I just got in and am catching up on Wednesday's market moves and I see there was quite a bit of volatility with all of the higher-risk, higher-yielding markets making strong downside moves. Catching up on the fundamentals I see what really hurt the euro and that was bad deflationary data out of the Eurozone early Wednesday morning and it all went downhill from there during the NY session with more bad fundamentals and a flight back to safety.
I do not have much more to add but from what I see the markets did just as their correlations dictate them to do... equities down + crude down + gold down = dollar up. In case any traders are scratching their heads wondering how the dollar could make a strong come back today, here's a re-post from this Sunday's update and take special note of points 2, 3, and 4:
Signs for a dollar rebound:
As I mentioned above, I'm not a bull on the euro or the pound because they have plenty of their own fundamental issues, it just so happens that the dollar's underlying fundamentals are in worse shape due to the fact it holds the status as the world's reserve currency and this sets the dollar in a special and unique place that no other currency holds. Plus, the most popularly and widely traded asset classes are denominated in the dollar and this connection between the dollar and its denomination to asset classes that receive multibillions in money flows add a completely unique amount of pressure on the dollar. The dollar's denomination connection to tradeable markets such as gold, crude oil, sovereign debt, and the most sought after equities keeps the dollar in a special place that no other currency can be a part of and this adds a high degree of sensitivity to the dollar and how money-flows directly effect its overall strength or weakness.
If the euro happened to hold the same status as the dollar and was the main currency which had denomination connections to light sweet crude, gold, soft commodities, or the highest trade volume equities, the euro would be suffering much the same fate the dollar is right now. This explains why the euro and Eurozone can have weak fundamentals yet maintains a higher valuation against the dollar despite economic conditions being as bad or worse in Europe when compared to the United States.
When you boil this all down to pure monetary policy, if the Fed hadn't instructed market participants to sell the dollar in order to solidify a near-term trend of dollar weakness, the depreciation of the dollar would have been slightly more orderly over the past 10-weeks. When the Fed says "sell the dollar", the markets sell the dollar. When the Fed's counterparts at the ECB say "keep buying the euro", the markets keep buying the euro and selling the dollar. Very simple.
I do not have the ability to predict exactly when the dollar's decline will end, I'll continue to rely on the underlying fundamentals and correlated markets to indicate that, but there are a few signs we traders can look for and use as a gauge to determine when the dollar shows a higher rebound probability. Bear in mind some of these factors may indicate just an intraday rebound while others on a near-term basis. I trust if you have read through my blog or all the educational writing I've done which is posted here, you will be able to disseminate which factors will work for the dollar on an intraday, swing, or longer-term basis.
1. ECB monetary policy--
In addition to crude oil and the S&P 500, central bank monetary policy sets market trends. Central bankers at the Fed and ECB do not look at charts or use Fib lines and moving averages when they want their respective currencies higher or lower. If you want proof of that took a look at what the US dollar Index did on 20-May at exactly 1400 EST... that was the day and moment the FOMC minutes gave the Fed's instruction to further devalue the dollar again. It's very clear and many times I can pinpoint an exact time a piece of monetary policy was given to the markets to set a trend.
As hard as it may be to believe the ECBs monetary policy is considered hawkish, strict, and conservative. When compared to the ECB, the Fed's monetary is sloppy, loose, and overly accommodative. Thus far the ECB has chosen not to follow the Fed down the path of 0% interest rates, monetizing government debt, and printing money to re-inflate the economy. So in order for the dollar to truly rebound against the euro, which carries the highest weighting against the dollar on the USD Index, it would take the ECB changing their monetary policy and verbal rhetoric to match what the Fed is doing.
Unless the ECB drops their key lending rate to at least 0.50% and or announces a new plan to buy and monetize debt, market participants will always view the ECB as having stricter monetary policy and this is a very positive thing for the euro despite all the economic, disinflation, and banking issues still facing the Eurozone. When the markets are not in a season of intense risk aversion participants will always gravitate to higher-yields and the prospect of better future returns and right now the euro, by way of the ECB, offers this to participants and they are responding accordingly. This Thursday the ECB does have the power to boost the dollar against the euro should Trichet choose to unveil monetary policy that is loose, like monetizing debt or doing a surprise interest rate cut. Those type factors would be dollar supportive.
2. Crude oil--
A switch in the ECB's monetary policy from hawkish to loose and sloppy would be just as important as the role weaker crude oil plays in terms of US dollar valuation. Until science is allowed and enabled to bring a viable alternative energy source to the world, crude's status as energy king will remain. With crude reigning as energy king of the world, the actual price of crude is what market participants use to determine the overall health and wealth of the global economic framework.
If you've ready any of my stuff you know what I've taught on the correlation between crude and the dollar so I won't waste the time on that now, but the point is if you're one of those traders who seem to have a magnetic attraction to the sell button when trading the EUR/USD, do yourself a favor and use the price of crude oil as an indicator to quantify your trade bias. You will almost never see a situation where the dollar and crude go up or down in tandem. It's a virtual impossibility not only because crude is denominated in the dollar but higher crude valuations attract money-flows out of the dollar and into higher-yielding currencies and higher-risk markets.
My forecasts in prior updates for crude to surge past $60 and keep going have been reached and as long as the S&P 500/Dow Jones do not have a structural breakdown I expect to see crude reach $68 with a probability to break above $70 and potentially move as high as $72 in the near-term. That being said, on almost any day where crude moves lower the dollar will stabilize or even move higher, it's a very simple correlation. As you are looking for signs of potential dollar strength, even on an intraday basis, just pull up a real-time crude chart or crude price feed, it will serve you much better than a lagging tech indicator.
3. S&P 500--
In my view the S&P and it's correlation to the US dollar is what traders should really monitor on an intraday and near-term basis. It's the easiest correlated market to spot potential dollar strength or weakness because of the strong inverse relationship that exists between the two. I will never rule out this inverse relationship changing, anything can change, but due to the fact the S&P 500 is a cash market and it's price value is cash-weighted, unlike the Dow Jones, the dollar is almost forced to move in the opposite direction of the S&P 500.
As market participants are in a constant quest of better yields and the promise of better future returns, a heightened risk appetite leads to participants desiring to buy and hold equities traded on the S&P 500 much more so than holding the worthless dollar which yields almost nothing. Buying the S&P 500 is very much the equivalent of shorting the dollar. It works almost the same way as buying oil and gold equates to shorting the dollar.
I don't personally believe in the rally we're seeing on Wall St. and I believe in it even less as we get closer to the summer trading session. But I'm not about to fight it, if Wall St. continues to be euphoric the dollar will continue to devalue, very simple. Here again, if you want a sign for dollar direction the S&P 500 is one of the very best indicators out there, it will almost never fail you.
4. Fed--
The Fed is the other major catalyst that drives the value of the dollar. I have no doubt in my mind the Fed wants the dollar lower as Bernanke has clearly stated as much. The Fed cannot afford a strong dollar. Reason being, a devalued dollar drives equity prices higher and that right there automatically makes people feel "rich" or that they at least have some money. In addition, the Fed's weak dollar policies flood the monetary base with cheap cash with the intention of re-inflating the economy with buying power so that things like the housing market can rebound. A strong housing market also makes people feel like they have money and the net effect of this is increased consumer spending. Plus, a weak dollar will stop the shrinking US trade deficit. The Fed wants a USD- trade deficit which would be a reverse of what happened when the USD Index recovered during the worst of the global recession.
The only thing the Fed may do is slow the dollar's depreciation down to appease the Chinese and other US debt holders and the way the Fed would accomplish this is through verbal intervention, by not monetizing more US government debt, draining liquidity from the US financial system, or by simply raising interest rates, but that would almost take an act of God to happen right now.
If you're a chronic dollar-buyer or euro-shorter you will be well served to put in the time and energy to stay on top of those four factors as they will do much to give clarity for the dollar's direction on almost any time frame you care to trade from. Traders always throw the phrase out, "the trend is your friend", that's a cute phrase but if you want to know what the actual trend is, you will find the trend set based on the above four factors. Thursday trading:
By far the biggest event tomorrow is the ECB rate decision which I already covered in yesterday's update. As I mentioned I'm not ruling out the ECB pulling the element of surprise today by doing something like a sneak-attack rate cut or announcing a plan to monetize sovereign debt or to expand their already existing bond buying program. I give the latter a much higher probability than seeing a rate cut but no matter what, there is credible risk on the euro heading into tomorrow's interest rate event and obviously market participant spent Wednesday booking profits to mitigate the potential risks. The other big euro risk is if Trichet finally admits there is disinflation in the Eurozone. I absolutely believe disinflation exists in Europe because most if not all of the Eurozone's fundamentals prove it. If Trichet uses the "D" word the euro will plunge, very simple. You can watch Trichet's press conference here.
In addition the BOE and BOC have their respective rate events plus we get another Bernanke speech at 0845 EST. I see Bernanke did a great job shaking the markets up on Wednesday so keep your eye on him. Overall from what I see in the markets and what happened I'm not changing my anti-dollar and bearish dollar bias. If I was trading today the dollar's inverse correlation to commodities and equities would have prevented me from buying the euro against the dollar anyway. I'll be back on the road early this morning and won't be trading but if you decide to trade do yourself a favor and stay closely tuned to Trichet's 0830 EST press conference and use the market correlations as your guide, and please practice smart risk and money management on Thursday as I expect a good deal of volatility.
Thanks to the strongest Pending Home Sales data in 8-years the dollar was put under further downside pressure as the S&P 500 was able to make it's highest close of 2009 and best overall gains since November 2008, spot crude moved back up over $68, and spot gold inched its way even closer to the mega $1K level. While those are all very USD- factors I believe the real story today was the dollar itself...
Euro hits 2009 high as dollar continues its fundamental unraveling:
Once again the dollar was brutalized across the board by market-movers trading on a fundamental basis and participants who are not averse to risk and hungry for higher-yields. The euro beat up the dollar and gained 1.1% to make a yearly high at the 1.4330 level. The dollar didn't just suffer at the hands of the euro... the pound sterling surged to the 1.6600 level, gaining almost 1% on the day and making it's highest close in 7-months. The CAD put in an even stronger performance against the dollar than the pound did, gaining almost 1.3% and even the worthless Japanese yen gained over 1% against the dollar. Going into the last 30-minutes that NY banks were open the USD Index was down 0.94% and trading at 78.42 after making a previous close at the 79.16 level yesterday. The USD Index is at its lowest levels since the euro went on a monster run against the dollar last December.
