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Coming back to interest rates…

Major Progress rarely occurs in one major move. Mostly, the whole thing happens in waves. You take a step forward, then stop and look around; you consolidate. you take stock of your situation, and try to work up enough momentum to take another step. You might even have to give back some ground if you are unable to consolidate…for instance, if the step taken was a major one and covered a lot of ground.

This is what we are seeing in the markets. Over the last few months things have been tentatively moving upwards. The tide has turned, surely. Earlier on in the year, when we had all that bad news coming hard and fast, it was really difficult for things to head up. Any bad news was reason to sell-off and head for the hills.

That has now changed. Most are now convinced that we have seen the bottom. The news is now more positive, and the trend is up. Now, any good news is reason to go on a spending spree. Yay!

This brings us to the Dollar. For most of this recession, the Dollar has been a safety play, like the Yen. Dodgy situation = Buy Dollar…because your dough is safer in US Assets etc etc. This held true, even as it became evident that the situation in the US was not better than in Europe (for instance), and that the US was probably not going to lead the way out of the downturn.

The question always was “When will the US Dollar really start trading on Economic fundamentals?” i.e. If things stay bad in the US, will the Dollar continue to rise because of risk? Also, will the dollar continue to fall if risk increases and the US economy gets better?

Well, as things get better we will most probably – have already started to – settle into the standard mode of operation…Interest rates. Currencies with higher interest rates will start to see more investment. The reason is two-fold. First, higher interest rates mean higher return on investment. That is standard.

However, the second reason is quite important in this environment. Having the guts to raise rates means that you are confident that your economy is really recovering. That just makes your currency an even rosier prospect. Just look at how the Australian Dollar has performed after they raised rates this week – though it was already doing well.

With the US economy not doing so great, investors have had no reason to believe that the Federal Reserve will raise interest rates (exiting other quantitative easing strategies as well) here in the US anytime soon. They have traded accordingly. However, The FED Chairman, Ben Bernanke – Helicopter Ben as he is called, apparently because of his predisposition towards said strategies – hinted that they are also considering an exit, like Europe and others. Thus, the rush to sell dollars has been temporarily stalled.

No one expects the FED to do anything until we really start to see improvement in Job numbers in America. So, I guess the dollar is still likely to keep falling, if not as drastically as before.

I yearn for the old days…the days when my currency pairs weren’t so sensitive to daily news and rhetoric. I think we’re on the way back though. Just a wee bit more time.

Happy Trading.

End of week Dollar movement…interesting

So, last week Job numbers for the US were released. It was a big announcement. No one can ever really be sure what these figures will turn out to be, but we often have indicators that experts can look to. In this case, the figures came out substantially better than most people thought they would be. Hurray for the US economy! It means that, though job losses continue (number of unemployed still at 9.4% nationwide), the rate of loss is considerably slower. That, in this nasty climate, is good news.

What was interesting was the way the Forex Market – well, the Dollar – reacted to the news. The set up was the same as it has been during this crisis. If the figures are about what people expect, then the current trend of dollar would continue, with no fundamental boost, positive or negative. If the figures were better, then that would be a bullish sign for the economy. That would mean a move away from safety; a move to higher yielding currencies i.e. a move away from the Dollar. If the figures were bad, then the dollar would gain strength. Simple.

Not!! We had really good figures (relatively speaking). I, along with most other traders, looked at our charts expecting losses in the dollar. We instead found a strong dollar. The dollar gained on all the other majors. Also, the dollar gained on the Yen. In the past we have seen that when there are bullish signs, the dollar loses against everyone else but gains against the Yen. When things are bearish, the dollar gains on everyone else but loses against the Yen. One can infer that the Yen is even more of a safety play than the Dollar. So, when the Dollar gains on the Yen AND everyone else, in a substantial move, it is safe to say that it based mostly on Dollar strength.

It is baffling. Suddenly, traders think that bullish signs in the US economy should impact the dollar positively? Why now? Why should there be a shift from the risk trade to fundamental? It is suspicious.
Though the move was major(ish), the trend against the dollar is not broken yet. More will have to happen for the Greenback for the bias to change. In any case, We will have to see what happens this week.

Walking in the Dead Zone

The story in the Forex Markets going into this week: Range bound trading. It’s been relentless. While that’s been the story for the last few weeks, that range got even smaller in the last week. Take a look at the Forex Chart for the EUR/USD Currency Pair below:

Forex Chart July 26th 2009

That last candle is actually for the Asian Session for Monday the 27th of July (It’s still Sunday here in the States). You can see that the price has rebounded down from resistance about 1.4200 (yet again) and is now on the way down to support. It’s still too early to tell right now where things will go. We’ll have a better picture once the news starts properly later on.

