Although there weren't many volatile price swings today, there are a few key events worth noting and the first one we're going to focus on is the testimony and rhetoric by our friend little Timmy Geithner...
No-stress test:
This morning Geithner was in DC testifying before another do-nothing committee and he took full advantage of the situation to put on show that would probably make David Copperfield shake his head... Geithner basically told the politicians and market participants he's not expecting any major failures and the banks will have options and alternatives to best deal with their insolvency. Now, he didn't use the word insolvency, he'd never go there, but what Geithner was saying is, don't expect to see another Bear Stearns or Lehman Brothers situation with the 19 banks undergoing the so-called stress test.
Geithner also told the committee that banking regulators, not the Treasury, are the ones determining who passes and who fails the stress test. Why would he say that when we all know it's not true? Because Wall St. and especially the financial sector has had enough government intervention, so now little Timmy has finally learned his lesson and is doing a great spin job of removing as much appearance of the government's hand as possible.
This comment here is what really gave Wall St. a boost:
"The vast majority of banks have more capital than they need to be considered well capitalized by their regulators"
His comment is both true and untrue... it's Geithner's way of speaking out of both sides of his mouth. What makes it true and untrue? Well, it's true that those insolvent banks will be considered well capitalized because the Fed has already offered unlimited and unbridled access to their balance sheet. With the Fed offering as much cash as needed at 0.00% rates, yes, in a weird and twisted way, you can say all of those banks are well capitalized.
But, here's where his comments are untrue and where the stress test is just another smoke and mirrors scam... the stress test being conducted on the 19 banks is not focused on the single biggest factor that destroyed the global equities market and helped lead the world into a globalized recession -- toxic assets that have the inability to be valued at market.
I'm talking about mortgage-backed securities, credit default swaps, collateralized debt obligations, you name it... the regulators, the Treasury, and the Fed are not scrutinizing the 19 banks based on the large amount of toxic assets sitting on their books, rather they are simply focused on capitalization and that makes this entire stress test thing a joke.
The biggest of the 19 banks are going to get a free pass when it comes to the potential damage those billions worth of toxic assets could cause and when the stress testing is done they will all come out with flying colors, but this ought not be. After all, wasn't it MBS's, CDS's, and CDO's that sent giants like Bear and Lehman to their graves in addition to causing at least a trillion worth of taxpayer money to be distributed to AIG, Citi, BOA, and a dozen European banks?
To me it's a crazy thing to see the markets rally on this type of news because at some point those toxic assets will have to be reconciled and accounted for. I know the Fed and Treasury are hoping and waiting for a bottom in housing before they deal with the toxic assets but that bottom in housing is not here and won't be here in 2009 in my opinion. I just have to laugh at the idiots on Wall St. that don't use their brains and see what's really going on here and that the smoke and mirrors game is unsustainable over the long-term.
The bottomline on this stress test issue is very simple -- the Treasury is treating the symptom, not the cause... God bless America.
Wall St.:
Geithner's reassuring words sent the financials soaring and helped push the S&P 500 right up to key resistance at the 850 level while the Dow fell just a few dozen points shy of the key 8,000 level. Although the S&P 500 managed to hit resistance, the S&P 500 futures (ES_cont) failed around the 848.50 level and has since backed off even further, and that's why I love the equity futures markets because there are a whole lot more smart traders in that market who are much more informed and make sensible trading decisions.
If it weren't for the dog and pony show in DC today, I don't believe Wall St. would have closed where it did. I would imagine Tokyo will follow Wall St.'s lead and we should see some recovery on the Nikkei this evening.
Gold and crude:
Spot crude made a strong recovery off its lows as the S&P 500 and Dow soared to the upside, recovering a good portion of their losses from yesterday. Spot gold on the other hand saw profit-taking in addition to money-flows heading out of gold and into equities. If you're a chart type person, pull up a spot gold (XAU) chart and a S&P 500 futures (ES_cont) chart, put one on top of the other, and I'd be willing to bet when gold topped out and started falling that the S&P 500 futures bottomed out and started moving back up, especially after the 1000 EST timeframe...
That's how those markets are going to behavior for now... when market participants are willing to take on risk, for whatever reason, the money-flows will come out of gold and move into the S&P 500 and crude.
Forex: It was a mostly quiet and subdued day in FX, but we did get a few interesting fundamentals to consider... as we forecasted, German PPI showed yet another negative print and that put some initial downside pressure on the euro, however, just a few hours later we got much better than expected ZEW data which stopped the euro's slide.
GBP--
In yesterday's update I mentioned the inflation/disinflation situation and how I didn't think we'd see any negative disinflationary data out of the UK this morning. Sure enough, all UK inflation data beat market expectations and this was highly supportive of the GBP/USD and the GBP/JPY in today's trading as we saw the pound sterling move back to the 1.4700 level while the GJ move about 350-points bottom to top.
In my opinion, as long as inflation keeps running hot in the UK, it should keep the pound somewhat slightly supported, however, should the UK go the way of the Eurozone and US in terms if disinflation creeping in, the pound will come under renewed pressure.
CAD--
This morning the BOC beat my CAD interest rate forecast and went ahead and dropped rates another 25bps. The BOC's 0.25% rate is the lowest in their 75-year history and they hinted at keeping their rate at historically low levels for the foreseeable future. The BOC even went as far as saying they have "considerable flexibility" in terms of future monetary policy. In other words, it's probably safe to say the BOC is ordering new printing presses and ink even as we speak...
I'm not a UCAD trader but we have a very good UCAD trader here in the community and after a brief discussion this morning we both agree it would probably make a lot of sense to buy the CAD on the dips, which would be a purely fundamental/interest rate play.
EUR/USD--
Once again the euro was able to hold strong above that key 1.2901 level I gave on Monday morning and unless we get a clear break of that key level, the euro can only keep testing to the upside. On Wednesday we get no euro data and out of the US we only get the Home Price Index and Crude Inventories, so expect the EUR/USD to maintain a tighter correlation with the equities and crude.
The euro's stuck in such a tight range right now between two mega key levels, so I really have no bias one way or the other. As far as trading goes, the only thing I did today was short the GBP/JPY at the 145.00 level which was like grabbing free money. But, at some point the market will have to make a decision and move out of this range. Overall, I'm still bearish on the euro and would feel more comfortable shorting the rises, especially if the euro failed around the 1.3050-80 level. Re-acclimating to trading:
One of our members sent an email to ask me exactly how I get myself back into trading-mode after being away from the markets for a week or more. I think that's a great question and I'm happy to explain how I re-acclimate my eyes and mind to the markets.
For the purpose of this commentary I'm going to use the EUR/USD pair for our point of reference, but the same process would take place for other pairs I'm trading like the EUR/JPY, GBP/JPY, or AUD/USD. 1. Review of 30-minute opens--
The very first thing I need to do is make a study of the EUR/USD 30-minute price opens for the entire time I was away from the market. If I'm away for a day or a week, I have to see exactly where the euro was at when I left, where it's at when I get back, and what happened in between that time.
The reason I make a study of all the 30-minute opening prices is so I can see what kind of price patterns, price behavior, opening sequences, and pip differentials played out while I was away. I need to see if there were more sequences of higher opens or lower opens. I need to see if the euro was over-extending itself to the topside or the bottomside, and then I need to see which side of the market the euro has over-extended itself when I'm getting ready to jump back in.
If I don't have a gauge on how the price patterns were playing out while I was away and how the price pattern sequences have developed the prior 24-hours to me getting back into the market, I'd really have no idea which side of the market to be on. The last thing I want to do is take a euro long if the price pattern sequences are telling me the euro's already over-extended itself to the upside, that would be dumb. So, I depend on my 30-minute opens to give me clarity and clarity and picking the right side of the market to trade is a key when you've been away from the action for 24-hours or more.
For those traders who don't have a system for capturing 30-minute price opens and analyzing the price pattern sequences, you can use any MT4 platform to all the 30-minute data you've missed. MT4's history center is a great resource to pull this information and you can drop it right into an Excel spreadsheet and you can sort it that way to see what you've missed.
2. Review of market correlated variables--
After I get through analyzing the euro's price patterns and price behavior, I turn my attention to the following market correlated variables:
S&P 500 futures
Spot gold
Spot crude
Treasuries
That list is in order of importance...
Just as I do with the euro, I review the price action and price pattern behavior of those correlated markets. With the S&P 500 futures currently carrying the strongest market correlation to the EUR/USD, I analyze the EUR/Equities correlation to see if there's been any changes that I need to take note of... are they still moving in tandem, are they disjointed, is one leading the other? Those are the questions I need to get answered in my mind.
I spend less time analyzing the EUR/Gold-Crude-Treasuries correlation, but analysis needs to be completed nonetheless. I need to see if money-flows have been moving into riskier markets or if risk aversion has been the main theme. I need to see if money-flows have been pushing gold and the dollar up in tandem while pushing the euro and crude lower. Basically, I have to get all the correlated markets settled in my mind and gain a good understanding for how they've all been behaving since I've been out of the market.
3. Review of fundamentals--
Almost every trade day at least one or two key pieces of fundamental data is released, so I take some time collecting and analyzing all the data I've missed in order to see how those data trends were playing out during my absence. I don't look at all the fundamentals, just the really important stuff like interest rates, inflation, consumer, manufacturing, and housing. I focus specifically on what I call the "flavor of the week" fundamentals.
Right now, my flavor of the week is inflation data, so when I got back yesterday I analyzed all the inflation data I've missed. Now, if the flavor of the week happened to be housing data or retail sales, I'd focus on all that stuff first and then go from there. Here's a real life example of how this works...
When I left for vacation I was bullish on the AUD/USD and my bias was to buy it on the dips. The Aussie was trading nicely above the 72.50 level and really had no problem getting above the 73.00 level. Guess what happened while I was away? We got negative inflation prints out of Australia in addition to the RBA taking a strong bearish tone on the Aussie economy. So, in a span of just a few days, disinflation reared its ugly head in Oz and the RBA did an about face and are now hinting at further rate cuts. Had I not taken the time to review what I missed, I'd have no clue what was happening with the AUD, the RBA, Aussie inflation, etc.