Message to dollar-buyers--
Before I get ready to hit the road for the next few days I have to take a serious tone here... I know for a fact retail FX traders are getting hurt and losing money in this current market environment because every day the market is open I get at least 1 email from a trader who is either stuck in multiple euro short positions or asks me if it's now time to short the euro. Any trader who thoroughly follows this blog and our forecasting should not even be thinking about touching the dollar or yen right now because I've been over-the-top anti-dollar and anti-yen and every day like a broken record I've repeated the same mantra, do not buy the dollar.
This message isn't about being right and I'm not saying any of this to pump myself up. I want traders to realize one of the main reasons I write this daily blog is to help as many traders as possible to understand the market and what actually moves the market so that they can stay on the right side and not get caught going the wrong way. From a trading standpoint there's not a single trader out there who can say they were steered wrong by something they read in this blog and the reason why so much effort is put into accurate and honest market analysis is not for my own glory but because I never want to get an email or a phone call from a trader to tell me I put them on the wrong side of the market or steered them in the wrong trading direction. I take that aspect of writing a public blog with the utmost importance and sincerity.
Never before in my brief trading career have I been so strongly against the dollar and after writing a blog for the past two years I've never been so vocal on my anti-dollar trading bias as I've been for the past 45-days or so. The basis for this bias is purely fundamental which is the same fundamental basis as the professional players who actually move the market. I'm far from a perfect trader and in the past 45-days the only time I've had to take losses on my trades is when I've ignored my own bias and I've taken a dollar-long position or yen-long position and that's plain idiotic for ignoring my own trading bias. But after a few losses from being an idiot I learn not to fight the market or the fundamentals and this is the message I want traders to hear and strongly consider...
If there's a chart or tech indicator telling you to buy the dollar or yen, get rid of it because it's dead wrong. One reason I'm against charts and indicators is because to my knowledge there's no chart or indicator on planet earth that can properly quantify underlying fundamental factors like the Fed printing money with reckless abandon, or geo-political fundamentals like when the five BRIC leaders tell the world they are ready to dump the dollar, which happened yet again yesterday when Russia's president reiterated his call to unseat the dollar's place in global trade.
There's no chart or indicator in existence that knew this morning at 0530 EST that Chicago futures money-flows poured into the euro and sold-off the dollar. Traders that have learned what I teach on market-timing and timing patterns for the EUR/USD would know that 0530 EST is an important time frame because that's when Chicago futures money-flows hit the markets and this key time frame holds a higher probability to move the market in the direction in which the underlying fundamentals connected to the dollar and the dollar's counterparts are pointing on the days those participants decide to trade.
I don't want any traders to think money cannot be made buying the dollar and yen. Of course it's possible because no currency pair moves in a straight line and they all have times of retracement but in my view there is far too much risk in attempting to trade that side of the market to make money, it's fighting for the wrong side and the odds are stacked against that trade and I don't see the point in taking on more risk than what already presents itself in the spot FX market, it just doesn't make any sense.
I would be lying if I said I was a bull on the euro or pound sterling. I think both of those pairs have their own set of fundamental issues and they both deserve to be run into the ground. Right now the euro and pound just happen to be slightly less crappy than the dollar and have slightly better underlying fundamentals when compared to the dollar. If either the pound or euro held the status of reserve currency they would be suffering the same fate as the dollar. Due to the fact the dollar is the world's reserve currency in addition to now becoming a funding currency just like the yen, it's got a bigger target on its back. There will be a time when the euro and pound correct but for any trader to say, "it has to come down" or "it's overbought" is living in lala land. There is no such thing as "overbought" in the currency market, the currency market is too liquid and there is an endless supply available to market participants. The idea of "overbought" is a myth.
I trust my message here will be received in the proper light. My point is that I hope to stop getting emails from traders who have been steamrolled by the market and more emails from traders happily sharing their success stories, I love getting those types of email. It's not worth fighting the fundamentals, the Fed, and the big money movers who are pushing the dollar and yen lower which is exactly what they should do because that is the proper trader right now. For those traders who do need help or have questions I do not want to discourage you from contacting me, I'm still more than happy to help. And those that are awaiting a return call from me, I will get back to you by Friday once I get to my final destination and have time to return calls.
Trading FX is by far one of the most difficult and challenging tradeable markets to be in and for those traders who may have taken a few hits I encourage you not to give up, not to revenge trade on the market, but to take some time evaluating where you might have gone wrong, write down all your mistakes in a journal, and come back to the market with a renewed sense of confidence that you can make money trading with proper discipline and solid risk and money management principles. ECB rate decision:
I realize the ECB's interest rate decision isn't until Thursday but I won't be able to do a blog update tomorrow night and I want to cover this event before I go away. Thursday's ECB rate event is monumental because it holds the possibility for Trichet to either use verbal rhetoric or actual monetary policy to slow the euro's rise or to even reverse the current trend. I'm not at all married to the euro long side because I know the power that the central banks hold and on Thursday the ECB holds the power to send this euro surge into a euro tanking.
Up until this afternoon I didn't think it was very probable for the ECB to do or say anything at the upcoming rate meeting to hurt the euro but now I've learned otherwise... in a letter from ECB's Nowotny he said the following:
"In the future monetary policy also has the ability to provide support through unconventional methods; Through the purchase of bonds or other commercial papers, the yield curve can be flattened, thereby lowering long-term interest rates, which are decisive for investment"
What I take from that is there is now a possibility to see the ECB either shock the markets with a 25bps rate cut or to shock them by announcing a Fed-style plan to monetize debt. At the last interest rate meeting Trichet told the markets that their current program would be enough to meet their objectives but now we are hearing otherwise from Nowotny and this is certainly a cause for alarm.
So if the ECB does decide to pull the element of surprise on the markets and cut rates and or announce a plan to further monetize debt, those two changes in ECB monetary policy would absolutely send the euro lower and add a whole new level of downside pressure. If the ECB does decide to go down the path of the Fed which is printing money and monetizing sovereign debt they would almost have to take their key lending rate under the current 1.00%. From a fundamental and monetary policy standpoint it wouldn't make any sense to keep rates at 1.00% while attempting to manipulate the yield curve to keep interest rates low in the Eurozone.
It's important to understand that every time the euro moves a hundred or more points against the dollar it is the equivalent of higher interest rates in the Eurozone. If the ECB wants to keep overall interest rates low they will need to stop the euro from appreciating. But the problem with central banks like the Fed and ECB who use the fractional reserve banking system is that when they print money interest rates actually go up by way of the correlation between loose monetary and the bond market. Interest rates can only be manipulated to a certain degree but when the markets finally wise up, as they are doing now, they sell government bonds when the printing presses run wild.
Just as the fundamentals of the Fed's monetary policy turned me into a raging anti-dollar bear the, ECB could easily do the same thing on Thursday. After reading those comments above by ECB Nowotny I'm now entering Thursday's ECB rate event with much caution because I believe the probability is now there for Trichet to pull a fast one on the markets. If that's what he has in mind it would make perfect sense why the ECB has talked the euro up so much the past 4-weeks because a change in monetary policy could really hammer the euro.
So I urge much caution to traders in regards to Thursday's interest rate event... expect the unexpected and go into the event knowing Trichet could shock the markets. I don't want to see any traders caught by surprise or off-guard...
Wednesday trading:
Once again there are many key fundamental events on the books tomorrow... out of the Eurozone we have PMI data, Revised GDP numbers, and most importantly Eurozone PPI. The UK also has a big PMI report, so if you're trading after London opens tomorrow morning keep your eye on that data as any upside or downside surprises should add a good bit of volatility in the markets.
Out of the US we have the worthless ADP NFP report which will probably show a decent upside print, ISM Services, but most importantly is Bernanke's 0900 EST testimony in DC. I expect Bernanke to get grilled on inflation, US sovereign debt, US-Chinese relations, the federal deficit, bailouts, and all manner of questions related to the Fed's ridiculous monetary policy. There's likely to be some heated moments and I'm sure the markets will be reacting accordingly. I do not expect Bernanke to say anything to directly help the dollar but during the testimony he could easily say something or be questioned on something that would take the S&P 500 down which would boost the dollar up. If you trade tomorrow it's imperative you watch or listen to Bernanke's testimony.
Lastly, don't forget Friday's huge NFP report. Based on current trends we may see a favorable print on NFP but I do expect the Unemployment Rate to print at 8.5% or higher if the truth is told. As always please use strict risk and money management disciplines in your trading. This will probably be my last update until next week but you can always find good economic and fundamental info here.
Courtesy of stronger than expected fundamental and economic data all markets saw a volatile start to the week. Commodities, equities, and energy all surged in today's trading which is a death knell for the battered dollar and yen... the S&P 500 gained 2.6% today and made it's highest close in 7-months, crude oil hit the $68 target I gave in last night's update, while spot gold inched its way even closer to the mega $1K level. Let's take a closer look at what moved the markets today...
Global manufacturing fundamentals lead market rally, send dollar and yen plunging:
Upside surprises on manufacturing data was the main story of the day and the fundamental factor that drove all higher-risk, higher-yielding markets to rally, leading to sharp losses for the USD and JPY. The upside surprises in the manufacturing sector began Sunday evening as the latest PMI data out of China, which has been moving higher the past 3-months, showed sustainable signs of growth instead of contraction.
Within minutes of the Chinese manufacturing fundamentals hitting the wires market participants began buying equities, commodities, and higher-yielding currencies like the GBP, EUR, and AUD. Further downside pressure was put on the dollar and yen after UK PMI printed at a 1-year high while Eurozone PMI showed its best improvement in 7-months. The UK PMI data was especially beneficial to lead the GBP/USD and GBP/JPY to substantial gains. Later on in the morning JP Morgan's Global PMI indicator jumped to 45.1 after printing 41.8 in April and was the biggest gain in 9-months
And finally we got US manufacturing data from ISM. Not only did ISM Manufacturing and ISM Prices show headline prints that beat market expectations, the individual components that make up these reports were very hot. In my breakdown of the data I saw that the ISM New Orders component printed at their highest since November 2007, showing a month-over-month gain of almost 4%. The Prices Paid component moved to its highest levels since September 2008, gaining 11.5% month-over-month.
