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.
European PMI data, particularly the German manufacturing PMI came in better than expected which gave the Euro a slight boost in the early London session, although this was not sustained into the afternoon as traders took it as a chance to short at a better price or exit long news trades early. The UK data was well under par though so EURGBP rallied although this again was not sustained ahead of Friday’s UK GDP data. US weekly jobs and flash manufacturing PMI both came in under expectations but the absolute numbers for the manufacturing PMI are still well above the European numbers, preventing a dollar sell-off. The Yen on the other hand, led by a very buoyant stock market fell considerably and was the only major move of the day, with USDJPY pushing convincingly above the 108.00 handle for now.
The market has been less hopeful regarding Friday’s UK GDP and the forecast seems sensibly priced so the number could go either way, as could the pound, but the US New home sales data has been strong so we expect this to continue.
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We rallied 0.2% on the day, mostly via USDJPY buying although the upside for the dollar was choppy as a result of the better than expected European data. The Euro eventually buckled under the strain so we ended the day near highs. Technically we now should push higher to the top of the channel in the 1.2600 region although USDJPY aside, the dollar move has not been a clear cut one so conviction is not very high, at least until we get the next positive US data release which may put new home sales in the spotlight to end the week. I am bullish USD% until EURUSD reaches 1.2600
USD% Index Resistance (EURUSD support): EURUSD 1.2600, 1.2500
USD% Index Support (EURUSD support): EURUSD 1.2670, 1.2714
The Euro tested the bottom of the wide bullish channel although this is deemed a correction still so the expectations of upside from here are limited currently. A poor UK GDP number though would likely be supportive of the Euro via EURGDP buying and likewise a great number may see this support level breached for the EUR% index. Overall the day is not expected to be too volatile for the Euro as traders play a waiting game to see if we’ll bounce one last time for short entry before the trend resumes. I am bearish EUR% but not from current levels
EUR% Index Resistance: EURUSD 1.2687, 1.2700, 1.2727
EUR% Index Support: EURUSD 1.2623, 1.2558
A convincing drop through the 400 hour moving average and a break of the bullish channel has seen the Yen weaken by 1.41%. Support for the Yen comes in at 108.64 for USDJPY although looking at the Nikkei 225 futures chart at the bottom, we have now met a confluence of the lower band of the Kumo and the Kijun Sen so there could be some profit taking from stock traders which would give the yen a slight break from selling. This move is also now an AB=CD from the recently rejected highs so again there could be some technical Yen buying. Overall, the outlook is cloudy, and we could still rally to meet the major trend line resistance at the top of the JPY% index chart, but with stocks so bullish, particularly US stocks, this may take the main stage in terms of Yen market sentiment. I am neutral / bullish JPY%
JPY% Index Resistance (USDJPY Support): USDJPY 107.77, 107.10, 106.62
JPY% Index Support (USDJPY Resistance): USDJPY 108.64, 110.50
The GBP% index is poised to go either way and keeps breaking in both directions making the outlook difficult to predict when pairing the pound with the dollar, however the EURGBP chart remains very predictable and as such pound strength remains intact against the Euro. With UK data ahead of US data and perhaps the bigger deal for Friday’s fundamental risk events, the UK really need a good GDP print in order to stop the rot setting in again for the pound. Since we are approaching USD resistance and because EURGBP continues to sell I remain bullish GBP so long as data does not shock to the downside. I am bullish GBP% but data dependant
GBP% Index Resistance: GBPUSD 1.6100, 1.6200
GBP% Index Support: GBPUSD 1.5980, 1.5873
The 200 hour moving average remains supportive for the AUD% index and we also remain above the seemingly magnetic support. The attempt to rally though was met with offers pushing us back to the support levels without making any really progress. The diamond shape still holds and the range to break is now 0.8840 to 0.8700 for AUDUSD. I still favour a upside for the Aussie in contrast to Goldman’s recent trade suggestion but lets just say I’m not betting the house on it. I am bullish AUD%
AUD% Index Resistance: AUDUSD 0.8800, 0.8840
AUD% Index Support: AUDUSD 0.8700, 0.8615
A very similar story here again as for the EUR% index largely due to the total lack of volatility for EURCHF now that we are nestled at key support. We ended the day in a pocket of support and now play a waiting game to determine if these levels will hold or fail. The reaction so far is far from bullish. I am bearish CHF% from resistance
CHF% Index Resistance (USDCHF support): USDCHF 0.9518, 0.9466
CHF% Index Support (USDCHF resistance): USDCHF 0.9557, 0.9600
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.