Considering the weekly timeframe, FXCM's Nasdaq CFD, NAS100, shows a decline (top chart) as the real interest rate appreciates (middle chart). As risk increases, capital will rotate out of the risk asset into a safer income-yielding investment. Moreover, the NAS100's required rate of return has increased, and its present value has adjusted downwards.
This mechanism has resulted in a solid inverse relationship between the NAS100 and real rate, indicated by a -0.83 correlation coefficient. This relationship makes for an interesting daily timeframe:
Given the weekly correlation coefficient, we note that the daily NAS100 shows a sideways consolidation (possible wedge), as the real yield charts a potential flag pattern (bottom chart). These are continuation patterns, implying that if completed, the instruments will continue trending as per the previous price direction.
In our view, the breakout depends on the real rate over NAS100. I.e. if the market needs to discount further tightening, this should be reflected in a real rate breakout and flag pattern completion. The current sideways patterns accompany market indecision regarding the size of the next hike, which has oscillated between 75-100bps. The current probability is 70% for 75bps. Ensuing breakouts or breakdowns will help determine if and when market expectations change.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.