With data like that, especially on the prices components within the PMI data, the markets couldn't do anything but go up. From China, to the UK, to the Eurozone, and then to the US, all of the manufacturing fundamentals were off-the-charts good and all printed with an upside surprise. This was definitely not one of those days for traders who attempted to trade against the fundamentals. But, in my view, although the fundamentals were the main driving force there was a little more to the story than just good data... Price action beyond fundamental factors:
In today's trading we saw some extreme moves on pairs like the GBP/JPY, EUR/JPY, USD/JPY, and GBP/USD. Clearly there was a pure fundamental basis for each of those pairs to move in the direction they did but not exactly to the vast degrees in which each pair moved respectively. While all fundamental and market correlation factors were strongly against the USD and JPY, after analyzing the price action from today and the pattern of the 30-minute opens on those pairs, I believe today was a case where the fundamentals had some help to drive prices.
Now obviously the S&P 500, crude oil, Dow Jones, spot gold, and US Treasuries were all working in unison to push the USD and JPY lower but I think from a pure price action perspective and what I know about price movements of the majors and crosses, I feel the factor of stop loss triggering and margin-calling played a big role in addition to the fundamentals. I do not have any raw data from the brokers and this is just my own opinion but I give the factors of stop loss triggering, position liquidation (short covering), and margin-calling as much as a 30% weighting towards today's price action on those pairs I listed above.
From a pure price action perspective, what is a fact is that stop loss triggering and widespread margin-calling both act as catapults to propel price further in the direction in which price is liquidating positions. On the retail FX side of things most brokers will take the opposite side of their customers trade and while retail FX traders and brokers do not exactly have the power and liquidity to move the market, the massive stop loss triggering and margin-calling from the combination of retail, commercial, and institutional players absolutely works to propel price and move price against those large and small positions.
There's a reason why the EUR/USD did not move up to the degree it's counterparts moved and I believe this is because far fewer traders were net short on the EUR/USD as opposed to those attempting to short the pound sterling and yen crosses in today's trading. The EUR/USD dropped resoundingly in the late afternoon NY trading because a higher percentage of traders were likely net long on the euro at or above the 1.4150 and 1.4200 level and the exact type of price action effect took place on the EUR/USD as it did with the GBP/USD, GBP/JPY, and USD/JPY, just in the opposite direction.
Many traders will monitor volume as an indicator and while I'm not a big proponent of volume in FX trading because there is no central exchange for spot Forex, for traders who see low volume levels on a strong upsurge or low volume levels on a strong downsurge, this is a fairly cut and dry indication that the stop loss triggering, margin-calling and position liquidation is likely one of the leading factors catapulting price when there is little to no buying/selling conviction behind the move. The other leading factor would be all those traders who think they missed a move and pile into the last 5% of an up or down move and then the market reverses on them.
It's not exactly a common occurrence to see a day where the GBP/JPY moves over 570-points bottom to top from Sunday's open until NY's close or for the GBP/USD to move almost 400-pips bottom to top during the same time frame and I absolutely believe those price surges were fueled by the price action effect of stops being triggered and positions and accounts being liquidated which is a very natural characteristic when price action is propelled to such extremes.
When a good currency is bad:
Over the past few days I've been getting questions by traders about the appreciating euro and how it could be a good thing. That's a very good question and as the euro and pound sterling have rapidly appreciated against the dollar and yen in recent months I think it's important to keep a few aspects of currency appreciation in perspective. With any upside for a currency there's always a downside. For this commentary I'm going to specifically focus on the euro, but it works much the same with any currency.
1. Buying power vs. earning power
Very simply, a strong euro gives foreign importers less buying power and it leaves Eurozone exporters with less earning power. Germany is the Eurozone's biggest exporter and one of the top exporting nations on the planet. When the euro is strong, especially against the dollar, German exporters suffer from less profit and less global trading opportunities because the euro's value is too lopsided. For example, it would cost a US importer of German goods more US dollars to purchase and import those goods and this acts as a deterrent to trade. In order to attract more trade and more exporting opportunities, Germany and other EMU companies generally have to drop their prices or else they sell less product.
Eurozone exporters should be very concerned about the rapidly appreciating euro because of the fact there is still a recession in Europe and every company who imports, especially if they import to turn around to sell retail, will continue to ignore countries where they have less buying power and right now there is less buying power in Europe. US exporters should be jumping for joy by the way the dollar has plunged and I'm sure their comrades in Europe are not too happy with the euro-dollar situation. It will be interesting to see if Trichet talks the euro down on Thursday in order to take some of the pressure off Eurozone exporters...
2. Deflation
A strong currency isn't always deflationary but it is deflationary when it's negatively affecting exactly what we talked about above. When a strong currency forces a company to lower its prices in order to appease an exporter, wholesaler, retailer, or consumer, this is pure deflation. When a market or a consumer steps back and says, "No way, I'm not buying your product until you drop the price" that is deflation at its essence. Deflation exists when the combined power to purchase controls and prohibits the ability to produce goods and bring them to market at sustainable levels and steadily rising prices. Right now I see a strong euro contributing to the deflation that exists in the Eurozone even though the ECB continues to deny it.
When the consumer is strong the consumer can cancel out the deflationary effects of a strong currency because they already have a pre-programmed inflation expectation, especially when commodity prices are high, and they do not shy away from higher prices for goods and services. Right now there is no consumer and if the appreciated euro causes the consumer to further entrench this will only further exacerbate deflation in the Eurozone.
Those are two of the biggest downsides I see to a strong euro. Other downsides include making it more difficult for deleveraging Eurozone banks to handle their debts, losses and writedowns. The same is true for UK banks as the pound sterling continues to appreciate. As bearish as I am on the dollar, I'm almost just as bearish on the euro because of these factors and I believe the euro's valuations do not match it's standing against the dollar and how it trades against the dollar through the USD Index. But until the markets are forced or led into another season of risk aversion, it will be hard for the euro to depreciate against the dollar to any large degree. No matter what, I think it is very important for traders to understand some of the negative fundamental aspects surrounding a strong currency because every sovereign nation should want their respective currencies to suffer the same fate as the dollar and yen.
Trichet is quite proud of the strong euro but eventually he may be forced to talk it down to stimulate growth and to help Germany and the rest of the EMU out of its recession. An appreciating currency is very much the equivalent of higher interest rates and higher borrowing costs. Those are good things for market participants seeking higher-yields but very bad things for the overall economy that needs low interest rates and cheap money to re-inflate itself.
Tuesday trading:
On Tuesday we have another big fundamental day. For those traders who got steamrolled by today's fundamentals it would be a good idea to pay close attention tomorrow because we get more manufacturing, growth, housing, jobs, and consumer data out of the UK, Eurozone, and US.
AUD/USD--
At 1230 EST this morning we have an RBA interest rate event and I expect to see the RBA hold rates at 3.00%. A surprise rate cut would obviously be a shock to the markets and should this occur I may look for a great trade opportunity on the AUD/USD. I've been bullish on the AUD/USD going all the way back to the first week of April and it's pretty much done nothing but go up since then. You can read my bullish AUD commentary here if you'd like a refresher.
EUR/USD--
The big event for this pair is the Pending Home Sales data and I expect a better than forecasted print because the data is counting foreclosure sales which may likely skew the data to the upside. In order to rattle Wall St. we would probably need a bigger downside shock with the housing data but I am not expecting to see this. The only important data out of Europe is the Eurozone Unemployment Rate which I forecast to print at 9.0% or higher.
GBP--
At 0430 EST there is key fundamental data out of the UK with Construction PMI, consumer credit, and mortgage approvals. If the UK data prints as expected or better, which has been the recent trend, be on the look out for another upside surge on the pound sterling. Market participants are looking for any piece of news or data to keep pushing it higher and they may get some more tomorrow.
As far as trading goes, my bias remains clear, intact, and exactly as it's been for over a month -- I'm anti-dollar, anti-yen and I see no fundamental basis to buy either of those currencies against the majors or crosses until fundamental and market sentiment factors change. Very simple. Fundamentals are driving market participants and their money-flows and it will take an event, situation, or geo-political surprise in order to cause risk aversion which would benefit the dollar and yen. Until that happens or until crude oil and the S&P 500 move lower, the dollar and yen will continue to devalue and suffer.
Please be smart with your risk and money management, do not overleverage under these volatile conditions. EUR/USD key levels will be posted in the morning before Wall St. opens.
This is one of those crazy weeks where we have a mega ECB/NFP event, several other central bank interest rate events, speeches by Trichet and Bernanke, and key inflation data releases. Instead of trying to cover every event in the outlook, I'm going to mostly focus on what's happening with the US dollar as the dollar has taken center stage right now. We'll finish things off with a look at the big fundamentals on the books for this week...
Fundamentals and strong market sentiment drag dollar lower:
In last week's trading the dollar was absolutely brutalized against the majors, especially against the commodity currencies. Even the Japanese yen managed to recover against the dollar which is pretty sad considering how fundamentally weak the yen is overall. The yen gained on the dollar by almost 2% on Friday.
Against the dollar, the euro made its biggest one week gain in 8-months, the highest monthly gain in 2009, and its first sustained move above the 1.4100 level in 5-months. Just in the month of May the dollar lost over 6% of its value against the euro and the pound sterling gained over 9% on the dollar. And just in last week's trading commodity-linked currencies like the CAD, NZD, and AUD all gained 2% or more against the dollar with the biggest gainer being the NZD as it appreciated 3.5%.
And for the ten kabillionth time I'll repeat the same mantra I've been repeating for a month -- DO NOT BUY THE DOLLAR. It's not worth fighting the fundamentals, the monetary policy, and the actions of the Fed.