That underscores what is moving the markets…and on a day to day basis as well: News. The S&P 500 rallied to over 9000, the highest since January. In this earnings season, we have had a good chunk of positive numbers from companies; certainly more positive than the negative ones. That has generally been bad for the Dollar, and good for the other majors. As you can also see on the charts, we have not dropped back to 1.4000. It might be range bound trading, but the price range is certainly higher than it was a couple of weeks ago. However, the earnings have generally been in line with what most investors expected. Companies have been doing all they can do rein in costs. People have been let go, practices changed etc. What we have seen is mostly the end result of that i.e. higher earnings. However, those earnings will have to start coming from increased production and sales for this Stock Rally to have real legs. Some analysts think the whole thing is bogus. They expect this boost to show itself for what it truly is shortly. Something real has to happen with the economy or equities could start to head down again.

I think that point was highlighted by some of the other news that came out last week. The GDP report for Britain was pretty bad. They haven’t seen such numbers since the seventies. The UK isn’t coming out of this recession with any real conviction anytime soon. There is some talk of further Quantitative Easing to provide stimulus, though some are against that approach. If they go ahead with it, it should be negative for the Pound. However, with the general air of positivity that is in the air (if that is still the case at the time), measures like that might actually help the Pound more than hurt it, as it might be perceived as a sign that the UK authorities are still willing to do more to ensure that growth occurs. It is worth taking that into consideration when looking at trades.

Things are traditionally slow in the summer in the trading world. I guess traders have to go on holiday as well. However, we are still in the middle of a crisis, so things could happen differently this year. In any case, I have had to adjust my trading style because of all the ranges we are having to deal with. So last week, I traded up and down with the markets…and did quite well. I used four-hour charts and look for short-term opportunities where I could. It seems to be the only way to get any action these days, unless you want to wait it out.

That is the BEST THING to do if you are not 100% on point with your Money Management. Trying to navigate without Targets and Stop Losses is truly suicidal in this environment. If in doubt…wait!

Forex Trends: long termers getting screwed

One of the reasons the forex market is so attractive to traders is that it “trends well”. That point was listed as one of the important points that made forex trading more advantageous than Equities, for instance. What that means is that the Major Currency Pairs tend to have a fairly clearer direction of movement i.e. The current trend is easier to spot.

Well, all that has gone to hell with the economic crisis. With the demise of a clear trend in the currency markets, Currency Funds have suffered greatly. A couple of examples, as seen on Bloomberg, are John W. Henry and FX Concepts Inc. FX Concepts is the largest Currency Hedge Fund. By May this year, it had lost 5.4 percent. John Henry lost 2 percent. What’s crazy is that last year they managed a 76 percent gain. They are getting whipped.

All this is because of the ups and downs in the markets. By the end of June, the Dollar Index stood at a 1.4 percent change (loss) from where it was at the start of the year. So, if you couldn’t see all the motion we have had all through that period, you would only be able to see the small change that has occurred in that price. Anyone who had bet on Dollar strength or weakness at the start of the year is not going to have any real profit to show for it.

The end result is that more and more traders have to resort to shorter time-frames for their trades…at least till the trend resurrects. More attention now has to be paid to the numbers as they come out; more fundamental analysis with a shorter term outlook. I mean days (in some cases less), instead of weeks. The other option is to wait it out.

There’s been much volatility as well. Somedays, things just happen to destroy your idea of where a particular pair is going. Check out the chart below:

Forex Trading Chart July 8

On the 8th of July, the USD/JPY Forex Pair fell to a four-month low. There was no US economic data out that day. Though there was some sell-off in the EUR/JPY and GDP/JPY pairs, that alone could not account for the fairly drastic fall. There were a group of other factors. In any case, such a move was highly unexpected. All of this just serves to add to the unpredictability that currently permeates the markets.

We all need to be even more careful than usual, at least until this storm passes.


Recently, faith in the Dollar has been put to the test. There have been doubts about the US and it’s ability to come out of this thing on top…doubts about America’s “AAA” rating. Then the job numbers came out today, and the US Dollar bounced back in style, gaining up to 1.8 % on the Euro at the end of what would have been a pretty horrible week, otherwise. What gives?

Over the last couple of weeks, as the global economy continues to move upwards (I think we can all agree that, at the very least, the bottom is in), we have seen a huge backlash against the strength of the US Dollar. The sentiment has flipped. Previously, we had people being pessimistic, and only coming out to play when there was significant good news. Now, everyone is getting in, and only slowing down when there is significant bad news.

So, yes the dollar’s weakness is, to a large extent, the by-product of confidence. The Volatility index has dropped considerably recently. It’s all good. However, there are other factors at play. This has been more evident in certain currency pairs than others.

