Tag Archives: EUR

This chart was posted up by Business Insider yesterday. What you’re looking at here is the flow of investment capital into European stocks in the last few months (using a 10-week moving average).

The two charts below provide supporting evidence of the impact of these flows on the euro and European stocks. The first chart features the German DAX stock index with an index of the EUR (non-traded but calculated by Thomson Reuters).

The second is a similar pairing of the S&P 500 and the USD index. The one thing which really stands out is the difference in the tracking of the two currencies. The euro has been gaining ground while the dollar has been losing it.

The whole US government shut-down and debt ceiling debate has of course driven the markets to a large degree, but it’s important to always keep in mind that at the core of things it’s the movement of money around the globe which creates the underpinning of exchange rate movement. The investment inflow figures above represent the fundamentals of the market – the reality which can at times be masked by shorter-term speculative market activity.

The question we have to ask – and try to answer – is of course what’s driving the investment flows into European stocks. Of the major financial markets, equity flows tend to be the slowest to happen, so when we see it we can be pretty sure it represents real money being put to work. That isn’t always the case when looking at the fixed income market.

At the same time, stock markets tend to lead the economic indicators. This suggests we’re seeing an improvement in the European economy being priced into share prices. Certainly, that’s being supported by the improvement in the euro. There is significantly less concern about what’s happening in the EZ these days. This isn’t to say things are going great guns, but conditions are improved.

Of course everything is relative. For a while it was the US out in front of the rest of the world in terms of economic recovery. The government shutdown puts that at some risk. Economists have already put out estimates for how much that will take off US GDP. So long as that concern is out there, Europe will be a beneficiary.

It is only a matter of weeks since European officials openly congratulated themselves on their seemingly successful efforts to bring the prolonged eurozone crisis to an end.  The backslapping subsequently proved premature, as the botched rescue package – designed to help an ailing Cyprus raise part of its emergency funding needs internally and ultimately secure external support of some €10 billion – put policymakers’ incompetence on show for the entire world to see.

The initial proposals are difficult to fathom, given that policymakers’ had months – and not days – to devise a credible plan.  The lack of time pressure should have allowed decision-makers to get ahead of the crisis, but this advantage counted for nothing, as the proposed plan to recapitalise the banking system was virtually certain to prove ‘dead-on-arrival,’ given that it violated the hierarchy of claims in the capital structure.

The original plan envisaged that senior bonds would be made whole, while uninsured deposits would participate in losses, even though these depositors should rank at least pari passu with senior bondholders.  Further, Cyprus’s leadership – in a desperate attempt to minimise the losses imposed on uninsured foreign deposits, and thus preserve the country’s status as an offshore banking centre – decided to bail-in insured depositors, even though such liabilities should be considered sacrosanct, so as to avoid devastating bank runs.

It came as little surprise that the deeply-flawed plan, which was intended to raise €5.8 billion and fill the hole in bank balance sheets left by bad debts and losses on Greek sovereign debt, was rejected decisively by Cyprus’s parliament, with not one single Member of Parliament voting in favour of the proposals.  Sent back to the drawing board, sanity ultimately prevailed among policymakers, as the revised plan unveiled eight days ago, resembled what one would hope to see in an orderly bank resolution.

The revamped plan scrapped the ill-advised idea to impose a ‘stability levy’ on all depositors, and will “safeguard all deposits below €100,000.”  Instead, the banking system will be restructured – the Laiki or Cyprus Popular Bank, the second largest lender, is to be split into a ‘good’ and ‘bad’ bank, with the former to be backed into the country’s largest lender, the Bank of Cyprus, and the latter to be wound down over time.

Both Laiki’s shareholders and bondholders – junior and senior – will be wiped out under the revised plan, while insured deposits, alongside the €9 billion in liabilities that stems from liquidity support provided by both the European Central Bank (ECB) and the national central bank, will be transferred to the Bank of Cyprus.

Meanwhile, Laiki’s uninsured deposits amounting to €4.2 billion will be placed in the ‘bad’ bank.  These depositors can reasonably expect to recoup very little – if anything – as they will eventually receive a sum that amounts to no more than the distressed value of the ‘bad’ bank’s impaired assets.

The enlarged Bank of Cyprus will face a large restructuring effort to raise its capital ratio to EU-mandated levels of nine per cent by the end of the programme.  Since no bail-out funds are to be used to recapitalise the troubled bank, both shareholders and bondholders are likely to lose all of their investments, while the hit to uninsured depositors – via a deposit-to-equity conversion – could amount to as much as fifty per cent.