The reason for my anti-dollar trading bias and why this has shown to be the proper trade is based purely on fundamental factors which has led to a strong surge of anti-dollar sentiment and rising tide of dollar-selling conviction. Anti-dollar fundamental and market correlation factors--
Overall, commodities surged across the board to make their largest monthly gain in 34-years
Crude oil advanced by 30% in May and sustained a break above the key $60 level
The S&P 500 gained 5.31% in May
The Dow Jones gained 4.07% in May
US equity index's posted three consecutive months of gains
US dollar Index plunged 6.36% in May
Gold closed up at an all-time high on a monthly basis
Silver gained over 27% in May
US consumer confidence reaches 7-month high
I could go on and on with all the percentages but the point is that those are the underlying fundamentals of the market which directly correlate to the value of the dollar, especially the S&P 500 and crude oil which clearly pointed to a lower dollar and continue pointing in that direction at least in the short-term. It's important to always remember the relationship that exists between crude, the S&P 500, and the US dollar Index... the latter two are the gods of war of all financial markets while crude is the great prognosticator of risk appetite and price valuations for higher-risk and higher-yielding assets classes and tradeable markets. Anti-dollar geo-politics--
The US deficit quadruples to $1.85 trillion
China issues warning against the depreciating dollar, the dollar's status as reserve currency, and a decreased demand for US debt instruments
China surpasses the United States as Brazil's biggest trading ally, an important step for emerging markets
BRIC nations discuss using local currency for trade instead of US dollar and question dollar's viability as a reserve currency
US sovereign debt faces possible ratings downgrade based on the ballooning deficit and printing of money
OPEC sets a price band for crude at $75 per barrel in 2009
China reiterates its desire to potentially create a new international reserve currency to replace the dollar
Fed monetizing $300 billion of US government debt
Fed telling the markets they may buy more US government debt in the future
Asian nations reallocate sovereign reserves away from US Treasuries
In my view those are just a few of the main fundamental, geo-political, and market correlation factors that I see leading the dollar lower and why I have such a strong anti-dollar bias. I realize I repeat some of this stuff over and over but I think it's important we all keep these underlying fundamentals in the front of our minds as we make our daily trading decisions.
Those factors are all well and good to explain exactly why the dollar's plunged, but as we traders know currencies don't just move in a straight line or trade in one direction in perpetuity. I'm 100% bearish on the US dollar but this does not mean I believe currencies like the euro or pound sterling are strong. Now lets look at the following--
Signs for a dollar rebound:
As I mentioned above, I'm not a bull on the euro or the pound because they have plenty of their own fundamental issues, it just so happens that the dollar's underlying fundamentals are in worse shape due to the fact it holds the status as the world's reserve currency and this sets the dollar in a special and unique place that no other currency holds. Plus, the most popularly and widely traded asset classes are denominated in the dollar and this connection between the dollar and its denomination to asset classes that receive multibillions in money flows add a completely unique amount of pressure on the dollar. The dollar's denomination connection to tradeable markets such as gold, crude oil, sovereign debt, and the most sought after equities keeps the dollar in a special place that no other currency can be a part of and this adds a high degree of sensitivity to the dollar and how money-flows directly effect its overall strength or weakness.
If the euro happened to hold the same status as the dollar and was the main currency which had denomination connections to light sweet crude, gold, soft commodities, or the highest trade volume equities, the euro would be suffering much the same fate the dollar is right now. This explains why the euro and Eurozone can have weak fundamentals yet maintains a higher valuation against the dollar despite economic conditions being as bad or worse in Europe when compared to the United States.
When you boil this all down to pure monetary policy, if the Fed hadn't instructed market participants to sell the dollar in order to solidify a near-term trend of dollar weakness, the depreciation of the dollar would have been slightly more orderly over the past 10-weeks. When the Fed says "sell the dollar", the markets sell the dollar. When the Fed's counterparts at the ECB say "keep buying the euro", the markets keep buying the euro and selling the dollar. Very simple.
I do not have the ability to predict exactly when the dollar's decline will end, I'll continue to rely on the underlying fundamentals and correlated markets to indicate that, but there are a few signs we traders can look for and use as a gauge to determine when the dollar shows a higher rebound probability. Bear in mind some of these factors may indicate just an intraday rebound while others on a near-term basis. I trust if you have read through my blog or all the educational writing I've done which is posted here, you will be able to disseminate which factors will work for the dollar on an intraday, swing, or longer-term basis.
1. ECB monetary policy--
In addition to crude oil and the S&P 500, central bank monetary policy sets market trends. Central bankers at the Fed and ECB do not look at charts or use Fib lines and moving averages when they want their respective currencies higher or lower. If you want proof of that took a look at what the US dollar Index did on 20-May at exactly 1400 EST... that was the day and moment the FOMC minutes gave the Fed's instruction to further devalue the dollar again. It's very clear and many times I can pinpoint an exact time a piece of monetary policy was given to the markets to set a trend.
As hard as it may be to believe the ECBs monetary policy is considered hawkish, strict, and conservative. When compared to the ECB, the Fed's monetary is sloppy, loose, and overly accommodative. Thus far the ECB has chosen not to follow the Fed down the path of 0% interest rates, monetizing government debt, and printing money to re-inflate the economy. So in order for the dollar to truly rebound against the euro, which carries the highest weighting against the dollar on the USD Index, it would take the ECB changing their monetary policy and verbal rhetoric to match what the Fed is doing.
Unless the ECB drops their key lending rate to at least 0.50% and or announces a new plan to buy and monetize debt, market participants will always view the ECB as having stricter monetary policy and this is a very positive thing for the euro despite all the economic, disinflation, and banking issues still facing the Eurozone. When the markets are not in a season of intense risk aversion participants will always gravitate to higher-yields and the prospect of better future returns and right now the euro, by way of the ECB, offers this to participants and they are responding accordingly. This Thursday the ECB does have the power to boost the dollar against the euro should Trichet choose to unveil monetary policy that is loose, like monetizing debt or doing a surprise interest rate cut. Those type factors would be dollar supportive.
2. Crude oil--
A switch in the ECB's monetary policy from hawkish to loose and sloppy would be just as important as the role weaker crude oil plays in terms of US dollar valuation. Until science is allowed and enabled to bring a viable alternative energy source to the world, crude's status as energy king will remain. With crude reigning as energy king of the world, the actual price of crude is what market participants use to determine the overall health and wealth of the global economic framework.
If you've ready any of my stuff you know what I've taught on the correlation between crude and the dollar so I won't waste the time on that now, but the point is if you're one of those traders who seem to have a magnetic attraction to the sell button when trading the EUR/USD, do yourself a favor and use the price of crude oil as an indicator to quantify your trade bias. You will almost never see a situation where the dollar and crude go up or down in tandem. It's a virtual impossibility not only because crude is denominated in the dollar but higher crude valuations attract money-flows out of the dollar and into higher-yielding currencies and higher-risk markets.
My forecasts in prior updates for crude to surge past $60 and keep going have been reached and as long as the S&P 500/Dow Jones do not have a structural breakdown I expect to see crude reach $68 with a probability to break above $70 and potentially move as high as $72 in the near-term. That being said, on almost any day where crude moves lower the dollar will stabilize or even move higher, it's a very simple correlation. As you are looking for signs of potential dollar strength, even on an intraday basis, just pull up a real-time crude chart or crude price feed, it will serve you much better than a lagging tech indicator.
3. S&P 500--
In my view the S&P and it's correlation to the US dollar is what traders should really monitor on an intraday and near-term basis. It's the easiest correlated market to spot potential dollar strength or weakness because of the strong inverse relationship that exists between the two. I will never rule out this inverse relationship changing, anything can change, but due to the fact the S&P 500 is a cash market and it's price value is cash-weighted, unlike the Dow Jones, the dollar is almost forced to move in the opposite direction of the S&P 500.
As market participants are in a constant quest of better yields and the promise of better future returns, a heightened risk appetite leads to participants desiring to buy and hold equities traded on the S&P 500 much more so than holding the worthless dollar which yields almost nothing. Buying the S&P 500 is very much the equivalent of shorting the dollar. It works almost the same way as buying oil and gold equates to shorting the dollar.
I don't personally believe in the rally we're seeing on Wall St. and I believe in it even less as we get closer to the summer trading session. But I'm not about to fight it, if Wall St. continues to be euphoric the dollar will continue to devalue, very simple. Here again, if you want a sign for dollar direction the S&P 500 is one of the very best indicators out there, it will almost never fail you.
4. Fed--
The Fed is the other major catalyst that drives the value of the dollar. I have no doubt in my mind the Fed wants the dollar lower as Bernanke has clearly stated as much. The Fed cannot afford a strong dollar. Reason being, a devalued dollar drives equity prices higher and that right there automatically makes people feel "rich" or that they at least have some money. In addition, the Fed's weak dollar policies flood the monetary base with cheap cash with the intention of re-inflating the economy with buying power so that things like the housing market can rebound. A strong housing market also makes people feel like they have money and the net effect of this is increased consumer spending. Plus, a weak dollar will stop the shrinking US trade deficit. The Fed wants a USD- trade deficit which would be a reverse of what happened when the USD Index recovered during the worst of the global recession.
The only thing the Fed may do is slow the dollar's depreciation down to appease the Chinese and other US debt holders and the way the Fed would accomplish this is through verbal intervention, by not monetizing more US government debt, draining liquidity from the US financial system, or by simply raising interest rates, but that would almost take an act of God to happen right now.
If you're a chronic dollar-buyer or euro-shorter you will be well served to put in the time and energy to stay on top of those four factors as they will do much to give clarity for the dollar's direction on almost any time frame you care to trade from. Traders always throw the phrase out, "the trend is your friend", that's a cute phrase but if you want to know what the actual trend is, you will find the trend set based on the above four factors.
ECB to hold interest rates on Thursday:
The ECB has been very vocal and clear in their direction for monetary policy. Unless Trichet has been deceiving the markets, which he's not generally known for, I'm forecasting the ECB key lending rate to hold at 1.00% and for there to be no announcement to further expand their €60 billion bond buying program. What could hurt the euro is if Trichet announces a new or expanded plan to purchase debt or possibly even monetize government debt. That would be a shocking and unexpected surprise and the euro would be pressured lower.
So far it is glaringly obvious the ECB is happy with the euro's appreciation against the dollar. The ECB's big names have done plenty to talk the euro up the past 4-weeks but obviously this can change on Thursday if the ECB governing council decides behind closed doors it's time to cool the euro off a bit and Trichet delivers that message. I'm keeping my expectations open because central banks love to use the element of surprise but at this point early in the week I'm leaning towards a euro supportive ECB rate event on Thursday. Fundamentals and geo-politics to monitor this week: EUR/USD fundamentals--
Core PCE Prices (Monday 0830 EST)
Personal Spending/Personal Income (Monday 0830 EST)
Non-Farm Payrolls and Unemployment Rate (Friday 0830 EST)
Geo-political events--
GM bankruptcy (Monday)
North Korea
Treasury Geithner trip to China (All week)
It will be important to keep up with any developments from Geithner's trip to China. The Chinese have taken a beating this year with the sharp bearish slide in Treasury prices and the recent plunging dollar. Geithner's trip to China is a mega geo-political factor that has potential to move markets based on the type of rhetoric or agreements or policy that is set during and after the various meetings between Geithner and Chinese officials.
