Author Bio

As mentioned in my last post, it can be very problematic dealing with the increasing plethora of statistics that bombard you through the trading day. We touched on structure around news events and statistics, and now we look at what this all means in the current economic and therefore trading environment.

Unfortunately the current climate is not easy to decipher as the influence of the American stock market continues to dominate nearly all asset classes. There remain two major counter forces. The first is the perception that major company profits announced this week have been beyond analyst’s estimates. I think it’s worth pointing out that it is in the market participants’ interest to underestimate in order to provide a positive spin. The results season is nearly always positive in the short term, but until the market has received all the information, it can rarely trend. It is also important to remember that banks generally make profits at the expense of everyone else, and moving forward, the new finance bill will erode their ability to generate derivative trading profits to the same degree.

Adding to the inability to find direction is the string of economic statistics that show the U.S. slowing down quickly, whilst Germany in particular garners some benefit of the weakened Euro via an increase in manufacturing. Finally, we had Mr. Bernanke’s biannual testimony, in which I felt he was extremely downbeat on his assessment looking ahead, and most worryingly, gave no specifics about how they would tackle problems if they occurred in the future.

The reality is that the Fed is largely boxed into a corner as rates at the short end and for providing liquidity to banks are already at rock bottom. However for corporates and individuals in the mortgage market, rates remain stubbornly high and the evidence that the recent slide in yields has had no impact on mortgage applications suggests that borrowing costs are still too high. When rates are perceived to be at rock bottom, it appears that all the risk is to the upside, which stifles commitment, entrepreneurial spirit and therefore growth.

The solution is relatively simple, but he shows no signs of considering it. The Fed needs to cap long term rates at a much lower yield than what they are now. A ceiling of 1.5% on 30 year money would in all probability lead to rate moving even lower as demand for any yield would still exist. If businesses and individuals know there is a ceiling it removes the fear, and allows for stabilization in asset prices and an environment for growth. The more proactive this is, instead of waiting for a fresh crisis to develop, the more positive the impact. Unfortunately from Mr. Bernanke’s comments this week, it appears a crisis will have to occur before this policy could even be contemplated. In a jobless recovery, stagnant wage growth and falling asset prices, the risks to that happening are increasing.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

In a world where the continuous stream of economic and fundamental statistics swamps even the most hardened trader, it’s important to maintain some sort of structure around how you can manage your positions through these numbers and not be caught out by short term spikes of volatility. It also allows you to have a game plan about how you can position yourself so that you’re not paralyzed into inactivity.

Thursday was a classic example of this and created trends that were reversed or continued as each statistic hit. The only real constant was foreign exchange where the dollar weakened or held station as each new story broke. This lack of volatility in relationship to bonds and equities was a good indication of the dollar’s continued inherent weakness that I have touched on in last week’s post as well as the post the week prior.

The day started at 3am with the Chinese economic numbers, which caused a spike in the E-mini and a fall in the dollar. The numbers were not as bad as feared. By the morning all eyes were on the Spanish bond auction, which was well received. Stocks rallied, bonds fell slightly, and the dollar had already weakened further before the number.

Next were JP Morgan’s results, which at first glance were startling good. However, a look below the surface saw that some 36 cents of gain was due to lowering their reserves against bad debts. I perceived this to be a somewhat dubious one-off adjustment that, if I’m right on housing as I have been, could well be reversed in the quarters ahead. stocks spiked again, but reality on the JP Morgan stats caused a drift back, and bonds collapsed far more than had been there reaction to Spain. A second bond negative story was what got the trend moving.

However, by 1.30 there was claims data and the NY Fed and PPI. The market focused on the most up-to-date figure on the Fed as equities went lower and the dollar fell again. The bond bounce was muted.  Industrial production for June was slightly better and caused a brief equity rally. The importance of analyzing and understanding stats was significant in the same way for JP Morgan, in that the rise was due to utilities increasing, which was due to the heat wave. That is an artificial expansion.

