A Forex View From Afar: 08/01/2008 - 09/01/2008

Will the ECB really cut rates?

Written by A Forex View From Afar on Tuesday, August 26, 2008

In the last few days, a number of analysts have appeared in the mainstream media saying that the ECB will cut rates at the following meetings. The big question now is will they really cut or is it just guesswork? Unlike the Fed, the ECB has one objective: keeping inflation close to 2% over the medium term. In the last few quarters the ECB had failed to reach its only objective, since the CPI number is running at 4%, twice as big as the inflation target. The ECB took the decision to raise in July because the outlook for inflation still lies to the upside.

Many of the voices that say the ECB will cut sometime in the near future base their outlook on the fact that lower growth will drag down inflation. Last time that this happened (or was supposed to happen) was in the 70’s; it was referred to as stagflation (no growth together with high inflation), but did the lower growth bring inflation down? The answer is a big no. However, the high interest rates set by the Fed's Paul Volcker did bring inflation down; higher rates did the job that reduced lending could not achieve.

The ECB has said a few times that the second and third quarter read will be weaker, but still the Governing Council decided to increase the interest rate. This clearly shows that the bank is determined to follow its goal of fighting inflation. Furthermore, a central bank must be clear and to some extent transparent in its decision. How confident can the markets be in a bank that a quarter ago said they wanted to fight inflation and then the next quarter cut the rate to ensure growth, while this was not on its priority lists? Not too much it may seem, nobody likes a central bank that flip-flops.

According the TheLFB Analyst team, Traders may want to keep an eye on the dollar’s valuation right now. The dollar is strengthening on the rumor that the yield differential will decrease. Even though traders should see that the chances for a hike from the Fed are very low, it must be remembered that there is just as much of a low chance of a number of rate cuts from the ECB.

| Posted in » ECB, forex, retail forex

Global Equities

Written by A Forex View From Afar on Monday, August 25, 2008

After Asian equities posted this morning the biggest gain in the recent weeks, European and US stocks declined on concerns about the financial markets.

Equity markets have developed a pattern of trading lately: every rally is short-lived because either inflation related-fears appear or rumors show up that banks may be constrained to have another round of write-downs based on the latest trends of credit rating agencies cutting the debt rating of various financial institutions on a daily basis.

The S&P is now testing the 1260.00 support area, which proved to be very important in the past. This area corresponds to the low points on 24th of January and the low made in March, when Bear Stearns was bailed out by the Fed. If the index will break under the 1260 level, it is very likely a wave of short orders will join the market.

Overall, this paints the picture of a market scared of its own shadow, in which traders have large sentimental swings. This creates a lot of volatility, something that can be seen on every chart, but in the same time despised by every trade desk or retail trader. The truth is that the financial institutions may have some hard times ahead, and the market, as the economy, will have a very hard time pushing things around without them.

| Posted in » forex, stocks

Changing Markets

Written by A Forex View From Afar on Friday, August 22, 2008

As a trader, it is very important to see and recognize how the market changes and shifts from one form to another, to be prepared to ditch opinion and also to accept what is right in front of us in the charts. In the last few months, it would have been a complete waste of time to expect sustainable price action from the U.S. session. It can be very easily said that the U.S. trading hours were nothing more than an extended Asian session (or forerunner) with just a little more liquidity. Well, it seems that things are changing due to the greater degree of the moves and breakouts that came during the U.S. session in the last period of time. The bad news is we do not have two full-time trading sessions now, since lately, during the European session nothing happens except testing of supports and resistance areas.

Another way how the market can change its form is when correlations drop from a strong degree (above 80%) to a very small correlation. This usually does not happen overnight because it takes time for the market to absorb the fundamentals behind this move. Sometimes it is very important to understand what drives the relationship between the different assets as well how they act in-line with the market. A good example would be the euro-oil correlation. A couple of years ago the two assets moved rather arbitrarily and only in the last year oil has started to have a high correlation (above 80%) with the euro as the dollar dropped.

Another popular correlation often used is the euro – swissy. In a hypothetical case, if the SNB announced tomorrow that they would raise rates at the next five meetings, 1% increase each time, while the ECB kept its current monetary policy (“we have no bias”) then it is very likely the correlation between the two pairs will drop close to zero.