4. Central bank rhetoric--
The next thing I need to do is get caught up on any rhetoric out of the Fed, Treasury, and ECB. Central bankers use verbal rhetoric all the time to manipulate the markets, so I need to be sure how the Fed and ECB are using their rhetoric to push market participants. A good bit of market sentiment is under the control of the central bankers... Bernanke, Trichet, and Geithner use their rhetoric to move markets, they are masters at it, so I need to see how the masters are manipulating things in order to prevent myself from being on the wrong side of the market manipulation.
If Trichet wants a lower euro, the euro will go lower, very simple. If Trichet and Bernanke both want their respective currencies lower, I will see their rhetoric and correlate that back to the EUR/USD price action patterns and price behavior, which will likely show a lot of disjointed moves.
So, those are the four key areas I focus on as I get my eyes and mind re-acclimated with the markets and get back into trading-mode. It's a lot of work but well worth the effort. I refuse to jump back into the market blindly, that's pretty stupid. But, by following this system I really don't have much trouble getting back into the markets without feeling lost or confused, I can figure out what's happening. After some research and analysis on the factors that actually cause markets to move I gain a lot of clarity and can begin trading again within hours.
That's it for now. Key levels will be posted in the morning. As always, be smart with your risk and money management.
For my first day back of watching the markets in about a week or so it felt like February all over again... fear, panic, and risk aversion were clearly the order of the day in the Forex market along with all other correlated markets as we saw the dollar, yen, gold, and Treasuries make strong gains while crude, the euro, pound sterling, Swiss franc, and Aussie took another beating and round after round of sell-offs. When we have a scenario where gold and the USD Index move up in tandem, you know market participants are pretty spooked about something...
I haven't done much trading the past few hours, I more so spent the day observing, researching, reading, and catching up. I wanted to get a feel for the current market sentiment and allow myself to get re-acclimated with the markets. It was a little shocking to see such a strong JPY but after some basic research it's clear why and it all goes back to what's happening on Wall St. in addition to what I posted this morning about the season of disinflation running through the major globalized economies.
Wall St. woes:
Wall St. got off to a rough start this week as the Dow lost over 3% and the S&P 500 lost over 4%. The Dow is still unable to sustain a break above the 8,000 level while the S&P 500 remains unable to hold any ground above the 850 level. The Dow put in its worst performance since before the bear market rally took hold on 10-March.
Wall St. shrugged off Bank of America's better than expected earnings... is it possible market participants are seeing through the smoke and mirrors? And when I say smoke and mirrors, I'm specifically referring to the fact that bailed-out banks such as BOA can still borrow money from the Fed at 0% and lend it back out at by as much as 35% in addition to the abrupt change in accounting rules which only further delays the obvious losses that will need to be taken at some point in the future. FYI, BOA's stock was down almost 25% today...
Oracle's $7 billion purchase of Sun is being lauded as another great sign of overall economic recovery and while the Oracle/Sun situation is the largest M&A deal of 2009, I'm looking at the deal from more of a negative standpoint. First of all, during this type of economic recession it would be more of a positive sign to see expansion and growth in the tech sector, not contraction. Oracle paid a hefty premium for Sun's stock, and that's all well and good but I can promise layoffs will be forthcoming.
The financial sector led Wall St. on it's hell-in-a-handbasket race to the bottom and based on historical trends with equities, financials can't lead the markets back and it would be up to sectors like tech to do the dirty work. After today's M&A news the tech sector took a negative tone and was weak to the downside all day long helping to lead the markets lower overall. Oracle's stock was down about 2% on Monday and that's not the way it should work exactly.... I think Oracle made a really dumb move buying Sun, but that's just my opinion.
Despite the losses with equities I'm still not ready to call an end to the bear market rally. With the equities market going on a 5-week+ run from bottom to the top, it's only natural to have a day where the Dow and S&P 500 have a violent sell-off. As I've mentioned many times, I see this bear rally being able to sustain right into the month of May as long as we do not get a major shock or surprise geo-political event. Market participants were looking for a reason or several reasons to take profit off the table and they got at least half a dozen good reasons to do so on Monday.
At this point I don't expect to see the Dow fall all the way back to 6,500 or for the S&P 500 to plunge to the 650 level. This may end up being one of those weeks where profits are taken, short's are forced to cover, and the natural order of price action and human behavior works its magic.
Commodities:
On Monday crude took another nasty hit, falling almost 9% while gold made a bit of a comeback after a few repeated failures to break below the $865 level. Gold benefited from today's fear trade and thanks to the shorts having to cover their positions. As far as crude is concerned, I think it's just another victim of the lack of inflation floating through the global economic system.
I can see a very strong correlation between crude's failure above the $50 level and the recent trend in surprisingly low PPI and CPI prints in the US, Europe, and Asia. To me it's very clear and I'm sure there's a chart out there somewhere that would justify my view. As long as the trend with consumer and producer prices remains negative, crude will be stuck and unable to break through the $55 to $60 level in the near-term.
That being said, over the long-term view I have to be somewhat bullish on commodities. The Fed and ECB will not allow the trend of negative inflation data to be the order of the day, it's not in their interest or the market's interest to see CPI and PPI fall much lower because it would only further complicate their job or re-heating and re-inflating the markets. It isn't the over-supply of crude inventories or the lack of manufacturing and production per say that would keep a lid on crude, in my opinion it's the negative CPI and PPI that are crude's worst enemies, along with a pair like the AUD/USD.
Mega fundamentals on Tuesday:
Sticking to my theme of disinflation and negative CPI's and PPI's, on Tuesday the markets will have to contend with more inflation data out of the Eurozone, UK, and Australia. I am forecasting another negative print on German PPI and a very strong probability to see a negative print on Australian CPI. I don't really follow the UK or the pound sterling but I would be shocked to see any negative inflation prints there, however, should the UK's CPI and RPI print much lower than expected I have to believe the GBP/USD and GBP/JPY will see another round of selling.
There's also a CAD interest rate event plus a BOC statement. I'm not sure the BOC can go much lower than 0.50% but we shouldn't rule out the possibility they follow the Fed down the path of quantitative easing or at least hint at it. Keep your eye on that event as it may provide a clear trade opportunity...
Eurozone and EUR/USD:
In addition to the German producer inflation data the markets will get the latest German and Eurozone ZEW sentiment data. I don't have a forecast for this event but based on what I saw in the markets today, it looks like participants will take advantage of any reason they can to send the euro lower.
This morning the Bundesbank did a nice job reminding market participants how bad the recession in Germany is and how much of a hit German growth is taking thanks to the death of their exporting sector. Weak German and Eurozone inflation data along with manufacturing data later this week should confirm the reality of what we're seeing in Europe and will serve to keep downside pressure on the euro, especially if Wall St. equities continue to slide over the next 24-hours.
EUR/USD--
Although I've been away from the market's for awhile I've not removed my overall bearish view on the euro and I still believe it should be shorted on the rises. I've not taken a euro trade in weeks now, I'm mostly sticking to the yen crosses but I will make an attempt to return to the EUR/USD and look for some solid trading opportunities this week.
Should Wall St. go lower on Tuesday, which I believe will be the case, and we get negative Eurozone fundamentals along with further weakness in commodities, it would appear to me there's a perfect storm to send the EUR/USD even lower, possibly down to test the 1.2750 level in the very short-term.
My 1.2901 key level held solid for most of the NY session but I'm not ruling out a test of the 1.2850 level or lower over the next 8-hours or so. On Monday morning Frankfurt and London took the markets lower and I don't see any reason why there can't be a repeat performance as long as some of those factors we talked about earlier come in to play. If you're looking to take a fresh euro short, you may want to allow Tokyo to get up and rolling or even wait until after the 0200 EST timeframe which is when Tokyo will typically take the euro higher and then London will take it lower.
Tomorrow morning at 1000 EST / 1500 GMT I will do a live audio Q and A session in our chat room, also, one of our members sent me an email to ask if I would explain how I get myself re-acclimated with the markets after being away. I think that's a great question and I will use a separate blog post to cover that aspect.
As always, if you're trading this chaos, please use the strictest of risk and money management. In my view, the FX market remains severely ill-liquid which is adding to the extreme price swings. The volume on Wall St. today was also shockingly low, and those issues of low volumes and ill-liquidity can wreak havoc with traders who are over-leveraged and on the wrong side of the markets.
EUR/USD key levels will be posted before Wall St. opens on Tuesday.
This morning's the first time I've looked at the market since last week and there's obviously been quite a bit of volatility... I think the last time I looked at the FX market the EUR/USD was in the 1.3400s, the EUR/JPY in the 133.00s, GBP/JPY in the 149.00s, AUD/USD in the 73.00s, and the GBP/USD was approaching the 1.5000 level.
While there's been a resurgence in the USD and JPY I also see equities have been fairly well supported. At first glance it wouldn't make much sense for the S&P 500 and Dow to show gains and support along with risk aversion currencies, but it's not really taking me long to figure out what's happening after a bit of digging and searching through some of the important fundamentals released the past few days, along with what I am seeing in the correlated markets.
Money flows have clearly come out of Treasuries the past week. This is obvious as we see the 10-year yield pushing back towards the 3.00% level, and I believe a lot of the money flows have poured back into equities as it's becoming more apparent the Treasury market is unable to sustain it's bullish tone, and if money won't go into Treasuries it's only natural for that cash to head to Wall St.
So, for the rest of this update and commentary, I'm going to do my best to explain what I am seeing right now in the markets and why I think this type of price behavior is occurring. Now this all might be old news to a lot of traders but for my own benefit of playing catch-up, I'm just going to write out what I'm thinking.
USD Index:
About two weeks ago I urged traders to keep an eye on the USD Index because it was nearing an ultra-mega key level, which was 84.50 and I see the USD Index failed repeatedly to break that 84.50 level. The dollar's clearly been stronger across the board as of late and the USD Index is the first culprit that points to the dollar's support. So now the question is, what's the cause for a stronger USD Index?
Next...
Commodities and Inflation:
In my view, gold, crude, and especially the latest inflation data tell the tale...
Gold--
With gold being denominated in the US dollar it's no wonder the dollar has continued to gain as gold continues to move lower to the downside. It really cannot work any other way right now, especially in light of the central banks continuing to sell gold to raise cash. Selling gold is the equivalent of buying dollars and ever since this commodity last touched the $1,000 level it's done nothing but sell-off and make lower lows on an overall view. The USD Index isn't going anywhere but up until gold finds support and a base to push it back up over the $900 level.
