A Quick Look At Short And Long Term Forex Trends, With Explanations and Chart Illustrations
Understanding trends is essential to successful investing. Most asset markets, be they stocks, commodities, forex or bonds, are all driven by the same forces. However they respond in different ways. Some markets move in the same direction, some in the opposite direction, and at times the usual correlations break down.
Thus it’s important for all investors and traders to have a basic awareness of forex trends and what’s behind them, because these carry lessons, hints, and warnings for other asset markets.Past Week’s Themes Reflected In The Below Currency Strength Rankings
Friday saw the largest selloff in US stocks since August, sparked by a US advanced Q4 GDP that fell below expectations and unrest in Egypt that threatens to spread to the key oil producing states. This Friday pullback changed the entire complexion of what had been up to then a relatively quiet trading week. There were plenty of events, but nothing had shown marked influence on most markets, which continued to move in the directions of their trends for the prior weeks.
After Friday however, the theme of the past week had changed from ‘mildly risk-on’ to ‘risk off’. Furthermore, there are a number of reasons to suspect that the long anticipated normal technical correction of 5%-10% in risk assets is coming.
How dramatic was the difference? Let’s look at some charts.
First, as always when we want a single picture of risk appetite, look at how the S&P 500 ended Friday
S&5 500 DAILY CHART COURTESY OF ANYOPTION.COM/MT4 20JAN29 2145
Note how we may have formed a bearish ‘double top’ pattern that is potentially ominous given that markets are at multi-year highs.
For details on why the selloff occurred and lessons for the coming week see:Weekly Market Movers: Immovable Resistance Vs. Irresistible Events & How To Profit
For further illustration, compare these weekly charts of the Euro, both before the US market open Friday, and after its close.
Before the US market open Friday January 28th 2010:
EUR VS.USD JPY GBP CHF – PRE-FRIDAY US MKT WEEKLY CHART COURTESY OF ANYOPTION.COM/MT4 11JAN28 1448
After the US market closed Friday January 28th 2010. Note the dramatic changes.
EUR VS.USD JPY GBP CHF POST FRIDAY US MARKET, WEEKLY CHART COURTESY OF ANYOPTION.COM/MT4 09 JAN 29 2057
After the US markets closed Friday, after markets had absorbed the US GDP miss, growing Egyptian unrest, tepid earnings results from Ford, Amazon, and Microsoft, and a hint from Moody’s that the US too could see its AAA credit rating challenged in the future.
Note how the EUR went from a net gain on the week to a net loss on the week vs. the USD, JPY, and GBP.
Key Points To Note
The index (and thus risk appetite) had its biggest single drop since August, on above average volume too
Its rising trend line from December 2010 was decisively violated
Note again that on the S&P 500 daily chart, our favorite single picture of risk appetite, we now have a tentative bearish double top forming. It needs confirmation from more follow through moves lower, but with markets at multi-year highs the pattern is ominous.
We will need to see follow up moves lower before we can even say that a normal 5%-10% technical correction has begun. For any real pullback to develop, we’ll likely need to see new bearish fundamentals to support it, most likely those related to next week’s ECB rate statement, US monthly jobs reports, or signs that the unrest in Tunisia, Yemen, Lebanon and Egypt is spreading to the oil exporting states.
Meanwhile, the multi-year uptrend remains intact, though a technical correction for risk markets of 5% – 10% would not surprise anyone, nor would it threaten the current rally from a technical perspective.
Also, a look at the S&P 500 weekly chart shows the 50 week sma crossing above the 200 week sma, which suggests the current uptrend is well entrenched and that any corrections coming could well be of relatively short duration ( a few weeks at most) barring any major new bearish news.
For details on key market movers for the prior and coming week, and the events that could support or reverse current trends, see: Weekly Market Movers: Immovable Resistance Vs. Irresistible Events & How To Profit
WEEK OF JANUARY 24 – 28 STRONGEST TO WEAKEST WEEK
There was a slight overall bias to safety currencies last week.
The picture is mixed and conflicted because until Friday the tone of the week favored risk currencies, and the change to risk aversion occurred suddenly and sharply on Friday. That didn’t give forex markets enough time to adjust, and still left the NZD and AUD relatively strong. We wait to see if next week brings a continuation of Friday’s risk aversion OR if the Friday selloff proves to be a mere aberration in the largely uninterrupted up trend of the past weeks. A normal technical correction should come within the coming weeks, but its precise arrival will likely need some bearish fundamental catalyst.