Finally, the Philly Fed arrived, which was weak as well, and now equities could slide aggressively until (in classic technical fashion) they filled the gap from Monday. This caused the bond market to erase all its losses and the U.S. bond market to rally to new highs. The dollar had already exhausted its ability to trend having been under pressure all day. Also, rumors of the Goldman’s settlement saw all the equity losses erased, but it was too late in the day to influence currencies or bonds in any meaningful fashion. In fact bonds just held there station.

So how do you ride the waves of stories? This depends on what time zone you are trading in. European traders are at an advantage because they have the benefit of riding through all the major statistics, which allows for two major trends per day. American FX traders normally just have one, but equity traders can still get two (as occurred on Thursday). They could end up being all one big trend or a major reversal of the morning move.

Obviously the first thing is to have a firm grip on all the likely market moving events. In order to prevent paralysis, signals must be taken as normal and stops entered. If the statistic moves your way trailing stops can then be applied and the time frame this is applied to is critical. My statistical analysis shows that trends typically last between 15 to 20 bars before some sort of corrective phase. This means that if you want to ride the morning and afternoon trends, a 15 minute chart is the correct one. If there is (as on Thursday) a sequence of tighter times between statistics, this must lower down to 5 minutes.

There are two basic ways to ride the trend (But first, just to use a simple 3 period moving average moved one bar forward so its value is fixed on the current bar. When it changes direction or price closes back in the opposite direction of the average you exit. This is the tightest form of trail you can use.):

1. For those who wish to track price action, the use of simple fractals or swing points can be used. In a downtrend as soon a price closes above a bar that was the highest point as the middle bar within a 5 bar patterns, you exit.
2. For those that are the most risk averse, you can use a 3 bar pattern, but this method is unlikely to ride the entire trend. In an uptrend it is simply the opposite, so you monitor the lowest middle bar within a five bar pattern. With this method, when a market such as the dollar simply trends throughout day this will normally capture the entire move.

Finally, remember that when a trend day occurs the most common occurrence is that the close will be very near to the absolute high or low of the day.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

There are times when the major FX rates present problems for a trader in that the fundamental backdrops appear to have drivers that are negative or positive for both pairs. I feel we are currently at that point for most of the major pairs (cable aside). My previous posts highlighted the potential turning point in the dollar and there was nothing in last week’s price action last week to question that view.

What has changed is that the euro received a boost this week due to the 1 year refunding, which did not tap the full allocation. However, reading between the lines showed that while the absolute tap was lower, the number of institutions participating nearly halved. This means that each one took nearly double the amount of funds as a year before. I can think of two reasons why this may be. First, they need the funds, or secondly, they feel the need to raise their capital base as a result of concerns over future counter party risk. Neither scenario is positive, and points towards further banking woes later this year.

French and German banks are said to be particularly exposed to peripheral Euro Zone sovereign debt. When analyzing comparable price action, what is clear is that there is a divergence between equity markets and the currencies that are most correlated to it. We have already seen the dollar fail to get benefit, but looking at the Australian and Canadian dollars show that both are still some distance from making new breaks of this year’s high or lows.

A more surprising pattern is the Aussie/Yen which normally tracks equity weakness slavishly. That has also yet to make new lows. This means that for the equity to break to be confirmed the currency markets must follow.

The other main area of interest is the emergence of vertical trends in the euro and pound cross rates against the risk currencies. The reasons for the fundamental bullishness I have on the pound have been documented before, but last week I received strategic weekly and monthly positive signals as well with similar signals on the euro. Even the traditional weak relationships for the euro against the yen and Swiss francs have posted positive signals as well.

However, one of my mantras is buy the strongest, sell the weakest. My bias remains to be positive towards the pound and euro against the risk currencies. Any breaks of those to new highs or lows against the dollar would provide another positive argument that the cross rate trends could have considerable longevity.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

Last week I concentrated on the fact that Mr. Obama had far more to worry about than BP – namely poor fiscal policy and the impending debacle in housing. Last week’s shocking stats were a brutal reminder of what’s in store, and no one should be soothed by those who point to the small year on year rise in the median house prices. Both new home sales prices and the 4-week average of mortgage applications dropped sharply. It was also alluded to that Mr. Obama would continue to believe that fiscal stimulus was the answer, and this week he has politely castigated his European counterparts for doing the opposite. He forgets one key difference – the fact that the dollar remains the reserve currency of the world, which allows a buffer against the plague of worries that have hit Europe.

