Shaun Downey on the American stock markets and the global Forex market

Post by Shaun Downey, Chief Market Analyst at Currensee: http://blog.currensee.com/about-authors/shaun-downey/

In this, the first of my weekly blogs I think it is best to give you a flavour of what to expect through the coming months. Whilst the subject matter is obviously currencies there is no escaping the overwhelming importance of the American stock market and its influence over the Dollars direction. It can sometimes feel like you are trading that and not the Dollar at all. This is especially true of the Canadian. Therefore I will look at all asset classes and assess their impact on currencies by providing a framework of a review of important market moving events, whilst give some insight into my own thoughts, both technical and fundamental, about what to expect in the weeks and months ahead. By default some of this will become semi educational in content.

Now we understand the scope we can begin returning to the eternal riddle of the direction of American stock markets and its currency impact. Once you have understood the key behavioural patterns you have the means to understand where the key levels are, which opens up significant opportunities in not only the Dollar rates per se, but also provides sudden insight into movement in cross rates. The obvious and least volatile place to start is with the Euro Pound rate when looking to explore these avenues. On the Dollar rates themselves it is fair to say that apart from the Euro and Swiss Franc (which often move in tandem), all of the other most liquid (Yen, Pound, Aussie, Canadian and Kiwi) all have individual characteristics and nuances that provide a trading edge.

For me, in the recent past, a key moment was when the Dollar broke down against the Euro, Swiss and Yen, but that was not matched by a break against either the Canadian or Australian Dollars. In fact, in the latter’s case it still had two more resistances that stood in the way of a breakout, with price ultimately failing at the first one. In a world that perceives that if stocks rally these more risky currencies will perform well, this simply did not happen. This weakness then manifested itself further when the Dubai story broke and the Aussie slipped alarmingly quickly.

Whilst it is fair to say that often the stock market leads the Dollar on a short term and day trade basis, the bigger historical picture can highlight divergences in this theory. Whilst the stock market edges to new highs, the lack of such confirmation in the risk based currencies is telling, and is a potential warning sign that the long period of Dollar weakness and possibly equity strength is in doubt. This is already showing with the NASDAQ failing to match the Dow or S&P.

This means that whilst the longer term direction of stocks is still not clear to me (although I continue to see more technical negatives building and I am short), the resident difficulties that this presents in knowing whether the Dollar will rise or fall, does not manifest in certain crosses. For me the obvious beneficiaries are negative views on the Aussie Swiss and vis-à-vis positive views on Euro Aussie. The logic behind this is simple, in that on a daily chart both the Swiss and Euro are attempting to build a new extended trend against the Dollar, whilst the Aussie is still some way from achieving this. The long term trends of Aussie crosses have already begun to show reversal patterns and it is worth noting that such crosses had predictive powers when understanding such turning points in other asset classes.

The Currensee social indicators of positioning also provide insight. Last months Unemployment number saw negative sentiment on the Dollar maintained, but this had changed dramatically by last weeks figure. Longs of Dollars against Yen and Canadian where in the 90’s%, which is particularly telling, when taking into the account the latter’s initial bearish move on a very positive Canadian jobs report. Positioning against the Euro and Pound was also positive for the Dollar.

Returning to be ability for Forex to pre-empt other asset classes turning points on a historical basis, in the Aussie Swiss the low was made long before stocks bottomed out in March. the absolute low was way back on Oct 28th last year and then another low was made on Dec 29th. This date is not without significance as I am a firm believer in two basic theories associated with crowd and market forces. They are that some markets reverse or accelerate their trends around holidays, especially American ones, and that the period between Christmas and New Year will see some markets make a high or low that will be last for most or all of the following year.

The pre Christmas blog will look at the fundamental set up of the U.S. consumer and holiday spending and the first post of the New Year will give my take on any technical signals that suggest which markets major turning points may be building.

For next week, last Friday saw the critical unemployment report and the blog will look at the connection between such an important fundamental statistics and how it impacts both technical outlooks and what I refer to as the strategic positioning of the trading Super Tankers.

The daily Aussie Swiss chart. The sequence of up arrows highlight a unique method I use in quantifying divergence through a multitude of price pattern relationships. It means divergence can appear in sideways patterns and as continuation of the trend.

The weekly chart signaled the beginning of the new trend and breakout when stocks bottomed in March

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