The Tidal Shift Strategy in DailyFX PLUS is now short EUR/USD. Here’s a look at the chart and the strategy setup:
The trigger for this drop seems to be speculation of a possible rate cut by the ECB:
[I]The ECB could lower interest rates further if economic data so warrants, ECB Governing Council member Jens Weidmann was quoted by The Wall Street Journal as saying on Wednesday.
“The ECB is a central bank that likes to prepare the market for any potential changes in monetary policy and that is why Weidmann’s comments are so important because it could be the first of many to follow,” said Kathy Lien, managing director at BK Asset Management in New York.
The euro earlier came under pressure after a media report cited former member of the ECB Executive Board Lorenzo Bini Smaghi as saying the central bank should find ways to stop the euro from gaining.
Now we wait to see if the EUR/USD can make a clean break through the technically significant 1.3000 level. You can find real-time updates to the DailyFX PLUS Trading Signals here.
Here are a couple of highlights from DailyFX Analyst David Rodriguez:
[B]Euro Breakdown Makes Next Dollar Move Critical[/B]
EURUSD: Our purely sentiment-based Momentum2 strategy was stopped out of its previous EURUSD-long position at a respectable gain, and the system has since sold EURUSD from $1.3041 as retail traders bought aggressively into the sudden Euro breakdown. We’ve seen relatively little follow-through on the sell-off, however, and our Senior Technical Strategist believes that this may have been a misleading EURUSD breakdown.
[B]British Pound Stops and Reverses - Is it a True Breakdown?[/B]
GBPUSD – Retail forex trading crowds have grown net-long the British Pound against the US Dollar (ticker: USDOLLAR), and our sentiment-based trading strategies have gone in the opposite direction.
Choppy GBP price action has forced our purely SSI-driven Momentum2 to go both long and short within the past week with mixed results. Our Speculative Sentiment Index most often works as a contrarian indicator to price action in trending market conditions. Most retail traders tend to buy weakness and sell strength, and such a mean-reversion strategy will tend to do fairly well in range-bound markets.
The Speculative Sentiment Index (SSI) is a contrarian indicator to price action, and the fact that the majority of traders are long AUD/USD gives a signal that the pair may continue lower.
The ratio of long to short positions in the AUD/USD stands at 1.97 as 66% of traders are long. The trading crowd has grown further net-long from yesterday and last week. Yesterday the ratio was 1.19; 54% of open positions were long.
Long positions are 35.3% higher than yesterday and 40.0% above levels seen last week. Short positions are 18.2% lower than yesterday and 1.2% above levels seen last week. The combination of current sentiment and recent changes gives a further bearish trading bias.
The Euro declined below 1.3000 against the US Dollar following a contraction in German services activity for the first time in five months, according to Markit’s Purchasing Managers’ Index (PMI). The sharp downturn in German PMI’s pulled the Euro about 80 points lower against the US Dollar, and the pair fell below 1.3000 for the first time in two weeks.
Past performance is not necessarily indicative of future results.
The Chinese HSBC PMI Manufacturing (APR) index also dropped to 50.5 from 51.6 in March, well-below the 51.5 consensus forecast. China is a key trading partner of Australia and as was to be expected, the Aussie also declined further against the US Dollar.
AUD/USD Daily Chart Past performance is not necessarily indicative of future results.
The SSI-based trading signals on DailyFX PLUS are currently saying to short the Euro, Aussie and other “risk-on” currencies versus the US Dollar and Japanese Yen.
Past performance is not necessarily indicative of future results.
Tomorrow’s top news for the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) will be the release of the UK GDP report. If the data falls short of forecasts, the Dollar Index may jump by some 11 points based on historical averages.
Research shows that price movement may be significant if the outcome is disappointing. Last quarter, the UK’s output contracted by 0.3 percent, on the heels of a temporary boost due to the Olympic Games. The following table summarizes the average 1-minute changes in the US Dollar Index following the release of UK GDP quarterly data, from between January 2011 and March 2013.
A worse-than-expected report has historically lead to the greatest increase in the Dollar Index, significantly differing from the overall average one-minute change in two years—effectively zero. Furthermore, it appears evident that trading on positive data is difficult, as an increase in GDP data will not necessarily result in a bullish Pound.
The US economy saw a solid improvement in the 1Q’13 relative to the 4Q’12, but growth still managed to disappoint what proved to be an overly-bullish forecast. According to a Bloomberg News survey, economists were expecting the world’s largest economy to grow at annualized pace of +3.0% in the 1Q’13; however, the US economy only grew by +2.5%
Following the release, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR), an equal-weighted basket of the Australian Dollar, the British Pound, the Euro, and the Japanese Yen against the US Dollar, continued its intraday declines, falling from 10509 to as low as 10495.