Of course North Korea has the potential to shake up the markets should they do something even more belligerent like sending missiles over Tokyo. If Kim Jong Il just keeps sabre rattling I don't expect much response from market participants but he is clearly unfazed by the UN, which is joke anyway. He's the most sanctioned head of state and he's probably only got a few years left to live and doesn't really have anything else to lose, so we should be on alert for further developments here.
At this point it looks like GM will move ahead and file for bankruptcy on Monday. Over half of GM's debt holders agreed to a plan constructed by GM and the US Treasury on Saturday evening. It appears all parties involved are doing everything possible to limit the number of GM brands that get eliminated in addition to preserving as many jobs as possible. I do not expect Wall St. to react too negatively to this situation unless they get hit with some surprise information or they do not like the fact the US government will control over 70% of the company. There's sure to be several press conferences on Monday over the GM including something from Obama and the Treasury Department. Be on the look out... Other key interest rate events--
RBA Cash Rate and Monetary Policy Statement (Tuesday 0030 EST)
BOE Official Bank Rate (Thursday 0700 EST)
BOC Overnight Rate and Monetary Policy Statement (Thursday 0900 EST)
Lastly, keep a close eye on the US dollar Index this week. It's dropped another 1% and moved to a sustained break below the 80 level. Should the USD Index move below 78 that will really put the dollar in the danger zone of a steep sell-off. I'll be watching for some support and a potential retracement back up a bit but overall the USD Index is in trouble which keeps the dollar at further risk of loss to the majors.
As far as trading goes, I probably won't even consider a trade until Monday. My bias remains negative on the dollar and yen and I will continue to short both currencies against the majors and crosses until the fundamentals and correlated markets show me otherwise, very simple. Switzerland, Germany, and France all have bank holidays on Monday, however, London is open. If you do trade before 0300 EST on Monday be smart with your risk and money management. The markets will be very ill-liquid when we open Sunday evening.
On a personal note, I'll be taking some more vacation time this week and early next week. I'll be leaving town this Wednesday and returning next Tuesday. If time allows I will try to post some kind of an update but if you don't see anything during that time you'll know why. EUR/USD key levels will be posted before Wall St. opens on Monday. Be safe and trade smart this week... it's always a different ballgame when we have multiple interest rate events combined with NFP.
For the most part all markets saw choppy trading conditions with several volatile price swings between the close of Tokyo, the open of London, and right through to the close of NY. At the forefront of it all was crude oil... crude obviously remains the leader of the pack this week just like it did last week.
As London opened this morning spot crude started making its move out of the $62 level and well into the $65 level. As spot crude started to turn upward at the 0300 EST time frame the dollar and especially the yen started moving lower and we could clearly see pairs like the GBP/JPY, EUR/JPY, GBP/USD and EUR/USD move up in tandem with spot crude. The dollar and yen also came under pressure as spot gold decided to make it's turn upward at the exact same 0300 EST time frame and never really looking back making it all the way to the $965 level.
From a pure trading standpoint whenever I see a situation where London comes into the market and starts pushing the higher-risk, higher-yielders up right out of the gate it's a fairly obvious sign not to attempt to trade against that type of market sentiment and buying conviction and that means sticking to the bias to short the dollar and yen against the majors and crosses. That being said, looking back at today, it was far from a normal trade day and what made it most odd was mostly the way market participants were driven by every piece of news, data, and geo-political rhetoric from folks at OPEC, the ECB, and others who like to use verbal manipulation.
Crude's drivers:
I spend a lot of time watching crude, writing about crude, and instructing other traders to use crude as a key market indicator. Reason being is because I feel the price of crude and the direction in which it moves is the greatest prognosticator for risk appetite, market sentiment, and money-flows right alongside the S&P 500. In order to understand crude it's important to understand what drives crude higher or lower.
In my view geo-politics is the #1 driver of crude prices followed by the value of the dollar via the USD Index, next by prices of US equities, next are fundamental factors, and lastly would be technical levels. Today we got a great example of a how geo-politics, dollar weakness, and fundamentals all contribute to higher crude and how we can use those factors for our trading...
Crude made an almost 3% gain today which is a pretty big move and obviously the biggest crude-related event today was a geo-political one, the OPEC meeting. OPEC made a move today that went off the script, it was purely political and was meant to drive the price of crude higher and keep it on the path of higher gains. For the first time in about 4-years all OPEC members stood in one accord to tell the markets they want crude to remain above $60 and that it should trade up to the $75 level.
The markets were not expecting OPEC to set an actual price trading band and participants responded accordingly by driving crude over the $65 level. Is it any shock or surprise OPEC wants crude to stay above $60? Of course not, but what took the markets by surprise was the fact all OPEC members stood together to tell the markets where they want and expect to see crude trading in the near-term... that's geo-politics at its purest and finest.
So for today, I see that event as the biggest contributing factor to crude's gains. From a fundamental standpoint, crude was also supported by the latest release of the Crude Inventories data which showed capacity utilization at crude refineries is up 3.3% from just the prior week. That type of fundamental data correlates directly to supply vs. demand. If crude and gasoline supplies are dropping and refinery utilization is rising, market participants look at those fundamentals in a bullish way as it could signal the demand for energy is growing which means economic conditions could be recovering.
For those traders who ask me how to best use crude as a trading indicator, this is exactly how I do it... just paying attention to the most important geo-political factors that effect the price of crude, how crude's fundamentals are printing, and the overall health of the USD and the S&P 500.
US housing market still distressed:
Before OPEC and the crude data was able to help boost Wall St., equities came under some initial pressure early this morning after the Mortgage Bankers Association released data showing new foreclose proceedings initiated in Q1 were up 1.37%, a record high. This sharp increase is 29bps higher than in Q4 2008 and 36bps higher year-over-year. That wasn't the only bad news, MBA also showed the delinquency rate on mortgages clocked in at 9.12% which is 227bps higher year-over-year.
That means that over 9% of all outstanding mortgages in the US are at least 1 month behind in payment. The 9% doesn't even account for homes already in the foreclosure process. That's an alarming number especially considering in just a year the delinquency rate is up almost 300bps. When the number of delinquent mortgage holders is added to those who are in the process of being foreclosed on, the overall number is 12.07% which is also the highest in recorded history.
Here's just another reason I won't call a bottom in housing because no matter how you slice it, the housing market is not in recovery mode and likely can't begin to recover until the jobs market turns around. Just this morning we learned that continuing jobless claims reached another record high. Despite what I'm hearing about housing finding a bottom this summer, I do not agree with this view at all and latest data doesn't support the view either. Friday trading:
Today's update is a little short but I really don't see much else to talk about other than what we covered above. The only other big event was GM's bankruptcy announcement but this was certainly not a surprise. From a trading standpoint what we'll need to do is just watch how that drama plays out especially with the potential for big job losses. The US government will likely take a 72% stake in GM and that's a pretty scary proposition right there... 1-June is the big day for GM and until that time I don't expect the GM issue to weigh on the markets.
We do have some key fundamental events worth noting... Euro fundamentals--
At 0500 EST on Friday we get the Flash CPI number and this is something I'll be watching very closely. The market is expecting a print of 0.2% which is a month-over-month decline of 0.4%. Over the past few weeks the ECB has promised the markets that deflation and disinflation are not issues for Europe, so I'm not expecting a negative print tomorrow but I'm not ruling out a print of 0.1% to 0.0%. German Retail Sales are released at 0200 EST and I'm not expecting an upside surprise with those numbers and we may see a worse than forecasted print. At 0515 EST Trichet will speak in Morocco. Trichet's not scheduled to speak directly on ECB monetary policy but there's always a potential for that whenever he speaks. Dollar fundamentals--
At 0830 we get the Prelim GDP numbers along with the GDP Price Index. I'm not forecasting a print that's worse than expected by the market. Should we get a downside surprise I do not believe it will be enough to rattle the markets too much. I think more attention might be on the Chicgo PMI and Michigan Sentiment data. All consumer confidence type data remain on center stage right now. It will be interesting to see how the inflation component to the Michigan Sentiment prints, keep your eye on that...
As far as trading is concerned I think tomorrow could be a typical wild Friday with some strong price swings and choppy volatility, especially on the yen crosses. The yen has really taken a beating this week so we should expect to see heightened volatility on the yens. At this point I maintain my overall trading bias not to buy the dollar or yen against the majors unless I get a high probability price action pattern to play. I'll renew my warning to be very careful shorting the EUR/JPY and especially the GBP/JPY. Until the downside pressure eases up on the JPY or until we get a decent downturn on crude and equities, the yen should continue to move lower across the board.
GBP/JPY--
The GBP/JPY has shown a very consistent pattern of being bought up under a 00 level if it's dropped from a higher 00 level and or a 50 level. For example, all this week the GJ has been bought up just under a 00 level starting on Monday and straight through to today. On Monday the GJ dipped below 150.00 and was immediately bought up, when it dipped below 151.00, 152.00, 153.00, and 154.00 it's been bought up just as agressively after coming lower from a higher 50 level. Hopefully this makes sense but if you're a chart type person, pull up a chart fro, this week and you may be able to see what I'm talking about.
So far tonight the GJ has been above 154.50, it's dropped below that 50 level, and if it drops below the next 00 level, which would be 154.00, based on recent price action patterns and price trends, the probabilities go up for it to be bought up at 153.90, or below the 153.50 level, and especially near the 153.00 level. For me personally if we get a decent pattern of lower 30-minute price opens that correlate to these price levels I'll probably look to take advantage of this buying opportunity.
If you trade the yens, the key time frames for tonight are: 1930 to 2030 EST, then at 2230 to 0000 EST, then again at 0000 EST to 0300 EST. Those are the time frames where I see the greatest potential for price movements and volatility. That's all for now, as always I don't reccomend any traders trade on Friday as the markets are too ill-liquid, illogical, and there's too many participants book squaring all day long. If you do trade, consider taking half your normal position size to mitigate risk. EUR/USD key levels will be posted in the morning before Wall St. opens.
Today was the first day I've looked at the market since last Thursday, so this will be an abbreviated update. Overall I do not see that a whole lot has changed... crude's well over the key $60 level, the S&P 500 and S&P 500 futures are hanging around the 890-910 levels, gold remains supported, the 10-year yield continues to rise and is now above the 3.50% level...