Crude--
I also see spot crude has been unable to hold any ground above the $50 level. Each attempt to sustain a break has failed. Once again we have another dollar denominated commodity that is weak to the downside and lending added support to the USD Index and to the dollar's overall strength.
So, we have a situation where USD-denominated commodities are weak and bearish. Why would this be happening if the markets are supposedly bottoming and turning around?
Inflation--
This is where it gets very clear... several times this year and just last week I warned about negative prints on inflation data and how it would not be good for all the non-risk aversion markets, markets like the euro, pound sterling, gold, crude, and the Aussie.
Last night the latest PPI data out of Australia printed negative... market participants were expecting a print of 0.6% but instead got -0.4%. Last week Japan's consumer inflation data printed -2.2%, US PPI printed -1.2%, German WPI printed -0.9%, US CPI printed -0.1%, Swiss PPI printed -0.5%, Aussie import prices printed -2.8%...
Seeing a pattern here? At the beginning of 2009 I said "woe" to the markets should we start getting negative inflation data and disinflation fundamentals. There's no way prices can be supported with inflation turning negative around the world. This situation with inflation going negative is especially destructive to gold, crude, and riskier currencies like the euro and pound.
With disinflation we get downside pressure on commodities and this pushes the USD and JPY back up and keeps the USD Index well supported in the short-term. I think this is extremely cut and dry stuff... these are the underlying fundamentals of the market and as long as fundamentals like CPI, PPI, WPI, and Import Prices continue falling, commodities like crude and gold will struggle to hang on to any gains made, along with the euro.
Trading:
After being away from the markets for awhile and seeing what kind of volatility is out there, and lack of liquidity and market participation, I'm going to ease myself back into trading. I don't like the trend I'm seeing with the inflation data, especially as we move closer to the summer session.
The economic calendar is light on USD data until the end of the week and a little heavier on euro data. Housing will take center stage later in the week and I don't expect any major upside surprises there even though some market participants called a bottom in housing last month for some strange reason. In the month of March 341,000 new foreclosure notices went out and foreclosures saw a 24% rise year-over-year. That doesn't quite sound like a bottom to me...
I'm going to do a live audio Q and A session on Tuesday at 1000 EST / 1500 GMT as I should be a little more acclimated with the markets by then and have a better feel for things. I hope traders have been practicing strict risk and money management, which often times means doing nothing at all... I imagine a number of chronic over-leveragers in the retail FX market have a few tales to tell from the past week...
Well, I've got more catching up to do... I should have another update later this evening and I will post today's EUR/USD key levels as we get closer to the Wall St. open.
As we officially kicked-off the start of earnings season, US equity markets were down for the second day in a row with the S&P 500 dropping 2.4% while the Dow lost 2.3%. And, for the second day in a row the markets were looking for anybody or anything to blame for the losses. On Tuesday the financial media blamed "legendary" investors Marc Faber and George Soros for making comments that spooked Wall St. Once again, I'm not buying it. Soros and Faber are not the reason why the S&P 500 and Dow are sliding in my opinion.
If Soros is the reason, it just means these markets are all the more a joke and will be unable to sustain any upside gains. George Soros hasn't placed a trade in a decade or more and he's fresh off a multi-million dollar fraud conviction for trying to manipulate a Hungarian stock. If market participants are truly listening to these old, washed up dinosaurs who don't even trade or manage their own money, this turmoil will continue to drag out for months and months.
Remember just two weeks ago when the S&P 500 showed a gain and rebound of 20% and based on that magical 20% number we supposedly found ourselves in a bull market? Remember when the Dow was supposed to be going back to 8,500 and the S&P 500 was supposed to go back to 1,000?
And now look where we are... within a matter of days of all the financial gurus claiming the end to the bear market and the start of a bull market, all based on some random 20% number, the Dow and S&P 500 stopped dead in their tracks and have given back hundreds of points.
What we're seeing on Wall St., with the EUR/USD, GBP/USD, EUR/JPY, GBP/JPY, and crude is the pure essence of the two most beautiful aspects of any tradeable market -- price action and human behavior. Call it overbought/oversold, call it technical, call it fundamental, call it whatever you want, but every tradeable market on planet earth that is controlled by humans will always overhsoot to the topside and bottomside. Every human-controlled tradeable market will always over-extend their moves in either direction and this happens on an almost daily basis in the markets, especially in FX.
Why market's overshoot--
Those traders that have been following my trading and my philosophies on trading know that my style and methodology revolves around the theory that all markets overshoot and over-extend themselves, and that the highest probabilities for any trade is to play the market's reaction that comes after the market has exhausted itself to the upside and downside.
Based on what I know about all tradeable markets, I've identified the two factors that cause all markets to over-shoot. The other beautiful thing, those two factors that cause all markets to exhaust themselves also cause them to run the other direction once the exhaustion reaches the point of no return...
Fear
Greed
Now I'm not revealing anything groundbreaking or prophetic here, this is common knowledge nowadays. But, I don't think traders really understand or appreciate how those emotions control price action and human behavior. I use the fear and greed that drive traders to make the decisions they do to capitalize on their misfortunes.
It's said that 90% of all FX traders ultimately lose money in the market. I agree with that but I also think I know how more of those in the 90% club can join those in the 10% club... it's my opinion the only way to truly be profitible in FX over the long-term is play the market's fear and greed against them. I believe the majority is always wrong, the masses are always wrong, and the people that go against the grain are the ones that win the prize in the end.
Think about who's made the most money during the financial crisis... it's the traders that shorted sub-prime when sub-prime was the hottest thing ever. It's the traders that shorted crude at $140 when fools like T. Boone Pickens were saying it was going to $300. It's the traders that shorted the financial and bank stocks when entertainers like Jim Cramer were screaming "buy, buy, buy". It's the people that shorted the euro at 1.6000 when it was supposed to be going to 2.0000, and shorted gold at $1K when it was supposed to be going to $2K.
Fear and greed--
The emotions of fear and greed that overcome over a trader when they see a market running hot and heavy causes the following thoughts and ideas to enter their mind:
"I've got to get in on this move or else I'm going to miss out"
"There's no way this thing is going to stop now and if I get in, I'm going to clean up big time"
"If I miss this run, I'm losing money"
"I could have made 200-points had I bought-in on this move, but I can still get in now and make some money"
Fear and greed cause traders to start thinking that way and it's precisely why the masses and majority of traders almost always pile into the market during the last 5% of an up-move or down-move.
Fear keeps them out of the beginning of a market run because they aren't sure it'll actually sustain, so they sit there and watch the market move and they keep thinking of all the money they are "losing" by sitting on the sidelines. If a trader allows fear and greed to cause them to think they are actually "losing" money by sitting on the sidelines they will never get out of the 90% losers club, never.
The fear of not capitalizing on a market that is surging right before their eyes leads to the greed that causes them to push the button and take the trade, often times overleveraging themsevles and going much heavier than is even logical in order to bank big profits on a move they believe can't possibly stop and reverse.
I'm far from a great trader, I rarely catch monster moves, and I typically only take modest profits on a daily basis, but it's a rarity I'll ever find myself buying a top or shorting a bottom, and trading this way makes it nearly impossible of being on the wrong side of market. Those that have stuck with me these past few months can attest to this. I don't want to take the whole update on this aspect of trading but hopefully this gives traders, especially new traders, some food for thought.
The last thing I'll say on this matter -- I speak from personal experience of battling with those emotions and finally seeing the light... I've made every single mistake a trader can make and it wasn't until I truly understood these core principles of tradeable markets and human behavior that I've found consistent profits.
Consumerism still dead:
There's a piece of fundamental data that mostly goes unoticed but is extremely revealing and important for us to consider... Consumer Credit. Credit and consumerism go together like Lennon and McCartney, peanut butter and jelly, and politics and corruption...
You can't have a consumer if you don't have a credit, and if the consumer can't get credit, he can't be a consumer because Americans have no savings, they have an average of four credit cards that are maxed to their limit, and they can't use their homes as ATM machines because they are upside down and don't even have the FICO score to get a car title loan at this point.
Today we learned Consumer Credit dropped by $7.48 billion, which is an annualized decline of 3.5%. The boom times of the 1990s and 2000s were built on the back of easy credit and consumerism. Obama, Bernanke, and Geithner are urging consumers to spend, they are doing everything in their power to re-inflate the economy through cheap and easy credit, but it's not working.
Within the consumer credit data we also learned credit card debt that was uncollectable rose by a staggering 9% while revolving credit plunged almost 10% in February, which is the worst in two decades. Discover and AMEX have been been bailed out by the federal government because their customers aren't paying their debts in addition to them being unable to establish new credit with new customers. And guess drove Wall St. the past few years... credit.
I've heard some analysts say the consumer will recover in the second half of 2009 and I have to wholeheartedly disagree. With 70% of GDP dependent on the consumer, and consumer's rejecting or unable to get billions worth of new credit on a monthly basis, I see clear indication the consumer-aspect of this recession and global financial turmoil is not months but years from fixing itself.
EUR/USD:
Traders ask me all the time, "when will the euro drop, why won't the euro drop, what's keeping the euro so supported..." Well, for now it's the EUR/USD's strong correlation to the equities markets and what's happening with the yen crosses, and the battle being waged in the EUR/GBP market that is smacking it around. The EUR/USD has no legs of it's own to stand on and there's really not much rhyme or reason for the moves it's making on a daily basis.
Sometimes I really hate the euro, especially when we get the type of data we've had today... we learned Eurozone GDP dropped by 1.6% in Q4 which was more than expected and the worst decline in 13-years. Household spending dropped 0.3% while Eurozone investment sank a staggering 4%. Eurozone exports are down 6.7%.
How the euro can even be above 1.3000 is a total mystery to me, it makes no logical or fundamental sense, but again, the EUR/USD is tied directly into the S&P 500, and when equities are hot, the euro is hot. Will it change? I don't know, I can't predict that, but I think at some point market participants have to come to their sense and destroy the euro.