Take the British Pound. It was clear that the drop in the Pound against the Dollar was much more extreme than circumstances demanded. At various instances in the last few months of the year, there was some back-and-forth between the UK and the rest of Europe as to who would fare better as the recession became more contracted. The UK suffered more, in the long run…and so did the pound. While fighting the trend when trading is not exactly a good idea, the pound was always going to stage a major comeback once all the negativity was reduced. And so it has…in a big way.

Last week, both the Pound and the Euro were helped along by their respective central banks. Why? Because there was no rate-cut. This is a signal that the banks think that whatever action they have taken is enough…that there is no need to do more. It means that things are getting better in their eyes. That was a big boost. Any rate-cut would have meant potential currency weakness. That didn’t happen. Instead, both currencies rose in value.

The same goes for the Commodity currencies. Australia, New Zealand and Canada…none of their economies took as much of a beating as the US. Once the dust settled, commodity prices were always going to rise, as was Oil. It has reached over a 7 month high now (Gas costs are starting to hurt my wallet again. oh, well. It was good while it lasted). Commodity prices will continue rise as well.

What we have been seeing here is normalization. The dollar got much too strong, not because of any real merit on it’s part, but simply because it was the safer choice. Now, it is no longer necessarily the only one. There was a bit of an uproar because of all the talk about the US losing it’s “AAA” Credit Rating. The fact is that things will not go back to normal here, or anywhere else for that matter, for some time yet. But things are getting better…everywhere. Naturally, people (particularly those who ran here in fear) will come out of US-based assets and spread them round. At some point, things will balance out.

Some normality returned because of the numbers out of the US. Though the unemployment is at historic lows, the rate of loss was just not as bad as people thought it would be. End result: The US will still be a leader on the way out of this thing. Forex Traders flocked back to the Dollar…some of their senses restored after good old-fashioned mob-mentality took over for a moment.

The US dollar might still have some value to lose before it returns to a reasonable level, but any sudden moves should be off the table…for now.

Happy Trading

Forex Heroes…Brazilian Real et al

It’s all getting a bit old now. The Forex Markets have been relatively predictable lately. The dollar is getting pounded. Everyone’s getting more confident in the economy…yada yada yada. But I guess that’s what is happening. People are just going to have to get used to the idea of a weaker dollar in the short term.

All the majors have been taking advantage of the fall of the dollar, including the yen. The dollar managed to fight back against the yen a little bit last week, but faltered. A steep drop followed. There are just too many speculators getting in on the action now. As I said, this is it, in the short-term.

There’s not much evidence that the US Dollar’s status as the preferred reserve currency has been crushed completely; however, there is some cause for worry. The main issue now: rumblings that Standard and Poor will drop the US’s AAA rating. It hasn’t been announced officially, but many see it as a foregone conclusion. Investors and traders can take a hint. They won’t wait for the sh*t to hit the fan. They are offloading the dollar as fast as they can.

It won’t go on forever. We should expect some pullback soon. If there is a major drop again early in the week, then a retracement should follow. The rate of the fall will slow. There just won’t be anybody left to sell the Greenback.

The guys that have benefited the most from this fall – in fact, from this whole economic meltdown – would have to be the outliers. I am talking about the South African Rand, the Brazilian Real and others like that. The Rand has climbed a whopping 11% against the Dollar in this month of May alone! It is now at the highest point it has been since early 2003.

The currency is strengthening so much that the Brazilian Central Bank is having to buy dollars to curb it. There’s good reason for this. They are afraid. While a strong currency shows some positive signs, especially in this case (where it is a result of investment in Brazilian stocks and other assets), there is cause for concern as regards exports. A strong currency means foreign countries have to pay more for Brazilian exports. That can only continue for so long, before they start looking elsewhere for other options. So they are buying dollars, and talking the Real down as well. This will also help to decrease the quantity of trigger-happy speculators out there who are interested in trading the Real against the Dollar.

When the people with the power to effect currency values (in this case, the central bank) start making comments that indicate they are willing to take strong action to change the trend, traders pay attention. You can often see this sometimes when a Central Bank announces a decision on whether or not to change the current interest rate. The markets might react in a particular fashion once the decision is announced, but the comments might change that. If a bank cuts rates (an action that would normally reduce the value of a currency in normal circumstances i.e. not these days), but then announces that it will be raising them shortly to address another issue. The currency might not fall as much, as traders will read the INTENT of the bank and might act on that instead. It’s just an example to highlight the fact that comments can be extremely important.

With that in mind, note that there will be 4 Central Bank meetings this week. Europe, England, Canada and Australia will be making rate decisions. These boys have all whipped the dollars ass this week. Changes to rates are not expected by any of their Central Banks. However, we come back to those comments again. What they say will be important. If there is negative talk, we could see some pullback in the trend. The dollar has fallen to pretty much everyone’s projected targets. Any excuse will do to gain, even if it’s just a little bit. That said, a further fall seems to be the more likely scenario this week. Not much further though.