The revised plan is a vast improvement on the initial policy blunder, since it respects established credit hierarchy.  However, there are still reasons to believe that the Cypriot banking crisis is far from resolved, while the new blueprint could well have far-reaching consequences across the monetary union that are decidedly negative.

The banks may well have reopened last Thursday – with no sign of a disorderly run on bank deposits – but this was purely a function of the €300 daily limit on withdrawals and curbs on cashing cheques.  These measures – alongside capital controls that prevent virtually any cash from leaving the island – are supposed to be temporary and last just seven days.  However, once lifted, panic is sure to ensue, as depositors scramble to protect their savings.

Cyprus’s banking system has already lost access to normal ECB operations, and is dependent upon emergency liquidity assistance (ELA) from its national central bank.  However, a shortage of unencumbered collateral – alongside the haircuts the national central bank applies – limits the availability of ELA, which may prove insufficient to fill the gap left by deposit flight.  As a result, further losses could well be imposed on uninsured depositors.

This means that measures are likely to prove anything but temporary, and remain in place far longer than currently envisaged.  This should serve as a warning to bank creditors in other eurozone states with ailing and oversized banking systems.  Depositors – both insured and uninsured – are sure to be increasingly nervous, and willing to withdraw their cash at the first hint of trouble, which means that banking crises are likely to develop far more quickly than previously.

Further, bank funding costs are likely to increase permanently for troubled banks.  The decline in margins and the resulting downward pressure on already-beleaguered profitability could well prove to be a key factor behind accelerated deposit flight.

It may be a small island, but the precedent set in Cyprus could have big consequences for many years to come.  Cypriot banking woes are a game-changer.


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. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

I had a chat with a reporter from Smart Money the other day. She wanted to know what kind of impact the big move in EUR/USD on Wednesday following the announcement of improved dollar swap line terms would have had on forex market participants. It was a pretty easy question to answer. After all, a 200+ pip move in either direction is always going to catch half the market in a bad spot. The speed of the appreciation in EUR/USD (and other markets) in and of itself is evidence that a lot of standing orders (stops) were tripped to accelerate things along.

Of course that brings up the subject of risk management.

No matter whether you're an investor or a trader, the current market situation is a challenging one. The market is hyper-responsive to news, especially news that has to do with the Euro Zone.

Witness Monday's market reaction to word that S&P was going to put the EZ countries on negative credit watch. Was that really a significant market development? No. Just as the swap line news from last week wasn't something that altered the fundamental economic and political landscape in Europe. Nor was it something that represented a meaningful change in dollar or euro supply/demand considerations. All it did was ensure that a worst case scenario of a major bank failure due to lack of dollar funding wouldn't happen. That's why there was no follow-through.



Too often, the headlines we're seeing these days serve as reasons for short-term traders to pile in and out of positions, creating lots of volatility. This needs to be accounted for by participants at every level of involvement.

While it's true that the forex market isn't any more risky than any other market, and is less so than most, it can still hurt you badly if you aren't careful about your exposure. The EUR/USD move on the swap line news was close to 2%. A trader using 50:1 leverage would have been completely wiped out by that if he didn't have protection against that kind of move. Even a position half that size would have seen an account lose 50% of its value in less than an hour.

Whether it's through hedging in some fashion or trading smaller positions (potentially with wider stops), forex market participants these days need to guard against the market's volatility. With volumes likely to drop as we head deeper into the holiday season, the potential for rapid directional moves will only tend to increase in the weeks to come.


We're coming into a kind of silly season for the financial markets. The period around year-end and the start of the new year is one of strong seasonal patterns. We've heard about the Santa Claus rally, and no doubt stock market commentators will be bringing that up quite a bit in the weeks ahead. They may also talk about tax-loss selling, especially given the type of year we've had in the stock market. And of course December sees volumes tend to decline as the big institutions wind down their activity into year-end and folks focus more on gift shopping and holiday parties.

It must be noted, though, that some of the strongest seasonal patterns in the market this time of year are those in the forex market. That's what I want to talk about in this article. As much as I could outline a whole array of year-end patterns among the major pairs, I'm going to focus here on just the yen.

Why the yen?

Well, it's been a pretty tough year where seasonal patterns are concerned. The developments in the Euro Zone in particular have overridden the sorts of trading we otherwise would have expected to see in the euro. The yen has held much more close to form, aside from the Japanese intervention that is.