Looking at a perspective that the market is always trying to improve itself and take out the “weakest links”, and as long as the market will obey the rules of the open economies (…sounds strange but couldn’t find anything else), it will always try to change its features, be it trading times or correlations. Furthermore, a trader that relies on blindness of this “characteristic” will always fail in the long run. Black-boxes, quants and LTCM are here to prove this theory right.

| Posted in » forex, retail forex

Bank of England Next move on hold

Written by A Forex View From Afar on Friday, August 22, 2008

The pound fell close to 1500 pips in the past two weeks, practically shedding every gain the pair made in the last two years, due to the market’s view that the Bank of England will cut at the following rate meetings. But, would they really do this? The meeting minutes released today do not suggest this, nor does it leave too many interpretations that the bank will abandon its target inflation regime to assure growth. The mandate that the MPC follows is price stability, and that is reflected in the stubborn way that the U.K. has held onto rates above 5.0%.

The vote was split, 7 members voted for a hold, while 1 member, Mr. Tim Besley, voted for an increase. On Tuesday the market sold the pound lower, directly after voting Monetary Policy Member Tim Besley stated that inflation in the U.K. would fall by year-end, and as such signaled that the Bank of England would possibly have no barriers to a series of rate cuts to help the beleaguered home and business owners who are suffering with 5% overnight interest rates. U.K. bond prices rose on this news, and that also added to bond values moving higher in reaction to negative equity markets, pushing down yields and automatically reducing the value of the pound. The vote from Mr. Besley was different from the opinion two weeks prior.

There was 1 vote from Mr. David Blanchflower, the MPC perma-bear, who suggested that monetary policy should be loosened. The August meeting represented the second meeting in a row, when the vote was divided this way 7-1-1. Overall, the meeting shows inflation still remains the major concern for the bank. Even if risks to the housing and economic outlook increased since last month, a rate cut is out of the way for the bank it seems. Risk to inflation poses a bigger long-term threat for the bank than an economic slowdown.

Inflation is now running at 3.8%, almost twice as much as the central bank’s target, with large increases in the food and energy sub-indexes. At the same time, according to the inflation report released earlier and not the hot air blowing of MPC members, the CPI read is expected to remain significantly above the target this year and stay above it at the start of 2009. Inflation is only expected to reach the MPC 2% target by 2010. The Inflation report that shows the central bank does not exclude the possibility of a negative quarter in the following period, however GDP growth is expected to pick up in 2009.

If the UK economic situation does not deteriorate much further in the following weeks, we may not see a rate cut from the Bank of England. There is only one member voting for a cut right now and will need at least another 4 members to reverse their thinking to obtain the majority; the voting trend does not support that, even in the face of a severe slow-down in the economic outlook. If the voting trend stays the same, then the pound’s downward movement may lose steam as the market sees a bank that is willing to stand behind their inflation objective; lowering rates into raging inflation is a sure-fire way of mortgaging forward growth, and sets up very shallow boom to bust cycles.

If rates are cut, inflation increases and the value of future growth is stripped. A short-term fix to cut rates can cost a lot more in the long run than the initial cost to the consumer in taming inflation. There is no dual mandate at the BoE it seems, and the market may soon look at the rate cut valuations that are in the pound right now as being a little imbalanced, unless, that is, the next few weeks before the MPC meeting offers deteriorating economics.

| Posted in » Bank Of Englad, economic preview, forex

Cad Sentiment Test. Majors to follow?

Written by A Forex View From Afar on Wednesday, August 20, 2008

The assumption that the forex market has found a temporary Usd bottom appeared as possibly true today.

In the U.S. session, the dollar had a very hawkish news report - the PPI read, which rose at the fastest level in the last three decades, indicates that inflation is still knocking at the Fed’s door, and therefore may force a rate hike (Usd positive). However, the greenback could not find the strength to higher lower and hold against the European pairs. The Asian major pairs (aussie and yen) both had confirmation from their central banks that growth may be slow in the coming quarters. As a technical note, there is no point in overacting the PPI read, it just reflects with a lag the strong gains in the commodity market in the last year, but may have surprised some with its lack of impact.