PAST 3-4 WEEKS STRONGEST – WEAKEST
The past month saw temporary technical bounces for the EUR and GDP that we not justified at all by improving fundamentals, though they were aided somewhat by the overall up trend in risk appetite. Beyond this it’s worth noting that we have the two currencies that sit in the middle of the risk spectrum as the strongest gainers, followed by a clear bias to the safer currencies over those that tend to rise with rising stocks and other risk markets.
Note how this longer term trend contrasts with that of the past week, which suggests this longer term ranking that suggests risk appetite may be breaking down, and that risk aversion, aka fear, may be on the rise. That’s negative for most assets, though usually positive for AAA bonds, the JPY, USD, and CHF.
For details of what that might be, and further lessons for the coming week see: Weekly Market Movers: Immovable Resistance Vs. Irresistible Events & How To Profit
IF you just wanted an overview of key movements in the forex markets, you can stop here. For a more detailed view of how each currency faired against its fellow majors and explanations (when they exist) see below.
DETAILS ON TRENDS THE PAST WEEK, AND TRENDS FOR THE PAST 3-4 WEEKS
Past Week: Due largely to Friday’s selloff in risk assets and corresponding jump in the USD, the Dollar managed to climb up out of the basement to close in the middle of the major currencies
UP vs.: EUR, GBP, CAD
DOWN vs.: JPY, CHF, NZD, CHF
Longer term: Down for the past 3-4 weeks vs. all except the CAD, as rising risk appetite and relative calming in the EU allowed the EUR to continue rallying for the past 3 weeks
Longer term: Past 3-4 weeks:
UP vs.: CAD
DOWN vs.: EUR, JPY, GBP, CHF, NZD AUD
USD WEEKLY CHARTS VS. EUR GBP CHF JPY 01JAN29 2046
USD WEEKLY CHARTS VS. NZD CAD AUD 02JAN29 2047
Past Week: The EUR’s 2 week uptrend vs. all other major currencies ended essentially on one day, Friday, for reasons noted above. The EUR dropped from being among the top 2 strongest to the being #3 from the bottom
UP vs.: GBP, CAD
DOWN vs.: ALL OTHERS
Longer term: Past 3-4 weeks: The EUR was the strongest due to rising risk appetite and growing calm about the EU debt crisis that allowed the EUR to bounce off its January lows
UP vs.: ALL
DOWN vs. NONE
EUR VS. USD JPY GBP CHF POST FRIDAY US MARKET 09 JAN 29 2057
EUR VS. AUD NZD CAD POST US MARKET 10JAN29 2058
Past Week: As with the USD, the JPY benefitted from the flight to safety this past Friday, and was among the top 3 strongest for the week. Note that this strength held despite the S&P downgrade of Japan’s sovereign credit rating from AAA to –AA, as Japan’s troubles are more long term and there are no immediate threats of default at all, and forex markets tend to be focused on the short term
UP vs.: USD GBP EUR AUD CAD
DOWN vs.: CHF NZD
Longer term: Past 3-4 weeks: The JPY’s longer term performance was weaker, reflecting the stronger risk appetite of the markets and calm about the EU
UP vs.: USD CAD NZD AUD
DOWN vs.: GBP EUR CHF
JPY WEEKLY CHARTS VS. USD GBP EUR CHF 05JAN29 2050
JPY WEEKLY CHARTS VS. AUD CAD NZD 06JAN29 2051
Past Week: The GBP was the weakest major currency. In addition to suffering from Friday’s risk aversion selloff, it was hammered by a huge Q4 GDP miss and declining consumer confidence. Another possible strike against the Pound was a report from the UK Daily Telegraph here that investor George Soros claimed the UK would have to either abandon its austerity program and deficit cutting due to coming extreme economic weakness OR face a relapse into recession. BoE Governor King asserted the UK would stay the course despite the pain. Much depends on how well the UK economy manages under the new austerity regime and how badly UK banks get hurt from a possible Irish debt restructuring. British banks have the largest exposure to Irish debt.
Soros has credibility regarding the GBP, as he became famous as the man who broke the bank of England with a massive short of the Pound and made a huge killing on the trade despite the BoE’s best efforts to thwart him. It’s not many traders who can take on a major central bank and win.
Will Soros be right again? It’s hard to ignore him given his past record.
This past week:
UP vs.: NONE
DOWN vs.: ALL
Longer term: Past 3-4 weeks: Like the EUR the GBP caught a technical bounce after a longer decline, which we saw as temporary within a longer term downtrend. Over the short-medium term it’s among our least favorite currencies after the EUR.
UP vs.: USD JPY CHF CAD NZD AUD
DOWN vs.: EUR
GBP1 WEEKLY CHARTS VS. USD EUR JPY CHF 07 JAN29 2052
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