So what do we expect from the JPY in December? Here's what Opportunities in Forex Calendar Trading Patterns has to say on the subject

First of all, December is a net negative month for the yen overall, though not hugely so. What's interesting, however, is that Fridays in the final month of the year have shown a pretty clear selling pattern. By that I mean about 60% of the time the yen ends the day lower, averaging a loss of about 0.20% against the other major currencies. This may not seem like much, but it does stand out in the statistics as an outlier.

The losses for the JPY tend to be front-loaded toward positions entered early in the month, however. The pattern starts to shift in the latter part of December toward one that is more yen-positive.

Normally, it would be worth looking at EUR/JPY or CHF/JPY as a good play against the yen (and in favor of other patterns) this time of year. With the on-going EZ issues, however, and the defined linkage between the EUR and CHF by the Swiss National Bank, it might be a good idea to avoid those pairs. A good alternative would be AUD/JPY. Long positions in that pair have their strongest positive 1-month hold returns of the year for trades entered in December.

For investors, the AUD/JPY pattern for December is a good set up for carry trade strategies. The cross is one of the strongest among the majors in terms of interest rate differential and the upside bias in the exchange rate has the potential for a nice added kicker to total returns. Just be aware that there could still be considerable volatility in the rate.

For those more trading oriented, a better approach is probably to use the seasonal patterns to bias or shade your positions. For example, you could perhaps take a little more risk when trading with the seasonals and less when trading against them. In other words, integrate seasonals into your existing strategy. Do not just make them a strategy unto themselves. By doing so you could improve your risk-adjusted returns.


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The S&P 500 broke down below its August lows on Monday. That was something a lot of folks were not expecting to happen (including some in my own office). As such, it begs the question of how far the market may yet go, especially with all the talk now about how it's officially reached bear market status based on a 20% decline from the most recent highs. This also ties in with the dollar given the negative correlation between the two markets. So with that in mind, let's take a look at a couple of potential indications of what may yet be to come.

First we have the weekly S&P 500 chart. It could be said that the consolidation we saw following the August lows which saw the index move around in about a 1120-1120 primary range was the building of a bear flag pattern. If we go along with that then Monday saw the expected trend continuation on the new lows, meaning we should be able to derive a basic target based on the height of the flag poll. The first red box on the chart encompasses the poll. The second one plots that area from Thursday's peak to provide a conservative projection of about 970 for the index.

It's worth noting that the 2010 market low is not far away from where the flag projection comes in. That gives us a pretty good expectation for support to develop in the general zone around about 1000.

For me the important leading indicator is the German DAX, which has already taken out its 2010 lows. The sovereign crisis over there is obviously a major motivator in the selling seen thus far. It's been interesting to observe, however, that the DAX has not made new lows in line with those of the S&P 500 in most recent trading. The German market successfully tested support just below 5100 a couple weeks ago and hasn't re-challenged that level on the latest downturn yet.

Significant in chart the above is the volume pattern of late. Notice how the volume has not been as strong on the down days as much as was the case earlier in the move. At the same time, there's been some uptick in volume on the positive days. If that pattern holds and we see the DAX form a bottom here it would be a very good development for the global markets, and likely a negative for the dollar.

Note in the daily EUR/USD chart how the DAX actually led the euro lower by starting to break down late in August. Could it also be leading by potentially putting in a bottom?

The DAX bottom obviously works against the S&P reaching the bear flag target, but I'm not sweating that. My suspicion from looking at the monthly chart is that the market is due for a bounce in that timeframe, one which could rally the index back into the 1200s. Beyond that though would be a challenge based on the current situation. The sell-off from the year's highs has been very aggressive, which bespeaks a weak market.

I think the best case scenario for stocks is a consolidation centered on about the 1200 level as we see the volatility come down, narrowing the monthly Bollinger Bands in preparation for the next meaningful trend move. That's looking well down the line, though. In the nearer term, watch to see if the DAX holds its bottom. If it does, stocks will probably post a decent rally, putting the dollar under pressure as the "risk-off" trade is unwound.