It's my opinion that ECB interest rates must come lower and they will have to at least begin buying corporate-sector debt and possibly government debt if they can get the laws changed to do so. ECB Quaden said:
"There is still room for maneuver and I confirm also that we are reflecting on other possible measures"
ECB Provopoulos said: "I do not see 1% as a threshold for the ECB benchmark rate. I do not exclude that the ECB could go down further from this level if the economic environment deteriorates further"
If?
Tomorrow we get the German and French Trade Balances, and German Factory Orders. I'm expecting the data to print at or worse than expected and for the markets to get yet even more indication all is not well in Europe.
For the US we have Crude Inventories and the FOMC meeting minutes which will likely be watched and scrutinized by market participants. I can't imagine the Fed saying anything in the minutes that will help the USD...
That's all I've got for now, I expect more insanity and volatility tomorrow, so please use smart risk and money management. Key levels will be posted in the morning.
We certainly had an interesting and volatile start to the week... just two-hours after Wall St. opened, the currency had pretty much already exhausted itself as most of the majors and crosses ran up like champs and fell back down like chumps. What does it all mean? Nothing really. The liquidity was severely lacking and as London and NY money-flows hit the FX market everything came right back down... no follow-through at all.
It's been reported a stock analyst named Mayo came out with a negative outlook on the banks and financials and this led to another panic sell-off in equities. Well, traders are welcomed to believe that but I suspect there are other factors at play right now. Did this Mayo guy tell anybody anything we don't already know? That would be like me making some grand announcement how the Japanese yen is weak and should be shorted and then acting like I've just made a prophetic revelation to the world... c'mon, everybody knows the banks are a mess, this isn't new stuff and if anybody believes the banks and financials are going to lead the economy and Wall St. out of the recession they are delusional.
What I believe we saw today was the market taking profit off the table ahead of earnings season which kicks off tomorrow with Alcoa and Bed, Bath, and Beyond. Within the volume on the Dow and S&P 500 I saw very little conviction selling, rather light volumes and more orderly moves signifying market participants were doing exactly what they should -- taking profit and risk off the table in case we get some surprises over the next two weeks. The markets were just being the markets...
At one point the Dow was down over 150-points but was able to make a recovery by the end of the day, only closing down 40-points. The S&P 500 saw similar price action and conviction within it's volume. So I'm not calling any end to the bear market rally and I believe there are more market participants looking for a reason to buy equities and not short them.
RBA and BOJ:
Some time late this evening or after midnight, the BOJ will release their decision on the BOJ overnight call rate along with a monetary policy statement. The RBA will release their interest rate decision and monetary policy at 1230 EST / 0530 GMT on Tuesday.
BOJ--
I do not expect the BOJ to move on rates, they are already at 0.10%, it's not like they can go much lower anyway. What I am expecting from the Japanese is nothing but JPY negative sentiment, rhetoric, and overall monetary policy. I do not see the BOJ saying or doing anything at all whatsoever to support the JPY right now. With the Japanese economy in shambles and the BOJ staying on a course of loose monetary policy, I'd be shocked to see anything other than the JPY getting trashed again post rate announcement. The BOJ's announcement is always tentative, so be on the look out for something from them after the 2300 EST timeframe and on.
RBA--
The RBA is a totally different story... as we talked about in yesterday's commentary, the RBA is much stricter with their monetary policy, the Australian economy has yet to enter a full recession, and I am not expecting to hear any announcements from the RBA about quantitative easing, forced currency devaluation, or alarming rhetoric. Those are all very good things for the AUD.
As bullish as I am on the AUD/USD, tonight's rate decision is not without its risks... based on my research it appears most economists and market participants are expecting the RBA to hold rates steady at 3.25%, which is still historically low for the bank. At their last meeting the RBA held rates and said they wanted to see how economic conditions in Oz evolve. Well, they have deteriorated a bit since then and I believe there is a good probability the RBA cuts rates by 25bps.
The other risk for the AUD is potential negative rhetoric or a negative outlook from the RBA. Over the longer-term view, I'm bullish on the AUD and I believe there is excellent upside potential for the AUD/USD. Because of the risks and the potential for a surprise cut, I will not attempt to pre-position myself in the market with an AUD/USD trade. The pair has been in a fairly tight range and for the sake of good risk management, I'd rather be patient and wait to see what the RBA does and says, then make my moves accordingly.
Taking a trade prior to the event or convincing myself the RBA will hold rates even though I know there's a chance they could cut would not be a smart thing to do... it's pure speculation. Even this commentary is just my best guesstimate but should I take a trade on the pair after the announcement I will be glad to let traders know what I'm doing in the market with the AUD/USD.
EUR/USD:
What's it doing and where's it going? I haven't really got a clue. I still don't like trading it but I did make money on it today, it was the only pair I made money on but it required me waiting for a nearly 100% probability to take a trade, and those types of probabilities don't come along every day in this market...
Prior to the EUR/USD showing a 100% probability of a buy, the pattern sequence of its seven prior 30-minute opens had never been made in the history of the EUR/USD. I've got every 30-minute opening and I never saw the EUR/USD make a downside pattern sequence in that kind of a way and my data confirmed what I was seeing... it never happened before. When the euro did finally bottom, the 100% probability of the euro moving up 50-pips showed itself between the 1.3358 and 1.3368 level.
Had I been a little more patient and waited for the entire sequence of lower lows to play out, I would have gotten in right at the bottom to the pip, but as you know, I got in 30-pips from the bottom (1.3388) and was not able to capitalize on the 50-pip payout potential. I'm not complaining at all, but it was certainly an interesting move we saw on the EUR/USD and another good learning lesson for how it's price action can behave.
Fundamentally, there is no euro or dollar data to contend with on Tuesday. I'm actually looking forward to a day without any data as it may give the markets less to go mental about. This doesn't mean we won't get any surprise comments from the ECB... on Monday ECB Nowotny made some very interesting comments worth noting:
On interest rates he said -- "There is both need and room for expansionary policy next year. In the short-term, there was still room for another cut to the main refinancing rate, cut by a smaller-than-expected 25 basis points last week to 1.25%, but not much more. There is still room for a next step."
Next step? I have no idea what next step he's referring here but it's probably not something that would be supportive of the euro in my opinion.
On the ECB supporting covered bank bonds he said -- "We have a wide range of possibilities and all of them are discussed." On the new accounting rules for European banks he said -- "There is a massive danger of disadvantages for the European side." Danger to European banks... that can't be good for the euro. He then said, "This is something that has to be changed very fast and I have to say that it was difficult for us to understand that the respective European committees are reacting to this challenge in a very slow way." It sounds like there's a little desperation and concern in his tones on this issue. I liked hearing it because we all know what kind of risks are facing the European banking system.
I can't tell you what tomorrow holds for the EUR/USD or any market, I'm just taking things on a 30-minute basis at this point and looking for relatively safe opportunities to make a few points here and there. It can be frustrating watching a pair make a huge swing and then waiting to play the retracement for not nearly as many points but I'm happy to be on the safe-side of the market and not riding with the cowboys.
This morning in the chat we had our first live audio Q and A and it went off without a hitch... every question was excellent and well received by traders. From here on out we'll do those Q and A's at 1000 EST on Mondays as long as market conditions allow. As I mentioned I prefer taking questions off the cuff and using the audio as opposed to typing things out, it's easier for me to communicate what I'm thinking that way.
That's it for now... we're already seeing some monster moves in the market ahead of tonight's rate decisions... the GBP/JPY has already made about a 250-point top-to-bottom swing... please practice smart risk and money management or better yet, do not trade at all until the markets show some stability and order.
Once again this week Wall St. will remain the center of the universe and where market participants take their cue. Geo-politics are heating up again... last night Kim Jong Il fired a missile over Japan and we should expect a response from the US and UN. Of course the UN's response willprobably be a harsh email to Kim Jong Il's gmail account, but it's a geo-political event we need to be mindful of anyway.
Hugo Chavez paid a weekend visit to Mahmoud Ahmadinejad where they discussed everything from destroying America, to the glories of socialism, and the mockery of the world's central banks. I can' think of a better time for some of these maniacs to pull a move while the US and other nations are flat on their backs economically.
No matter what, it's also difficult to justify the euphoria on Wall St. and in the other financial markets around the globe knowing the entire recovery hinges on the United States. Some market participants are promoting the Chinese to the role of leading the world out of the global recession, but I think that's a joke. The Chinese will take care of the Chinese, not America and not Europe...
Right off the top of my head here are a few reasons why I find it so hard to justify in my mind how global market participants can be so euphoric and hopeful of an "overnight" US recovery that will solve the problems:
13.2 million unemployed American consumers
An 8.5% unemployment rate with a target of 10%
A 15.6% unemployment rate when laid-off and part-time workers are included in the unemployment data (the BLS does not include this data in NFP)
Americans have lost $2.2 trillion in personal wealth since September 2008
$10 trillion added to the US deficit
A 5% surge in the US savings rate since Q4 2008 (consumers are saving, not spending)
Average work week at a record-breaking low of 33.2 hours.
Average weekly earnings are dropping by over $610 a month
US government is cutting jobs (when the government cuts jobs, you know it's bad)
ISM Services shows further declines, not improvement (US economy is now service-based and no longer manufacturing-based)
Need I go on?
Earnings week:
Starting on Tuesday and over the next two weeks our friends on Wall St. will get Q1 earnings reports. Earnings are forecasted to drop 36.6% year-over-year and I expect to see some surprises, both upside and downside. All markets will likely take their lead based on sentiment from participants in the equities markets.
Since we first forecasted the bear market rally in our 1-March outlook, I've not personally seen any indication it has to come to an end. If you read back through my blog even on the days where Wall St. lost 200-points or more I never said the bear market rally was over and stated it as such.
Over the next two weeks it could be a different story... the past 30-days Wall St. has shrugged off bad economic data while reacting euphorically to the rash of surprisingly good data. That's a clear sentiment shift. Fundamental data and corporate earnings, however, are two totally different things and they represent the state of the economy using two totally different views.
It's easy for the government to manipulate certain data sets they know market participants will react positively to. Earnings data is far less likely to be fudged and will give a more accurate representation of economic conditions in my opinion. The Dow and S&P 500 are entering earnings season having made the strongest gains since 1933. They are well up over 20% and what really complicates matters is that both indexes are sitting near key resistance levels at the start of earnings season.
