Top Market Moving Indicators

Like many Mondays, tomorrow probably won't be moved by the very latest economic release because there really aren't with 1 exception. At 9 a.m. tomorrow, the TIC report is released.  This report measures demand for US assets and could be yet another nail in the dollar but I'll be watching just to see if this is a report that would move the market in the future.  See Kathy Lien's study that puts TIC report at market mover #9 for first 20 minutes after release and #3 for the entire day.

I'm going to be releasing my Economic Release PDF again this week with comments.  It looks like Wednesday (US CPI) and Thursday (Bernanke Speaks) are possible US session movers and there are a couple of other important non-US releases like the BOJ Interest Rate Statement on Friday (1 am EST.)

In much of my reading, I stumble upon useful bits of information.  There was a study by Kathy Lien, an FXCM strategist, of the top market-moving economic indicators for the Dollar during the first 20 minutes following a release and for the rest of the day.  These are ranked from highest average pip range and are only for the EUR/USD.  Considering other pairs like the GBP/USD react more to these economic releases, the average pip range would be much higher.

First 20 minutes

1. Unemployment (nonfarm payrolls) 124 p
2. Interest rates(FOMC) 74 p
3. Trade balance 64 p
4. CPI 44 p
5. Retail sales 43 p
6. GDP 43 p
7. Current account 43 p
8. Durable Goods 39 p
9. TIC data 33 p

Daily

1. Unemployment 193 p
2. Interest rates (FOMC) 140 p
3. TIC data 132 p
4. Trade balance 129 p
5. Current account 127 p
6. Durable goods 126 p
7. Retail sales 125 p
8. CPI 123 p
9. GDP 110 p

It is interesting to note how the importance of economic reports actually changes over time.  For instance, here is FX Dealer importance of Economic Data as of 1997 and as of 1992.

As of 1997 

1. Unemployment
2. Interest rates
3. Inflation
4. Trade balance
5. GDP          

As of 1992

1. Trade balance
2. Interest rates
3. Unemployment
4. Inflation
5. GDP 

Popularity: 2%

Momentum Divergence in the EUR/JPY

An observation from Learn::Forex that may pique your interest.

Euro/JPY has our attention…

Why? 

Notice
on a Daily chart we are attempting to push up into the zone of 145.00
although the momentum is clearly beginning to fall off. This is again
confirmed with the 120 minute chart as well. This combine with the
resistance area we are looking for a short opportunity anywhere from
current price up to a retest of the 144.80/145.00 zone. Targets on the
short side are 143.00 and if we get a clear break of 143.00 we could
have a second target of 142.00. We would look to place a stop up above
the 145.00 level.

  

 

 

 

 

 

 

 

Popularity: 2%

Newest Forex Volume Report Released

Open interest dropped across the board this week except in the Australian dollar.

Canadian Dollar
Big swing from NET LONG to NET SHORT

Swiss Franc
Very Bearish.  50,327 Short positions vs. 3,462 Long positions

British Pound
18,418 Short positions, 13,183 Long positions 

Japanese Yen
Decrease of 17,632 short positions.  Still Bearish 

USD Index 
Decrease of 7,196 long positions.  Still bullish with 11,114 Long positions and 4,491 Short positions 

Euro 
EURO remains Bullish with another decrease this week in Short positions (-10,149) 

New Zealand Dollar
Less Bullish than last week with decrease of 688 long positions and increase of 178 short positions 

Australian Dollar
Bearish.  Increase of 15,455 Short positions on increasing open interest. 

Crude Oil 
Less open interest than last week with an almost equal balance of long (128,840) to short (135,177) positions. 

Popularity: 3%

Do Interest Rate Differentials affect Currency Price?

I wanted to do a study on my own between the EUR/USD and interest rate differentials so I gathered all historical interest rate data from 1/1/1999 to present.  What I found was that there was no correlation between the actual differential and the price of the currency pair.  What I did find was the following:

We are in the third cycle of price changes.  What I mean by this is that there was an extended period where the USD gained versus the EURO (Cycle #1) and then an extended period where the EURO gained versus the USD (Cycle #2).  Currently there has been another extended period where the USD has gained versus the EURO (Cycle #3)

Here are my estimates of cycle length:

Cycle #1 - 01/1999 - 05/2001   BULLISH USD (29 months)
Cycle #2 - 05/2001 - 12/2004   BEARISH USD (43 months)
Cycle #3 - 12/2004 - present    BULLISH USD (16 months +)

I found that the most defining point regarding the change of cycle was that it happened right after the interest rate differential between the EURO and USD hit 0%.

Here are the periods of time when the differential hit 0.00%:

5/11/2001
11/10/2004 

As you can see, there is a correlation between the differential being 0% and the change of cycle.  Unfortunately we have limited data since the EURO has only been in existence for the last 7 years or so.

If I was to use this information to predict the future direction of this currency pair, I would have to predict that the USD will remain BULLISH for quite some time to come.  Seeing that the interest rate differential currently is 2.50% and the fact that the Fed may increase rates 2 more times, I cannot foresee this differential decreasing anytime soon.   

I don’t know if this study is B.S. or not.  There are many other economic factors that can affect currency prices and I didn’t take any of these into consideration such as the US Account Deficit or the Eurozone’s slower GDP growth.  In addition, with Iran switching to EURO’s for payment of oil, there are other things in play that make it more difficult to predict the future. 

 EUR/USD Interest Rate Diff- Excel (20.50 KB 06.03.2006 11:32) 

Popularity: 1%

Waiting for a Yen pullback?

I’m waiting on a Yen pullback.  The price has been hanging around the S2 pivot point all day.  Depending on where the pair is during the Asian open, I may be shorting this pair if it pulls back a little more.   Remember that this pair is trending on the 240-minute and momentum indicators aren’t worth a bit.  Right now I’m watching the Directional Movement Index, pivot points, and trendlines.  The pair will have to pull back quite a bit for my continued interest, at least to the high 116’s.

The chart below shows the S2 pivot point at 116.08, .09 below the price (bottom red dotted line).  The pivot point for today was 116.807 (thin solid black line)

 

 

 

 

 

 

 

 

 

 

 

 

Popularity: 3%