Author Bio

There’s no doubt that we’ve had some serious volatility over the last week or so thanks to the S&P downgrade of the US credit rating and the move by the FOMC to put a time frame on the “extended period” language that’s long been in place regarding how long the zero interest rate policy would continue. Those two specific events, however, only served to accelerate the market’s reaction to on-going issues, especially those around the European sovereign and banking sector issues. There’s been a lot of talking about the comparison to 2008. Let’s take a look at that.

Stocks
Clearly, equity prices have taken a tumble. The bars for the last two weeks in the S&P 500 are certainly large, at least by comparison to those from recent times. They are certainly akin to the types of ranges seen in 2008 during the worst of the selling, but the volatility measures aren’t yet anywhere close to where they got three years back.

Notice on the chart below how N-ATR (Normalized Average True Range, which expresses average period ranges as a % of average price over the same time frame) has only just turned up. It hasn’t yet reached even 5%, never mind getting anywhere close to the 2008 peak near 10%. Likewise, BWI (width of the Bollinger Bands as a % of the 20-period average) has only just turned up and has a long, long way to go to match those prior highs.

Oil & Gold
A look at the oil chart (continuous front-month contract futures) shows a very similar pattern. Volatility has upticked, but we’re a long way from being anything like 2008. The same is true for gold, though there we can see that back in 2008 and 2009 the BWI peaks weren’t quite as high on a relative basis as was N-ATR.

Treasury Market
Back in 2008 and into 2009 there was a lot of volatility in the Treasury market as the result of a massive flight to quality when investors thought the world was coming to an end. We can see the peaks in N-ATR and BWI during that period on the 10yr Treasury futures (continuous front month contract) chart below. As we’ve seen in stocks and commodities, though, while there’s been an uptick of late in both volatility readings, in neither case are where at levels anything like where they were back during the financial crisis. Both measures are generally in line with their ranges for the last year or so.

The Dollar
How, what about the currency market? We barely see any change in volatility in the USD Index. Notice in the chart below how N-ATR is holding steady near 2%, which is a little above the mid-point of the range going back to 2007. It’s basically holding to the range it’s been in since late 2009. This is despite some pretty big swings in value. Meanwhile, BWI has actually continued declining toward the low end of its range of the last 4-5 years. That, by the way, gets me to start looking for some kind of new major trend move to develop before long (relatively speaking, since we’re talking about the weekly time frame).

EUR/JPY
The EUR/JPY cross rate has been looked at as an indication or risk aversion in the global markets. It’s a function of the carry trade on the JPY side as money tends to move in and out of the yen when market psychology changes. At the same time, the EUR is often the first currency sold when currency traders want to express risk aversion. As such, the cross is likely to see somewhat exacerbated volatility in nervous markets. As we can see from the chart below, though, while volatility has ticked up somewhat, both BWI and N-ATR remain well within recent ranges.

Conclusion
What I think this all basically tell us is that the equity markets are dealing with their own issues, some of which are clearly related to the global economic environment as indicated by the action in oil. The currency markets don’t show near the same sort of market strain as we saw in 2008, and the Treasury market doesn’t either, indicating that it’s not the global financial system underpinning issues this time around. It’s more about actual economic fundamentals this time around. We may see volatility in stocks stay somewhat elevated for a while (it tends to cycle like that), but I don’t see much of a knock-on effect in the currency market.

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

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

Risk taking has outperformed risk aversion for the past 6 days.  EUR/JPY has traded higher each day and stocks have followed along.  One would have to wonder if that performance would not be even better if it were not for the Monday afternoon late-to-the-party downgrade from Moody’s on Greece. 

This downgrade just happened to come after a few well-regarded advisors over this past weekend said that the 1t Euro lifeline to Greece was not enough and that Greece will eventually be forced to default.  Now we know.  The roadmap for trading and investing successfully is not always very well laid out.  Luckily we have China to thank for their resolve, right? 

Or so I think.  In case you missed it on Tuesday morning, in China the Foreign Ministry spokesman Qin Gang told the US to stop politicizing the Yuan exchange rate and let China decide on the issue of its flexibility!  That is fairly strong stuff from China.  They are probably becoming a bit impatient with the US on the lack of an economic recovery.  The Wall Street Journal even mentioned on Tuesday that Fed members were quietly weighing options on what to do if the economy gets worse.  It looks as if we have gone from removing extraordinary accommodation to maybe even more extraordinary measures.

Still neither the Fed nor Moody’s nor China is the cause for the recent shift in risk-taking of late.  The real reason may be individual currency traders.  Yes, currency traders.  If you live in Japan you have had to endure through a zero interest rate policy (ZIRP) for quite a long time now.  Japan knows this all too well; China knows; Treasury Secretary Geithner knows this and surely doesn’t want it to happen here.  Yet the ZIRP has endured in Japan, forcing investors to seek yield in other countries, meaning selling the Yen and investing elsewhere.

Reports out of Japan show that Japanese investors sold off 10% of their euro holdings in May.  It is always hard to get exact volume figures in foreign exchange because it is primarily an interbank market and not traded via exchanges but locally they believe that retail investors account for 25% to maybe 50% of all Forex trade in Tokyo.  The 10% repatriation was in May but since those figures have been tallied EUR/JPY has risen by 4.5% off its multi-month lows of 108 and risk taking has benefitted globally.