Looking back through all the 30-minute price opens from the past few days I am noting the EUR/USD's inability to sustain a break above 1.4020 which I have as a very important key price level. I see some fundamental factors that are weighing on the euro and we'll cover those in a bit. Over the past few days it also appears the pound sterling and Aussie have been two of the best performers against the lower-yielders. Existing home sales data not so pretty:
The headline number for April's Existing Home Sales looked decent as it showed a 2.9% increase month-over-month but once you scratch the surface it's easy to see why equities didn't benefit and Wall St. came under pressure after the 1000 EST time frame. March's data was downwardly revised to -3.4% but what really hurt equities, crude, and the euro was the jump in unsold inventory... according to the data there's now a 10.2 month supply of unsold home inventory which means there's almost 4,000,000 unsold homes currently on the market.
Even worse, the median price for a home in the US is now down 15.4% year-over-year while the average price is down 13.8%. The US Home Price Index printed at -1.1% vs. an expected gain of 0.2%. Low prices and high inventories are extremely deflationary and clearly indicate that the so-called bottom in housing that many politicians and economists have already called is still a ways off.
Weak German inflation data causes euro sell-off:
In addition to the bad US data which helped the dollar by way of weaker equity prices, the euro came under added pressure sending it all the way to the 1.3870 level after we got the complete regional German inflation numbers. The overall German Prelim CPI printed at -0.1% month-over-month vs. an expected rise of 0.1%. The year-over-year CPI data printed flat at 0.0% vs. an expected rise of 0.2%.
Inflation absolutely remains key for these markets and for how market participants gauge risk appetite... I'm still all about inflation and it remains the center of my attention and obviously other participants feel the same way too. What really hurt the euro from this bad inflation data was the fact that the German Prelim CPI showed it's first year-over-year decline in 13-years.
No matter what, as long as inflation in Germany and the Eurozone keep falling, the euro's gains will be capped, especially against the dollar and pound sterling. The big money movers would almost never buy the euro on a day like today when inflation data prints worse than expected and negative. As long as the risk of deflation remains in Germany and the Eurozone the euro will remain pressured on days when we get this type of negative inflation dat.
In my view I absolutely see deflation as the biggest risk as opposed to inflation. I don't really care what Trichet has to say about remaining vigilant against inflation because he should start getting vigilant against deflation as deflation is the real risk for Europe and the euro right now. The ECB didn't waste any time calming deflation fears because within an hour of this German inflation data being released ECB Papademos came out with strong rhetoric saying there is no risk of deflation in Europe and that helped bring the euro off its lows around the noon EST time frame before coming lower again as the S&P 500 futures sold-off into the Wall St. close.
Thursday trading:
Tomorrow is filled with several important fundamental and geo-political events... one of the big events is OPEC's meeting in Vienna. There's no expectation of any policy changes but it would not surprise me to hear OPEC renew its call for the 11 OPEC members to follow policy on cutting crude production in order to drive prices higher. OPEC member nations produce almost 40% of the world's crude supply and many of the members rely on crude profits to fund their respective governments. Any time crude falls under $70 a barrel it causes a lot of political pressure so it's up to OPEC to do whatever they can keep crude moving north.
USD fundamentals--
These are the fundamental events for the USD I'll be following closely tomorrow:
Core Durable Goods (0830 EST)
Durable Goods (0830 EST)
Initial Claims (0830 EST)
New Home Sales (1000 EST)
Crude Inventories (1100 EST)
On the housing data I'm not seeing a big upside surprise there. What could hurt equities and higher-risk markets is further weakness with continuing jobless claims and data that shows low demand for bigger ticket items which would signal the consumer is still well entrenched and waiting for prices to come lower before opening their wallets. Other key fundamental events for tomorrow are a speech by ECB Weber at 1015 EST along with UK consumer confidence and Japanese inflation data later in the evening.
As I mentioned earlier I am taking note of the EUR/USD's repeated failures above the 1.4020 level. My overall bias remains to short the dollar and yen against the majors as I do not see any major fundamental or sentiment shifts happening over the past few days. With the euro showing a bit of weakness the pound sterling has benefited and is the stronger European currency right now, so in addition to that and several fundamental factors, the euro does carry risk of falling further to the downside.
As far as trading goes I'll continue to take my cue from the US equity markets, crude oil, gold, and Treasuries. Unlike in prior weeks I'm more open to shorting the euro against the dollar especially if the S&P 500 shows weakness or is unstable above the 900 level. Some of the strong upside momentum we saw on the S&P 500 and Dow is clearly starting to subside especially as we get closer to the summer session and the time of the year when liquidity can be extremely thin. So keep your eye on these price action and underlying fundamental factors in the days and weeks to come.
Wall St. had a rough go of things the last half of the day and as NY closed at 1700 EST the S&P 500 futures were hovering right above the key 890 level. If you plan on trading this evening keep your eye on the Asian markets as they may lead the higher-risk, higher-yielders even lower. EUR/USD key levels will be posted tomorrow morning before Wall St. opens. As always be smart with your risk and money management.
Fundamentals and geo-politics hammer dollar and equities:
Today was probably one of the more wilder trade days I can remember from the past few weeks... the insanity, price swings, and volatility were completely driven by fundamental, geo-political, and monetary policy factors, all hitting the markets within a period of about 12-hours.
For today's update we're going to look at what's going on with the dollar, Wall St., crude, and the pound sterling. They are all inter-connected and all lead directly back to fundamental and monetary policy factors which drive risk appetites, market sentiment, and money-flows.
US dollar--
The normal correlation between the USD and the S&P 500 became totally disjointed and uncorrelated today. This is not a fluke or random coincidence and the explanation is about as simple as it gets... the disjointed price action between the dollar, euro, and equities is directly connected to what we talked about in yesterdays update in regards to the message the Fed sent the markets through the latest FOMC Meeting Minutes.
I don't want to repeat what I explained yesterday, but the market was simply doing what the Fed told us to do -- keep selling the dollar. When the Fed says to sell the dollar, the market sells the dollar no matter what. There is no greater force than the Fed and the Fed always gets what the Fed wants. The Fed's message to sell the dollar was about as clear as it's been in recent history and market participants responded accordingly, despite a sell-off in equities.
It's not a coincidence that the dollar has been sold-off almost non stop since 1400 EST yesterday. That's when the FOMC minutes came out and since then the dollar and USD Index have done nothing but devalue. No trader on earth has the liquidity to fight against these kind of fundamentals and monetary policy issues because there's almost no risk in selling the dollar when you know the central bank give its full blessing to do so.
When the Fed says "please sell our currency, please devalue and depreciate it" that's exactly what's going to happen. It doesn't matter what any analyst, chart, or tech indicator says, the dollar will get sold-off and any trader that fights against this gets steamrolled. There's not really much more to add on this topic, it's as clear. And for the ten kabillionth time I'll repeat the same mantra I've been repeating for a month -- DO NOT BUY THE DOLLAR. It's not worth fighting the fundamentals, the monetary policy, and the actions of the Fed.
I'm writing this part of the update with a very serious tone because based on all of the emails I've received today I know traders tried to fight the Fed by shorting the euro against the dollar last night and early this morning. All I can say is, when I repeat something like don't buy the dollar every day in every update, there's a reason why... for those that are asking me what they should do with their EUR/USD shorts, I have no idea what to say on that.
The only thing I will say is that I do expect a retrace and pullback after this week's run-up. How much of a pullback? I have no idea, that's not anything I can predict. It's possible the euro could be looking at a retrace to the 1.3820 level at the minimum, possibly even further but it will require market participants to book profits on their euro longs going into the weekend. At this point I just don't see market participants not continuing to buy the euro on the dips.
If you're one of those that emailed me about your struggling euro shorts, the first time frame you may get a EUR/USD, GBP/USD, EUR/JPY, and GBP/JPY pullback is between 1930 EST and 2030 EST tonight. So my best advice is to be in front of the market at that time because you may get your chance. The next time frame after that could bring a potential pullback is between 0300 EST and 0630 EST. There's a potential to see profit-taking and book squaring during that time frame and should market participants book profits on their EUR/USD longs, the euro will come lower. The next time frame after would be between 0930 EST and 1200 EST on Friday when another round of profit-taking and book squaring can occur.
The last thing I'll add on this issue -- do not be fooled by what you're seeing with the euro. The euro is not strong, this is not a euro strength story at all whatsoever. This is purely a dollar weakness scenario fueled by the Fed. If the ECB were to tell the markets to sell the euro like the Fed did to the dollar, the euro would be getting hammered right now. The Fed and ECB play a game of see-saw, that's just the way it goes. Don't fight it.
Pound sterling--
With the GBP/USD we have a purely fundamental and geo-political factor at play. At 0424 EST / 0824 GMT, the Standard & Poors rating agency downgraded UK credit to negative from stable with a potential to drop the AAA rating on UK sovereign debt. That's what sent the pound plunging this morning. Very cut and dry stuff.
What also hurt the pound this morning was S&P's warning that the UK debt-to-GDP ratio could go as high as 100% which basically puts the UK at third world country status. Any time sovereign credit or debt gets downgraded to negative or the ratings get cut the currency gets hammered. If it weren't for the dollar being so weak and worthless right now the GBP/USD would have never been able to recover the way it did. It was quite a recovery in fact going from 1.5512 all the way to a high of 1.5890.
As bad as these fundamentals are for the GBP, as long as the USD stays on a weak footing, the GBP will not suffer too badly until things begin to turn around for the dollar again.
Crude--
Despite the S&P 500 getting rolled, crude remained resilient and firmly above the key $60 level. A lot of crude's strength can be attributed to the dollar's intense weakness as crude is denominated in the US dollar. The other reason crude remained well supported is due to the fact a greater majority of market participants still believe in Wall St.'s ability to keep moving higher even though we've now had a 3-day slide in equity prices. Crude is still the main driver of market sentiment and is still the center of the universe right now and I believe it has room to run higher especially if the dollar continues to be trashed like it has the past 24-hours.
Trading lessons--
Overall, there's much to be learned from a day like today in terms of how we can all become better traders. For those of us that stuck with the game plan not to buy the dollar the best lesson is that even the market correlations between the dollar, euro, and equities can become disjointed when the Fed steps in and tells the market what to do. It's rare to see equities sell-off and the euro to rise, it almost never happens, but even the correlations are no match for monetary policy and the power of the Fed.
Other good lessons are how things like credit and debt ratings have a direct correlation to risk and money-flows. The important thing to understand about the connection between credit ratings and sovereign debt is that fund managers use those credit ratings as a means of decision making when building portfolios. It's all about risk. US Treasuries are considered the absolute least riskiest asset class to invest in. If that were to change, which it probably should and probably will, it means billions and billions worth of money-flows need to be redirected elsewhere. It also means the currency comes under attack.
