Key Highlights:

  • EUR holding support, break above 1.1835 could reignite uptrend
  • JPY finds strength as Party of Hope brings political risk to Oct. 22 election in Japan
  • CAD rebounds alongside crude oil on Saudi announcement to cut exports
  • IGCS Highlight: rise in GBP/JPY long positions favor further JPY strength

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.

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Strong/ Weak Index October 10, 2017

USD Drops as Catalysts For Rebound Dissipates, NZD Drops: SW Report

Highlights:

-The US Dollar has lost its luster after the discounted NFP came and went. The question now remains, what will be the next catalyst to buy USD? A long-term look at the daily chart of the US Dollar Index shows the downtrend remains with a failure to close above 94.20. The price peaked above this level Friday morning but quickly closed lower. A story that has been in the background, but may soon move to the foreground is the firming Chinese Yuan, which had a stronger fixing set by the PBoC for the first time in seven days. The strengthening yuan aligns with eight straight months of higher reserves while the US 10-year note yield, which has been strongly positively correlated to the USD also looks to be running out of steam. The combination of the stronger yuan and US 10yr yields hitting resistance may seem loose, but as China’s 19th Communist Party Congress kicks off next week and US yields seem to have little reason to move higher, it’s fair to favor this ST trend of USD weakness to continue.

-Quietly, the Japanese Yen has begun climbing from the bottom of the SW ranking to the middle alongside the Canadian dollar, which is also bouncing. The strength of the Japanese Yen has been forecasted by the options market, which has seen an impressive increase in open interest on options that expire on Oct. 22, which is the date of the snap election called by Shinzo Abe. While the consensus view remains for Abe remaining in power, it’s fair to keep an eye on the new Party of Hope, led by Tokyo Governor Yuriko Koike. Any ground gained by Koiki remains the outlier to watch, but overall, any significant loss of majority by Abe could lead to JPY volatility that would likely see JPY strength on uncertainty-bred repatriation.

-Over the summer, Deputy Governor of the BoC, Carolyn Wilkins was the first governor to signal a BoC rate hike. Speaking on Tuesday, she will be looked at to provide a sense of the BoC’s thoughtprocess going forward. Recently, PIMCO and Blackrock have said they believe the BoC is done hiking. Given the ~60% pricing in of a rate hike, this would come as a shock to the market if Wilkins confirmed something similar. Recently, BoC governor Stephen Poloz mentioned that the bank of was not looking to hike blindly, but would remain data dependent. This comment was enough for a few-weak handed CAD-longs to bail on the trade and push USD/CAD up to 1.2600 eventually. They key thing to keep an eye on will be the trend of CAD economic data, which has recently been weak alongside correlated market like crude oil.

-EUR strength is on the rise after German exports strongly beat estimates of 1.1% with a print of 3.1% m/m for August. EUR/USD has fallen from the early September high by ~3.5% to a lot of 1.1670 for a drop of 435 pips. The weakness aligned with the bounce in the DXY, which as mentioned above may be running out of catalysts along with concerns voiced by ECB members concerning the FX level (i.e., the EUR was seen as strengthening to the point of constraining growth.) The focus remains on whether or not markets will see policy convergence. Any failure for normalization to be realized by the ECB in their upcoming policy announcement could put a lid on EUR growth unless the gains come at the expense of other currencies weakening.

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IGCS Highlight: GBP/JPY 75% increase in long positions w/w warns of further downside

USD Drops as Catalysts For Rebound Dissipates, NZD Drops: SW Report

GBPJPY: Retail trader data shows 50.6% of traders are net-long with the ratio of traders long to short at 1.02 to 1. The number of traders net-long is 1.5% lower than yesterday and 75.1% higher from last week, while the number of traders net-short is 24.1% higher than yesterday and 38.0% lower from last week.

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

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

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