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 knives are starting to come out for ECB president Mario Draghi from within the ECB. Many there are annoyed at his very insular method of policy implementation and key figures are starting to become concerned that policy which has been agreed upon by the governing council collectively is being changed on the fly by Draghi in press conferences. Key players are often left in the dark regarding direction. Exactly what that means for the Euro is not clear, but there has been a moderate bid tone for EURUSD throughout Tuesday regardless, although there are also technical reasons for this too. The chances of a more hawkish president, perhaps more sympathetic to the German cause is a real possibility which may alter the governance of the ECB to a more hawkish stance, perhaps dashing the market’s hopes of ABS or government bond purchases by the ECB.
Data on the whole was soft on Tuesday with Spanish unemployment change sharply higher, UK construction PMI below expectations and US factory orders under par.
Wednesday sees Spanish, Italian and UK services PMI, US ADP and ISM non-manufacturing PMI as the data focus, so it should be another busy day ahead.
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Aussie was the biggest mover and the pound was the smallest mover vs the dollar (relative to daily ATR) for Tuesday’s bout of minor dollar weakness. We have key USD% index support suggesting USDJPY 113.20 as a key dollar support which if tested would mean the opening gap will have closed for the dollar and also we will have tested the 100 hour moving average for the USD% index so it seems like it may be robust support and a long USDJPY from that level suggested. I am bullish USD%
USD% Index Resistance: USDJPY 113.83, 114.00, 114.36
USD% Index Support : USDJPY 113.20, 113.10, 113.13, 112.61
After the poor start to the week at the open, the Euro has been continually bid, testing channel support and rejecting the level nicely. The 100 hour moving average did not see a large number of offers enter so we could see the 200 hour moving average become the next target. Trend remains very clearly bearish at this stage so perhaps a short recommendation from the 1.2600 level for EURUSD would be suitable, with stops above the 1.2666 figure and 1.2400 the first target. I am bearish EUR%
EUR% Index Resistance: EURUSD 1.2581, 1.2600, 1.2666, 1.2700
EUR% Index Support: EURUSD 1.2520, 1.2475, 1.2400
A very mild retracement for the Yen makes the near term USDJPY level in the 113.00 region likely to hold if tested for a continuation for the bearish Yen theme. This would align nicely with a further push for the dollar from USD% index support. If we break through that level there is key USDJPY support in the 111.74 region via JPY% index bearish channel resistance and this would likely see the Nikkei 225 test the recently broken ichimoku kumo top as well, which would act as support for Japanese stocks and weaken the Yen from there. RSI remains off the scale, although when central bankers wade in with wild money printing, RSI becomes totally unusable so this is to be expected. Near term targets are 115.27 for USDJPY. I am bearish JPY%
JPY% Index Resistance (USDJPY Support): USDJPY 113.00, 111.74
JPY% Index Support (USDJPY Resistance): USDJPY 113.61, 114.44, 115.27
The ECB situation along with poor UK data has made the pound situation more complex. The GBP% index remains in a correction higher and is indecisively hovering around the 100, 200 and 400 hour moving averages, suggestive of the index coiling before a more pronounced move in either direction. EURGBP after the poor data bounced well from support and stayed there although the cross remains bearish which will further support the pound. GBPUSD 1.6120 is now key bearish channel resistance and remains the threshold for bull/bear, meaning that we are currently correcting the bear trend for the moment until that trend line breaks. 1.5930 has rejected price continually and repeatedly but we will soon run out of room and be forced to make a decision on which level should break. I would sell another push higher towards key resistance with a first target of 1.5950, ideally from the 1.6100 to 1.6120 region although a strong failure of that move and we should reverse trade direction on the breakout from a retest of the then broken 1.6120 level if given the chance. I am neautral / bearish GBP%
GBP% Index Resistance: GBPUSD 1.6073, 1.6150, 1.6200
GBP% Index Support: GBPUSD 1.5933, 1.5828, 1.5750
A reasonably convincing bounce from key support as the RBA have dropped the ‘overvalued’ comments in relation to the Australian dollar. This does not aid our clarity though and traders keep gravitating back to the 0.8737 level like a magnet, giving us a narrow range to play with. Aussie data has been quite off lately, but Aussie data is rarely the longer term focus for Aussie traders, with China and the overall global picture taking president in the longer term. It will be interesting to see how the Saudi decision to slash the contract price for US oil customers at the expense of the eastern nations will affect the Chinese slowdown. My thoughts are that it might become big news later down the line and further weigh on the Aussie if it causes the highly strung Chinese economy some troubles. As a contrast, with such a weak yen expected, all of the high yielding currencies such as the Aussie and Kiwi gain support due to the interest rate differential, which may paint a contrasting bullish picture. Until we’re confidently above 1.8900 or confidently below 0.8500 then the rest will unfortunately be noise. One for the range traders it seems. I am neutral AUD%
AUD% Index Resistance: AUDUSD 0.8875, 0.9050
AUD% Index Support: AUDUSD 0.8737, 0.8650, 0.8563, 0.8500
EURCHF has pushed below the key 1.2050 support level due in part to the ECB uncertainty but also due to the market now considering the prospect of the SNB being forced to give up the 1.2000 floor as a result of the referendum in Switzerland. Technically the CHF% index looks keen to test the 200 hour moving average which currently sits around the USDCHF 0.9572 level. 0.9525 could also be a key resistance for the Franc if that level should fail. Things could begin to get interesting for the Franc though after such a long time of shadowing the EUR% index. I am bearish CHF% although prefer Euro shorts
CHF% Index Resistance (USDCHF support): USDCHF 0.9589, 0.9525, 0.9500
CHF% Index Support (USDCHF resistance): USDCHF 0.9620, 0.9675
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.