There are three ways I see Wall St. will react to negative earnings:
1. Shrug it off like they've been doing since 10-March and continue higher 2. Get spooked and go sideways 3. Freak out and panic sell
The Fed and US government have exhausted themselves giving Wall St. a reason to keep buying and going up -- everything from trillions in economic stimulus, to 0.00% interest rates, and now the latest is relaxed accounting rules that were put in place to govern banks from doing the very things they did between 1998 and 2007.
I won't call a top or bottom on anything, I don't believe in them. I also don't believe in anything ever being "overbought" or "oversold". Any tradeable instrument can continue in one direction until that instrument's market decides otherwise. You could easily make the case the USD has been oversold for 20-years or more... look at the USD Index since Bretton Woods was enacted... Wall St. may see some profit-taking and selling on bad earnings numbers but I'm not ready to call an end to this rally we're in. Downside moves could be seen as a buying opportunity at least through May, and you know what happens when Wall St. goes up...
It would be healthy for equities to sell this week on bad earnings data. Should the Dow and S&P 500 disregard bad data as they've been, I see no reason why Wall St. cannot continue higher right through the month of April and into May, barring an unexpected shock or surprise geo-political event. I'm already looking ahead to the coming summer session and at this point I believe we'll see some repeat performances of last summer. With most market participants on holiday and an extreme lack of liquidity, I think equities and riskier asset classes may slide back down.
AUD:
Over the weekend I was thinking about the markets, trading, and where these markets might be headed in the near-term. The EUR/USD is a bloody mess, at least to me. I'm finding the pair increasingly difficult to trade and even harder to forecast direction like I'm accustomed to. The EUR/USD is the most fundamental pair, the most liquid, and the pair most traded by the large financial institutions, but those factors and others that give the EUR/USD its distinct character are severely lacking or even non-existent.
For me the problem with the EUR/USD is the fundamentals and the fact there is no clear direction for either the euro or dollar. I think about it this way... I'm in the woods, I'm lost, I don't have a compass, I'm at a crossroads that could take me in any direction, but I know I can make it home if I go north or south, because they both lead to the same place... it's pitch black, I don't have the sun to show me direction, I can't see the moss on the trees to show me where north is and I don't have the constellations in the sky to show me where south is.
What do I do? I could make an educated guess on which direction to go but that doesn't give me a good probability of being correct. My next choice is to either wait for direction or find another way home. As most of you know I use probabilities on all of my trades but here lately even 90% or better trades I'm finding on the EUR/USD are either failing or not worth the stress waiting for the payouts.
Even a blind squirrel can find an acorn every now and then but I don't want to be that blind squirrel right now. Where I've gone wrong is trying to trade a misbehaving pair. The best thing I can do is turn to a pair where there is much more clarity and a clear fundamental bias. In my opinion that pair is the AUD/USD.
I spent time this weekend researching Australia's underlying fundamentals, government fiscal policy, monetary policy, and growth potentials for the future. Based on my research I feel the AUD presents a much stronger fundamental case against the dollar as opposed to the kind of fundamental case the euro can make against the dollar.
Even if Australia falls into recession it's not likely to be as deep as the US and based on my growing understanding of the RBA, I'm not convinced they will follow the Fed, BOE, SNB, and BOJ down the road of forced currency devaluation and extremely loose monetary policy.
Right now the RBA's interest rate is 325bps better than the Fed's and that fact alone is why the AUD/USD has been resilient while most other currencies are making huge swings and are in a season of devaluation. On Tuesday the RBA has a rate decision where they may cut 50bps or more. Should the RBA cut rates and the AUD drops, I will use the dip as a buying opportunity. It's my opinion that the AUD/USD is bullish, it's a buy, and it's got real potential to make stronger gains against the dollar than the euro or pound sterling.
Those of you that have known me for awhile know I'm strong on the fundamentals. I can make a strong case for the AUD's fundamentals. After dealing with the pairs like the EUR/USD, which has no clear fundamental bias, I believe I need to focus on pairs that have a clear fundamental bias. In doing so, it's much easier to find swing trades, it's easier to let the winners run, and easier to allow trades to sit in drawdown without taking a panic loss.
There's a whole lot I do not know about the AUD/USD, about it's nuances and specific price patterns but when I take a purely fundamental approach to trading a currency pair, most of the details make no difference to me because I've got a clear bias that will not change despite the fluctuations in price and all the noise.
My commentary about the AUD/USD is not meant to be a trade recommendation but I want the traders in our community to know exactly what I'm looking at, thinking about, and how I'm attempting to flow with the evolving markets. I've not decided whether I'll call AUD/USD trades live in the chat, but by all means I will be happy to tell any trader what I'm doing with the pair at any given moment.
I miss trading on the fundamentals, I miss the catching the 200-point swings and I'm getting burnt out on bi-polar pairs like the EUR/USD that have no fundamental connection to its price action. I think the AUD/USD can provide what I'm looking for and I encourage any traders who might be feeling the same way and are looking to trade fundamentally to spend some time looking at the AUD/USD. EUR/USD:
If this is the week Wall St. decides to cool off I would expect some of the familiar risk aversion to return to the market. I would expect the larger institutions to take a bearish tone on equities at the start of earnings season until we get a clear picture of how things will play out. If equities pullback the euro should pull back along with pairs like the EUR/JPY and GBP/JPY.
As I mentioned above, all markets will start the week at critical levels... on the EUR/USD the 1.3520 level is acting as minor short-term resistance. On the downside there are more layers of support which I see between the 1.3420-1.3380 levels and then at 1.3340-1.3310 levels. Should the 1.3520 level sustain an upside break and equities gain in tandem, I think we can easily target the 1.3650 level with a view towards 1.3800.
If somebody put a gun to my head and made me take a trade on the EUR/USD I would probably have to buy it on the dips. At this time I'm going to limit my exposure on the pair and make an attempt at practicing some patience with it and wait for a good opportunity. Right now I've got a 1.3421 short and 1.3453 long. My worst case scenario is about a 35-point loss but what I intend to do is find a trade, short or long, to knock out which ever trade between the two is in drawdown.
Fundamentally the euro could be tested almost every day this week... retail sales, industrial production, PPI, factory orders, and a few bank holidays on Friday. For the dollar the fundamental calendar is much lighter, so again, expect the EUR/USD to take a lead from Wall St. and whatever sentiment is prevailing in the markets.
Euro risks--
In a perfect world, the euro should be trashed. Between the European banking system on the brink, the real threat of sovereign debt defaults in eastern Europe, and very serious structural issues with the euro, I believe fair value on the EUR/USD right now should be around the 1.2000 level. Remember a few months ago when the markets were hammering the USD because the feeling was the Fed's actions were too slow and Bernanke was taking too much time to react?
Well, right now we have the same exact situation in Europe and with the ECB -- the ECB's comrades have worked together to make aggressive moves with their fiscal and monetary policy, with the Swiss shocking the markets the most. Why market participants aren't destroying Trichet for acting too slow and hammering the euro is a complete mystery to me. I suppose between the drop in the USD Index and Wall St. making a 20% up-move, the euro can't do anything but go up regardless.
I can pretty much promise you this... should Wall St. take a turn and we see the recent euphoria return to panic, talk of the ECB acting too slow and being the last to emerge from the recession will take shape and the euro could finally be punished. There's no way I can predict that happening but I believe it's a real risk. Trading--
The second week of the month is usually my favorite time to trade... we're past the G20, ECB rate decision, and NFP which always complicates things much more than they need to be. I think I've made my thoughts and opinions on the market very clear. As far as trading goes, patience must be practiced. I've not been as patient as I know I need to be, so here again I'll be taking my own medicine. Of course, risk and money management is paramount during these chaotic conditions.
Lastly, keep an eye on the USD Index. In my view, I see the 84.50 to 83.80 levels as extremely critical right now, a breakdown and slide below could trigger another strong round of USD selling across the board, which fundamentally would be totally justified.
As always, risk and money management disciplines will be paramount this week... be patient and methodical with your trading.
It was a wild day across the board just we expected... we'll get started with Trichet.
ECB:
Defying my forecast and just about all other forecasts, Trichet only cut interest rates by 25bps which obviously was great for the euro. The main event was his press conferencewhich yielded a number of interesting comments and rhetoric.
I have to say that today's press conference with Trichet was one of the more bizarre events I've seen lately. Trichet didn't fail to deliver putting on that dog and pony show we talked about last night... first he shocked the world by not cutting 50bps, then he showed up at the ECB press conference to put on a display of showmanship worth an Academy Award.
Trichet said:
"We are in a disinflation mode"
What he was specifically referring to with this comment on disinflation pertains to how the sharp drop in crude brought prices down as a whole across the board in the Eurozone.
"1.25% is not the lowest we can go"
That comment speaks for itself. I'll guess Trichet wants to chip away at rates like the Japanese do.
"We are in full-fledged non-standard measures"
What Trichet is referring to here is another comment he made about the ECB's balance sheet being "much larger than the Fed's". Trichet claims the ECB is providing a greater degree of non-standard measures when compared to the Fed and BOE. The non-standard measures also include a mega-low deposit rate and nearly unlimited amounts of liquidity and cheap credit for European banks.
When asked specifically about quantitative easing, Trichet said:
"We will tell you at the next meeting on any new non-standard measures"
I really didn't hear any hints at the ECB running the printing presses like the Fed. Trichet said rates can come lower and they likely will in May. After the press conference, ECB Stark said: "May could be the right time to act on non-conventional steps".
I also didn't hear any direct rhetoric to talk the euro down. I was waiting to hear it during the press conference and I waited to hear any post press conference comments that were intended to talk the euro down and we got none. To me it sounds like the greenlight is back on to keep the dollar under pressure and allow the euro to rise.
Maybe the ECB and Fed, via the G20, have decided it's time for the euro to appreciated until the summer months and then the dollar will take over. That's just pure speculation on my part, but I do not think it's out of the question. We know for a fact currencies were discussed at the G20 and of course the world's heavyweight champions are the USD and EUR in terms of their connection to global trade and the underlying fundamentals of the financial markets.
I think Trichet displayed the attitude that he doesn't care if the euro continues to rise from the ashes like a phoenix. I'm sure he'd love to see it despite Europe's enormous debtload that will only get more expensive to fix as the euro gains against the dollar.