In the United States this week, we were twisting and shouting like a 1960s disco track, while Italy wasn’t feeling the amore from financial officials and Greece wasn’t succeeding in its Olympic financial fiasco. Here are the top posts from last week:

The markets were expecting the Federal Reserve to announce Operation Twist, in which the Fed would sell short-dated Treasury debt and use the proceeds to buy long bonds. The Fed initiated a similar act in the 1960s, but with today’s numerous economic uncertainties – high unemployment rates and consumer debt – this small step is unlikely to create much spending. While America grappled with its monetary quandaries, Europe tried sorting its financial flounders. Standard & Poor downgraded Italy’s credit rating, saying arrivederci to the country’s A+ grade and ciao to its A mark with a negative outlook. Across the Adriatic Sea, Greece was also continuing to experience its continued economic pounding as it straddled the brink of default. The European Union

commissioner has said “the EU will not abandon Greece or let it default uncontrollably.” France is planning a 10 to 15 billion euro recapitalization plan for five top banks combating the debt crisis, causing a formal denial from financial ministries. The ministries said the government held discussions with leading banks about their state of heath, but denied bailout offers. One top financial executive said “French banks have a sufficient capital base compared to other European banks and they are making profits.” Also in Europe, the Swiss bank UBS’s chief executive resigned Sept. 24 after a $2.3 billion rogue trading loss. Oswald Greubel’s resignation ends days of speculation about whether or not he would retain his top post among one of the biggest scandals to hit the Swiss bank.


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. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.


The question of currency market diversification is one that seems to come up on a fairly regular basis. For example, this query was posted during a recent webinar:

Looking at currency as a longer term alternative to cash, how many different currencies would you recommend to maintain adequate diversification??

From a trading perspective

In trading terms, the limited number of major currencies puts serious constraints on how many pairs you can reasonably have positions in before you start having correlation issues (yes, you could mix in the more regional currencies, but since they are primarily traded either against the USD or the EUR they won't help much). Basically, any two pairs which share a common element, such as EUR/USD and USD/JPY, are going to tend to be quite correlated. If you're looking to be diversified you wouldn't want to hold both pairs, unless you cut the size of each to account for the singular USD risk represented.

So if you avoid having any one currency in multiple pairs, sticking with just the majors, you'd only be able to hold four pairs at a time. They might look something like USD/CAD, EUR/CHF, GBP/JPY, and AUD/NZD. Even then you're bound to find times when one or more of those pairs are correlated in some fashion because similar events are driving them. For example, in a strongly risk averse market USD/CAD and GBP/JPY could be highly negatively correlated.

From an investing perspective
Now, if you're an investor aiming to diversify your holdings you'll look at things in a slightly different way. You're not thinking in trading pairs anymore. Instead you should be thinking in terms of having your money in the currencies of countries or regions which are not closely linked economically to your own, meaning they don't tend to move in a common direction for the same reasons. For example, the Mexican economy is closely tied to the US. As a result, the MXN tends to trade on US developments. That might not make it such a good diversification currency for a US investor, but it could be a reasonable option for an Aussie.

In a like manner, think also of the commonalities shared between different currencies. For example, the so-called commodity currencies have a common tendency to react in a similar fashion to moves in the commodity markets. That means a Canadian investor probably wouldn't want to hold a lot of AUD, but might find the JPY a good choice.

The best way to frame the diversification decision is to start by thinking about the major economic drivers of the value of your home currency. Then, look for currencies which are driven more by other factors. This requires a fair bit of research and understanding of fundamentals. It's not to be taken lightly. Most investors are probably better off just sticking to their home currency, since that's where there expenses moving forward will be.

Trade Leader Outlook blog post written by Currensee Trade Leader, Spencer Beezley.

August is usually a difficult month to navigate for currency traders, and this August was no exception. There are a lot of issues in the world that have yet to be sorted out and traders are having trouble determining the lesser of "two evils" so to speak. On one side, you have the USA and the downgrade in credit rating and debt issues, and the lack of decision making by the FED on what to do next. And then Europe with the PIIGS and the Eurozone crisis and all the things that need to be sorted out there. This confusion was evident in the market by looking at the lack of direction the EURUSD took in August. Some volatility was evident, but the market experienced a sideways range that couldn't breakout of the 1.45 and 1.40 levels, which were tested but never significantly broken through. Now after the first full week of September, the Dollar rallied and broke that 1.40 level and is starting to gain traction against the Euro. We might see some retracement back to the upside but we need to keep an eye on all the numbers and the key technical levels to determine if this will develop into a longer term dollar rally or false movement. Watch for the fundamental developments of strong decision making in Europe and the ECB, or the Fed in the USA.

My plan for the market:

I am a firm believer in sticking with the strategies that I've had success with. However, sometimes traders get in trouble by not paying attention to certain factors in the market that could negatively affect their strategies. Since August was not a month of breakouts, we have to closely monitor price action and key technical levels of market support and resistance, as well as daily range. In August, I found that many of my targets were not reached, because of the ranging nature of the market, which is why I have exit strategies set up in case of a reversal and I certainly don't want a winning trade to be turned into a losing trade. Also, make note that I use a tight stop loss on my trades, so there may be some losses, but they are cut short in order to protect equity and to provide a solid risk/reward ratio.

