Index Support (USDCHF resistance): USDCHF 0.9566, 0.9613, 0.9663
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.