However, at the time this report was written (approximately 30-minutes after the US 1Q’13 GDP report), the USDOLLAR had rebounded to 10494. A look at longer-term charts shows that the USDOLLAR is finding support ahead of channel support off of the April 2 and April 16 lows, at 10475.
The greenback weakened against three of the four components, led by a 1.46 percent rally in the Japanese Yen, and the low-yielding currency may continue to gain ground against its U.S. counterpart as the Bank of Japan (BoJ) moves to the sidelines.
The deviation in the policy outlook should drive the USD/JPY higher over the longer-term, and we may see the pair threaten the 100.00 figure should the FOMC talk down bets for more QE.
[I]Today, we received another batch of soft European data that paints an even gloomier picture of the region: a deepening recession that will easily take the rest of 2013 to see some of its effects reversed.[/I]
The Euro-zone estimate for inflation in April rate fell to +1.2% y/y today, its lowest such rate since February 2010, as consumer demand has been absolutely demolished in the world’s largest economic region.
Moreover, unemployment in Germany increased another 4K in April after expanding a revised 12K the month prior, and we may see the European Central Bank (ECB) carry out its easing cycle throughout 2013 as the region struggles to return to growth.
The SSI-based trading signals on DailyFX PLUS are currently buying EUR/USD. These trading signals are available as automated strategies at FXCMapps.com
[I]Past performance is not necessarily indicative of future results.[/I]
With Tuesday’s 0.3 percent decline, the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) has dropped for five consecutive days. Matching the longest series of declines since January 2012, we may see a true break to trend reversal depending on how the Fed judges policy.
It is important to recognize something immediately with the upcoming Federal Open Market Committee’s (FOMC) rate decision: the policy group is unlikely to change its actual policy. That means that we shouldn’t expect a change to the current extracurricular stimulus program (also called QE3) - much less a change in rates.
However, that doesn’t mean the event is not going to be market-moving. In fact there is a high probability of a significant reaction from the dollar and other risk-sensitive assets depending on how the deliberations go. The Fed’s influence is tied to the market’s speculative effort to time the slowing and eventual end of the $85-billion-per-month stimulus effort.
Heads up! At 5pm New York time today, there will be quintuple rollover on JPY pairs due to the Golden Week holidays. That means you will earn or pay 5 days worth of rollover interest for any JPY trades that are still open at the stroke of 5pm.
You can use the DailyFX Rollover Calendar to keep up to date on when holidays will affect the rollover schedule.
The latest readings from our Speculative Sentiment Index (SSI) show that retail traders remain aggressively short the SPX500 contract which tracks the S&P 500. Since SSI is a contrarian indicator, this points to further record peaks.
Past performance is not necessarily indicative of future results.
Warning signs on a potentially significant turnaround are everywhere, but as long as the crowd continues to sell in anticipation of a peak we’re unlikely to see an important turnaround.
US non-farm payrolls for April saw the biggest rise in three months and gave the US Dollar a major boost against most of the other major currencies.
USD/JPY 4-Hour
[I]Past performance is not necessarily indicative of future results.[/I]
The change in payrolls was reported at 165 thousand, beating expectations for 140 thousand and higher than the revised 138 thousand rise in jobs seen in March. The unemployment rate was reported at 7.5% in April, the lowest rate since December 2008, and better than expectations for the unemployment rate to remain at 7.6%. Average hourly earnings rose 0.2% in April.
[B]THE TAKEAWAY: US Change in NFP Payrolls beats expectations at 165K for April -> Unemployment rate falls to a four year low of 7.5% -> US Dollar rallies[/B]
The US Dollar rose about 100 points against the Japanese Yen, rising above 99.00 for the first time in a week. USD/JPY may next see resistance around 100.00, which hasn’t been broken in four years. Support may continue to be provided around 97.00.
[I]Past performance is not necessarily indicative of future results.[/I]
The SSI-based trading signals on DailyFX PLUS are currently placing opposing trades on USD/JPY. The Range2 system is selling the pair, while the Momentum2 system is buying. These trading signals are available as automated strategies at FXCMapps.com
When you set the filters on the DailyFX Economic Calendar to show only high importance events, you can see that the RBA rate decision at 04:30 GMT tomorrow is the first important announcement scheduled in a relatively light week. As such, it will be covered by the DailyFX analysts as it happens in the Live Trading Room.