One of the things that is important is to not over-trade. With my strategies, some weeks will be lighter on volume than other weeks just depending on what the charts look like. Some traders try to avenge losses immediately or during an open floating loss. This is a setup for failure as it is best to wait until the next valid trade opportunity and not to trade off emotion. In August, I noticed that the market wasn't ideal for one of my strategies, so as a result, I stopped trading that strategy until the market gets back to a place where I feel comfortable re-implementing that strategy.

Going forward through September, I am hopeful that the market will have a higher daily trading range and I believe that more valid breakouts and trends will form as traders begin to get a better feel for this current market we are faced with, and how the economies and currencies will be affected. I am also a true believer in technical analysis and stop trying to predict what is going to happen with an economy, rather let the fundamental developments play out which will all be translated into the technicals, chart patterns, and price levels of the currency in which we can base our trades and strategies from.

With chaos and confusion often comes opportunity. I am a firm believer in trading where there's a trade and holding off if the market isn't there. September's rally out of the gate is a positive trend that I'm ready to ride.

To download Spencer Beezley's Currensee Trade Leader profile please click here.

The yen has been doing pretty well over the last few months, much to the chagrin of the Bank of Japan and the Ministry of Finance. The Japanese have been pretty vocal about not liking the direction of their currency, but they haven't yet taken any big steps the way the Swiss have done in putting a floor under EUR/CHF. The gains in the JPY can be seen quite dramatically in EUR/JPY, but the story isn't all that different for USD/JPY.

Here's the rub, though. We're in a period in the calendar where the yen tends to be strong. In fact, this week specifically is the point of year from which USD/JPY tends to have its worst 1-month performance as the chart below shows (courtesy Opportunities in Forex Calendar Trading Patterns). There are an awful lot of bars pointing down on the histogram from here to year-end, so it's not like things get much better after this week either.

Here's the question to ponder. Presuming the Japanese authorities are aware of the seasonal strength in the yen this time of year, does that inspire them to work to prevent it? Meaning will there be verbal and/or market intervention to at least blunt any JPY gains in the weeks ahead? Or, will they not want to fight the pattern and take a hands-off approach with the idea that their efforts would produce better results more toward the end of the year?

Of course this may end up being one of those years where the second half (despite the way it's gone so far) doesn't end up being overly strong for the yen. Seasonal patterns are only tendencies, after all. In that case, intervention won't be required (though it could be used to accelerate JPY weakness). If the yen keeps going as it has done the last few months, though, it's going to make for an interesting decision for the BoJ, etc.

By the way, the CHF has been in a strong seasonal pattern up to now. The Swiss National Bank clearly decided to go against that.

Today is one of those days in the forex market that definitely do not come along very often. The announcement from the Swiss National Bank (SNB) that they will be enforcing a minimum EUR/CHF rate of 1.20 saw the cross jump nearly 10% in very short order. That's one of the biggest daily exchange rate moves there's ever been among the major currencies, and no doubt caught a lot of folks positioned the wrong way.

Now, it should be noted this isn't a "peg", as it has been called in the press. A better term would be "enforced floor". The SNB has not officially set EUR/CHF at 1.20. It has simply said that any rate below there is unacceptable and it will sell as many francs as necessary to keep that from happening. From the press release:

"With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."

They are happy, though, for EUR/CHF to move above 1.20.

Note that this does not mean USD/CHF cannot move down, or that the other CHF cross rates can't reflect better Swiss strength. Those movements would happen as a function of the EUR strengthening against the other currencies, however. For example, USD/CHF would fall with EUR/USD rising. Since the Euro Zone is the main trade partner for Switzerland, though, the SNB isn't really worried so much about non-EUR exchange rates.

The interesting factor in all this is what happens on the Swiss inflation front. The SNB has basically just committed to flooding the world with francs if required. That seriously dents the CHF safe-haven status, and probably puts gold more in the spotlight in that regard. It also means, though, that import prices are likely to face upside pressure. If that forces the SNB to raise rates, this could actually work against the forex intervention by making the CHF more attractive.

More immediately, though, I can't help but wonder how long it will be before the markets test the SNB's resolve. There's nothing to prevent those who want CHF from buying it via non-EUR pairs. If that then forces the SNB to buy EUR/CHF, things could get very interesting, as a strengthening euro isn't likely to be seen all that positively by some in the Euro Zone.