If Japan had 20% interest rates would they be investing so much internationally?  Nope.  But they do not and it looks as if they have some smart currency traders.  Currensee is the place to meet currency traders from around the globe.  Listen to what others have to say, share ideas and follow the flows.  There is no better time to get started than the present.

This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.

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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

Some refer to it as a bank holiday, in Canada they call it Victoria Day and in the US we celebrate Memorial Day. Regardless of the name, for traders it is a day away from the trading screens and hopefully a time to celebrate and take a road trip with family and friends. If you were lucky enough to do just that, then undoubtedly you took a peak at the local economies. You almost have to since traders could set their watches by the economic releases from around the world.

How were the local economies doing? Are more small businesses starting to reopen again or are they still closing? Were people spending money or just browsing in the shops?

Where I was at there was little doubt on how the local economy was doing. This is normally a popular 3-day weekend destination but this year it seemed as if all the hotels had vacancy signs, with some even advertising ‘off-season rates’. Even the day-trippers seemed to have been staying home as there was no need for a reservation at restaurants. This is just one example, though, and maybe the places that you visited had just the opposite true with big crowds.

Will I use this information when I trade for the remainder of this week? Absolutely not. My trades in GBPUSD or EURJPY that hit the Currensee Market Watch table will not be persuaded by anecdotal evidence. If that were the case then most US traders who have had the chance to travel internationally would be underperforming as a weaker US Dollar has made travelling exponentially more expensive for us.

Then why do I bring this up? Last week the US GDP report was released and showed that Q1 growth came in at +3.0%. Consumption accounted for 70.7% remaining the heavyweight in the economy but it was off the highs of 72% from a few years ago. This was also the first time since Q1 of 2007 that we saw such strong consumption levels. Despite relying more heavily on productivity companies were still able to turn out strong profits. The graph below compares the performance of corporate profits to the Dow Jones on a yr/yr basis.

From 1999 through the first quarter of 2010 you can see that the Dow Jones has been receiving a premium for profits. Currently that is not the case. If the US and global economies are bouncing back from the 2007/8 credit crises and companies are producing profits again, then why haven’t traders and investors fully embraced the risk-on trade. (This graph is pre-European crises, but the argument remains the same.)

My guess is that the high unemployment rates have caused investors to spend less and save more than they otherwise would. The ‘flash crash’ and the European crises are not helping either, but in days past those events would have served as an opportunity to place risk back-on. To be seen if this is just a temporary phenomenon, or a change in attitude on saving and spending in the US.

As you trade and invest in the weeks ahead, you will certainly hear from those arguing that valuations are cheap and now is the time to reinvest. Others will argue that another correction (right shoulder per technicians) is ahead. In the end judging the US consumption patterns may be your best guide.

This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.

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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

Now that May is near the end it may be time to look back and see how your trading performance was for the past month. Or not! Some will surely want to forget this month and for those who do it should be noted that this was no ordinary month. Who will ever forget the swings on Thursday, May 6th! If you had capital at risk you certainly will not. EURJPY’s move from 122 all the way down to 110 and back to 116 in the same afternoon reflected what had to have been the most volatile period in the currency markets in recent times. I can only wish that you were on the right side of the trade.

That said one day does not make a month. Although there is a high degree of uncertainty in all markets at the moment I would not expect this past month to be repeated often in the months ahead. I say often since I’m not discounting the potential of another crazy summer, in other words “all traders off the beach!”

Whether you are creating profits or still using demo accounts you can always stand to learn more about the markets. In many cases you will find that the ones who do the most research happen to be the ones with the most experience.

This Thursday there is a webinar on Currensee titled “Using Elliot Wave analysis for Forex trading setups”. It is being presented by Lara Iriarte. The webinar is free for Currensee members. Lara analyzes patterns to help determine the most probable direction for her clients and trades forex using a pure Elliot Wave perspective.

Whether you trade EURUSD, Gold or S&P e-mini’s this webinar should add to your knowledge base of the markets. For example the moves in the currency markets this past month are well known. The image below shows hourly charts on EURUSD and EURJPY since early May.

EURUSD is on the left and EURJPY is on the right.

Chart is courtesy of Boston Technologies MT4.

Despite both pairs having Euro as the base currency and being traded against ‘safe-haven’ currencies their moves were far from identical. EURUSD found a bottom towards May 17th which would be well ahead of EURJPY. It also weathered a sizable rebound around May 20th while EURJPY would whip around before creating a lower-low for itself.

Point being that understanding the bigger picture and knowing when a security has reached its short, medium or long term target may help you create more trading profits. Trading separate securities identically may not be the way to go. All the more reason to expand your knowledge base when you have the chance and put the work in to help you become a better trader in the days ahead.

This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.

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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

Up late working on some cool stuff you’ll see soon at Currensee, I happened to check in on the Asian session.  We checked up on the Aussie Dollar last week and this time I bounced off a post by our buddy Casey on the EUR/JPY.  Given all the chatter about the weak USD, it’s nice to look at a pair that doesn’t include the greenback.

Casey notes that the EUR/JPY is “testing a downward trendwall on the 4hr chart and that could be significant change in trend” and posits a resistance point at 133.77 after which he says, “we could see a reversal of the current down trend and that could bring new highs.”

Over at the Currensee dashboard, we can see that the community predicts similar Resistance points, but most of the Currensee traders have so far guessed wrong on this pair.

As the sun rises on the US trading day, we’ll see what develops.  I hope you’ll join the discussion on Currensee.

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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.

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