What Are The Tightest Correlations In FX Land?
John Noyce's latest technical packet is out and it's a doozy, guaranteed to provide hours of entertainment for FX chartists.
First, a look at the EURUSD.
As Noyce points out, "Our bias would be to look for opportunities to enter short positions looking for a larger retracement of the rally from the January lows. The levels which held and the weekly patterns which were subsequently posted (details on the following slide) argue that we’ve seen a significant peak for the time being."
The key words in the EURUSD is exhaustion:
- Last Wednesday’s high at 1.3862 was a little beyond the ideal level at which we had hoped the market would peak; 1.3740-1.3780 - where the 61.8% retrace of the drop from the November ‘10 highs to the January ‘11 lows and the old uptrend from the June ‘10 lows were converged. However, the sharp turn around from just above that level which was accompanied by –ve daily oscillator divergence (something seen at other interim peaks last year) tends to indicate we have set a reasonably significant peak.
- In terms of strategy from here it essentially looks as though the market is likely to enter a period of range trading bound by 1.3852-1.3947 on the upside (converged old uptrend from the June lows, interim high from last week and the 76.4 retrace of the drop from the November ‘10 highs) and 1.3500 on the downside (interim high from 14th December ‘10).
For those who mock Fib analysis, the next chart should present some reason to reevaluate their skepticism. It appears the 76.4 level is the key one that prevents further breakouts:
While we don’t yet have related level breaks to act as confirmation the price action seen over the last couple of weeks supports this bias, with two points in particular of note on the weekly chart:
i. Last week’s high at 1.3862 was only marginally below the 76.4 retrace of the drop from the November ‘11 highs to the January lows at 1.3947. This is the third marginal undershoot of a 76.4 retrace since the market hit the all time highs back in July ’08 (the three instances – i.e. including last week’s – are highlighted by the green, red and pink arrows on the chart). It’s quite rare to see series of near-76.4 holds such as this, but where they are seen following a cycle high (in fact in this case the all time high from July ’08) it tends to be as part of a larger topping structure/process.
ii.Last week’s candle pattern was a classic “hammer” or “shooting star”. This pattern being posted where the market rallies sharply in the early part of the week but then drops back sharply later in the week to close approximately where it opened. A very similar pattern was seen at the highs in November.
Overall, it’s more evenly balanced, but our bias is still on the negative/bearish side.
And while the EURUSD sees resistance in the 76.4, the DXY has found a temporary support base at the same retracement level
In short, technicals indicate that Bernanke's quest to destroy the dollar may be challenged for at least a bit:
A very clear weekly hammer was posted against important support as a result.
- As with EURUSD a similar USD +ve weekly candle pattern was posted against the November lows too.
- Overall, as with EURUSD, we still need further confirmation, but it looks like a significant base could well be in place at last week’s low
And if we are indeed about to see a support to the DXY, logically the next move is a jump in short-term rates. While this would be truly wonderful, Bernanke would likely never allow it.
Quote Noyce: "we do strongly believe we’ve now got signals which argue that rates in the U.S. are ultimately preparing to move higher, however, following the initial extension above the 55-wma as we’ve seen over recent sessions we may well enter a period of consolidation prior to the real move beginning after quite an extended period. Signals of this pattern beginning to develop are definitely something we’re watching for."
Then moving on to other key pairs, we are likely seeing the right shoulder of an AUDUSD head and shoulders formation:
A peak in the AUD is certainly not surprising, considering the massive amount of tightening going on in China.
First of all looking at AUDUSD the interim high set last Friday at 1.0201 was very marginally above the interim high from 5th November at 1.0183. Both of these peaks were set just below the cycle high from 31st December at 1.0257.
While it is very early in the process, it could now be argued that the market is forming an H&S top against the cycle highs. The neckline of the pattern standing at 0.9927, a little below the uptrend from the June ‘10 lows at 0.9950.
Daily oscillators are also again close to the top of the range in place over the past 7-months.
In conclusion, while it’s too early to categorically say that a significant peak is in place, we should definitely be aware of the risk that a topping structure could be forming against the cycle highs.
AUD and NZD overvaluation is also quite apparent when looked at on a swap spread basis.
Regarding the chart on the left, here is Goldman's take:
This chart shows the AUD/USD 2-year swap spread in green overlaid with AUDUSD spot in blue back to May ‘10.
From May to late-November ‘10 the two were very highly positively correlated. However since then they have begun to diverge, with swap spreads moving quite significantly in favour of the USD but AUDUSD remaining relatively close to the top of the range.
This theoretically sets quite a favourable backdrop for a bearish AUDUSD theme.
As for the right one...
NZDUSD is similar if you look over a much longer time frame, the above chart showing the 2-year NZD/USD swap spread in green overlaid with NZDUSD in blue beginning in March ’09. Since late-December a large discrepancy has begun to develop as with AUDUSD, where the swap spread has moved in favour of the USD but NZDUSD spot has remained relatively close to the top of the range. Again this seems to set an interesting backdrop against which to hold a bearish NZDUSD theme.
As for those who were drawn to this post based on the title, here is the one correlation to keep track of going forward. With correlation desks dead and largley disbanded across the US, and neither the AUDJPY nor the EURUSD to ES correlations working any longer, the correct pair to watch for (until it gets too heavy) is the Kospi to AUDUSD.
On the Kospi-KRW chart:
- This chart shows the Kospi in green overlaid with the inverse of USDKRW in blue (i.e. KRWUSD). While the directional correlation has remained quite strong over recent months, the Kospi has rallied much further in %age terms.
- With this in mind, while a correction lower in the Kospi could well lead to some corrective KRW weakness, it’s not the classic tight correlation that existed historically.
But the key chart is the AUDUSD-KS11.
- This chart shows the Kospi in green overlaid with AUDUSD spot in blue, the overall directional fit and turning points are pretty similar.
- It therefore fits that we’re beginning to see signs of a potential top developing on AUDUSD just as the same happens on the Kospi.
Many more charts in the full presentation by John Noyce:
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