Can tracking global money flows provide clues to stay in the dark?

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According to the Bank for International Settlements, daily foreign exchange (FX) trading turnover around the world averages $6.6 trillion. At Technical Traders, we follow a variety of global markets, asset classes and money flows looking for clues that will help us in our quest for ETF returns. Interestingly, when FX is plotted as a benchmark for the SPY (S&P 500), we can see that FX has also been in a risky environment for the past 2 years.

Recently we looked at volatility using the CBOE Volatility Index known as the VIX. But there are other means or tools that we can use to analyze asset prices.

Global money flow has been risky

As seen in energy, metals, food and real estate, the recent surge in inflation has also occurred in currencies. Commodity currencies generally refer to Australian, New Zealand and Canadian dollars. To some extent, the US dollar also due to its global ranking among the world’s top producers of oil and gas.

Typically, a currency like the Australian dollar will experience global silver inflows in a risky environment. While in a risky environment, the reverse happens when money moves out of currencies like the Australian dollar and back into what are considered safe-haven currencies like the Swiss franc, Japanese yen and US dollar.

Recently, silver has been reallocated to different assets as global investors chase yields. Foreign exchange markets also benefited from capital inflows. Looking at the past 2 years, from the Covid lows set in March 2020, we see that the SPY moved from a -30% loss to early January where the SPY touched +50%.

Interestingly, the AUDJPY (Australian dollar against Japanese yen) rose from -15% to over +20%, a total change of 35% over the same period. But how do we use this information to determine where we are in the current market cycle? Let’s go through this process together to see what clues the forex market may have to guide our ETF selection and trading.

AUDJPY vs. SPY – Daily Chart

Global Money Flow

Technical Traders – TradingView

GBPJPY Reacts to 6-Year Upper Channel Resistance

Based on historical analysis, the GBPJPY (British Pound vs. Japanese Yen) tends to follow the SPY, and so we will do a quick breakdown of the GBPJPY.

Immediately, we can see on the following monthly chart that the GBPJPY is reacting well to its upper and lower 72-month or 6-year channel. In 2011, the GBPJPY bottomed out and ended up at its 6-year lower channel.

During the period from 2015 to 2016, the GBPJPY then set up an upper head and shoulders formation over a 12-month period at the upper 6-year channel. Importantly, the head of the top was 166.6% off the GBPJPY all-time low in the GBPJPY, and the shoulders were made Fibonacci 161.8% off the GBPJPY all-time low.

The 2016 drop was 17 months and the 2017 reaction was 17 months. The 2019-20 downturn was 26 months, and to date the 2020-21 upturn has just completed 26 more months. Note: The indicator includes or counts both the lowest month and the highest month in its counts. The main point here is that the GBPJPY in its recent past has mirrored its previous price wave.

The lows of 2016 and 2017 were reached 50% of the all-time high of the GBPJPY. But the 2020 low also turned to the lower 6-year channel.

We now see that the GBPJPY is currently reacting to its 6-year upper channel after booking a 26-bar (month) rally.

It is important to note that this article is written to give us an overview of some alternative research to challenge us to find clues about the price. Time may or may not provide confirmation of this research, but if price continues to react at these levels, we may need to consider that the psychology or trend of the market may begin to change.

GBPJPY – British Pound Counter. Japanese Yen – Monthly Chart

Global Money Flow

Technical Traders – GBPJPY – Daily Chart – FXCM Trading Station

Learn how to use price to determine trend

As technical traders, we only follow the price, and when a new trend is confirmed, we modify our positions accordingly.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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