Lastly, if any traders are really stuck in a bad position or bad place and need somebody to talk to or bounce ideas off of feel free to give me a call at the number on our contact page. If I can somehow help or give clarity I'm happy to do so. Believe me I've been in plenty of bad positions myself in the past and if there's anything I can to do help I'm be glad to. Friday trading:
Don't forget there is a BOJ interest rate event this evening. The BOJ doesn't set an exact time for their interest rate event but they usually come out with an announcement sometime after 2300 EST, so be on the lookout for that. The biggest risk with this BOJ event is that they come out with strong rhetoric to talk the JPY down. The yen has been fairly resilient especially against the dollar and this is the absolute last thing the BOJ wants or will tolerate for too long. I would urge strong caution if anybody is trading the JPY crosses tonight because the BOJ holds the power to rock the markets with their interest rate decision and especially with whatever they say that their monetary policy meeting.
There's not really any big fundamentals for the euro or dollar on Friday. The only big event is a Bernanke speech at 1400 EST and you can be assured all eyes and ears will be on Bernanke tomorrow as participants are looking for any clues on exactly what the Fed is thinking. Those FOMC minutes really shook the markets up because of the mixed message they gave to Wall St. about the state of the economy.
Most of Wall St.'s sell-off can be attributed to the gloomy message the Fed gave yesterday after spending the past month painting a rosy picture. I don't know why the Fed is causing such confusion here but obviously the markets do not like it. The main problem is all the politics at play right now. If congress or the Obama administration want to push through another stimulus package they will need the Fed to bring the markets back down and the best way to bring them down is to tell them everything is not as good as they thought they were...
Don't forget Friday trading conditions are unlike any normal trading day... the markets will be ill-liquid and there will be plenty of price swings and strong volatility as money-flows are pouring in and out of the markets from the time Europe opens right until NY closes. If there's a lot of fear and risk tomorrow we could see a good deal of profit-taking and book squaring before everybody goes home for the weekend.
Overall I don't see the weak dollar trend magically reversing between now and Friday. My bias remains clear -- I'm shorting the dollar and yen against the majors. The only way I would short the euro or other higher-yielders against the dollar is if I get a mega high probability price action pattern that carries a 98% probability or higher. Otherwise, I will keep buying the euro on the dips.
On a personal note, I'm going out of town on Sunday and I will be gone and traveling for most of next week. My time in the chat will be limited, but when I get a chance I will try to do some updates in the blog if time allows. As always, be very smart with your risk and money management if you trade tomorrow. I suggest using half your normal position size on Friday to mitigate risk and minimize a possible loss.
Once again crude led the charge in today's trading to the benefit of higher-risk, higher-yielding markets. As forecasted last night in the update, today would be the day crude breaks the $60 level and we saw this play out as crude sliced through $60 and settled above $62, gaining almost 3.25% on the day. Consequently the dollar took a nasty beating across the board, especially to the higher-yielding pound sterling and euro. The dollar lost 1% today on the USD Index and put in it's worst performance against the euro since this January.
But the real news of the day is the shocking and confusing messages sent by the Fed via the FOMC Meeting Minutes... Fed shakes up markets with mixed messages:
I wasn't expecting too much of a reaction to the FOMC minutes unless they said something unforeseen or shocking and sure enough, we got an unforeseen message that the markets were not expecting and which came as a shock...
The first message the Fed gave to the markets was abundantly clear -- keep selling the US dollar. And that's exactly what the markets did as soon as the minutes were digested by participants, which only took about 90-seconds as the message was obvious. The Fed said they saw the potential need to monetize more government debt. In other words, the Fed said they may expand their forced currency devaluation through quantitative easing (buying US Treasuries).
Why this came as such a shock is because the last time we heard from the Fed on this issue, they clearly told the markets that their $300 billion program to buy Treasuries would be enough to meet their objective and now the markets are hearing otherwise.
Confusing rhetoric from Fed--
That rhetoric about further monetizing debt hammered the dollar in the FX market but the Fed's other rhetoric rocked the equities market, sending the S&P 500 futures back down to the 900 level and causing a sell-off on the S&P 500 cash market and on the Dow.
For at least the past month everything we've been hearing from the Fed about the US economy has been upbeat, positive, hopeful, and optimistic. Some of the FOMC members, including Bernanke, have even hinted the economy has bottomed and is in recovery mode with brighter days ahead. Well, the Fed completely contradicted all of their recent rhetoric in today's FOMC report and that's exactly why Wall St. freaked out into the close...
Here are some of the contradictory messages in the FOMC report:
Deeper recession in 2009; slowed rebound in 2010
GDP to decline 1.3-2% in 2009, grow 2-3% in 2010
Unemployment rate at 9% or higher through 2010
Raises Q4 2010 jobless rate forecast to 9%-9.5% from a prior forecast of 8%-8.3%
Raises Q4 2009 jobless forecast to 9.2%-9.6% from a prior forecast of 8.5%-8.8%
Fed agreed to hold decision on more securities buys to see how economy, financial conditions evolve
This is exactly opposite from what the Fed has been telling the markets in their recent speeches, especially the stuff about buying more bonds. It's like some kind of bipolar Jekyll and Hyde Fed we're dealing with now. So which Fed are we supposed to believe? The euphoric Fed that's been smoking their green shoots in a waterbong or the Fed that's painting a dismal picture of the US economy in order to justify future stimulus plans and forced devaluation of the dollar?
Which Fed do you believe?
I'm inclined to go with the latter. It's obvious the Fed wants the dollar to die and this is one of the main reasons why I've been telling traders in these updates not to buy the dollar against the majors. I'm even further convinced the Fed wants to see the dollar brutalized in the near-term. A strong dollar does the Fed and US economy no good right now. If the Fed or Treasury truly believed in a strong dollar like they sometimes say they do, their actions don't match their words at all, and it is their actions which carry more weight in my book.
Plus, by further monetizing debt it will help keep interest rates low and money cheap. That's another thing the Fed wants right now because low rates and cheap money acts as a catalyst to re-inflate the bubble which burst last year. The Fed doesn't want rates to rise because that could slow growth and recovery, especially in the housing market.
You have to keep in mind that the Fed are nothing more than price-fixers and price manipulators. The Fed doesn't actually do anything useful or proactive, their policies are which cause booms and busts and busts and booms... the Fed is their own cause and effect machine... the Fed is both the arsonist and firefighter. Nobody can fight the Fed, so if they want to monetize more debt to drive down interest rates and devalue the dollar, that's exactly what will happen. Bottom line, I think the Fed's monetary policy should always be a part of any traders game plan, especially in the FX market.
Thursday trading:
Other than crude touching new 6-month highs and the FOMC rattling the markets, it was pretty much a status quo trading day... tomorrow is a huge fundamental day starting with French, German, and Eurozone manufacturing data which comes out between 0300 EST and 0400 EST. I don't really have a forecast for all that PMI data because I'm not sure it even matters right now, the euro clearly remains tightly correlated to crude and the S&P 500, so I'll continue taking my cue from those markets. I'll repeat this yet again -- crude is the center of the universe right now and so goes crude, so goes the markets...
Big US data includes Initial Claims, Philly Fed Index, and another Geithner testimony at 1000 EST. Here again, I'm not nearly as concerned about the fundamentals tomorrow as I am with following crude and Wall St. The dollar is really in a tough place right now and I can sense a growing tide of anti-dollar sentiment which is exactly what Bernanke and the Fed wants.
So as far as trading goes, I maintain my bias to buy the majors against the dollar and yen and to only short the majors against the dollar and yen when they show some exhaustion and a high probability trade opportunity. The euro and especially the pound sterling have come up a long way this week but I wouldn't count either of them out, they still have plenty of more room to keep running as long as crude continues moving north, that is the key to it all.
I see crude hitting potential resistance between the $63 and $64 levels but should it sustain a break there, I see even higher gains to come in the short-term for crude and it's correlated markets. Besides the consumer I can't think of anybody else that would actually want or need crude lower. Market participants are starved for yields and forward looking returns, this is why they pour out of the dollar and yen and pile into the EUR, GBP, AUD, NZD, CAD, and CHF. While the current market sentiment and risk appetite prevails, I think the best trading strategy is to continue buying the dips and avoiding the USD.
It's possible some of the majors see a bit of retracement after today's strong upside gains, keep an eye on the market between the 1930 EST and 2030 EST time frames tonight and then again between 0000 EST and 0300 EST. Any dip that occurs between 2000 EST and 2230 EST tonight would probably be seen as a new buying opportunity by market participants.
Don't forget there are bank holidays in Switzerland, Germany, and France tomorrow, so the markets will ill-liquid leading to a heightened chance for volatility. As always, practice smart risk and money management in your trading, stick to those 0.5% entries and keep your usable margin above 96% and you'll be well positioned to avoid getting hurt during this chaotic and volatile times.
After the wild price swings during the late Asian and early European sessions, Wall St. traded mostly under choppy up/down conditions. The S&P 500 and Dow were in the green for a good part of the day mostly thanks to crude remaining well supported, but I think a lot of the choppiness was due to alarming weakness with the financials and a big downside surprise with the housing data.
Today's price action gives pretty clear evidence that market participants continue to look for any piece of news, rhetoric, or geo-political event as an impulse to either buy or sell. The financials on the S&P 500 dropped over 4% keeping the entire index under pressure and capping gains for most of the day. The downside slide on the financials intensified almost immediately after Moody's released a new negative report on the commercial real estate market.
Many are saying the commercial real estate market is the next shoe to drop. I don't know much about that sector but I do not find myself disagreeing with the speculation commercial real estate will take a big hit. So between Moody's report about falling real estate prices and the abysmal housing data, crude was unable to sustain above $60 and the S&P 500 suffered from profit-taking and lack of buying conviction. Housing and building permits worst on record:
There are a few good lessons from today's housing data, and not just about how bad the US housing market is but also a great lesson about market behavior and market psychology... before we get to the trading lesson, lets break down the data. According to the Commerce Department new Housing Starts plunged 13% last month while Building Permits dropped by 3.3% -- both of these are record low prints and clearly show evidence a bottom in housing has not been put in as some analysts have been saying.
Most of the downside attributed to the surprising drop in Housing Starts is the fact that multifamily homes declined to 90K in April after printing at 167K in March. That's a pretty nasty drop and shows there are far fewer subdivisions and apartment complexes going up, and that likely means commercial contractors can't get the loans they need based on the lack of consumer demand in addition to lenders remaining fearful of the commercial credit market.