I have long been bullish on the pound, especially once the election was out of the way. It is clear to me that those countries which have both political will and mandate from the population to do what is necessary to cut deficits will benefit. The question now is whether the markets will finally shift their focus further to those that propose no intention to. This last week, during which I have been away on business, I took a step back from the day-to-day hurly burly, and it is clear now that in this last week’s price action – for the first time in many months – equity weakness has not equaled dollar strength. I find FX the hardest asset class to trade, as I am a directional trader and every FX trade is a spread. It is about working out where the relative movement will come. However, what is clear is that the risk is that focus will turn on America’s huge deficits and begin to exact a toll on the dollar. Carry trades can quickly unravel and any further equity weakness and a lack of positive dollar reaction to it, or equity strength, which should see the risk currencies over perform. These highlight how a shift in the dollar’s dynamic over the coming months could just be beginning.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

After the unprecedented stimulus post the Lehman’s collapse, the recent economic data is beginning to expose the cracks in the error in providing such a stimulus without lowering long term interest rates, and therefore stabilising the housing market. Whilst the housing statistics have tended to be given less prominence than other indicators, the decline and problems will resurface as asset prices fall and personal and bank losses mount.  For me, the most telling statistic is the fact that whilst stimulus has had some benefits in the bounce in a variety of areas, the housing stimulus has largely failed, and the recent curtailment is showing the inherent weakness in this crucial sector of the economy.

Mortgage applications have posted fresh lows on a four week average and the bounce from the tax credit was insipid at beast. With single family homes also turning down, this suggests a fresh down leg in house prices is beginning.  The more recent statistics elsewhere highlight sudden weakness with continuing claims remaining elevated and suggesting another poor payroll number for May. Retail sales for May were disappointing, and now we have a weak Philly Fed for June.

With most of the rest of the western world being forced to accept the reality of excessive debt, a key question will be whether any refusal (which appears probable) for America to accept that there unique place in the world as a reserve currency has acted as a buffer, and it cannot live beyond its means forever. This weekend’s announcement from China looks like a clever move to deflect problems at the G20 meet and deflate the possibility of further pressure being placed by America. It was light on details and suggests that any revaluation will be small and slow. It was clear in their statement in how it would help in there need to offset the Euro’s weakness, rather than any appeasement to America. Mr. Obama hopefully knows that China already holds all the trump cards and their reluctance to buy Treasuries in recent months is significant. Any suggestion of outright sells would see long term rates rise significantly and place yet more pressure on an already beleaguered housing market. BP is not the only thing Mr. Obama needs to worry about.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

This week has seen the report from the OBR (U.K.’s Office for Budget Responsibility) and the inflation numbers. The market’s reaction was to construe that inflationary pressures remain elevated, and we saw the perennial hawk from the Boe, Mr. Sentence once again saying much the same thing. However, it is important to breakdown the numbers and judge what effects are temporary and what are more entrenched. This suggests that whilst deflation is not an immediate threat as it is in Europe, the inflation outlook is still relatively subdued.

In the short term it is clear that the Vat increase and the car scrappage scheme have provided one-off hits. The weakness of the pound against the dollar has also meant that energy prices are high in spite of oils recent 10% drop. It is therefore necessary to relate the core number to the more relevant CPI against constant taxes. Here the numbers are far more benign. The CPI fell 0.3% month-on-month on this basis and just 1.4% compared to 3.4% year-on-year on an unadjusted basis. Energy and cars had a huge influence at 6.5% year-to-year. As mentioned in previous posts, my view is that sterling will recover on a strategic basis as both a safe haven for Gilts and the political mandate to institute debt reform. That should influence energy and the end of the scrappage scheme which already seen a large drop in car sales should see the inflation drop considerably in the coming months.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