With currency pairs reversing some of the dollar gains, there are what looked like consolidation moves that are looking like long-dollar distribution possibilities happening right now. For example, the Canadian dollar has been trading in a range for a week. The pair just bounced from the resistance level, helped by a much better than expected wholesales report from Canada. The pair may retrace to the range support area, and that is where the next test of dollar buying resolve will take place.

| Posted in » Bank of Canada, forex, retail forex

Temporary Technical Bottom

Written by A Forex View From Afar on Monday, August 18, 2008

It looks like the market is trying to find a temporary bottom for the dollar strength seen in the last few weeks.

The daily chart for pound (Gbp/Usd) and aussie (Aud/Usd) look like the pairs are making a reversal pattern. The pound made a doji bar followed by a pin bar, while the aussie made two pin bars, not being able to break under a 7-months low in the 0.8600 area. In the same time, the euro (Eur/Usd) is struggling to make a lower low, but until now, the dollar seems unable to pull the valuation lower.

The Canadian dollar is unable to break for a few session above TheLFB R1 or under S1, reflecting the markets indecision for the pair’s outlook. What is important is that the pair made these moves on a volume significantly higher than the average.

It is not clear enough if the base set in the last trading days is temporary, only or is allowing the pairs to absorb some more valuations, or if the dollar’s strength has come to a standstill. It is certainly that the market needs a breath of fresh air after all the selling from this last month.

| Posted in » forex, retail forex

Currency Re-valuation Glass half full, or half empty?

Written by A Forex View From Afar on Saturday, August 16, 2008

It is pretty clear now the major economies- Euro-zone, Japan, US, Canada, UK and Australia, are heading towards a slowdown. In the last two weeks we have had the confirmations from all of them, culminating with the European economy having a negative quarter, lead by the German powerhouse. From a bigger perspective, the Japanese economy is still suffering from the last recessions and still has not totally recovered. The Australian economy has almost two decades of continued growth may help it weather the financial crisis and internal contraction with more ease. Canada will be reborn from the ashes once the U.S. economy expands and then resumes the flow of Canadian imports at the regular level. However, the UK and Euro-zone will probably suffer for some time it seems as the European consumers, known for their pessimism, may weigh on sentiment. The Bank of England and the ECB has stubbornly help onto interest rates in an attempt to contain inflation, and both now may be at least on hold for the foreseeable future, whilst the market goes about its business of re-pricing valuations just in case a cut comes.

The U.S. economy flipped from negative to positive in just one quarter and straight away some say the future looks brighter. The economy was helped in the last quarter by strong export industry, adding an important number of points to the GDP number; a stronger dollar may negate somewhat the export numbers for the rest of the year, U.S. exports just increased by the 6% increase in the value of the dollar index over the last two weeks. In particular, the second quarter positive GDP read was helped by the rebate check;, they did their job, but no more are coming this quarter. Some have even suggested, including Mr. Bernanke, that the tax rebate did nothing more than re-distribute the growth perspective from Q3 and Q4 into Q2 numbers. Another tax rebate, or tax cuts to encourage spending, will have negative long-term effects, the money has to get repaid from future growth prospects and the U.S. economic is already heavily mortgaged.

As the global economy slows, so will the US exports. In Europe there was a real belief that emerging countries would support the export demand side, but until now it seems there was not too much help coming. The future looks to be offering a phase of contraction, no matter what economy are we speaking about, the benefit that the U.S. has is that it has been contracting for eighteen months now, and may just be ahead of the game. Even so, there is a slight change the central bank’s outlook (that growth will pick up in Q4) may be too optimistic, just how they proved to be in the past.

The dollar has shown recent strength, but on a weekly chart this is nothing more than a test of a trend-line that has the dollar index locked in a short channel. If 77.00 breaks and holds this may turn out to be more than a storm in a currency tea cup, and this week of economics may well provide the answer. If the market buys the dollar at these levels it may signal a sustainable move, but we just have to be aware that going long-dollars may be a short-term trade that runs off momentum and near-term sentiment; take advantage of it, but do not over-commit to it.

| Posted in » forex

The currency market in the week ahead

Written by A Forex View From Afar on Saturday, August 16, 2008

The currency marketThe currency market in the week ahead in the week ahead will have to deal with inflation, growth, confidence and retail numbers

This week starts with a dollar in unique shape, something that the greenback has been searching for quite a while. The dollar has strengthened for 5 weeks against a wide range of currencies; the dollar index cannot find any resistance tough enough to stop the gains at the moment, and Chicago based Commitment of Traders reports now show net long dollar positions.