G20 update:
For the record, today was the official start of the so-called apocalyptic, New World Order.
This morning in his speech Gordon Brown said: "I think the new world order is emerging"
That comment ought to give conspiracy theorists and paranoid end-timers plenty of fuel for their fires. I wouldn't blame Brown though, he's just a well paid pseudo-powerful script reader. If people want to start pointing fingers for who really started the so-called New World Order most of the blame needs to go to former US president Woodrow Wilson.
Woodrow Wilson's dreams of a globalized and centralized one-government system is finally starting to take shape according to what Gordon Brown told the us today. I hold Wilson responsible for this fast move towards the destruction of sovereignty, personal freedoms, and a life for all that's as uninhibited by government as possible. Oddly enough, on Wilson's deathbed he said he regretted forming the United Nations, he regretted giving banks unlimited power, he regretted linking banks and government, and he regretted trying to force the world to unite as one.
I don't know what Wilson saw or realized to make him come to that conclusion but it's a little too late for those regrets because Woodrow Wilson is getting exactly what he wanted, he was the catalyst for this movement and mindset. I'm not sure I'll see a truly one-world, globalized government system in my lifetime but I honestly believe we moved a whole lot closer in that direction and it's disturbing.
Later in the day Obama said:
"This G20 is a turning point in the global financial crisis" and "We must put an end to the bubble and bust economy"
Really? If we're supposed to put an end to that game why are we re-inflating the bubble with 0% interest rates and a surge in the monetary base funded with credit created out of thin air and which has no limit?
Here's an Obama gem:
"America's faith is tied up with the larger world"
What does that even mean? I'm an American but I have no clue what kind of faith I have tied up in the world or what kind of faith I'm supposed to have. That's about the stupidest thing I've ever heard any politician say.
One distinct pattern I noticed with every reporter that asked questions during a press conference by a world leader or central banker -- they all wanted to know what exactly the G20 is putting in place, on a global-basis, to fix the financial crisis. The journalists have actually been doing a great job in my opinion because they have been determined in their quest for actual specifics and real measures that all twenty nations collectively agreed on.
Basically, the press wants to know how all twenty nations are going to act in accordance to solve twenty different problems that need twenty different solutions. I didn't hear anything other than the G20 agreeing to offer $1.1 trillion in fiscal aid and another $202 billion or something like that in trade stimulus.
The IMF and World Bank will fund insolvent governments, and the major players all agreed for strong regulation that is standardized across continents. Good luck with that. They also gave strong rhetoric against sovereign nations that act as tax-havens, and came to the conclusion they have what it takes to fix the whole crisis.
Napoleon Sarkozy started the G20 by threatening to walkout if anybody disagreed with him and he ended by speaking out against hedge-funds and tax-friendly zones like those in Switzerland. Can somebody remind Sarkozy nobody cares what he thinks and his opinions are irrelevant? Obama played the rock star, easy call on that one. Mrs. Obama played the cool, trendy mom. While people are losing their jobs, kids are starving, and mushroomhead Kim Jong Il is threatening to attack anybody and everybody, Mrs. Obama's $5,000 designer dresses are adored and admired by the press.
Gordon Brown played the seemingly nice old dude who's probably more crooked and twisted and than any of them. There's something about Brown's character I do not like and I find him anything but trustworthy and honest. I'm sure Geithner was trying to get the president of India to stuff dollars in his turban to bring back to India to flood their market with cheap USD too. The whole thing is a mess.
This G20 was a joke.
EUR/USD and NFP:
Not to be outdone by the G20 and ECB, the Non-Farm Payrolls will provide plenty of fireworks for the markets tomorrow. The economist range for NFP is: -525K to -711K. For unemployment it's: 8.2% to 8.6%. I love those tight ranges the economists nail down on NFP every month...
My NFP forecast is -688K and 8.4% on the unemployment rate. How confident am I in my forecast? Not very because it's become a waste to even bother forecasting data the past few weeks. Almost overnight all US data started printing better than expected. Like this morning's upside surprise on Factory Orders...
With growth shrinking by 6.3%, over 5-million unemployed Americans collecting weekly jobless benefits, 500,000 new unemployed people every month, foreclosures up 40% and home values down another 15% it's impossible to believe Americans are buying big-ticket items like appliances and electronics. It doesn't even make any logical sense that this could happen and the correlating fundamentals do not even support strong gains we've seen in manufacturing and production. America doesn't even make anything anymore. It's become a nation of servers, celebrities, and lunatic politicians.
Euro--
Right now Wall St. is buying it up and running wild with euphoria. The fundamentals are clearly being ignored the past 48-hours in all markets and especially with the EUR/USD.
If Trichet is giving the greenlight for a stronger euro and Bernanke wants a weaker dollar, it's not that hard to figure out what's going to happen next. Wall St. has been given a 7-course meal to keep them satisfied for the time being. It makes more sense for the USD and JPY to weaken while the EUR, CHF, and GBP experience a season of growth.
A weaker dollar and yen will serve to push Wall St. higher. Higher equities prices are great when a financial system is going through a leveraging and de-leveraging process... it's exactly what it is, more equity. Think about your trading account and your equity. If you trade FX you use leverage. When you become over-leveraged, your equity gets dangerously low, so if you were to add more equity to your account you could then use your leverage to make money. It's the exact same principle in the stock market during this season of leverage adjusting in the global financial markets.
Trading--
As bearish as I am on the euro, I will attack the EUR/USD from a long euro point of view. This doesn't mean I'm bullish on the euro or Europe, but the way these market conditions are evolving, I've got to take a stance and decide to fight with the side I think will best pay me.
If Wall St. wants to continue higher with the help of euphoric market participants, I have to do the same whether I want to be a team player or not. I don't have the liquidity or power to fight against the market, I've tried that a few times this week and it's been mediocre at best.
I view Wall St. as the leader of the markets right now and the trend in Wall St. is up, so if I'm going trade with the market trend, that means I need to buy the euro on the dips. Is there risk in this plan? Of course, a European bank failure, a sovereign debt default, or a surprise announcement from the ECB could tank the EUR/USD in a heartbeat. But, there's a lot of risk buying the dollar right now too... just take a look at the USD Index...
I think Bernanke and the US economy needs a weak dollar. The Fed's not doing anything to stop it from sliding and even though the dollar's made a massive recovery, over the long-term it's decaying and trending lower in my opinion. It's a dying currency. It ran a good cycle of strength until about the 1970s and then it turned to the cycle of weakness. It's possible the euro is still in it's cycle of strength even though the fundamentals tell us otherwise. In the end, it's human behavior that dictates these things, not a piece of data.
Besides all the insane fundamental data, you know it's Friday and that means chaotic price swings from here on out. Geo-politics will heat up again as North Korea said they would "launch an attack if our missile is shot down". That's the exact quote I heard reported over one of the news wires. They didn't say who they would attack, how they would attack or what they would attack with, but I think the interesting thing is that they said the device they are going to launch is a missile, not a rocket. That implies it's probably not a satellite they are sending up so mushroomhead can watch the latest episodes of Dancing With the Stars.
I intend on trading these markets no matter what, but I am following an exact game plan. If you have a low risk appetite, call it a week, it will likely be a mess tomorrow. Things may return to more sense of order next week. If you trade, use smart risk and money management.
The final 48-hours of Q1 started as exciting as we expected with most markets being hit by heavy profit-taking, repatriation of sovereign funds, and plenty of news to suck the euphoria out of the equities markets and cause sharp price swings, especially with crude and the JPY crosses.
Crude took a beating today and to me it looks like money-flows were pouring out of the crude market as hedge funds and other participants were taking profit and squaring their books for the end of the quarter. Nobody believed crude could really hang above $52 for a sustained period of time, so with it being the end of the quarter and crude ending at the topside, the timing couldn't be better for market participants to book profit and call it a quarter.
Early this morning the yen crosses saw a heavy round of profit-taking and fund repatriation as they all mostly tanked in unison. The EUR/JPY and GBP/JPY were all I traded today, those two pairs made the most sense based on what was happening in the market and had plenty of great volatility to play the retracement moves.
I believe when Asia opens this will be their last day of the fiscal year and that could mean we see sharp moves during the Asian session, especially as we get into that time between Tokyo's close and Frankfurt's open.
Wall St.:
I'm not ready to call Wall St.'s sell-off the end to the bear market rally. As I mentioned last night, all it will take is a piece of bad news and the equity bulls will dump their positions and the bears will ride down the volatility and that's exactly what played out today.
I do not consider today's news about GM probably going bankrupt (their words) or Geithner saying banks might need more funds as any kind of shocking news. We forecasted a GM bankruptcy in January and it's no shock to me there's banks in the US financial system who are on the brink of failure. Wall St. was at critical levels and the market needed something to react to, fortunately the news was bad, and all markets sold-off while the USD and JPY made strong gains through risk aversion money-flows.
What I found bizarre was how the Obama administration could come in and remove GMs CEO. I believe Obama made this move more so to appease the unions and secure bluecollar votes in the future. This is Obama throwing some muscle around and showing Main St., working-class America he'll take out a CEO or two and he's not all about pleasing Wall St.
The Dow and S&P 500 both lost well over 3% today and are again at critical levels. If this is still a bear market rally we're in, market participants should use a sell-off like today as a buying opportunity. The S&P 500 futures have lost more than 30-points since the market opened 24-hours ago, but if the bulls are for real, they should be buying it up at these levels which would lend support to the EUR/USD and yen crosses.
EUR/USD:
The pre-G20 rhetoric is already flying out of the US, UK, Europe, and Asia and you can expect it to pick up as the week rolls on. Europe is at odds with the US and UK on how to best handle the global economic crisis and while we may not see much noticeable evidence of the different ideas clashing, you can be sure in the dark hallways and in the corners of the bar there will be heated debate, out of the eye of the cameras.
G20 alert--
France's Finance Minister said there will be no talk of currencies at the G20. I don't believe her. How in the world can they have a meeting of the top 20 industrialized economies who are all there to fix the global recession and not talk about currencies? That would be like going to a soccer game and talking about everything but the game or the sport. Nobody should believe this garbage, currencies will be discussed and some sort of resolution will be made on how each nation's sovereign currency will be allowed to devalue through this process.
