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Fundamental day

Written by A Forex View From Afar on Wednesday, March 26, 2008

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Today we had one of those Fundamental days, where new macroeconomic thoughts come into our minds and trading ideas depart, or even better, our trade ideas get re-enforced

On one side of the Atlantic, on the European Shores, business owners are starting to see a brighter future ahead, reflecting in the 3 months positive IFO Business Climate and Expectations. This somehow positive attitude was also seen in Mr. Trichet speech; Inflation remaining Europe’s biggest fear (at least for EcB).

The current ECB objective is to safeguard inflation at 2% over the medium term, and today Mr. Trichet made clear for the first time what medium term actually means: 18 to 24 months. It is good that it gave a clear indicator in time, but it is not a big surprise: this is the standard time accepted by academic views for monetary policies to take effect, sometimes even faster.

Mr. Trichet re-enforced our views, at this time; we clearly do not see any rate cut from the ECB on 2008. As we posted previously, if CPI remains above the target, as soon as the credit crises clears we will not be surprised to see a rate increase.

All this happened on the shores of Europe, were miraculously the storm on the other side of the Atlantic is not reflected.

After the US posted yesterday’s “good” performance in statistics, today Durable Goods and New Home Sales had the role of reminding us were we really are. Durable Gods came worse then expected, but New Home Sales beat analyst expectations.

Lucky them, but New Home Sales are at the lowest point in 13 years, so clearly even if they beat analyst expectations, this was not good at all.

Other victims of the credit crises are developing economies, like Iceland. It was a subject heavily debated today, Iceland's Central Bank (Seðlabanki Íslands) raised the interest rate with 125 Basis Point move to 15%. The Icelanding Krona, is a victim of the “safety run”, which involves selling high yielding currencies, and speculative positions from buying bonds.

The Iceland CPI chart shows a real economic drama that unfortunately is happening in other countries too.

Iceland CPI inflation
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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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