Euro-Zone: The currency market will have another hard test of valuations as a number of releases gauging the investor and consumer sentiment from the euro-zone hit the wires. Lately, the analysts have failed to gauge the release numbers and sentiment. One of the most important this week, the Zew economic sentiment for the Euro-zone, is expected to come at -65.0, dropping 90 points from a year earlier. The Purchase Managers Index (PMI) releases, showing the latest developments in the manufacturing and service sectors, will be out this week as well, with activity levels in the Euro-area expected to show continued contraction.

The U.S. PMI reads however show activity is starting to pick up on the other side of the Eur/Usd pair, after its dip into the contraction zone. The strength the euro had for some time, together with high interest rates had a negative effect on the Euro-zone business climate and this is starting to be reflected now in the Zew and PMI releases.

Central Banks: The Reserve Bank of Australia and the Bank of England will release the meeting minutes. The RBA releases are expected to show the board expects a prologue slowdown at the same time that inflation will be less of a worry, the markets will have to question how much is already baked into to current valuations. The Bank of England meeting minutes are expected to show that the MPC had 7-2 (hold-cut) vote for a hold. At the last release the vote was 7-1-1 (hold, cut, raise). The financial and economic data coming out of UK has weakened at a steep pace since the last meeting. An additional vote for a cut may trigger another wave of selling, sending the pound even lower from the current 22-months low and probably extending the longest decline in the last 37 years. That is unless the ‘sell the rumor’ part of the ‘sell the rumor buy the news’ has already been put in place. Retail sales on Thursday may bounce the pound around as the markets look for the recent economic effects on the U.K. consumer.

In Japan the GDP releases recently showed the economy contracted at a strong pace in the second quarter. The finance ministry, the movers behind the Bank of Japan said in recent statements that the economy may have a hard lending in the following quarters, as exports decline. It is a possibility the bank will consider to loosen the monetary policy at the next meetings, the first of which is on Monday, and if so the Jpy may further depreciate.

America: The U.S. calendar is somewhat lighter in the coming week. There are just two releases expected that might create a lot of volatility and are both scheduled in the same day: building permits and Producer Price Index on Tuesday. The recent release data shows the new building permits may have found a (temporary) bottom, but adjusting from the raw numbers, the housing market is in a very bad shape. The expected number, of almost 1M, is just half of what the releases would have shown from the expansion phase of 2003-2006. At the same time, the Producer Price Index shows a large degree of inflation coming from the food and energy products and eventually those numbers will hit the CPI, especially if oil cannot breach and hold under $110 a barrel. If the U.S. releases are not up to scratch the market can look forward to Fed Chairman Mr Bernanke’s speech at 10:00 EDT on Friday to put things into perspective.

| Posted in » Bank Of Englad, ECB, economic preview, Fed, forex, retail forex

Economic Valuations The currency impact

Written by A Forex View From Afar on Thursday, August 14, 2008

It is pretty clear now the major economies; Euro-zone, Japan, US, Canada, UK and Australia, are heading towards a slowdown. In the last week the market saw confirmation for each of them. Today, the list culminated with the European economy having a negative quarter, lead by its powerhouse: Germany.

From a big-picture perspective the Japanese economy is still suffering from the last recession and still has not totally recovered. The Australian economy has almost two decades of continued growth and this might help weather the financial crisis with more ease. Canada will reborn from its ashes once the U.S. economy expands (it is a unwritten rule). The UK and Euro-zone will probably suffer for some time, as the European consumers, known for their pessimism, can only make things worse.

