We pointed out a compression in €uro futures that broke in the 12th October edition and we advised buying the €uro immediately. Compressions that break signal the start of new moves but the break is sometimes a bit too quick (or big) to catch. There is often a second chance to adopt the trade if the price retreats back toward the compression in what we call a ‘return movement’ and these are common. The reasons are explored in our userguide where we explain that feedback often produces ‘attractors’.
This is happening in currencies right now. The €uro futures price ran up for 4 days after the break and then started to retreat. It will find support at the compressed level and should then resume the upward move. A strengthening €uro means a weakening $ and we see the same picture in the $/Swiss franc FX pair. This price is quoted as ‘Swiss Francs per $’ which is the opposite of the ‘$ per €uro’ in the futures market so in this case the weaker $ move is shown as a declining price. Selling the $/buying the Swiss Franc is essentially the same trade as buying €uro futures, so please think about risk concentration before adding this $/Swiss trade – it is OK to do it if you have room in your portfolio.
Yen futures have also compressed and then also broke in the direction of a weaker $ three days later. They too are now retracing back to the compression in the familiar ‘return move’ and can now be bought. There is a similar picture in the €uro/Yen which broke in the direction of a weaker €uro. We don’t advise taking this €uro/Yen trade, despite today’s return movement as we don’t have a view as to which of them will eventually be the strongest against the $.
These anti-$ trades are not likely to last long as there is still QE in Japan and Europe, steadily eating away at the value of these currencies. Our model portfolio will not take any of them and will just keep the existing ‘long €uro’ position – our positions are starting to point in the same direction so it is time to limit correlation risk.