This week has seen the markets calm somewhat as Trichet soothed the short term traders with upbeat comments, and avoided putting his foot in it as he did in the previous months ECB press conference. However, whilst there was little else he could do but talk up the Euro, the economic and political headwinds suggest that little has changed. In fact, the lack of the Central Banks realization that debt deflation and not inflation is the problem moving forward, and the German political reluctance (understandable) to bail out the rest of Europe, means that the Euro’s woes can reignite at any time. As mentioned previously, the devaluation will benefit Germany the most as has been seen by the beginnings of impressive export numbers. Unfortunately it has come far too late in the cycle to help the more struggling nations, even allowing for the fact that devaluation is simply a one off benefit. This can be seen in the U.K’s poor manufacturing numbers this week. The sudden reversal from Government spending to huge cutbacks will see the Euro zone slide back into recession in the 3rd and 4th quarters. More worrying still, is the fact that the ECB is likely to continue to resist an aggressive policy of quantitative easing in such an event. It can be rightly argued that even if they were to embark on such a policy it is now too late. Yields of Government debt remain elevated outside of Germany and with the economic slowdown almost inevitable in the peripherals, it could be viewed as throwing good money after bad.

This brings me to the proposed Bond EU 700 billion loan guarantee announced last week. I won’t repeat the details but one part stood out above all others. The vehicle for the process will be a “Limited Liability Company”. The last time I checked the whole purpose of having a limited liability was it meant you could walk away from those liabilities. It hardly inspires confidence and suggests that it is simply an exercise in trying to massage perceptions in the hope that you don’t actually have to do anything. Professional colleagues I have discussed this with all came to the same conclusion that it was simply smoke and mirrors. Any sign that that stresses are rekindling will in all probability see the fragility of such a program made starkly clear.

So what does it mean for the Euro? A have little interest in either a politician or central banker talking a market up, as this usually simply provides opportunities for day traders. It does nothing to address any of the big issues. Therefore, whilst the Euro/Dollar stays below 1.2265 it is under pressure in the short term, whilst on a more structural play, a long term decline through the second half of the year is the most probable outcome.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

Notwithstanding the FX market’s obsession with Greece over the last few months, one thing that is clear is that the crisis has placed the different political, Central Bank, and fundamental economic outlook, in focus. It is clear that there are some seismic shifts in performance that suggest that the pound should appreciate against many of the cross rates and particularly against the euro.

Firstly political. Initially there was skepticism that a U.K. coalition government would last, therefore creating a pressurized sterling. Now that the dust has begun to settle, the lack of reaction to losing a senior government minister last week highlights the market’s perception that the coalition is here to stay and can ride through the tough measures in the months and years ahead. In fact, they have been elected on such a mandate which is in sharp contrast to the governments in most of Europe that pledged to keep on spending.

Today’s rumors that Hungary’s new government is prepared to default has not been lost on the bond market, the CDS (credit default swap) market, or the euro itself. Now that the weakest economies are being picked off one by one, politicians face the problem of being forced to do the opposite of what they wished; therefore, this reluctance to take tough action – amply visualized by Angela Merkel’s dithering over Greece – will continue to way heavily on the euro currency and European economic growth.

From a central bank standpoint, the BoE’s (Bank of England’s) embracement of quantitative easing and an allowance of the currency to devalue has borne fruit finally, as manufacturing growth has been particularly strong. The fears of inflation remain in the background. But with outright deflation plaguing Europe, it needs to be remembered that moderate inflation is a far better place to be. The devaluation of the euro has been far too late in the cycle to provide real benefits to the weaker members of the euro. Glancing at the big picture of its valuation since inception, it is pretty much smack-bang in the middle of its high and low. On a macro basis, this still seems too high based on the block’s obvious woes.