So what's the lesson? Well, I learned a good lesson today, maybe not so much a lesson but a good reminder... I was personally forecasting a positive print on today's housing data and obviously got it wrong. I don't really trust government data so whenever I do forecasting for a bigger fundamental events I look at other areas and sectors and markets to get clues and signs. Yesterday as I was doing my research for today's fundamentals, and specifically the housing data, I noticed almost all of the big name home builders like Pulte, Centex, and Lennar put in a wildly strong performance, ending the trade day with strong gains.
I was thinking that was a good sign the data might actually print to the upside... reason being, if somebody knew something I didn't know, and they knew the data would surprise to the upside the stock values of those home builders would probably surge, so I correlated yesterday's gains on the home builders as a sign market participants were pre-positioning themselves for today's housing data.
But what I failed to realize and failed to remember was the old mantra that exists not only for the equities market but for all markets -- buy the rumor, sell the fact... I'm not a news trader so the fact I got the forecast wrong didn't hurt me or cost me anything, but had I been a little smarter and savvier in this case I should have known the big market movers were buying the rumor so they could sell the fact and recognizing that I at least could have produced a better forecast.
When we're in a trading environment where market participants react to the daily news events I think it's important for us to be mindful of the psychology and gamesmanship that goes on before and after these news releases. In this scenario we have a very clear example of what it means to buy the rumor and sell the fact, but these types of moves go on every day in the markets, and especially in the FX market.
And speaking of buy the rumor, sell the fact... UK inflation data slows pound sterling appreciation:
If you took my advice to watch the market during this morning's inflation event you would have observed the GBP/USD and GBP/JPY run up like gangbusters from the moment Europe opened and right until the UK inflation data was released at 0430 EST. Unfortunately for any traders that were buying the rumor at the top got hit hard by the worst inflation print in the past 15-months and the worst retail inflation data in the past 41-years.
As the inflation data hit the news wires, the GBP/JPY went as far as it could possibly go, making a top at 149.62, and then did a 180-degree turn, never looking back and falling as far as the 148.05 level within just 5.5 hours. The GBP/USD didn't take quite an immediate hit and continued to test up at those levels but never had the fire power to continue higher and finally gave way and made its lows as the sterling-yen was make its low.
Why didn't the pound take nearly the beating the euro, dollar, and yen does on negative inflation data? I think there are a few reasons... first of all, although there is a definite disinflationary environment in the UK, it's not nearly as bad and protracted as what's happening in the Euro area or in the US. UK CPI is at 2.3% which is actually above the BOE's target rate of 2.00% and Core CPI is only 0.5% below the 2.00% level.
So there's surely disinflation happening in the UK as the prices of food, energy, and wages are continuing lower but it's not as dire a situation as in other parts of the industrialized world. As bad as the fundamentals are in the UK, they still have some minor inflationary pressures going for them and this is supportive of the pound against the majors. If the inflation situation continues to go south on the UK that's when the pound would come under greater pressure than what we saw today.
I still believe inflation data continues to be some of the most key fundamentals right now and data the big market movers are watching closely and reacting to. And speaking of inflation, Australia has an inflation-related data release tonight at 2130 EST...
Wednesday trading:
For tomorrow's trading, crude oil, along with the S&P 500, will remain the center of the universe. Crude made another multi-month high today but once again failed to sustain a break above the key $60 level. I'm going to forecast that crude does end up breaking the $60 level and we could see it happen any time between now and tomorrow's trading. Barring an equities sell-off I believe the market will make another run at $60 and bust through.
Sure enough, just as crude lost some momentum yesterday another "fire" broke out a refinery in Texas and you know what happens... it means prices go up as participants react to this news event. Crude and the S&P 500 both need each other right now like two co-dependent crackheads. Is there any fundamental justification for crude to be up at these levels? Of course not, but fundamentals are no match for risk-hungry market participants who believe the quickest path to gains is buying crude, for whatever reason.
The first big fundamental event is actually at 1950 EST this evening when Japan releases their latest GDP data, so keep an eye on the Forex market for some heightened volatility between 2000 EST and 2230 EST this evening... you may find a good trading opportunity or at least something fun to watch. The Japanese Prelim GDP printed at -4.2% but the really bad part was the inflationary comoponent to their GDP which printed 1.1% and this is very JPY negative. Euro fundamentals--
Out of the Eurozone the big data on Wednesday of course is PPI. I expect PPI to recover slightly and not make a lower print than the prior month but should we get a downside surprise here, the euro could easily come lower, especially if PPI prints at -0.8% or worse. Dollar fundamentals--
Little Timmy Geithner has a speech at 0930 on Wednesday, so be on the lookout for that. The two biggest data events are Crude Inventories and the FOMC Meeting Minutes. For some reason I believe Crude Inventories will be crude+. The FOMC Minutes shouldn't be too big of a deal, I don't expect anything shocking, if there is any shocking rhetoric it will be to the benefit of Wall St. and against the dollar.
As far as trading goes, I'm sticking to the same plan which following crude and the S&P 500, and that means buying the euro and pound against the dollar and yen on the dips when I get a good probability trade. I'm not opposed to shorting on the rises but I would need a very high probability price action pattern to risk on the short side, I think there's less risk going on long until the market sentiment changes and risk appetite subsides.
For all the CAD traders don't forget you have inflation data to contend with tomorrow at 0700 EST. That's all for now. Be smart with your risk and money management. Key levels will be posted in the morning.
Market rally led by crude's 6-month high and S&P 500 gains:
Today's monster rally was led by exactly what we talked about in yesterday's weekly outlook... crude oil and the S&P 500. Crude put in it's best performance in 6-month's leading the S&P 500 and all US equity markets to strong upside gains and taking the higher-risk/higher-yielding currencies right up with them while sending the US dollar and Japanese yen to the depths. Spot crude started Sunday by moving decisively off its lows around the $56 level and skyrocketing well above the $59 level.
After crude got the party started the S&P 500 futures rose up from the ashes around the 875 level and never really looked back, going all the way to the 908 level by the time Wall St. closed this afternoon. When it was all said and done the S&P 500 cash market gained 3% on the day and the Dow gained almost as much.
The euro, pound sterling, dollar, and yen started Sunday where they left off on Friday but as soon as their correlated markets decided to go on a rampage the dollar and yen didn't stand a chance to gain any more ground on their higher-yielding counterparts.
I'll repeat what I said yesterday -- it's all about crude right now... so goes crude, so goes the markets...
Why did crude gain 5% today?
Today's 5% gain was fueled purely by geo-political reasons. Market participants are looking for any and every reason to either buy or sell and just a few hours after we opened for trading yesterday the reasons to buy crude kept piling up which correlates to plenty of reasons to sell the dollar and yen... I'm sure my opinions on this will be shared by just about everybody else out there, but no matter, this is purely geo-political stuff going on that have nothing to do with demand or pretty colored lines on a chart...
1. The world's largest democracy, India, sent a strong message against communism and elected a more free-market style legislature. In return India's benchmark equity market called the BSE Sensex surged by 17.34%. When an emerging market like India puts in this kind of performance coupled with a democratic victory in their legislature, crude almost has to go up as this is a great sign for emerging markets.
2. Nigerian crude pipelines were sabotaged by rebels in addition to them threatening to prohibit shipments of crude out of the Nigerian delta. You remember last spring and summer when crude started making its historic descent? If you do then you probably remember that every time crude dropped a few bucks, like it did last Friday, all of the sudden Nigerian rebels started attacking pipelines.
Surprise, surprise... the same exact thing is happening again at the same exact time of year. I highly doubt this is a coincidence. The main reason Nigeria is such a geo-political hotbed in relation to crude is because Nigeria produces the good stuff, the light sweet crude and that's exactly what I watch to determine direction of the S&P 500, USD, EUR, GBP, etc. That's why this particular geo-political issue is of such importance to trading.
3. The largest crude refiner in the North had a big explosion yesterday afternoon and operations were halted. The explosion was at a Sunoco plant which produces 175K barrels of oil a day.
So, even though the fundamentals are against crude being able to gain, the fundamentals are no match for geo-politics and there's been nothing but geo-politics the past 24-hours that are very supportive of crude. If I didn't think crude wasn't the center of the universe right now I wouldn't have been so long winded about it yesterday and like I'm doing now... Mega fundamentals for GBP, EUR, and USD:
For those who trade the GBP/USD, GBP/JPY, GBP/CHF or any other variation that involves the pound sterling you will absolutely want to be in front of your trade station when the latest UK CPI, Core CPI, and RPI data hits the markets at 0430 EST on Tuesday. I'm not expecting a big downside surprise with the UK's consumer inflation, but should we see something shocking like a print below 2.00%, the pound should come under considerable downside pressure. Conversely, a hotter than expected print would give market participants even more confidence to continue buying the pound against the dollar, yen, and the others. Inflation data remains critical to currencies...
As for the euro, we get the important German and Eurozone ZEW data. I believe we'll see a print as expected with a decent probability to see a better than forecasted print. With the ECB moving their key lending rate to 1.00% in addition to announcing a plan to further stimulate the economy, plus the recent trend of surprisingly good US data, I think the ZEW index will continue moving positive. The historical average for ZEW is 26.1 so if we get a major upside surprise and see a print at 26.1 or better, the euro would benefit mightily against the dollar on this news.
The big US data tomorrow is obviously Housing Starts and Building Permits. I forecast improvements in both sectors and on both pieces of data. I think it's interesting that the big-name home builders such as Pulte, Centex, and Lennar all put in an extremely strong performance a day before the housing data is due to be released. So based on recent trends with the housing data and what we saw on Wall St. today, I'm not expecting any downside surprises here.
Tuesday trading:
For Tuesday's trading it should be fairly cut and dry just like it was today -- good fundamentals, no downside surprises with the inflation data, and a continued upswing with crude will keep the USD and JPY pressured against the high-yielding currencies. Crude will remain the linchpin that will either hold all the markets together or send them unraveling.
I really don't have much more to add, it's not rocket science here... I'll be taking my cue from the correlated markets and at this point remain more biased and comfortable to buy the dips and sell the dollar and yen against the majors. The ECB continues to talk up the euro, so we don't have any change in verbal manipulation in this regard. Keep your eye on that UK inflation data and of course the market correlated variables to help give trading direction.