With all of this the U.S. economy may be facing another issue in its expansion process. The economy was helped in the last quarter by strong a export industry growing under the blanket of a cheap Usd, and in doing so adding an important number of points to the GDP read. The second quarter was helped by the rebate checks. The tax rebate helped a lot the second quarter GDP read, but it will not be there to support the next quarters. Some have even suggested, including Mr. Bernanke, that the tax rebate re-distributed the growth perspective from Q3 and Q4 to Q2. Another tax rebate or tax cuts to encourage spending will have terrible effects in the long run.

As the global economy slows, so will the US exports. In Europe there was a real belief that emerging countries will support the demand side, but up until now it seems there was not too much help when it was needed. Furthermore, how we said earlier the

All this tells reveals that the future is not bright, no matter what economy we are looking at, in regard to easily valuing currency pairs; matching debt loads against low growth, or cheap exports against internal consumption is a complex path, and one that is likely to lead to more volatility on the four hour charts. Right now however, the dollar has it.

| Posted in » economic preview, forex

U.S. Trade Balance Overview

Written by A Forex View From Afar on Tuesday, August 12, 2008

The US trade balance came much better than expected, having a read of 56.8B, beating even the most optimistic analysts, which ranged from $58 billion to $65.7 billion. The market did not have a strong reaction to the release, and after news that should have been very dollar positive the euro managed to post some gains. The trade balance had a very strong influence over the markets in the 80s when economist actually believed a currency will depreciate until it managed to cover the trade deficit. Well, those economists still waiting for the trade balance to be covered from a weak currency, 3 decades later, will still probably have to wait some more years.

Oil prices made their presence felt in the news release, since both the import and export of petroleum products rose to a new high. It is no surprise, since June crude oil has posted some very strong gains. Overall, the trade deficit fell 4.1% in June; exports rose by 4.0% from one month earlier and rose 21% year-over-year. Over the same period imports also grew 1.8% from May and 13.5 percent from June 2007. Despite the strong advance in exports, the goods balance did not improved significantly. The goods deficit is running $2 billion above the average of 2006 and 2007, which shows improvement can still be made.

If this number is not be revised next month it seems that the second quarter number will be adjusted, since exports and imports are included in the GDP numbers.

| Posted in » economic preview, forex

Dollar Case of study

Written by A Forex View From Afar on Monday, August 11, 2008

The dollar had not really got going in posting its gains before analysts from the most important banks were starting to speak about the end of the new long dollar trend. On Friday, the dollar closed the trading session after gaining a whooping 320 pips on the euro, the biggest one-day gain in the last 8 years. Soon after that analysts from the Bank of America, Morgan Stanley, Barclays Plc and Credit Suisse said that the moves were unsustainable, as the markets had overpriced the possibility of a rate increase from the Fed, and that the US economy does not show signs of major improvements over the next quarters. It is very interesting that these analysts foresee the dollar stronger by the year-end, but now right now it seemed that it was just too much, too soon for the big boys.

The technical stochastic indicators, including the relative strength index (RSI) and the stochastic oscillator are way into the oversold line, showing a retrace of the previous move may be possible, but that will not at this stage be initiated by jawboning and headlines. Maybe the big boys did not get there toys out of the sand pit before the dollar moves happened. Maybe they needed a reason for the market to pull back so that they could get on the new trend, and once they were actually in it, the new headline would be; “Dollar sustains mighty break-out, economics look fine”.

We should not trade headlines, we should read headlines, and trade charts. Over a long time of chart reading we develop an understanding of what the charts actually build from, and the layer that is behind them. Experiencing the yearly swings, and the sentiment drifts enables us to more comfortably sit in a trader's skin. It is not about knowing it all, it is about knowing a little of what really matters, and ignoring headlines is one of the first steps to a successful career.

It may just be that the euro has a very hard week ahead in regard to testing fair value, with the real test probably being on Thursday when the economic schedule is fully loaded with important releases from both sides of the Atlantic. No headline, just a warning that the fundamental driver of the Eur/Usd may force the big boys back into the sand pit on Thursday.

| Posted in » forex

Introduction to Forex: What is Forex?

