Before we get into the weekly outlook, a few personal notes... as far as my travel schedule is concerned right now I'm sitting in the Denver airport writing this week's update, waiting for my plane. I'll be back at home very late this evening as I have one stop off to make before I get home to Nashville. Between now and February 21
st I'll be at home with the number focuson trading and offering good analysis on the EUR/USD for traders as we enter the next phase in the markets after the start of the new year.
This past week I realized that I've been sitting in an FX trading chat room since the end of February 2007 until the present without so much as a total of two week's worth of vacation. All those who were freaking out this week because I took some personal time can get over it, I've paid my dues and put in the time, but now I'm back and ready to roll strong very the next couple of weeks until I go to Europe.
This is my last full week at ProFXI and my solemn promise is to put in an honest effort to find higher probability trades from Monday until Friday and close out this phase on a positive note. If there are times when I'm quiet in the chat it just means I'm focusing on the markets and the task at hand.
As far as the markets go, I have no clue what they did last week for the most part. The euro remained bearish, the yen remained bullish, and equities remained bearish just as we forecasted accordingly and traders who followed our advice to just simply short the euro on the rises and buy the yen on the dips have reported good gains for last week. Last week I was very clear on two things: don't short the euro below 1.2850 and don't buy it above 1.2950...
EUR/USD Fundamentals:
I'm writing this week's outlook having done limited research so far, however, at this point I'm not seeing anything fundamentally or geo-politically that could be a catalyst to cause a sustainable trend change for the EUR/USD for the 24-hours.
We do have quite a bit of critical data on the books this week for both the US and Eurozone. At least at the start of the week the biggest event by far is the FOMC rate decision and FOMC rate policy statement which happens at 1415 EST/1915 GMT on Wednesday.
Technically the Fed could move interest rates a few basis points lower as the so-called "trading band" for the Fed Funds rates floats between 0.25% and 0.00%. It's possible the Fed could drop the interest rate to an effective 0.00% and just open the floodgates for what is virtually free money hot off the printing presses.
I'm forecasting we see the Fed not make any moves on the Fed Funds rate but rather I see the FOMC voting on some sort of new measures or plan to make for the easier flow of credit in the money markets. The FOMC statement will likely sound as if Stephen King wrote it... the US economy is that horrific at this point.
As we head into Wednesday's FOMC policy decision it will be important to watch Treasury yields for signs the markets are becoming increasingly wary of the Fed and Treasury's ability to guide the markets through the next round of market turbulence.
I was just looking at how Treasuries traded on Friday and I see within the moves of Treasury yields that the markets may have little or lessening faith in Obama's ability to pull the US economy off life support. A friend of mine made a great point the other day... when Obama was running for office he promised a plan to create 2 million new jobs, then when he got elected he promised to create 3 million new jobs, and now the latest promise is that he will either create and or save a total of 4 million jobs.
If the Obama administration wants to keep hitting the markets with that kind of flip-flopping on one of the biggest issues facing the global economic system (jobs) it's going to erode whatever confidence Wall St. is trying to build up. The real question is, how can anybody actually quantify a saved job? If the economy continues the trend of shedding 500,000 jobs a month instead of 600,000 a month does that mean Obama saved 100,000 jobs? I didn't expect Obama to act like an idiot a week into the White House but I guess I was wrong.
On Monday and Tuesday I will be watching Treasury yields for clues on how the markets are feeling this week because if Treasury yields continue to rise while the Dow and S&P 500 continue to decline, we have a divergence there that could trigger the next leg down in this financial turmoil. There are several reasons why it could turn ugly if Treasuries go bearish along with equities...
First of all, if market participants pull money flows out of Treasuries and are too scared to buy equities this could be a sign of not just intense risk-aversion and outright fear but it could be the market's way of saying the supply of Treasuries exceeds the demand. The reason the market would think that way is because of all the debt the Treasury has to create to not only keep funding the TARP program but to do things like bailout Bank of America, send another $3 billion to Fannie Mae and Freddie Mac this week, and then of course to fund all of Obama's messiah programs in the coming weeks.
The other problem with a tag-team combo of bearish Treasuries and equities is that it would show more signs of credit freezing up again. It's no secret the credit markets remain mostly frozen but if market participants cannot get credit to buy what's considered the "safest" asset-class (US Treasuries) then we'll have a major problem on our hands.