However the G20 decides to value/devalue the dollar, euro, yen, aussie, swiss, and pound is not likely something we'll read in the communique or hear at the press conferences. It's possible, but not probable. The finance ministers do not want to cause a sudden and sharp market reaction because that would defeat their purpose, so they will use verbal manipulation and monetary policy to push the currencies where they need them to be. It will be discussed.
Final day of Q1--
Tuesday is the last day of the quarter and the last day for market participants to get their books squared away and ready for the start of Q2. Expect more of what we saw today... sharp price moves and erratic price swings. There's really no point in giving any kind of forecast for the next 24-hours because these markets will be under pressure in both directions from varying degrees of liquidity and volume of money-flows.
In other words, it should be a mess in the markets for at least another 24-hours. If you're patient, sit it out, let the dust settle and the markets get themselves situated one more day. It's a very risk situation in these markets, especially with the EUR/USD.
Tomorrow we get German employment data and Eurozone CPI which are both critical reports right now. I don't have a forecast on either but should CPI somehow print between 0.3% and a negative number, that could lead to talk of deflation in the Eurozone.
By far the most important piece of fundamental data is Consumer Confidence. I have no clue how this data will print... I know how the government wants it to print, so let's just say it will probably print their way. We also get very important home price data and Chicago PMI which I believed is released earlier for those that pay for that privilege.
If you trade tomorrow I recommend using smaller margin entries and good risk management. These markets can snap in either direction at any given moment if a certain amount of liquidity and order flow hits a certain market. I'm still bearish overall on the euro and will continue to look for opportunities to short the rises. I took a 1.3272 short last night and I'll hang on to that one for now. We may see a move over the 1.3200 level during Asia. A break the 1.3110-1.3104 price zone could open the door to test the 1.3070 level.
To start the week, all markets are at critical levels with several major market-moving events on the books, and the end of Q1 to contend with. In this week's outlook I cover some key areas we need to be mindful of and some other issues traders have been asking me about lately.
Where is the EUR/USD going? I would be purely guessing to give an answer. I think 1.3250 is probably a fairly key level on the downside. The sharp and violent drop on Friday was fueled by rhetoric and verbal intervention from a German Finance Minister and ECB central bankers.
I have seen a rising pick up in rhetoric out of Europe to talk the euro back down, but I cannot predict if we get more of the same. These finance ministers and central bankers are changing their minds like the wind. Of course it's possible for the euro to retrace after the sharp drop or we could easily be on our way back to the point of lift-off from when the Fed announced it was buying Treasuries the week before last.
These are the unknowns but what we need to be on the lookout for. Every trade day carries a risk level of 10 out of 10. It's like we have the World Cup, Super Bowl, Stanley Cup, and World Series all in one week... these four events are monumental and will have strong sway over the markets:
I think these markets will be hit with rhetoric, verbal manipulation, and geo-politics all week long and that means times of sudden and erratic price swings. Be prepared to see it happen at any given moment on any given day. Last Friday my mental stoploss was hit on a trade so I intend to cover that loss this week and hopefully end the week in profit. If you trade this week, know the risks are extreme.
ECB to cut rates:
In last Sunday's outlook I gave my forecast for the ECB to reduce rates by 50bps at the next meeting and at this point I'm sticking to the same forecast. Trichet, Weber, Papademos, Smaghi, Nowotny, Orphanides and others on the ECB governing council have all hinted at a rate cut. I believe the ECB's key lending rate will be reduced to 1.00%.
On Thursday banks like Goldman Sachs and Credit Suisse suddenly came to the conclusion the ECB will cut rates and I believe this was another factor leading the euro's sharp decline from the 1.3650 level to the 1.3250 level in about two trading sessions. For some unknown reason I didn't pick up on this change in sentiment, but had I been thinking better, this change in sentiment would have caused me to take additional euro shorts. Lesson learned.
On Monday at 1030 EST, Trichet will testify before the European Parliament in Brussels and I can almost guarantee you his rhetoric will be watched and reacted to by global market participants -- expect volatility and sharp price swings on pairs like the EUR/USD, EUR/JPY, EUR/CHF, and USD/CHF.
Broker IB warning:
Last week a conversation came up and mentioned an issue with IBs (independent brokers). When I sat down to write this outlook I thought it might be worthwhile mentioning the conversation. Two of the clients I manage accounts for opened them with their broker through an IB. In both cases each IB offered the client a free or special incentive to use them as an IB.
This isn't going to make me very popular to say, but it's my personal opinion that the whole IB thing has everybody else's interest in mind except for the client. The IB scheme is good for the broker because the IBs act like salespeople to drum up new business. Every FX broker constantly needs new blood, just like a vampire. It's good for the IBs because they get a residual kickback on every trade for the life of the account.
IBs just have to create a product to lure a person to choose them as an IB. The IB makes their money back after the first trade or two is taken, and from then on it's free endless money for as long as the account is alive.
Here's where this presents a huge problem for the trader -- if the account is linked to an IB and the account experiences heavy trade volumes and more wins vs. losses, it's my opinion the broker begins causing slippage, slowed execution times, and timeouts.
I have two reasons why I believe this to be true, and both are based on personal experience and experiences I've heard from other traders just like us. The heavier the volume, the bigger the kickback the broker has to pay the IB. The heavier the volume means a bigger win and that means more money comes out of the broker netcap. That's a problem for a trader because brokers aren't in the business of giving, they are in the business of taking.
FX traders aren't supposed to consistently win and when they do, the broker's netcap takes a hit because that's where you get paid from, and then you factor in the kickback they have to pay the IB and it presents a problem for the broker and he does what he must to solve the problem.
Personal experience--
The largest account I managed signed up with his broker through an IB and did so without telling me. The IB offered him a free e-book on trading, so he took the offer and didn't even think to mention the IB or stupid e-book. On this account the trading was at heavier volumes at certain times and I noticed within just a few weeks of trading the account I was experiencing the broker games... I was getting slipped on every trade, even in low-volatility times, when I wanted to close a trade it would sit there and hang in outer space for several minutes and then the market would have moved out of profit, then the trade would magically close at a loss.
As the weeks went on, the heavier I traded, the more I experienced issues with the broker. The worst of all was getting filled on the wrong side of the market on a 5M entry. I had to take a hit on that one that cost me the spread and that made my blood boil. At the time I also had a new client who did the same thing with an IB for a free piece of software and I was experiencing similar issues on his account with his broker.
Long story short, the client casually mentioned the stupid e-book thing and it was my conclusion the broker was causing the problems because he was getting killed in his netcap and kickbacks to the IB. On that account it's typical I'll make 1M and 2M entries which means the IB gets $100 or $200 per trade from the broker for doing zero, plus whatever they have to pay me out of their netcap for my win.
We ended up closing that account, getting out from under the IB, re-opening the account with the same broker, and guess what happened? After the IB was gone I was never filled on the wrong side of the market, the slippage is 95% improved, and the execution times are to my satisfaction. I don't believe in coincidences. Anything that puts an account in jeopardy in addition to all the factors that already make this market one of the riskiest should be something all traders avoid.
E-books?
The issue with my client and his IB also got me thinking about another odd part of the FX market, which is the brokering of educational information. The client I mentioned above was referred to me by a banker in another country, he was unfamiliar with this website. I got upset with him falling for an e-book scam but then I realized he didn't find out about this site until after his account was opened.
Anyway, I was thinking how that one e-book caused so much trouble when it all could have been avoided. If the guy wanted to learn to trade I would have taught him or he could just sit in our chat room and follow along.
I think that's exactly where many traders initially go wrong... the majority of retail FX traders take their first step into the market through the eyes of individuals who do not trade and only know how to make money through direct-response marketing... they sell e-books, DVDs, charting packages, seminars, webinars, coaching programs. It's like they do everything they can to avoid the actual trading part, to me that's dumb because all the best money is sitting right there in the market.
Traders always ask me what books they should read. My answer is always the same, none. Do not read any books, do not buy educational material, do not use a paid-subscription service, and do not pay a non-trader to tell you how to trade. If you have to, stop reading this blog. If that makes you better and more profitable, that's all that matters to me. The one and only book on trading I've ever read is Jesse Livermore's, Reminiscences of a Stock Operator and it's the only I'll ever recommend if I have to recommend a trading book.
With all this stimulus flying around and tax rebates, a new crop of retail FX traders are about to hit the markets in the coming weeks and many will start their journey in this adventure at a disadvantage because they will be using tools created to do everything possible to distract the trader and take their eyes off the one thing they should be on: the market.
If you want something to read, read the market's price action. It's more than blinking numbers and flashing lights. Every time those prices move and the way they behave at certain times of day will tell you just about all you need to know. Ultimately, each trader needs to find their own way and develop a systematic methodology for trading their market.
No trader can find a balanced approach to trading the market in a book or by watching a DVD. The best advice I can give is to just start trading. Use a demo long enough to learn how to maneuver around your trading platform, but when you take that first trade, do it with live money, even if it's a nano-lot. Trade pennies if you have to, I don't care, it's not the amount that's important, it's the fact you're in a live market with your own money and when you take a hit, you'll feel it no matter what.
I promise the market will teach you everything you need to know. It will show you if you're cut out for trading and have what it takes to survive. With stricter risk management more traders would have what it takes to survive. That's a simple fix to make but it requires discipline. If a trader can practice solid risk management, the market will do the rest of the teaching.
Instead of wasting $5,000 on a non-trader's coaching program or spending $1000 on a DVD set, drop that into a mini account, use it as pure risk capital and tuition. If you pay your tuition to the market instead of a man you may be able to unlock the door to learning how to trade your way to consistent profits over the longer term.
One reason we built this site is to provide a different option for traders instead of following the 90% of the herd that ultimately gets slaughtered. When I was 6-months old my parents threw me in a pool to teach me how to swim. An adult can't teach a newborn how to swim, but the water can. Give the market a chance to do some teaching this week.
Wall St.:
The folks on Wall St. will have their hands full in the next five days and this means the effects will be felt in the FX, commodities, and Treasuries markets. It's been reported the group responsible for setting accounting standards, FASB, changed some of the market-to-market rules for toxic assets held by banks. I do not know all the details on this but obviously it's something Wall St. should be euphoric about.
