Key Highlights:

  • GBPremains atop SW rankings as Brexit fears focus are replaced by BoE hawkish stance
  • JPY has moved to weakest spot after BoJ held the rate unchanged as expected
  • IGCS favors keeping an eye on further GBP strength against weaker FX (e.g., JPY, CHF)

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: September 26, 2017

USD Climbs Up Strong Weak Index Ranking, JPY Remains a Punching Bag

Highlights:

-US Dollar gained again on Tuesday as Yellen sent a message to markets reinforcing a December hike is in play. When looking at Fed Funds Futures, the market is now pricing in a near 70% probability of another hike in 2017 followed by multiple hikes in 2018 per their forecast. Other forces in the Fixed Income market showed a consensus of a strong Dollar through bets on higher yields via UST 2year note, and Eurodollar futures. Either way, traders watching the DXY should keep an eye on a weekly close above 94.19 as a sign the DXY’s worst days are behind it for now.

-Canadian Dollar remains near the top of the SW index. A few soundbites from Canadian Minister of Finance Bill Morneau that provided support for the Canadian Dollar and should make trader’s second guess a desire to sell Canadian Dollars. Morneau said that the Canadian Economy will continue to do well at these levels of the CAD and that higher interest rates should be expected given economic strength currently displaced.

-EUR moved lower in response to Yellen’s comments stated above. EUR/USD traded to its lowest level in a month, but the longer-term picture appears optimistic. There appears to be technical support at 1.1662, and an inability for EUR/USD to close below there would argue that USD strength is best played elsewhere.

-The weakest currency in the G8 is the Japanese Yen. USD/JPY at the current levels would close the month with a bullish key month, which is a strong continuation pattern continuing the move from Q4 2016. The session high on Tuesday was 112.48 vs. USD, but other traders are continuing to keep an eye on GBP/JPY & CAD/JPY. CAD/JPY looks to have completed a bullish (inverted) head and shoulders pattern that would target near 100 (spot: 90.88).

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IGCS Highlight: GBP/JPY flashing sides that favor further upside

USD Climbs Up Strong Weak Index Ranking, JPY Remains a Punching Bag

GBPJPY: Retail trader data shows 35.9% of traders are net-long with the ratio of traders short to long at 1.79 to 1. The number of traders net-long is 29.7% lower than yesterday and 11.0% lower from last week, while the number of traders net-short is 6.1% higher than yesterday and 15.3% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPJPY prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPJPY-bullish contrarian 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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