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Four Relative Positions in Gold, Oil, FX Majors and Tech Shares for Signal and Opportunity

Four Relative Positions in Gold, Oil, FX Majors and Tech Shares for Signal and Opportunity

2018-09-11 06:30:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Gold may not seem to be an appealing haven, but its performance relative to silver may change that picture
  • EURUSD is a familiar pair, but the individual and undistorted picture of the Euro and Dollar alone make for a different read
  • USDCNH is a poor measure of trade wars impact, but a comparison of key US and Chinese tech shares may circumvent controls

See how retail traders are positioning in US and UK Oil, gold and silver, EURUSD and the tech-heavy Nasdaq Index - as well as FX majors, global indices, gold and oil intraday using the DailyFX speculative positioning data on the sentiment page.

Relative Analysis and Trades can Offer Unique Signals and Sometimes Unique Trades

When we make a call on a single asset, there are many different assumptions that go into establishing our measure of conviction. Some elements are critical factors in establishing our view and/or milestone for executing a trade. Others are ancillary factors either over-ridden or completely ignored. While we can reasonably establish a hierarchy for which aspects of the market are more important for the market at large, it can presumptuous to count out factors that may have a significant influence if properly motivated simply because they are not presently active. That is complication that can be significantly reduced when we consider 'relative' or 'pairs' trading. At present, I follow this strategy as a necessity considering all FX trades combine two discrete currencies which both contribute to the movement of their subsequent exchange rate. However, I used to be more active in the less conventional combination of related - or otherwise purposely paired - trades. An example of what would have qualified for my observation or investment nowadays would be a relative exposure between Ford and Tesla. These two companies are significantly different for size, for management approach, level of volatility and fuel dependency. However, they are also worth watching for the influence of tariffs and trade in this world of trade wars. Let's take a look at four other importantly paired assets to see what they can signal.

UK Oil vs. US Oil Chart (Daily)

Four Relative Positions in Gold, Oil, FX Majors and Tech Shares for Signal and Opportunity

Two Commodity Views that Clear Otherwise Convoluted Readings on Oil and Gold

The US-based benchmark crude oil contract (the West Texas Intermediate or WTI) has proven notoriously frustrating among technical traders lately as it has continuously come up short on tentative breaks. It is not unusual at all for markets to flounder presently - whether a major asset or not - but it still catches traders wrong footed as they have been groomed by central banks to assume quiet but steadfast advance. Yet, when we pair the WTI with its UK/European counterpart (Brent); the picture changes. The spread is grown aggressively in Brent's favor these past weeks - exploding to nearly a $10 gap. We were higher in early June and there have been other periods where the skew was large, but the backdrop of circumstances is shifting. Amid trade wars and uneven energy demand, there is more insight to garner for global growth and fallout from policies aimed at extracting growth at the detriment of others. Another commodity relationship from which we can garner serious insight - or potentially trade opportunity if you craft a proper strategy - is the gold-to-silver ratio. They are both precious metals, but their performances have taken very different courses. It is difficult to register the more expensive metal's role as an appealing safe haven given the complication of the Dollar and other major currencies under policy stimulus - not to mention the lurid sense of questionable risk appetite these past months. However, the appeal of Gold as a deep haven not distorted by central banks' QE perhaps shows through in its outperformance relative to silver which brings the ratio to an area that has set the peak over the past 24 years. Though we see it on a weekly and monthly charts, keep tabs on this important measure.

Gold vs. Silver vs. SPX 500 Chart (Daily)

Four Relative Positions in Gold, Oil, FX Majors and Tech Shares for Signal and Opportunity

A Different Way to Evaluate EURUSD and the US-China Trade War

How are the Euro and Dollar faring? That seems easy enough to evaluate when you look to EURUSD. Not only does this pair represent the most liquid exchange rate - and asset - in the world, but its liquidity further represents extraordinary weight in spillover to other currencies and even asset classes. That said, if you wanted to make a thorough evaluation of the currencies individually or even collectively, the EURUSD pairing may not offer that unadulterated reading. In fact, when we compare an equally-weighted Dollar and equally-weighted Euro index, the comparison is very different than what we get from the exchange rate. Both have risen over the past months which may show more appetite for liquidity and/or rate forecasts than more traditional metrics. Another relationship that can help us tap into a theme that has proven otherwise difficult to accurately assess is found between US and Chinese tech shares. Considering how active Chinese authorities are with controlling economic data and the Dollar-Yuan exchange rate, it can be difficult to see just what kind of impact US tariffs are having on China's economic and financial health. That said, one of the better means for comparison may be the comparing the top performing niche of each county to assess underlying or inherent values not easily accessible in data alone. Tech shares have proven pace-setting not just in equities but among global risk assets. So, if we were to compare top Chinese firms like Alibaba or Tencent to the famed FAANG group in the US, we could get a sense of the speculative market's view - and perhaps formulate a trade opportunity along the way. We look at some notable pair and relative trades in today's Quick Take Video.

EUR Index vs. US Dollar Index Chart (Daily)

Four Relative Positions in Gold, Oil, FX Majors and Tech Shares for Signal and Opportunity

Tencent vs. FAANG Chart (Daily)

Four Relative Positions in Gold, Oil, FX Majors and Tech Shares for Signal and Opportunity

Written by John Kicklighter, Chief Currency Strategist for DailyFX.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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