The first event Wall St. will have to contend with is Consumer Confidence. The past two weeks the government data has done well to distract people from how bad the economy really is, so why not continue the trend with good consumer data? A print that comes in higher than expected should send the S&P 500 and Dow flying, keep a lookout on the markets when this data is released Tuesday at 1000 EST.
G20 and NFP are the other two main events for Wall St. I do not see much right now that will stop this rally in it's tracks and make the market do a 180. It's going to take a piece of news, rhetoric, legislation, or geo-political event to cause a strong sell-off on Wall St. If everything continues as it's been and the G20 comes out with a show of strong solidarity and willingness to support the markets without getting in the way, Wall St.'s rally should continue. This means less risk aversion and the potential for a weaker USD and JPY as money-flows would continue into equities, sending the USD Index lower.
Recession benefits--
Over the weekend I was talking to a friend who's going through a difficult time right now because of the economy. After thinking about all that, I don't believe this global recession is completely bad and just has to be about doom and gloom. For the initiated, I think now is a time of opportunity. It's actually the perfect time to make a big life change like starting a business, becoming a full-time trader, or inventing a new product.
If the government is giving out free money to start a business or go to school, take it. I think education will explode in the months and years to come. More non-traditional methods of education will hopefully emerge and I think we'll see less textbook and classroom style methods of education. If the government is offering free money, take advantage of any opportunity out there right now because if you're a taxpayer, you're funding all this anyway, so why not use it?
If the government is going to print dollars to re-inflate the economy I hope billions go to people who bring new technological advances to humanity. Technology is what should spring out of any recession. This recession is one of the worst of all and I hope this means we get some of the best technology ever. Medical advances and technology could be where it's at in the future and I believe could be the sectors that lead the economy out of the recession once the Fed's monetary policy gives the illusion of recovery and a return to prosperity.
They say the sector on Wall St. that led the economy into recession can't be the sector that brings it out. Well, if that's really true, that knocks out financials. Based on the underlying fundamentals of the US economy, I think it also knocks out manufacturing, industrials, and probably consumer staples. I believe technology, energy, and health care should be the sectors that will have to lead Wall St. back to more over-inflated levels and prolonged periods of euphoria.
With technology advancing and leading the way, I'd also like to see people return to the traditional ways like agriculture and industry. Where home and my parents live is off the beaten path in Tennessee. There's not even a stoplight in the nearest town. In their community there's several different cultures, religious groups, and ways of thinking but one commonality for many is their ability to be self-sufficient. People work the land for food, make their own clothes, grow their own vegetables, fix their cars, and build their own homes.
Many are off the grid and I doubt the government has any idea they even exist. One thing I know is, if this recession turned into a depression and things got really bad, I'd be going home because people that know how to work the land and hunt for food can survive if things happen to turn ugly or civil unrest breaks out or worse.
No one can predict the future but I don't think the future is the end of the world... out of all this turmoil there are changes coming and some of them will not be good. I don't think the governments of the US and UK can continue on by printing money and creating debt, that has never worked. No matter what though, there's always opportunity in adversity.
EUR/USD:
As I mentioned above, at the open of the market on Sunday, I have no clue where the euro is going. I need to see where it's at when my broker opens my platform, then I need to see how it's price behavior is acting, how the 30-minute opens are sequencing, and if the price action is showing a strong upside/downside bias.
End of Q1--
Monday and Tuesday are the last trading days of Q1 and this means the FX market experiences times of heightened volatility, sharp price swings and erratic moves. It has to do with market participants squaring their books, taking profit/loss, re-positioning in the market for Q2, and repatriating funds.
As two of our members pointed out on Friday, the JPY experienced sharp gains because the yen was being repatriated back to Japan for various reasons. These types of events are the underlying fundamentals of the market and something we need to be mindful of the next 48-hours.
Repatriation--
Repatriation of any sovereign currency will give it a boost... if US market participants repatriate the USD in the next 48-hours, and the liquidity that is bidding for dollars exceeds that which is available and more than the euro, the dollar would then gain on the euro and we'd see a bigger move, that's how it works. If market participants in Japan continue to repatriate the yen for tax or end of quarter purposes, it will show strength.
Euro--
I'm not ruling out an upside retracement from Friday's drop as long as the 1.3250 level can hold solid. If the euro can move above the 1.3334 level and sustain an upside break, the following levels could be tested: 1.3356 / 1.3389 / 1.3424 / 1.3458.
If the 1.3250 level sustains a downside break, the euro could be on it's way to returning to the point of lift-of from when the Fed announced it was buying Treasuries. I'm not ruling this possibility out either. The EUR/USD has strong historical price pattern evidence of returning to the point of lift-off when the market makes a sudden reaction to a piece of news or fundamental event. In this case, the euro is not strong at all, it went up because the dollar is weak and the same thing would happen to the euro if the ECB followed suit.
Should the 1.3250 level sustain a downside break, the following levels could be tested: 1.3227 / 1.3195 / 1.3162 / 1.3107.
My overall bearish bias on both the euro and dollar has not changed. That might sound bi-polar and it probably is, which is making this pair increasingly frustrating and worthless to trade. I've allowed the market to beat me on this pair more than any other the past few weeks. The high level of geo-politics and verbal and monetary manipulation are confusing market participants. My eyes may be on trading other pairs this week if the EUR/USD continues to behave the wrong way.
Trading--
As I mentioned above, I may look to make back my loss and book this week's profit by trading the AUD/JPY and other yen crosses or the GBP/USD if it shows signs that it could take another hit. This is just my opinion, but I think the overall, longer term trend for the JPY should take it lower. The Japanese economy is getting hit on exports and there's no way the BOJ or global trading network can tolerate a strong JPY, it's not possible. Interest rates in Japan are not going up any time soon and the BOJ will use loose monetary policy for the foreseeable future.
If I find myself in a situation where I'm in a trade and a central banker or finance minister makes a surprise comment and the trade goes against me, I'm likely going to take my loss. Every day last week the markets were hit with this kind of stuff at opportune moments.
I can't stress enough how important risk management is this week... don't be afraid to take a manageable loss and don't push a trade. If I wasn't a full-time trader and just did this for fun or to make a little extra money I'd probably be on the sidelines this week.
For the most part the markets saw steady rounds of profit-taking across the board in all markets. After Monday's massive gains, market participants were doing as they normally do. Asia may follow suit this evening as well. I wouldn't call today's drop in equities the end to the bear market rally or the bear market...
ECB hints at following Fed:
I'm not sure how much attention this received on the financial networks, but I think traders should take note of the following rhetoric on quantitative easing from ECB Papademos:
"This is an option which could be considered, the pure quantitative easing, in case the more traditional means for implementing monetary policy have been utilized."
ECB's Weber, Orphanides, and Papademos have all given rhetoric in favor of loosening credit even further for European banks and now we have Papademos talking about the ECB using quantitative easing to devalue the euro and keep interest rates at artificially low levels.
There really isn't much more to say, I think the ECB has made things clear and now it's safe to say euro devaluation is on the table for the future. The ECB has been talking the euro down all week and I will be watching and listening for what kind of rhetoric they use as we get closer to the next ECB rate meeting. No matter what, this new rhetoric out of the ECB puts added risk on the euro.
Fed begins quantitative easing Wednesday:
The Fed is not wasting anytime devaluing the dollar and flooding the Treasury supply... tomorrow they begin the long process of buying at least $300 million in Treasuries throughout 2009. The Fed is going to sell $98 billion in Treasuries this week and they will specifically be buying 7-year and 10-year notes on Wednesday.
Why those two Treasuries? Simple, they are tied directly into mortgage rates. And what does the Fed want to do with interest rates? Use them to re-inflate the housing market by price-fixing mortgage rates, providing 0.00% loans, easy credit terms, and backing to push banks to start writing mortgage loans to consumers.
Remember when Bernanke said he would rain down dollar bills out of a helicopter to stimulate the economy if he had to? Well, that's exactly what he's doing through this Treasury buying program. Ultimately, this plan will fail and the mess it creates will likely be beyond what the Fed, Treasury, and US government are capable of fixing. It will be too large for them to print their way out of like they're doing this go around.
The Fed is buying Treasuries on 27 and 30-March; 1 and 2-April. The money-flows that come in and out of the Treasury market will likely have an impact on FX, equities, and commodities, so keep this in mind. The Fed says they are buying $300 billion worth of Treasuries but I don't believe them. I think they have to buy three or four times that amount.
The deficit is already in the trillions and that automatically make US debt very unattractive. All of the money printing makes US debt extremely unattractive because money printing is pure inflation and inflation is the enemy of bonds. China is running their mouth about the deficit/Treasuries situation. China called for the IMF to create some kind of super reserve currency to replace the dollar. I think this is the Chinese blowing off some steam, and just another bark, not a bite.
It's not in China's interest to cause too much panic in the currency market. They know they hold the power to send the dollar on a free-fall with a few choice words and I don't see them using that weapon at the moment. At one point during the Bernanke/Geithner testimony this afternoon I thought I heard them make some obscure reference to the idea a new currency might be a good idea... weird stuff going on...
These geo-politics and underlying fundamentals will continue to keep command in the markets the rest of the week and all traders should manage their risk accordingly with this in mind.
EUR/USD:
I mostly traded all day and really didn't pay much attention to any of the correlated markets like equities or commodities. These markets are moving based on all the geo-politics, changing fundamentals, and the many emotions that drive traders to make the decisions they do.
At 2000 EST this evening Obama will address the nation on economic issues and we could see some volatility from this. Fundamentally, we get German IFO, Core Durable Goods, New Home Sales, and Crude Inventories. I believe German IFO and New Home Sales may print at or better than expected, while Durables may come in weak.
The data may not matter much as the central bankers will use the primetime of the markets to hit the newswires with rhetoric at opportune moments. These central bankers might be idiots but they are smart idiots when it comes to this stuff...
As far as trading goes, exactly what we did today in the chat is exactly how I plan on trading the rest of the week. I'm not a bull or bear, today I decided to fight with the bulls and I just waited for the bottom of each move to buy and then take profit on the move up. These market conditions are very choppy and I prefer to stick with a safer way to trade until things stabilize.
Use smart risk and money management because the closer get to the end of Q1, the wilder the market conditions will get.
