How Do You Know When The Currency Trend Changes?

Currencies trend based on economic news and expectation. A trend will reverse only when the markets future expectations change dramatically.
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Currency Trend Changes

Okay, then we quickly had a question from Mike. Mike is asking what signs would indicate that the USD/CHF as well as the USD/JPY may be heading to turn higher in the long-term or are they still bearish in the more long-term?

Now, the things that we can look for for potential signs of any potential upside in the USD/CHF and the USD/JPY is firstly a drastic turnaround in terms of the equity markets.

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Now if we just quickly zoom out on the equity markets, and taking a little bit more of a higher timeframe view, if we start to see a drastic turnaround in equity markets, that can see some potential upside for the USD/CHF as well as the USD/JPY, currently analysts are still in agreement that we are in an overall bear market now.

One of the tell tale signs of bear markets are very big bounces or rallies and we saw quite a lot of bounces in terms of equity markets last week, where we saw the Dow as an example put in a 11% gain in one day, which was one of the biggest one-day gains since 1933.

Now those type of bear market bounces are very common in overall bear markets, and that is something to keep in mind if we do see any of those short-term bear market bounces that can cause a lot of pain for the any type of Yen longs, but in the medium term, as long as we do have a bear market environment, the JPY should remain well supported.

Another key factor to consider for equities overall, is volatility. Now, if we quickly take a look at the VIX, and this gives us a much bigger picture of the, a much bigger idea of the type of panic that the markets are in at the moment.

Now just looking at the VIX from this weekly timeframe, we can see the very last time that the VIX spiked to these type of levels was back in the global financial crisis, going back to 2008 and 2009.

We normally see VIX shoot up in times of great uncertainty, and you’ll notice that whenever we see these big spikes in the volatility index, you normally see big moves to the downside in terms of equity prices as well.

So the VIX is something that we can look at as a more clearer longer term view for the JPY as well as the CHF the moment when we see the volatility index start to come down and we see market start to ease and that can provide some further ease in the equity markets and that can provide some potential upside in the USD/JPY as well as the USD/CHF as some of the markets start to ease back on those equity short positions, and we see an overall calming down in the markets.

Now, also, another thing to consider in terms of the USD/CHF and the USD/JPY is the dollar index, of course now, looking at the dollar, just from a daily time frame, we have seen quite a lot of whipsaw recently. We had that downside move as the markets were pricing in Fed cuts, then we had that upside move as a lot of markets were scrambling to get dollar reach in this environment, and then we also saw downside last week for the reasons that we gave in the videos earlier today.

Considering the dollar for the short-term, the bias is definitely to the downside as the recession signals are basically all flashing bright red right now, in terms of the economic data.

We also had the Fed coming out with that unlimited QE announcement. Now that should prove as a short-term negative driver for the US in terms of the Fed as well as the economic data, but we also know that during times of great uncertainty, the dollar does act like we saw two weeks back, does act as a safe haven like we saw.

So make sure to keep track of the overall market tone. If we see another massive sudden panic swoop into markets and see a lot of downside coming into equities again, that can lead again to further dollar strength, and that would be a good time to close out any type of USD/CHF shorts or USD/JPY shorts.

So that’s the type of signals that I’ll be waiting for to show us whether we are at the end of this move to the downside in terms of the USD/JPY, as well as the USD/CHF.

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