The Australian Dollar underperformed in overnight trade, sliding as much as 0.5 percent against its leading counterparts, after a disappointing set of economic data increased the probability of an interest rate cut at tomorrow’s RBA policy meeting though consensus is still for rates to remain unchanged.
Retail Sales unexpectedly fell 0.4 percent in March and the HSBC China PMI gauge fell to the lowest level since August 2011, warning of slowing performance in Australia’s largest export market.
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The Reserve Bank of Australia made history last night cutting its key benchmark interest rate to an all-time low at 2.75%, a 25-bps rate cut from 3.00% that generally surprised market participants. According to Bloomberg News, of the 29 economists surveyed, 21 had expected a hold.
Past performance is not necessarily indicative of future results.
Needless to say, the bit of surprise has provoked some shuffling out of the Australian Dollar today, which has fallen to under 1.0200 against the US Dollar.
Past performance is not necessarily indicative of future results.
Readings from the Speculative Sentiment Index (SSI) said that traders were net long AUD going into the RBA rate and have since added to their long positions.
Past performance is not necessarily indicative of future results.
Since SSI is a contrarian indicator, the SSI-based trading signals on DailyFX PLUS have been short AUD going into the RBA rate cut and additional signals to go short have been added since.
Past performance is not necessarily indicative of future results.
The RBA rate cut spurred a break of the 1.0200/20 level, and sellers have indeed been inspired to continue the push towards yearly lows just above 1.0100. As a contrarian indicator, the Speculative Sentiment Index (SSI) signal complements the bearish technical bias.
Prices are testing support at 1.0181, the bottom of a range that has contained the pair since late July 2012. A break below that targets the bottom of a Falling Wedge chart pattern at 1.0137, followed by the March 4 low at 1.0114.
Formerly broken channel bottom resistance is at 1.0231. A push back above that eyes the Wedge top at 1.0309.
The latest readings from the Speculative Sentiment Index (SSI) show that FX trading crowds are long the US Dollar (ticker: USDOLLAR) against all majors except the Australian Dollar. Those positions might work out well as the USD bounces off key support.
Since SSI is a contrarian indicator, such one-sided sentiment would normally leave us in favor of Greenback weakness, but low forex market volatility expectations suggest the USD is unlikely to break lows.
Dow Jones FXCM Dollar Index
Instead we’re broadly in favor of buying any significant US Dollar declines as long as it continues to hold key lows versus the Euro and British Pound.
The SSI is available free twice a day on DailyFX PLUS for all FXCM live account holders. The public can also view a weekly SSI report on Thursdays on DailyFX.com
Yesterday I commented that DailyFX analysis was “broadly in favor of buying any significant US Dollar declines as long as it continues to hold key lows versus the Euro and British Pound.” Today, we see that the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is in the midst of one of its best upswings of the year, gaining over +1.50% since the European Central Bank meeting on Thursday.
[B]EUR/USD[/B]
The uptrend off of the March and April lows broke yesterday with fervor, and further downside pressure today has the EURUSD well on its way towards 1.3000 and below.
Should price close below the late-April swing low, there is light support in play until the 50% Fibonacci retracement off of the July 2012 low and February 2013 high at 1.2875/80.
[B]USD/JPY[/B]
The break of 99.95 has led to a sharp move up into the mid-100.00s, and at the time of writing, the pair had surged up towards 101.60.
With the Bullish Ascending Triangle in play, I’m now looking for a move towards 102.00, then a small pullback before the march towards 103.50 begins. I’m bullish and long from 99.95 and 100.19.
[B]AUD/USD[/B]
The AUDUSD has been crushed the past few days as market participants have overlooked the strong April Australian labor market reading, and instead are focusing on the renewed easing cycle that the RBA has entered.
Between the RBA’s rate cut yesterday and the decision to lower the 2013 growth and inflation forecasts, the AUDUSD has slipped below range support at 1.0110, dating back to last July.Now, a test of parity is in line, which would be the first such appearance of a sub-1.0000 exchange rate since June 28, 2012. We’re bearish and short from 1.0150.
Traders have spoken: the Euro, Japanese Yen, Australian Dollar, Swiss Franc, and other major currencies have broken decisively lower against the resurgent US currency. The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) trades at 3-year peaks.
On Friday, the DailyFX analysts updated their trading biases as forex volatility prices surged, and indeed they still like buying into US Dollar strength across the board.
[B]1-Month Volatility Prices across Major Pairs versus Japanese Yen Pairs[/B]
Past performance is not necessarily indicative of future results, but this surge in volatility prices leaves us broadly in favor of our volatility-friendly Breakout2 trading system as well as our trend-following Momentum2 strategy.
