Author Bio

The currency markets have been acting like a tale of two cities of late. Meaning that risk appetite has increased in some currency pairs providing meaningful moves while other pairs have seen risk aversion applied and enjoyed far less moves. One could argue that we are seeing a similar situation in equities as well.

In foreign exchange the increase of risk appetite has the Yen on the move, backward. Whether it is versus the Euro, British Pound or Australian Dollar the Yen backpedaled in March. Has the ‘carry trade’ returned? It may be a bit premature to state that it has but with Japan’s ultra low interest rates this has been a nice reminder of how the Yen will trade when global interest rates head higher. In equities the general indices are posting sizable gains with indices such as the German Dax posting a 9% gain in March.

Those are nice headlines but as mentioned trading has not been all that easy as risk-taking has not been universally widespread. One currency in particular that had a down month and has only recently showed some renewed vigor is EURUSD. Why is this meaningful? Because EURUSD is the most active currency pair traded in the interbank market as the BIS statistics show and is the most active currency pair traded by individual traders as Currensee shows.

As of this writing Currensee showed that there are 5x as many positions in EURUSD as there are in EURJPY. If you were to also consider volume and not just net positions then that tilt would be probably be even larger in EURUSD. Back to equities, we know that equities have been moving higher but its also well known that the volume in the equity markets has been rather low. In March there were only 4 days where daily S&P 500 volume was over 5b shares traded per day. By comparison in March of 2009 there was Zero days where volume was less than 5b shares traded per day.

Traditionally EURUSD has been the best measure of global risk-taking since the US has an equity surplus. Those light volumes in equities are matching the price action in EURUSD right now and it appears as if the US investors (larger mutual fund and other institutions) are not ready to invest internationally for the added equity return. Interest rate spreads certainly matter but when the DAX is up 9% in a month you might expect a bit more out of EURUSD.

Thus is there opportunity ahead in EURUSD? Taking a close look at the volumes in the major equity indices may provide some clues. Still one does not always need to trade or invest in the most active pairs to find opportunities. The Yen has provided a nice reminder that there are plenty of opportunities to be discovered in the forex market outside of EURUSD.

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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

Although I primarily invest in equities and trade foreign exchange it is hard not to notice the recent bounce in Crude Oil. For me as soon as I log in to Currensee I have my Commodities Market widget right smack in the middle of the screen and Crude is right on top. The Commodities Market widget lists the prices of multiple oil prices, gasoline, heating oil, natural gas, coffee and coal to mention just a few.

I bring this up because it was just a few weeks back that crude was sub $70, equities were correcting and the dollar was making gains. Since then Crude has bounced back above $80 yet EUR/USD continues to hover around the 1.36 area. Of course the Canadian Dollar has been outperforming during this time, especially against the Euro where it has made tremendous strides this year. Still I’m alluding to the larger picture of global risk-taking and when many commodities rebound, including crude, then normally EUR/USD will rebound as well. Much of this stems from the US being an equity surplus country and the potential for leveraged equity returns elsewhere during times of risk-taking. When risk is on demand picks up and prices reflect that.

So why is crude higher and EUR/USD still hovering around 1.36 creating a correlation gap? Last week saw the surprise announcement from the Fed when they hiked the discount rate to 0.75%. The US Dollar reacted initially but since then it has given up much of those gains. Speculation is high that China will make an aggressive move with their Yuan policy; this should initially boost the Yen but then I would expect that the Euro would tumble on risk-aversion. This as the markets would try and gauge how this will impact corporate profits, equity prices and how often Yuan policy will change in the future as well.

That said we’ve heard about potential changes in Yuan policy now for years. We also know that the FOMC will be taking its time in returning policy towards normalization with an approximate 10% unemployment rate in the US. Trading on speculative moves by either central bank, especially speculation which may be months down the road, usually does not yield the most favorable of results.

Therefore from the currency side it appears as if there certainly is a gap in the correlation between Crude Oil and EUR/USD. This has not been lost on the Currensee community though. On the ‘Market Watch’ table 75% of traders are Long EUR/USD. This encompasses nearly 350 traders so it’s a nice sample indeed.

