Key Highlights:

  • USD strength aligns with altogether different US yield curve structure, term premium
  • GBP may have a difficult time holding top spot as manufacturing data disappoints
  • CAD falls and trades to weakest level since August, faces long-term chart pivot
  • IGCS Highlight: Increase AUD/USD net-longs show USD strength may persist vs. weak FX

Strong Weak Analysis is a way to identify momentum in the FX market. Trend traders rely on spotting and riding momentum as it develops and looks to benefit from trends extending, as many do. It’s also worth noting when the strength of a trend is waning, which Strong Weak analysis can also benefit.

Each day will bring you an index of strong and weak currencies as identified via the methodology in our article, ‘How to Create a "Trading Edge": Know the Strong and the Weak Currencies.' I will also share with you sentiment developments via IG Client Sentiment that can provide additional insight to help you decide what trends could extend.

Strong/ Weak Index October 2, 2017

DXY Strength Opens October with Intermarket Support: SW Report

Highlights:

-A key use of the Strong Weak Index is helping you see what trends not to fight. Right now, that honor goes to USD. The US Dollar Index (DXY) was a clear highlight of trading in September, and if opening price action is any indication, the trend could continue into October. What is impressive about the USD rally is that when looking to highly correlated markets like US rates, the rally appears supported. There is a lack of steepening of US Rate curves, which we saw clearly in Q416, which is a hallmark of inflation expectations.

The lack of steepening in the yield curve seems to show that the front-end action likely leads the current move. Front-end action argues the market was underpricing Fed policy, which is an easy argument to make as the Eurodollar curve showed one hike priced in through 2018 a month ago. If the underpricing view of the dot plot (anonymous Fed votes of policy at future dates) stays on course, we could see more stability in the DXY after this rise than we did from the Q416 run up that faltered. The price on the chart that is worth watching is 94.19. A break above this zone could see the new leveraged short positions unwind to extend the rally further. September US ISM manufacturing print also showed ty highest level since before the financial crisis, and all the way back to 2004.

-While still holding onto the top spot when you analyze GBP through the lenses of the H4 chart and 200-DMA, the British Pound may have a difficult time holding on for long. On Monday, UK manufacturing PMI disappointed while still showing growth. The price support in focus is the early August high near 1.3267 followed by the September low near 1.3150. If the price weakness continues, USD should take the top spot in the S/W rankings. Stay tuned.

-From a purely technical perspective, USD/JPY remains of keen interest. The month of September shows a key reversal for USD/JPY closing the month above 111.05. The chart fails to show the critical risk-sentiment pair as out of the woods yet. We’re roughly three weeks away from the Japanese election, which could provide some volatility, but the intermarket picture mentioned above for the DXY rally seem also to support the bullish USD/JPY view.

-The Canadian dollar has traded to the lowest level against the US dollar since August. The move lower to start the quarter is in line with the ~2.25% drop in Crude Oil on Monday. Hedge funds are likely not happy with the recent bout of CAD weakness as the Commitment of Traders showed leveraged funds increasing their net-long CAD positions further. Later this week, both US & CA employment data should help clarify the next move, but for now, the market continues to push out expected BoC hikes, which would further add to troubles for those holding CAD long positions.

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IGCS Highlight: AUD/USD increase in weekly longs favor a breakdown ahead of RBA

DXY Strength Opens October with Intermarket Support: SW Report

AUDUSD: Retail trader data shows 48.9% of traders are net-long with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is 6.5% higher than yesterday and 55.4% higher from last week, while the number of traders net-short is 2.5% higher than yesterday and 26.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUDUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warns that the current AUDUSD price trend may soon reverse lower despite the fact traders remain net-short (emphasis added.)

For a deeper explanation on what’s been shared above, please join the FX Closing Bell Webinar with Tyler Yell

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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