Many analysts have been scratching their heads due to the recent disappearance of the 'risk on – risk off' paradigm. The disappearance has been discussed extensively on sites such as Bloomberg and Reuters. At FXCC we've discussed many aspects of it in our Mind The Gap and Between The Lines sections. Quite why analysts have fretted over finding the apple that upset the cart is baffling given the market phenomena disappeared in direct correlation to the introduction of unlimited monetary easing as directed by the USA Fed.
Pre the commitment to unlimited open ended monetary easing the RORO phenomena was strong. As recent as the turn of the year, when the last market 'meme' in the form of the fiscal cliff was with us, the RORO phenomena was dominant. The impact of "Q.E. to infinity" as many analysts have termed it, has been felt primarily in the equity markets of the USA, in particular the DJIA and Nasdaq. The impact on major currency pairs has been inverted; in as much as the flight to currency safe havens has been reversed. No longer did the dollar represent a safe haven if markets fell, the dollar was rising versus its major peers as equity markets have parabolically risen. However, with the latest market meme of ending Q.E. being speculated on (the timing of 'tapering' off) the markets may begin to resume to their previous RORO phenomena. Traders would be well advised to keep this potential return to the previous normal market correlations at the forefront of their minds.
The previous ongoing trends, that had been evident since the market sentiment last turned on June 18th – 19th, ended abruptly on circa July 10th as the majority of the major currency peers suddenly 'hit the brakes' and found reverse gear. The technical evidence, as the markets turned, took on a familiar pattern to any analyst or swing trader who prefers to plot technicals using daily Heikin Ashi candles. Heikin Ashi dojis, plotted on daily charts, were evident on fibre (EUR/USD), cable (GBP/USD), dollar-Swissie and dollar yen. The doji had appeared on the daily chart for USD/CAD the day previous to the major currency pairs on July 9th.
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After reversing trend on July 10th the majority of indicators trend traders would prefer to use, in order to establish market trends, have turned bullish. Having breached the 200 simple moving average in a downward trend on circa June 24th, price breached the 200 SMA on its upward trend on July 10th. Since which time each Heikin Ashi candle has been closed with upward shadows. The MACD on standard settings became positive on July 11th. The DMI on an adjusted setting of 20 turned bullish on July 11th with the histograms reaching higher highs on successive days. The RSI (on the standard 14 setting) has passed through the median 50 level, whilst the stochastics (plotted on a 9,9,5 setting) turned positive on July 9th – July 10th. For trend traders it would be advisable to monitor for any reverse signals, as a consequence of a major reversal in sentiment caused by the fundamental backdrop, before any opposite direction trend trade should be considered. Until then staying with the trend would be the logical position.
Similar to the current situation for EUR/USD cable began its bullish trend on July 9th after the doji was formed on the daily chart on July 8th. However, the gap between current price and the 200 simple moving average is considerable, therefore it would be expected for many traders to have avoided a long trade until further confirmation was experienced. The MACD is still yet to print positive despite making higher highs on the histogram since July 9th. Similarly the DMI is yet to print positive in this move, whilst the RSI, with a current reading of 44, has yet to breach the median 50 level. The stochastics, (measured on a setting of 9,9,5) have moved from the oversold zone and both turned bullish. Many trend traders may prefer to wait until many or all of the most popular indicators (used to determine trends) are printing positive before entering a long swing trade.
The bullishness evident in the greenback versus many of its major peers has not been evident versus yen. Yen gained strength in the market late last week due to pronouncements (courtesy of the BOJ and the Japanese govt) regarding their monetary stimulus programme and potential milestones being set to finally bring it to and end. As a consequence many of yen's currency peers fell including the greenback and the loonie, but it was versus the Aussie that yen experienced its largest rise.
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Currently USD/JPY is priced significantly below the 200 simple moving average. Although the DMI on an adjusted setting of 20 is bearish very few of the most commonly used trend/swing indicators are yet to match it. The MACD is still positive, the RSI is just printing at the media 50 level, the stochastics are only just exiting the overbought zone whilst the Heikin Ashi candles (despite being closed) have developed shallower bodies and short tails. Traders would be advised to maintain careful observation of fundamental policy decisions from the BOJ in order the gauge further sentiment. Traders already committed to this trend trade would be advised to look for exit signals such as the PSAR turning positive and printing below price.
Spot gold began its trend reversal mid week. Since which time the precious metal has developed many of the trading indications associated with a bullish run. The H.A. candles have been bullish, whilst many of the trend trading indicators have also taken on a bullish appearance. Once again the correlated relationship of RORO, were previous safe haven securities are concerned, has been occasionally inverted. Many of the previously mentioned trend indicators are positive with only the RSI yet to breach 50 and the DMI on an adjusted setting of 20 to turn bullish.
Many of the positive data prints emanating from the USA last week over powered any negativity attached to the slowing job growth prints and slowing consumer confidence. And with the FOMC meeting ending with Ben Bernanke (the Fed's chairman) stating that the Fed is still wedded to a programme of aggressively accommodating further monetary stimulus, the Standard & Poor's market took out new highs. Similarly the DJIA printed highs. On that basis many market commentators and analysts are looking for an outlier shock, or a sudden ending of Q.E. before and end to this secular bull run could be called.
The DJIA resumed its bullish momentum from July 4th since when the rise has been significant, over 600 points. Looking at the technicals many traders may prefer to exit this long trend trade particularly if they judged their entry well from July 4th. Currently the stochastic levels appear oversold, the RSI is printing at 63.8, whilst histograms on both the DMI and MACD are printing lower highs as revealed on this Friday's H.A. candle. Given this evidence and the continued narrative in the financial press with regards to the USA Fed inevitably tapering its stimulus, many trend traders could feel justified in closing their long trades.