Currency Secrets

As some of our regular visitors will have discovered over the last few weeks there is something that needs to be more carefully monitored than a breakout.

And what is that?

If you guessed the consolidation (or congestion) AFTER the breakout then you would be right.

Let’s look at the daily EURUSD chart. Last week we had a large weakness due to some underlying fundamental shifts made in the ratification of the EU constitution in France in Netherlands. This uncertainty plagued the EUR and it weakened across the board among all major currencies.

So what does its current state tell you about what it’s likely to do next?

Do we see the EURUSD vehemently opposing its weakness and regaining its once lost strength? No. We see an acceptance of this weakness, all that is needed now is something to push it over the edge a little more.

Therefore, due to its FLAT consolidation after last week’s break I would expect another break of its currently held short-term support at 1.2175 soon (no later than one week).

If we assume that the current formation of the EURUSD is a BEARISH FLAG then we can further assume that the currency will move the length of its flag pole distance – being about 400 pips (top of flag pole ~1.2550, bottom of flag pole ~1.2150). If we use the safe flag pole target calculation we measure where the EURUSD is likely to go from the uppermost flag trend line, being ~1.2350 – 400 pips = 1.1950, or if we think the EURUSD will be weaker than expected we could target the 400 pips from a break of the lower flag trend line, arriving at… ~1.2175 – 400 pips = ~1.1775.

Interesting how this seems to confirm our previous weekly view on the EURUSD with support laying around 1.2000 & 1.1800!

Once every two-three months I like to gauge which currency is the strongest and weakest out of the top currency crosses (AUD, CAD, EUR, GBP, JPY, CHF) against the USD.

The reason I do this is that it helps to know which currency to open a position in if a negative or positive economic report is released by the USD, and to open a position that would best take advantage of the strong/weak USD economic report.

As an example, if the AUD has decreased 10% against the USD over the last 3 months, and the EUR has decreased 15% against the USD then if the USD were to release a negative report it could safely be assumed that the AUD will likely rally further than the USD as it hasn’t depreciated as much as the EUR.

Of course this is not always the case and here are some things to be mindful of:

• Does the economic report influence JUST the USD or are there other repercussions against the currency you are considering to trade?
• Does the currency you are considering to trade have any economic releases soon?
• What does the chart say?

There are many ways to gauge which currencies are the strongest/weakest against the USD. Here are some methods that I’ve used:

• Rate of change of the CLOSE over the last 20 trading days (or 60 trading days)
• Rate of change of a MOVING AVERAGE of the CLOSES over the last 20 trading days (or 60 trading days)
• Using channel lines

The method that I prefer is the rate of change of the moving averages coupled with the channel lines. I plot a 20-day moving average and then obtain the rate of change of this moving average over the last 20 days and 60 days. I then just compare the raw figures of these stats to see which currency has the highest number and which currency has the lowest number.

Once I have the two currencies that are the strongest and the weakest against the USD I then plot their charts to determine where resistance and support lay, as these technical zones override any arbitrary rate of change figure.

Here is a table showing these stats (note that the USD is the BASE currency for each currency cross – makes it easier to identify):

CURRENCY >> ROC(SMA(20),20) % >> ROC(SMA(60), 60) %
AUDUSD (2.07) (0.67)
CADUSD (0.99) (0.84)
CHFUSD (3.19) (2.54)
EURUSD (3.36) (2.65)
GBPUSD (3.64) (1.13)
JPYUSD (1.35) (2.53)

As you can see from the above table ALL currencies have weakened against the USD over the last 20 and 60 days (according to their moving averages). The strongest currency over the last 20 days against the USD has been the CAD, over the last 60 days it has been the AUD. The weakest currency over the last 20 days against the USD has been the GBP, whereas over the last 60 days it has been the EUR.

As mentioned in our previous posts the EURUSD looks as though it could easily reach 1.2000 within a matter of days… possibly by the end of this week!

With the EURUSD today confirming the downward trending channel by having its second consecutive close below the channel’s lower trend line I decided to check for more probable support zones on the EURUSD with its WEEKLY chart.

Here’s how I conduct weekly analysis:

Weekly analysis is something I do once every blue moon (probably once every 3 months). When I do this analysis I plot the Fibonacci zones to determine where likely support/resistance zones may lay. I personally don’t think there’s anything special about Fibonacci zones, however, as other forex traders use it in *their* analysis the zones become self-fulfilling prophecy… so I watch them, but don’t design trading strategies around them.