What are their targets? Are they short-term traders or long-term investors? There is only one way to find out which is by starting a discussion and asking them. On the Currensee Community Historical Volatility widget it shows support and resistance levels as determined by the community’s historical trade. There is a resistance level at 1.36159 at the time of writing. Will more traders become long if EUR/USD closes above starts to close the current gap with Crude Oil? Is there an opportunity right now in the foreign exchange market? That is for you to decide but the community will be watching.

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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

During the majority of 2009 the dollar was heavily swayed by the risk aversion/risk acceptance swings in market psychology. That was why we saw stocks and the dollar generally going in opposite directions. When the markets were nervous they sold stocks and sought the safety of the dollar, mostly meaning short-dated Treasury securities. They the markets were feeling better, especially as the economic data improved, the market go out of its hunker down positions and moved into risk assets like stocks and emerging markets. We can see this very clearly when overlaying the dollar index (black plot, right scale) and the S&P 500 (red plot, left scale) on one chart.

We can also see this when overlaying the price of the 10 year Treasury Note futures on the Dollar Index chart. In this case we can see how falling prices (rising yields) from folks exiting the Treasury market matched up with a falling dollar.

Things began to change with the Dollar/T-Note relationship in the latter part of the third quarter, though, and that really showed up in December’s trading when rising rates (falling T-Note prices) came in conjunction with a rising dollar, and for the first time in a long while stocks and the greenback were consistently rising at the same time.

Why did this change? Because the markets are anticipatory things.

The fall in the dollar, as much as it was a lifting of the risk aversion trade, was also linked strongly to the dollar carry trade (borrow cheap dollars and invest them for higher returns elsewhere) and the Fed’s quantitative easing operations (buying Treasuries and mortgages). Both of those are generally things which increase money supply (whenever someone borrows money supply increases). More money means less value for the currency, which is why quantitative easing is considered a negative.

Two things started to happen in the latter part of the year, though. One was that the Treasury market, especially on the longer end, started getting worried about inflation driven by all the Fed operations. That’s a big part of what caused Treasury prices to fall, especially on the longer end. At the same time, the Fed finished up its program of Treasury purchases, so a big buyer left the market. Less demand means lower prices. This all contributed to the big steepening in the yield curve that’s been so much in the market discussion.

Of course the concern about inflation, combined with an improving economy, has traders starting to think about when the Fed will start raising rates. That wasn’t being asked until late in the year. Now it is, which is why Fed statements and minutes are being so closely monitored for indications. Higher interest rates, especially in the short maturity area, will kill the carry trade and make the dollar more attractive to investors. That is what helped lift it up from the late November lows.

Now consider one more element of all this – the money supply equation. Look at the chart below and make note of the grey M1 and blue M3 lines.

Notice the big growth rates in M1 during the latter part of 2008 and into 2009. That is the result of the Fed’s actions with quantitative easing and its various liquidity programs. The Fed has massively increased the monetary base, which is why you hear about the banks having huge levels of reserves.

Here’s the rub, though. M3 is not only not matching that growth, it’s actually started falling. You can think of M3 as being all the money in the economy, but most notably it includes bank loans. This is the thing people look at when they complain that banks are not lending. If M3 is falling when the monetary base is holding steady or increasing (or rising less than the others) it means that credit is contracting and loans are being paid off.

It is definitely going to be worth tracking money supply in the year to come. It will no doubt be tied closely to when the Fed starts to hike rates and how the dollar performs in general terms. On the one side, if M3 starts to rally quickly the inflation hawks will start screaming for Fed rate hikes and/or other measures to pull liquidity out of the system. Both those things would generally be good for the dollar so long as M3 doesn’t accelerate too fast. At the same time, if M3 keeps falling it will mean fewer dollars in the system. That’s also a positive for the greenback.

Now of course in the forex market it’s about relationships, so what happens with exchange rates will be dictated by more than just what’s happening in the US. Still, the makings are there for 2010 to be a good year for the buck.

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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.