Written by A Forex View From Afar on Sunday, August 10, 2008

Forex or Foreign Exchange is an unregulated market where money is swap for different purposes. Some of them employ goods swaps while other are purely based on speculations

The Foreign Exchange market was initially developed for banks and state own institutions to swap money, thus, sometime the forex market is referred as to the interbanking market. In a while, the forex market’s gates were open for very large hedge funds. This happened at the beginning of the 90s. In the following years, the market slowly became a global currency market where more and more financial institutions were allowed. The year 2000 was a crucial year for the currency market, is the year when retail traders first started to access the Forex’s floors across the globe. This is when the forex truly became a global currency market

At this point in time, the Foreign Exchange market had evolved from a very illiquid market, were gaps were more often than candles to the most liquid market there is. Some analysts are even saying the Forex is the closest market to the perfect market model, where information is widespread, investors take rational decisions and there is no major player that could influence the market all on its own.

We, retail traders, are just a scratch of the market’s total volume. Some even say liquidity in global foreign exchange markets reached $3.98 trillion. This huge volume is divided between hedge funds, banks, commercial companies, central banks.

What is important for every retail forex traders is that the market is opened 24 hours a day and that we can have a great advantage compared with other markets: leverage. To conclude, forex trading offers unique perspective over the financial market, a chance that should not be missed out by anyone.

| Posted in » forex

The Forex repricing process

Written by A Forex View From Afar on Saturday, August 09, 2008

The euro (Eur/Usd) fell the most in 8 years today, dropping almost 300 pips, as the market cannot, or will not, see past what the ECB are doing at the next meeting, and sentiment swing that a cut may be coming if oil prices continue their slide.

The market is now in a major re-pricing process, and moving on from the initial stage reported three weeks ago where distribution of short dollar positions was seen to be happening. A higher European interest rate means buying the Eur/Usd pair will pay out in overnight swap interest, making it more attractive to hold long positions, but now the decimation of the intrinsic value of the pair eats into that process. As the market sees less probability of an interest rate hold the asset (our case the euro) is sold lower until all the excess orders are taken out, and right now it looks as though institutional orders still have not been found as support in any great number. The speculator’s job now will be to discover where the sell orders are on the dollar, and from there possibly bounce the euro in a contrarian move to regain 23.6% of the lost ground. It is odds-on that the bounce higher will be a Fibonacci move, but finding the bottom is a fool’s game right now.

The euro’s story does not end here. More and more releases indicate the Euro-area may have a hard landing in the second and third quarter, the sentiment and economics are dropping hard, and in turn, this will impact the currency’s valuation.

The longer-term outlook seems to be that the market will still stay in a range, as the bad news coming out of the Euro-area will start to be seen as fair value, and the US economy will not be able to show real growth signs. This does not mean the market has now found a bottom, since more adjustments will come from the economic releases in the following weeks. The question is at what value the market will find the equilibrium point; we will see it as a four hour chart reversal, possibly as a MACD crossover, a Stochastic read, a Support area bounce, or a trend-line break. Whatever is used to signal a reversal it is very important to keep out of the minutia when attempting to catch a falling knife, and as such trying to trade a chart time-frame lower than 240 minutes could be a very inappropriate decision. We need confirmation from a big time-frame that the buyers have had to step in.

Next week, the Euro-zone will have another rough fundamental test; on Thursday the GDP numbers are expected from the Euro-area, and Germany, and both estimations point to a contraction. Get the gloves ready to catch that knife.

| Posted in » forex

ECB Press Conference Analysis: Inflation is still the main problem. Now add lower growth

Written by A Forex View From Afar on Thursday, August 07, 2008

• Inflation rates are likely to remain well above the price stability levels
• Risks to price stability over the medium term remain on the upside
• Real GDP growth figures for mid-2008 will be substantially weaker
• Weakening in GDP growth due to factors such as slower expansion at the global level and dampening effects from high and volatile oil and food prices
• Growth in the world economy, while moderating, is expected to remain relatively resilient
• Fundamentals of the euro area are sound and the euro area does not suffer from major imbalances
• Household disposable income and consumption, are unlikely to compensate the loss of purchasing power
• Uncertainty surrounding this outlook for economic activity remains high
• Very high and volatile levels of commodity prices and the ongoing tensions in financial markets
• Downside risks continue to relate to the potential for the financial market tensions to affect the real economy more adversely than currently anticipated
• Annual HICP inflation has remained considerably above the level consistent with price stability
• Annual HICP inflation rate is likely to remain well above a level consistent with price stability based on current futures prices for commodities
• Risks to price stability at clearly on the upside and have increased over the past few months
• Monetary analysis confirms the prevailing upside risks to price stability
• growth of broad money and credit aggregates is showing some signs of moderation
• The current yield curve has led to rapid increases in time deposits and to a substantial decline in annual M1 growth

