Index Trading: Panic Dollar Selling Bends The Market

When the US is in trouble we get a less common form of risk aversion, whereby stocks fall, the yen and treasuries rally and the dollar falls, but often the so called risk currencies such as AUD, GBP and EUR can be dragged higher as a result of the dollar weakness, clouding the risk aversion picture. The scale of this is also a function of quite how much the dollar has rallied in such a short space of time against those risk currencies, indicating a need for market participants to press the panic button and close out some very in the money USD vs Risk positions. At the start of the week I warned about a potentially wild week ahead and it seems the chop has only just begun as traders have the unenviable task of weighing the fundamentals now that rate hike expectations are out the window. The sudden drop in economic performance in Europe and America the cause of this change in picture but also making the decision much harder. Can it be that we no longer have a best looking horse in the bubblegum factory? They all look a bit lame to me except perhaps gold which doesn’t have any fundamentals to mess things up for us.

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USD% Index

usd index wed 14 oct 14
We never did make it back inside the bullish channel and the dollar was struggling to even hold it’s head above the 200 hour moving average so the writing was on the wall so to speak for a big drop, all we needed was the trigger. Core retail sales coming in at -0.2% vs 0.2% and the Empire State Manufacturing Index blowing a serious gasket with a print of 6.2 vs 20.3 expected was exactly the trigger that the market hoped we wouldn’t get. We briefly broke through the previous multi-year high shown as the thick yellow support line. This support now looks vulnerable and the one below perhaps more favourable as support for the dollar in the medium term indicating a possible push to 1.2935 for EURUSD. I am neutral / bearish USD%

USD% Index Resistance (EURUSD support): EURUSD 1.2800, 1.2771, 1.2741, 1.2676
USD% Index Support (EURUSD support): EURUSD 1.2878, 1.2935

EUR% Index

eur index wed 14 oct 14
Of great interest on this chart is the thick blue resistance trend line that we are rapidly accelerating towards after the violent break back out of the bearish channel again. This represents the previous angle of descent for the Euro before we had to steepen the channel so is what would have been the original channel resistance and if tested may be significant (currently the 1.3000 region for EURUSD). The previous high in the region of 1.2782 was thoroughly roasted in the price action although the next level higher held up better, capping the spike. Price action remains quite constructive on this chart, however if we look at the Euro trade weighted index on the chart below, we can see that we are now back into the sell zone for the euro so we could see some ground lost again to the pound meaning a possible drop again for EURGBP. I am neutral / bullish EUR% in the short term

EUR% Index Resistance: EURUSD 1.2876, 1.2995, 1.3000
EUR% Index Support: EURUSD 1.2792, 1.2687

EURX Trade Weighted Index

EURX wed 14 oct 14

JPY% Index

jpy index wed 14 oct 14
A lovely test of the 100 hour moving average offered a great chance to enter short USDJPY right at the top of a very large sell-off. The Yen index rocketed higher and Nikkei 225 futures dropped sharply as the panic sets in regarding the global outlook. 104 seems like a good target for USDJPY so we should review things once we get there but it seems hard to imaging this panic buying for the Yen stopping any time soon unless there is a game changer fundamentally. I remain bullish JPY% but only if stock don’t rally

JPY% Index Resistance (USDJPY Support): USDJPY 104.92, 105.63, 104.10
JPY% Index Support (USDJPY Resistance): USDJPY 106.59, 107.16

GBP% Index

gbp index wed 14 oct 14
Some serious pound chop with an up down up whipsaw the entire distance of the average daily range. We ended the day strongly though which was unusual. Scalpers were also offered a nice chance to short from the 100 hour moving average and close at the lows of the day before the final bounce higher. EURGBP is now in the sell zone technically and to back that theory up we are right back at support for the Sterling ERI which shows a trade weighted index that favours the dollar and Euro vs the pound although contains a whole basket of currencies. For this reason and due to the dollar being so weak I now expect a bounce higher for the pound vs both the dollar and the Euro although definitely not the Yen. I am bullish GBP%

GBP% Index Resistance: GBPUSD 1.6041, 1.6135, 1.6325
GBP% Index Support: GBPUSD 1.5964, 1.5933

Sterling Trade Weighted Index (top) vs GBP% index (bottom)

Sterling ERI wed 14 oct 14

AUD% Index

aud index wed 14 oct 14
Much like the pound we are going nowhere fast but the relative security of Chinese grown and the positive and seemingly now stable interest rate differential between Australia and the US should see some bids enter from these lows once the dust has settled somewhat. AUDUSD carry trades may now be a good bet for the long term once volatility dies down a bit and the often correlated gold may also offer a helping hand for the Aussie. I am bullish AUD%

AUD% Index Resistance: AUDUSD 0.8800, 0.8900, 0.8971
AUD% Index Support: AUDUSD 0.8654, 0.8556

CHF% Index

chf index wed 14 oct 14
As suggested yesterday we certainly had some upside for the Franc which because it wasn’t alongside EURCHF upside could make the SNB a little nervous and start trying to talk the Franc lower. There is no escaping it though. The Swiss have by far the best of all the G8 economies in these uncertain times and as such the SNB may have their work cut out defending the floor if this CHF panic buying continues. I am neutral / bullish CHF%

CHF% Index Resistance (USDCHF support): USDCHF 0.9380, 0.9360
CHF% Index Support (USDCHF resistance): USDCHF 0.9450, 0.9500

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