In our Forex Weekly Outlook for May 30, 2016, we focus on the importance of knowing your intermarket relationships. While they are never 100%, they can dictate the strength of current trends or signify the onset of a new trend.
Forex and the U.S. Dollar
US Dollar Index and the S&P 500 are still sharing a strong positive correlation despite the continued noise coming from the potential interest rate hike. The key VantagePoint level to break free of this week is 94.930. Our optimism of continued DXY strength is guarded moving forward as the medium term predicted difference crossed over the long term last week. The Dollar could trade flat heading into the ADP report on Wednesday and the nonfarm payroll report on Friday.
The S&P 500 is approaching a very significant swing high at the 2110 level. If the market is to remain bullish this week, it will require staying above the key VantagePoint level of 2066.36. The predicted differences are indicating a loss in momentum so we remain leery of continued strength.
The DAX mirrors the S&P in approaching an upper trendline resistance with a key level of 10047.50. As this continues to move higher, it will keep the Euro weak. If the DAX sells off, get long on the Euro/USD.
While oil traditionally has an inverse correlation with the DXY, we’ve seen a positive correlation between these two markets of late. It’s a perfect scenario to show the importance of knowing how intermarket correlations work, and knowing which markets influence each other. If oil falls, DXY could also. Longs on both markets are going to want oil to stay above the key level of 47.50.
Gold is the one market we keep a close eye on that is showing a strong inverse correlation. The labor report that comes out at the end of the week should shed more light on this relationship. Expect an excessive amount of volatility when that occurs. A weak nonfarm report will give some momentum to a gold rally.
These global equity markets are always key factors in what is driving, impacting and influencing the prices of Forex pairs. Nothing goes straight up or down and understanding these relationships can help Forex traders be better prepared for the market movements.
Forex Weekly Outlook for Major Pairs
When we take a look at the major pairs this week, we are reminded that while correlations between the pairs or in relation to the DXY are extremely important, they are never 100 percent. Knowing your key levels and understanding the strength of the intermarket relationships will help you immensely when trading the major pairs.
Euro/U.S. Dollar (EUR/USD) is very dependent on equities, the DXY and oil markets. While you might not have any personal stake in these markets, the strong correlation means you are virtually trading them when trading the Euro. With the equities all rising as one, the Euro continues to fall. But the second those markets flip, so will the Euro. That could be as early as next week with the nonfarm payroll reports. The key level for this week 1.1243 with shorts favored while below that level.
U.S. Dollar/Swiss Franc (USD/CHF) is showing nearly 100% correlation with the DXY with virtually no lag between the two. This pair is being held up by the VantagePoint 8-day predicted EMA at 0.9896. Long term predicted difference is in overbought territory and with all three predicted difference moving lower, it suggests very little upside left.
British Pound/U.S. Dollar (GBP/USD) is another example of a traditionally inverse correlation that is showing signs of positive correlation coming out of last week. A sure sign that someone’s strength will be giving way, with the GBP most likely to blink first and show signs of weakness. We’ve maintained a fairly steady level dating back to January 1st (difference of about 140 pips). In order for us to consider the GBP bullish, it needs to rise over that year-starting price.
U.S. Dollar/Japanese Yen (USD/JPY) is, by far, the toughest pair to trade while waiting for the nonfarm payroll. We strongly advise traders look at minimizing the trading of this pair during nonfarm report weeks due to increased choppiness. There was a lot of activity around the key VantagePoint level of 109.42 with four separate hits. This pair’s relationship with the equities points to a possible loss of strength for the equities and a reversal of fortune for the Yen.
U.S. Dollar/Canadian Dollar (USD/CAD) came off a bullish week which could signify weakness for commodities, like gold, going lower this week. We had a trend line break that was immediately picked up by the VantagePoint neural index. The key VantagePoint support level is 1.2968 with a bullish close at 1.3020 on Friday. While wavering, the predicted RSI is maintaining at a 56.4 level, confirming the bullish status.
Australian Dollar/U.S. Dollar (AUD/USD) is one of the two major pairs that have no part of the DXY. So correlations extra care has to be taken when trading this pair. It doesn’t seem like anything can save this AUD. A continued downtrend has been going on since April. People who are going aggressively short need to keep in mind the short position has been in play for a month already. Chances are, it could be turning around soon. Many indicators are already showing the downward trend is losing momentum. Don’t get caught in the potential bear trap.
New Zealand Dollar/U.S. Dollar (NZD/USD) is the other pair not associated with the DXY. The trend line is running along the VantagePoint 8-day predicted EMA at 0.6739. The hold above the lower trend line continued for another week. If we recover off the trend line, don’t be surprised if we return to the key level of 0.6774. That would bring the swing highs back into play. But the predicted differences, neural index and predicted RSI all suggest that more bearish moves could be in the short term future.
The Forex Weekly Outlook is designed to help traders remain aware of the intermarket correlations of these global market relationships. You can become more profitable if you know how to get ahead of the trends and understand these relationships can potentially expand your portfolio.