Trading Tips

EUR/USD falling or more Fed QE?

A post went up on Zero Hedge yesterday showing the chart below as proof that the Fed will be doing a $700bln QE3 operation. It shows the ratio of the Fed to ECB balance sheets (white line) relative to EUR/USD (orange line). The argument goes that in order to bring the relationship back in line, the Fed will have to do QE.

Here’s the thing, though. Notice the two other circled times when the two lines deviated. What happened to bring them back together? Ummm…EUR/USD sold off – and fairly sharply. Why does the blog author expect something different this time? Given the Commitment of Traders figures that have shown the short bias among euro traders, it certainly looks like the major players are leaning in that direction.

This strikes me as someone looking for proof of their thesis rather than developing a thesis from the evidence, which is a major pitfall we all face in the markets.

The Basics

Twenty-four Hour Forex Volume Distribution

The question of volume in the forex market is a common one seeing as there is no one central aggregation of the data. I happen to work for a company that has a major forex dealing platform in it, so I get to see some stuff that isn’t available to the public. One of those things is how volume is distributed throughout the day.

Here’s a graph of EUR/USD volume based on Thursday’s trading (times noted are in GMT).

The pattern is pretty obvious. The volume in the Europe/US overlap is the most significant. Outside of that it’s markedly lower.

And to provide a perspective on a currency that would be thought to have a more regional bias, here’s AUD/USD.

Here we see more of an Asian time frame volume spike, but still we have to look at the US morning as the biggest volume period.

Of course this is just one day – a day when there were important data releases in both the US and European mornings, which is reflected in the spikes we see in EUR/USD. Other days will show different distributions. The primary pattern of heaviest volume in the overlap will basically always be there, though.

The Basics Trading Tips

Understanding and Using the Dollar Index

The folks on CNBC and elsewhere in the media are all over the fact that the Dollar Index got below 75 yesterday, the lowest level since August 2008 (the lowest point was about 70.70 in March 2008). Yes, the dollar has been weakening pretty consistently from the time stocks turned north in March, but there’s something you need to be aware of here. The dollar index is more than half weighted to the euro. Here are the weights as per the ICE.

Euro = 57.6%
Japanese yen = 13.6%
British pound = 11.9%
Canadian dollar = 9.1%
Sweden krona = 4.2%
Swiss franc = 3.6%

In other words, the main driver of the Dollar Index is EUR/USD – even more so when you consider how closely correlated the euro and Swiss franc are. That means the index can be skewed at different points as the EUR either over- or under- performs. That creates a potential opportunity to look for divergences between the two.


As you can see above, while the index and EUR/USD matched turning points in late 2005, they diverged at the more recent ones. That could have tipped you off that something was changing, just like looking at divergences in indicators or stock market internals.

The problem, though, becomes when looking at something beyond the euro, like USD/JPY.


Notice how relatively unrelated the path of USD/JPY has been compared to the course of the index. That tells you there are other considerations involved here related to the yen which don’t reflect in the general dollar situation.

Being able to see the differences in how related markets trade can go a long way to help you make good trades.