All of those potential problems that are legitimately looming would translate into intense volatility in the FX markets, specifically with the EUR/USD, EUR/JPY, USD/JPY, GBP/USD, USD/CHF, and GBP/JPY. I stand by the belief the overall bullish Treasuries market is a bubble that is soon due to burst. I've personally never witnessed or traded through a bullish bubble burst in the Treasury market, so should we encounter that situation it'll all be new to me.
In August of 2007 the yield on the 10-year was trading around 5.25% and just a few weeks ago we almost hit the 2.00% level on the 10-year. In my view a decline of about 320bps in a matter of 17-months is a sign of a bullish bubble that's ready to pop because at some point the supply has to outpace demand and I think we're seeing the signs of this now. There's going to be a lot of Treasury supply on the market the next few months...
GDP-
On Friday we get the Advanced GDP for Q4. My forecast is that we get an absolutely abysmal number compared to the fudged number we saw for Q3. The decline in Advanced GDP should exceed the -5.00% level in my view. A print showing economic contraction of -4.00% or better is going to be a fudged number.
The markets should be rather prepared for nasty data this week, including a terrible GDP number. About 75% of GDP is derived purely on the activities of the US consumer, so without taking the time to explain the state of the consumer, which is obvious, all I have to do is use US retail, PCE, import/export, Durables, and jobs data to arrive at my extremely bearish forecast for GDP.
I realize Obama wants to pump $825 billion into the US economy by the end of February but the positive effects this will have on GDP will last a quarter or two at best and then we'll be back on train to Crapsville when that round of free money evaporates out of the economy.
So overall, I'm remaining extremely bearish on this week's US and Eurozone data. We do get a ton of it this week and it's all geared around some of the most beat-up sectors like housing, growth, employment, manufacturing, the consumer, and market sentiment. The data itself will give the markets little to work, so expect confusion to reign while some of the bigger numbers hit the markets.
EUR/USD:
I'm entering the start of the week with no bias on the EUR/USD as I still have quite a bit of research to do for the week in addition to needing to see how the market reacts after we get Frankfurt and London's liquidity first thing Monday morning. That being said, I would urge caution against shorting the EUR/USD between market open and the open of London. I see a potential for the euro to make an upside attempt during the Asian session on Sunday/Monday.
Downside key levels to be mindful of this week: 1.2904 / 1.2855 / 1.2552 / 1.2467 / 1.2358
Upside key levels to be mindful of this week: 1.2998 / 1.3054 / 1.3177 / 1.3242 / 1.3328
Although I still have an overall bias against equities I believe the euro may be due for another upside attempt as long as we can sustain above the 1.2855 level, according to what I'm seeing in the markets. I would not short the euro below 1.2855 currently. If we do move back down for a 1.2855 test, a sustained break there should take the euro straight through the 1.2800 level and down to test the 1.2760 - 1.2740 levels.
The other market correlated variable I'll be closely watching this week is the USD Index. I noticed towards the end of last week the USD Index was back testing my key 86 levels again... going through my email this afternoon I see a few questions from traders asking me why I said not to short the euro below the 1.2850 level and the answer is because of where 1.2850 would have put the USD Index which was back up to what I see as a decent resistance zone at 86 on the USD Index.
A solid upside failure of the USD Index in addition to downside failures on the euro, gold, and crude can only mean one thing and it's not rocket science to figure out... speaking of commodities, I really have no clue what they did on Friday so I'll also be watching to see how crude and gold respond after London gets rolling. My overall bullish bias on gold remains after seeing it also fail to break below downside resistance levels.
That's all I've got for now, I need to jump on a plane in the next few minutes. I will be in the chat after London opens and before 0730 EST on Monday. I have one goal this week and that is to trade for profits and show a good return on Friday. I'll also try to spend as much time in the chat as possible this week. Key levels will be released no later than 0730 EST tomorrow.
Don't expect any of the volatility and erratic price swings to magically disappear this week. All markets will remain severely ill-liquid which will give us the sharp price moves we've become accustomed to. That means all traders need to keep their emotions in check and not let the chaos of the markets win the mental battle. Risk and money management disciplines are imperative for trading this week and all traders should practice smart risk management.
-ProFXI
