In this week’s Forex Outlook we take a look at how important intermarket correlations are. We can use any number of strategies and indicators, but the one that outweighs all of them is the relationship these markets have with each other.
Forex and the U.S. Dollar
The U.S. Dollar is starting to build momentum, due partly to the Bank of Japan offering negative interest rate loans. That relationship calls into question whether this rally has any legs because when a central bank tries to weaken a currency, in this case, the Japanese Yen, it almost never works. Predicted short, medium and long-term differences are moving up, so it’s reasonable to think the dollar will see at least two or three days of strength. That strength is heavily fueled by the equity markets, specifically the DAX and the S&P 500.
If the global equities can continue to move higher, look for the dollar to continue to move higher.
The DAX has little to comment on this week other than approaching heavily overbought territory.
The S&P 500 appears to have little year-over-year growth since last year. This should be a cause for caution for traders who may be interested in buying at these levels. If the S&P sells off, look for the dollar to sell off as well, at least against the Euro.
Oil is also continuing to struggle. A common theme recently and something that works against an uptrend for the dollar. While oil appears to have a bullish look entering this week, it needs to move quickly. Entering the strongest period of the year for oil, it typically peaks in Mid-June, if it’s going to happen, it needs to happen soon.
Gold is also in a similar position with a very toppy look. Gold peaked last May with a steady decrease occurring the rest of the year. There doesn’t appear to be a lot of fundamental reasons to be buying gold at this time.
Outlook for Major Forex Pairs
These global equity markets are key factors to what is driving, impacting and influencing the prices of Forex pairs and understanding these relationships can help Forex traders be better prepared for what is likely to happen.
Euro/U.S. Dollar (EUR/USD) appears to be a mixed bag this week. A bearish close on Friday have indicators pointing even lower. A closer look at the intermarket correlation of the drivers of this pair, the DAX, oil, and gold, show a clearer picture of what we may expect this week. The inverse correlation with the S&P, which is showing some short-term growth, only strengthens this position.
U.S. Dollar/Swiss Franc (USD/CHF) is nearly 100 percent correlated to the U.S. Dollar index. If the dollar index goes higher, expect this pair to go higher. If we hold above the key VantagePoint predicted moving average of .9674 then this remains a long play.
British Pound/U.S. Dollar (GBP/USD) appears to be bullish this week. The key VantagePoint level was held for 4 days last week. While the short-term indicators show some struggle, the medium and long term indicators are showing this pair going higher as the week plays out.
U.S. Dollar/Japanese Yen (USD/JPY) had a massive bullish candle left over from Friday after the “stunt the Bank of Japan pulled to weaken the Yen prior to the FOMC.” It’s unlikely the Yen holds its recent gains when you look at past trends, though. What goes up that fast, usually comes down even faster. This pair is highly reliant on the equity markets so look there for a sign of what could happen in this pair.
U.S. Dollar/Canadian Dollar (USD/CAD) typically shows strength from the Canadian dollar this time of year, but not this strong. Selling into the major resistance level of 1.2873 is the preferred play based on the indicators. But, if the equities turn lower, this is a great potential buy due the intermarket correlations.
Australian Dollar/U.S. Dollar (AUD/USD) is extremely correlated to the global equities. The drivers of this pair going higher are the equities going higher, especially the S&P 500. Charts for these two markets look nearly identical so look to the S&P for an indication of what to expect from this pair throughout the week. Many indicators point to a bearish setup, but it’s important to look for a confirmation before making that move.
New Zealand Dollar/U.S. Dollar (NZD/USD) doesn’t have too much going on this week. This pair is being driven by whether or not equities can breakout to new swing highs. Expect considerable uptrends if the equities can do that. Intermarket correlations trump any other indicator that we use and there’s no better example of that than this pair this week.
If we remain cognizant of these global market relationships that affect prices in the Forex market we can get ahead of trends and become more profitable in the market.