So what does this mean for the pound? As always it’s important to pick which currency should underperform the most. The euro has obvious reasons and, from a technical standpoint, this week has also seen a major breakout on the weekly chart. This has held throughout the week and targets 0.8000 on an initial basis. I don’t rule out a move down to 0.7000 over the next 6 months. The other currencies to watch are the traditional risk averse and commodity-based currencies. It was very instructive to me that, in spite of numerous rate rises, the AUD went sideways for 6 months against the USD. So much for the carry trade! The first sign of stock market weakness has seen the Aussie collapse. It remains extremely top-heavy and liable to further unwinding and liquidation pressure.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

This week Germany has announced a variety of measures to combat what it regards as unfair manipulation of markets by those in a position to short sell a variety of instruments. Once again this typifies the attitude that it is the market that is at fault and not Central Banks and Governments. I find it somewhat incredulous that this has extended to the sales of certain financial stocks, when a glance at the market shows that the Dax is still up on the year. It begs the question what would happen if the market actually did turn negative. The history of intervention is awash with failure down the years and whilst they often create temporary respite, the dominant theme and therefore trend that the market dictates usually quickly re-asserts itself. When the Sec banned short selling on Sept 19 2008 a 450 point one day rally in the Dow to 11,500, saw the market then collapse to 7900 just 3 weeks later. Obviously those naked short sellers couldn’t have been the reason. Neither for that matter, was the panic and huge falls of May 6 this year the result of a fat finger as was muted at the time. Thus far they cannot find a reason. I can give them one. Panic and a complete lack of faith in the ability of Governments and regulators to get there act together.

Once again the powers that be fail to see the folly of there own policies. The faults in the Euro zone are obvious to all apart from those who hang onto a flawed dogma. The market was led to believe that the Greece bailout was to the tune of 30 billion, but it didn’t believe this and punished Greece and the Credit Default Swap market. Then, low and behold the bailout suddenly becomes 100 billion, with another 450 billion plucked out of thin air in case there was any other countries being economic with the truth about there attitude to debt. Is it any wonder that the currency fell?

The reality is that the markets are there to provide the reality check and expertise in understanding the fault lines and weaknesses in the Global economic system, and whilst markets overshoot when panic sets in, prompting cries of the evil forces that would destroy, the regulators and politicians are happy to see markets overshoot equally when the outlook is viewed through rose colored glasses.
Therefore whilst some measure such as providing circuit breakers to excessive short term falls makes sense and moves to take certain OTC markets into the exchange traded world can also be viewed as a positive, more blanket measures to curb what is regarded as rampant speculation are counter productive. The irony of the latest Hedge Fund directive from the European Union, when viewed against the move to Mifid which has caused large scale market fragmentation in exchange traded instruments and the creation of dark pools is obviously lost on them. All politicians and regulators would be best served to be reminded of the law of unintended consequences before looking for someone other than themselves to blame.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

Seems to me to be the pertinent question as there is no doubt that yesterdays savage downgrades could have been expected to have a far more damaging effect. In fact the Euro actually rose against the Canadian Dollar. I mentioned in a previous blog that markets get fatigued and bored by the same story or saga going round and round and yesterday has proved to be a classic example of that. But what does this mean moving forward? Normally, yesterday’s reaction in my mind would suggest that the Euro is more likely to rise than fall, but there is one major problem in this synopsis. That is the shifting of focus. I mentioned before that the real threat to the Euro was if the markets got tired of Greece and decided to start attacking another Euro member. The downgrade of Portugal’s debt is a catalyst for such a scenario. Two year yields there, whilst still only around 4%, have risen sharply in the last few days, but it is important to place this in context with Greece’s which are at an eye watering 17%, having been at just over 10 just a few days ago.

However, the effective doubling of Portugal’s yields in such a short time highlights how quickly things can change. It appears that the market will continue to attack as long as the indecision and fractures remain between Euro Governments, the Ecb and the IMF. This means that the problems for the Eurodollar currency remain deeply entrenched and from technical prospective rallies can be regarded as purely short covering against a long standing downtrend. Structural targets remain distant at 1.2880 and 1.2572.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.