Once again, Mr. Trichet put a lot of pressure on the inflation problem, but at the same time he underlined the fact that the economy will weaken in the second and third quarter. It seems the market had interpreted this detail as a rate cut may be possible. During the speech, the euro fell more than 70 pips, creating a lot of volatility on its way down.

| Posted in » ECB, economic preview, forex

The Euro and the ECB Meetings

Written by A Forex View From Afar on Wednesday, August 06, 2008

When referring to currency valuations there are two aspects that are reflected in the charts; business cycles and inflation. The business cycle can be determined by economic releases, and the central banks each gauge the regional inflation expectations.

A central bank can communicate with the market throughout several ways, ranging from speeches, statements, press conferences, and sometimes with published research papers. The ECB likes to be in touch with the market by press conferences it seems. A simple outline of the days when Mr. Trichet, the head of the ECB, had a press release shows how the market really bought his words; most trends developed from that time, the attached chart shows.

The recent price action clearly shows the euro is in a downtrend, but soon the pair will run into the 1.5300 support area, something that held the pair higher in the past. Quite interestingly, the pair bounced from the same area when Mr. Trichet appeared with a new speech the last time that we were here.

Usually, a lot of volatility accompanies the 08:30 EDT conference, especially when the market were delivered surprise message (read interest rate increase announced during the Q&A two meetings ago). Is very likely that tomorrow the market will see a new trend develop which will either turn the pair around, or make it break under the 1.5300 area. If we see the same Chairman’s thoughts, bullish over the euro-economy and its fundamentals, is very likely the pair will reverse some of the recent losses. The 1.5530 may offer some a good entry point, with a close T1 and medium range T2.

However, if Mr. Trichet recognizes the Euro weakness (which we have seen in the news releases lately) we may have a case of strong selling pressure and something that could make the pair fall under the 1.5300 support area. As such, the 1.5350 area could offer some a good entry point with a ticket split into 3 targets. The first ticket should be close range, the second target could be closed as the U.S. comes to a close, while at the same time letting the third ticket to run as low as possible, and maybe even hold it until the next press conference! No Buy, Sell Or Hold!

| Posted in » ECB, forex, retail forex

Dollar and Equity Boost Oil, Wheat and Corn drop hard

Written by A Forex View From Afar on Wednesday, August 06, 2008

Despite the strong gains posted this year, commodities have started slowly to move lower, erasing a lot of the increases made in the last months. Oil dropped more than 20% from the high made in July, Minnesota wheat dropped an amazing 60% since the top was reached in March, while corn is off by almost 30%. The medium and long-term effect of this sustained selling will be seen in the inflation read later this year, when out of nowhere inflationist pressures will drop. Furthermore, companies and ultimately consumers will see and feel these lower prices in their pockets and read the effects in the earnings report.

It is not clear what exactly dragged commodities lower: a supply and demand problem, the strength of the dollar lately or speculators closing long orders that have earned their keep over the last eighteen months. It is pretty clear that the equity markets have enjoyed this power selling, and seems to have helped the market to find a near-term bottom.

The fundamentals have aligned for some sustainable equity and dollar buying it would seem, and all that may be required is for traders to get back from vacation and start to build a trend. The dollar index just broke the 200 day SMA area, and now has a real test if it is to hold it. Oil and gold are doing their part, and it looks as though the speculators have moved from Corn, Wheat, and Metal towards (dare we say it out loud).....equities. Forget the headlines, the charts are reflecting a near-term swing change. The S&P and the dollar index now have to do whatever it is that they need to do, including holding huge near-term resistance areas that are being challenged.

| Posted in » commodities, forex

Euro Curve Ball More Hot Air?

