A Forex View From Afar

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A bleeding Q4

Written by A Forex View From Afar on Monday, January 12, 2009

The latest estimates for the three major economies, U.S., European and U.K. points to strong contractions in the fourth quarter of 2008.

Estimates are a 1.5% contraction in each of the three economies, in nominal terms, or 0.6% annualized. This would be the strongest contraction seen in the last few decades. In addition, both Q1 and Q2 of 2009 are seen negative next year, making this recession much longer than previous ones.

The very poor GDP forecasts should not be any surprise, since almost every release is at a record low, or very near. Manufacturing and industrial production, the two big components of the real economy contracted at the fastest speed on record in the last months, according to the PMI release.

The labor markets are also in a horrible state. The unemployment rate in the U.S. is now 7.2%, but forecasts go as high as 8.5%, even with President Elect Obama’s stimulus plan. The U.K.’s labor market trails very closely, having the rate rise by almost 1% since the summer of 2008. In Europe, the jobless rate rose steadily by 0.6% in the last year, reversing a downward trend that lasted more than 2 years.

With such poor forecasts ahead, it is wise to expect risk-aversion coming back into the market from time to time. The latest case was the NFP release, when the dollar strengthened more than 300 pips against the euro, after a very poor release. However, this is good news for currency traders, because we can enjoy strong (and profitable) trends. Risk-aversion can be a very good thing, as long as you are on the right side of the trade.

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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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