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 market was already keen to offload some long USD exposure ahead of this week’s FOMC and the poor US Durable Goods Orders number was just the catalyst. We did have a very positive Consumer Spending though at 94.5 vs 87.4 expected, so USDJPY actually defied the dollar selling with a bounce from the 100 hour moving average again, ending the London session firmly in the green. Another quite unusual move which isn’t something covered by this analysis but comment worthy was the continued Canadian dollar strength as crude rejects the 80 dollars per barrel figure. This figure is significant because it represents the break-even point, below which the majority of oil production becomes too expensive to be profitable. Something to keep an eye on for sure.
Wednesday sees the FOMC statement as the economic highlight and technically the market is poised to go either way, other than USDJPY traders which seem quite confident in the outcome. Since that is the pair most sensitive to fed policy change at the moment due to the policy divergence between the US and Japan then we can take this as a positive sign going into the FOMC tomorrow.
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The dollar broke through our support level and has now exposed the well tested and seemingly quite robust dollar support in the 1.2815 region for EURUSD. Looking at USDJPY we could say that the market was willing to risk holding fresh trades going into the event in expectation of nothing too dovish from the FOMC. It seems prudent to get a confirmation though before we pile into dollar longs again. A very bullish outcome tomorrow and the consolidation channel resistance at EURUSD 1.2625 may come under threat. I am bullish USD% although preferably from 1.2800 for EURUSD
USD% Index Resistance (EURUSD support): EURUSD 1.2732, 1.2704, 1.2650, 1.2625
USD% Index Support (EURUSD support): EURUSD 1.2815, 1.2875, 1.2924
The dollar position squaring pushed the EUR% index through the 200 hour moving average and as such we may see a further spike higher to clear out some near term stops before we continue lower. This is assuming of course that the FOMC don’t throw a cat amongst the pigeons with a very dovish FOMC. We have resistance at 1.2791 in the near term although that may be a little to close to hold, beyond that is the more likely to hold level of 1.2835 as this aligns better with the USD% index support. I am bearish EUR% longer term but we may see better prices yet
EUR% Index Resistance: EURUSD 1.2791, 1.2800, 1.2839, 1.2900
EUR% Index Support: EURUSD 1.2650, 1.2600, 1.2500
Another nice rejection from the 100 hour moving average for the JPY% index keeps the Yen sellers in control but the Nikkei buyers, which are normally in tune with Yen sellers, are not able to break the ichimoku kumo resistance. Until we have both a hold below the 100 hour moving average and a break higher for the Nikkei then we should expect choppy condition, although this all will likely be decided by the outcome of the FOMC meeting. Stock traders often get ahead of themselves so upside for global stocks is likely if the FOMC hold on the previously stated expectations with regards the final taper and the timetable for tightening. I am bearish JPY% once we break the Nikkei 225 kumo
JPY% Index Resistance (USDJPY Support): USDJPY 107.00, 106.50
JPY% Index Support (USDJPY Resistance): USDJPY 108.60, 110.50
Still looking good for upside although now very close to the point at which I may switch directional bias. The major bearish trend line at GBPUSD 1.6240 may be tested in the FOMC volatility although longer term, due to the deterioration in Europe and the UK, the pound is expected to remain on the back foot until data picks up. The bullish orange trend line is the line at which this retracement has failed so a break there will signal the move lower, which currently sits in the 1.6088 region for GBPUSD. EURGBP is currently right at resistance so we should see the level hold if we are to go higher for the GBP% index. A break to the upside for EURGBP and we may not test the expected GBP% resistance level and simply begin selling from here. I am bullish GBP% short term, bearish long term
GBP% Index Resistance: GBPUSD 1.6174, 1.6200, 1.6240
GBP% Index Support: GBPUSD 1.6088, 1.6066, 1.5985
Hooray for Goldman Sachs trade notes as a contrarian signal yet again. We have now broken resistance to the upside and all of the commodity currencies seem to be doing quite well as a result of oil’s failure to break and hold below 80.00. Not normally associated with oil, the Aussie may be seeing some upside due to a combination of factors including a general bottom in key commodities but I have remained with a bullish fundamental picture recently for Australia and the Australian stock market seems very buoyant. A strong dollar via the FOMC (if not too dovish) will certainly test AUDUSD bulls’ conviction on Wednesday. If we end Wednesday higher for AUSUSD this is a very bullish signal. I am bullish AUD%
AUD% Index Resistance: AUDUSD 0.8926, 0.9000
AUD% Index Support: AUDUSD 0.9935, 0.8800, 0.8773
As with the EUR% index we have popped higher and may pop further yet before we return to selling. The 0.9425 region may be a nice place to enter long USDCHF if given the chance, but only if the hawk/dove balance does not shift away from tightening at the FOMC. 0.9500 is the level to break for a continuation of CHF weakness. I am bearish CHF% from resistance
CHF% Index Resistance (USDCHF support): USDCHF 0.9425, 0.9400
CHF% Index Support (USDCHF resistance): USDCHF 0.9481, 0.9519, 0.9589
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.