If we look at the Fibonacci zones on the weekly chart by using the long-term high and low we see that the 38.2% retracement sits at 1.1720… and this is interesting from a trend line perspective: have a look at how many peaks and troughs formed around this area (I’ve highlighted it with the green dotted box). This “green” area was once resistance (in June and Oct 2003), then became support in May to June 2004 (if you’ve heard of the trading axiom old resistance becomes new support or change of polarity then here’s a working example!) and will therefore likely become support again if the EURUSD hits this area.

So, between the support zone of 1.1800 – 1.2000 we should expect the EURUSD to reverse, however, if this in turn is broken then I can’t see much support until 1.1100 and this only because its the 50% retracement zone which doesn’t hold much weight of evidence for being a support zone (it’s just a line in the sand with no previous history backing it up… whereas our 38.2% line did have evidence supporting a bounce).

Summarizing then: I use Fibonacci zones, but I don’t trade them AS IS, I only add them to my weight of analysis if they ALREADY confirm some other form of technical analysis such as trend lines.

Therefore, my target for the EURUSD in the short-term to hit 1.2000 still stands (and now you can see why I used this area as my initial target area), with 1.1800 being the last area of this support zone. If 1.1800 is broken then I’d be expecting further sharp falls to 1.1100. If this does happen we’ll review it in due time, but at the moment let’s just stick to one target at a time: 1.2000.

It seems that after yesterday’s price action the EUR is far weaker than the GBP against the USD.

The EURUSD finished at 1.2303 nearly 150 below the channel whereas the GBP bounced back inside the channel!

So what can be expected today?

I would expect further downside for the EURUSD… especially considering that the Dutch are now voting on whether to ratify the EU constitution (the French voted NO). However, as it has been in my experience sometimes we can get some wild volatility in the other direction. So be careful with the EUR today.

With the GBPUSD I would watch the low of yesterday just in case the GBP really is weak and DOES decide to break the lower channel trend line. However, as the bounce of yesterday showed the GBP may indeed bounce even back over the broken UPWARD trending trend line that it broke yesterday (similar to what the EUR done on Friday after last Thursday’s break).

If the GBPUSD rallies back above 1.8200 we would have a confirmed bounce, if we see further downside with the EURUSD I would be expecting 1.2000 very soon (watch the news for the results of the Dutch votes too!).

If you’ve read our weekend post on the movement conducted by the currencies on Friday you would have been able to ascertain our view on the strengths of the GBP and the EUR in comparison to the USD. By analyzing the power of their retracement back into their downward price break on Thursday you would have known that the the EUR, while weak, was stronger than the GBP – as the EUR retraced further back into Thursday’s break than the GBP.

The GBPUSD failed to rally any higher than 50% of Thursday’s down move so it was to be expected that she would weaken further – with a break below the low of Thursday confirming it.

Yesterday there wasn’t to be much movement expected with both the GBP market and the USD markets shut, and indeed this was the case – the GBPUSD only moved within a range of 50 pips.

But what of today’s early break?

At the moment we have the GBPUSD sitting around 1.8150, slightly below the downward trending channel that is monitoring its current medium-term trend, AND we also have it outside its long-term upward trending channel! This doesn’t bode well for the GBP.

Let’s summarize:

• Breakout from its upward trending channel (will need to be confirmed tomorrow as I prefer two consective closes outside a trend line to confirm a break… NB: this doesn’t mean that I will wait until the second close though before I enter)
• Breakout from its downward trending channel – to the downside!
• Breakout candle forming (opened near its high, travelling at its lows)
• Confirmation of weakness by breaking Thursday’s low

So what’s going to happen to the GBPUSD?

If we see a close beyond 1.8150 today then I would assume that two things are likely: a large move back into the downward trending channel (i.e. a close above 1.8200), or a collapse to 1.7800 possibly 1.7700 within a week!

All of the above factors don’t bode well for the GBP folks and you can no doubt tell that I’m very bearish.

Today and tomorrow will confirm this for me.

What of the EURUSD?

With the EURUSD also confirming signs of weakness we have a similar situation to that of the GBPUSD. A break of the downward trending channel seen at 1.2450 (currently at 1.2392) has clearly indicated that this currency is weakening… especially considering the news made by the French to exit out of the EU!

Watch carefully when the European markets open within the next 5 hours to see how both of these currencies fare.

Looking at the economic announcement front I don’t see too much in the way of releases that can see any of this movement being reversed… maybe Friday with the US NonFarm Payrolls (as these look weaker than expected – for the US economy).

Targets for the GBPUSD this week would be: 1.7800 on the downside, 1.8200 on the upside (I really can’t see it getting up).
EURUSD: 1.2000 on the downside, 1.2600 on the upside (there’s more hope for the EUR getting up than the GBP).

We’ll see how things pan out, again, by tomorrow’s close we should be able to better foresee what is likely to happen.