Written by A Forex View From Afar on Tuesday, August 05, 2008

The F.T. says in an article published today, without quoting an official source, that Germany’s second quarter GDP number will come at -1%. This is breaking news, since it shows that the European powerhouse would have contracted for the first time in the last year, and will raise questions on what the GDP number will actually be that is released on the 14th of August, and whether such a contraction is priced into the current euro price. The question remains how reliable the data is, since the newspaper refuses to divulge its source, but is not the first rumbling of this nature, and points to a slow-down that can be attributed directly to the raising of rates last month, in an effort to fight inflation. All does not look well in the Euro-zone.

If this drop in GDP follows through the euro may have big problems ahead. Over the last seven years the euro reached most analyst estimates, on most releases, whilst the U.S. failed, time and again to get to analyst parity. Now it seems that the wheel had turned and U.S. is the one expanding (relatively), while the Euro-area is floating somewhere between contraction and expansion. Such news has the potential to completely revalue the euro; a negative read at -1% GDP does not justify such a strong currency, the value of all goods and services in the region do not equate at that level to a euro at 1.5550.

On the other side, the IMF (International Monetary Fund) has just published a report keeping the European growth forecasts for 2008 and 2009 unchanged at 1.7% this year and 1.2% next year. Going forward, IMF specialists are divided as to whether the ECB has to raise or keep rates on hold over the medium term. There is a huge void between these numbers, and although one source is reliable, and the other unknown, the IMF have been revaluing forecasts for all of 2008 it seems.

What is sure right now, the incoming data is pretty mixed and the market will need some time to digest it, especially as the FOMC meeting will be added into the dollar valuations. This may be a volatile time ahead as fair value is argued.

| Posted in » ECB, forex

The FOMC statement and its short-term effects

Written by A Forex View From Afar on Monday, August 04, 2008

A few times a year the Fed has a meeting in which they decide upon their most important economic lever: the overnight Fed Fund rate, and once the interest rate decision is revealed the Fed issues a statement giving a short description of where the FOMC members see the real economy going. The statement has only one purpose, and that is to stabilize the market. The July release was followed by events that showed the FOMC have a big role to play in market stability. Until now however the FOMC have failed to restrain inflation, nor to anchor price increase expectations, even though every statement from the recent meetings says inflation will moderate in the coming quarters, and that the Fed is closely monitoring the situation.

Tuesday will bring a Fed that will make an open statement assuring growth, and that fighting inflation are their main priorities (even if they are somehow opposed it would seem to both at this time). The other thing the Fed may say tomorrow is that the economy has possibly bottomed, although in the coming quarters the GDP number may not surprise anyone due that the rebates checks that have redistributed the growth potential.

If the hot air blows tomorrow, as is the norm recently, the short-term effect will be dollar strength across the market. The euro may very well test the support area of the 4h chart channel the pair is trading in right now. The swissy may test the daily chart topside areas that have held as support since May, and all as a consequence of a stronger dollar (relatively speaking), and higher treasury yields that may force equity traders back to their buying mode, at least for the rest of the afternoon.

| Posted in » Fed, forex

Long Fed, Short ECB

Written by A Forex View From Afar on Monday, August 04, 2008

Fed Funds Futures contracts are pricing a hold on overnight interest rates for the next meeting outcome, scheduled for 5th August.

If the Fed do hold, as the market expects, it will be the second FOMC meeting at which rates are kept at 2%. This after the Fed cut at the April meeting by 25 basis points. According to the Cleveland rate probability the market sees a 90% chance of a hold on Fed Funds next Tuesday.

Regarding future expectations, Fed Funds Futures are pricing a rate increase for the December settlement date. This outlook has the potential to influence the dollar’s valuation, especially if we add the data from the latest period, which suggest the US economy had found a bottom. The old greenback may be further empowered by the fact that the Eonia future contracts in Europe are starting slowly to move up, reflecting the market view that the ECB will likely hold rather than raise.

As such, the dollar bulls may overcome the market for the time being. However, these futures expectations may alter quickly once one of the central banks steps again in the market to do some more jawboning, keep your eye on the calendar; they tend to sneak these speeches in under the radar. Outside of hot air it does look as though the euro has some work to do to hold current valuations, and that makes 1.5550 a very pivotal area to work up or down from.

| Posted in » ECB, Fed, forex

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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.