Key Highlights:

  • USD dethrones GBP for top spot on SW ranking as market was poorly positioned for US resurgence
  • Widening Trade Deficit Adds to ST woes for Canada pushing USD/CAD > 1.25
  • GBP trades to a four-week low vs. USD as May’s speech adds to Tory concerns
  • IGCS Highlight: rise in AUD/JPY long positions w/w favor further JPY strength
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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 5, 2017

USD Takes Top Spot In SW Ranking Ahead of NFP Ousting GBP: SW Report

Highlights:

-The stage is set for a blockbuster NFP. Not that a surprise to the upside of the unusually low 80k would increase the odds further of a rate, currently at 75% probability of an increase in the reference rate for the December 13 meeting and 14.5% for November 1, but for a further unwinding of the USD short trade. While the USD has had a 2017 that many dollar bulls would likely prefer to forget, one thing is certain, and that is that the USD has historically won the fourth quarter. Despite trading at the lowest point in two years this September, the DXY has risen for the last six fourth quarters going back to 2011. While Non-Farm Payroll’s have the widest spread since 2012 as economists are unsure how much of an effect the hurricanes will play in the employment picture of economic stalwarts, Florida and Texas. Either way, a meet or beat of the headline number with a surprise on Average Hourly earnings could see a test of key resistance at 94.19. To watch the NFP live with our top analysts, register here.

-The Canadian Dollar continues to hold to the top three in the SW index, but this morning’s trade deficit data brought further concerns to surface that caused USD/CAD to remain above 1.25. Canadian exports have fallen 11% since the record high in May when the spread between the US/CA 2-yr sovereign yield began to close and eventually flip on a more hawkish BoC than Fed. As noted yesterday, some very large fund managers, PIMCO and Blackrock are favoring the view that the BoC is done hiking in 2017 and today’s trade data showing exporters are stumbling with the fastest three-month drop since the last recession in 2009 helps make their case.

-Another currency that is falling from grace is the British Pound. This morning, GBP was removed from the top spot and traded to a one-month low against USD after poor UK auto sales in September and reports surfaced of a ‘Tory-rebellion’ brewing after May’s speech. The political turbulence has taken GBP/USD to the 55-DMA at 1.3130 and brought GBP/JPY to the lowest level in three weeks. This is likely unwelcome news to the leveraged accounts that flipped net long on GBP for the first time since May 2016 per the CFTC’s commitment of trader’s report.

-The Australian Dollar continues to trade around 0.78 against the strengthening USD after AU retail sales overshadowed a support Trade Balance report. The kicker for many was that July’s retail sales report was also revised lower. Overnight Index Swap markets are showing the pricing in of the next RBA hike is getting persistently pushed back and now rests in the fourth quarter of 2018. Internal price support remains at the Oct. 3 low at 0.7786, and the sentiment picture below encourages you to keep an eye on potential AUD/JPY downside developing.

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IGCS Highlight: AUD/JPY 40% increase in long positions w/w warns of further downside

USD Takes Top Spot In SW Ranking Ahead of NFP Ousting GBP: SW Report

AUDJPY: Retail trader data shows 39.6% of traders are net-long with the ratio of traders short to long at 1.53 to 1. In fact, traders have remained net-short since Sep 14 when AUDJPY traded near 88.38; the price has moved 0.5% lower since then. The number of traders net-long is 18.0% lower than yesterday and 40.2% higher from last week, while the number of traders net-short is 8.4% higher than yesterday and 9.0% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUDJPY prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUDJPY trading bias (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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