Happy Trading.

“Once bitten, twice shy” resonates pretty strongly with forex traders – most investors, in fact – in the current environment we find ourselves in. Things are starting looking up, in general, but some have been badly burned. This can produce fear, and the unwillingness to open positions. Paralysis, one might call it. However, there are opportunities currently. More and more forex traders have been taking them lately…against the US Dollar.

Just take a look at the Volatility index, courtsey of Yahoo Finance:

Yahoo finance Volatility Index

See how much it has fallen in the last week. That’s fear leaving the market, slowly being replaced by growing confidence. The mood is bullish…enough to allow the market shrug off some bad news.

The effect is evident on our Forex Pairs. EURUSD, GBPUSD, AUDUSD, NZDUSD etc. They are all up. The general consensus at the moment is that they will continue to rise, as long we don’t get any major negative news. However, since we have established previously that this thing is not completely over yet, there will still be some bad news to come. Care is still required.

How much care though? Some longer term traders – along with learner traders – have lost money in this environment. The quote “Nothing ventured, nothing gained” comes to mind. You have to put your money where your mouth is, or you’ll never make progress. The key is MONEY MANAGEMENT. If you ensure that you only risk 2-5% of your account per trade, then chances are that you will have many-an-opportunity to make some profit.

Don’t get greedy, even when things seem good.

Happy trading

The beginning of the end for the Dollar…in the short term anyway

You know the scene I’m thinking about. The one where a former great leader is surrounded by the same people off of whom’s misery he has derived his wealth and power for a long period of time. Now, he lies there, beaten and bloody. Everyone of them wants a piece of him. The poor guy has no where to go. He might not be responsible for everything that went wrong in their lives, but he’s an easy target now, so he gets it.

That dude is the US Dollar right now. The mighty dollar has benefited quite a bit from all the stuff that’s being going on. Falling Equity prices, poor commodity prices, cheap oil,bad economic news (even the ones in the US)…all round fear. It’s all been good for the Dollar. While we have seen some forex market pairs fight back over the last few weeks, last week was quite important.

A couple of things happened that could signal a more powerful shift in trading sentiment. First of all, you have the job numbers in form of Non-Farm Payrolls. They came in at 539,000 jobs. Now that’s lot, no lie. However, it was significantly less than the 590,000 that experts had estimated. This is good. Very good. We then have the results of the Obama Administration Stress tests which were quite interesting. There has been a lot of debate about these tests. There was skepticism by some about whether they were anything more that a PR stunt to cover up what was really going on. No one was really sure what metric would be used to score these institutions. It just didn’t add up. At the end of the day, the tests turned out alright. Some clarity was brought to bear on the financial system. In fact, the results were pretty much what people expected, in terms of the institutions that need help and those that don’t. No major surprises. It has boosted confidence, and it seems pretty clear that there will be no more major bank failures.

The US Government seems to have a plan on how to tackle the issues with the problem companies. If a company is not viable, then it must be restructured. Think Chrysler. Buy outs, Bankruptcy etc. The options are being used. I think more people (myself included) are fully convinced now that these money-sucking pits (supposed companies) will be allowed to fail if that is what it takes. Companies have been given deadlines to raise certain amounts of money, as proof that they can survice. If they don’t, then further steps will be taken. The Administration is now the strict parent. I am not entirely sure that putting a deadline on a drive for funds will work as intended, but it seems alright to investors…at least for now.

So it was a two-hit combo against the dollar last week. For this week, we have retail sales numbers to look forward to. Those are expected to be better. Mind you, this optimism is of the cautious variety. No one wants to jump the gun. However, it seems like the dollar will keep taking a beating. Commodities are on the rise. Oil is going up. Risk appetite is rising. Investors are starting to walk with a skip in their steps. It’s all good.

So, unless the dollar can make like Popeye and suddenly starting whooping everyone’s ass, I think the dollar will lose more ground. Popeye needs spinach to do his magic. Spinach here would be negativity. We are seeing less and less of that these days.

Happy trading.

Swine Flu splutters…The Markets love it

First off, I am glad that the global pandemic didn’t quite happen. It was a near thing. I have to admit, I was really worried about it. I had to fly out from one of the New York Airports last weekend. I was suffering from a bout of Hay Fever…which means I was sniffing a little…and sneezing…and my eyes watered. End result: Nervous stares in my direction everytime any of those happened. Consequently, I worked extremely hard to avoid showing any symptoms. I also overdosed on a homeopathic drug I had purchased to supplement my one-a-day Claritin. That provided some relief…along with other side effects that I won’t discuss here.

The markets are also quite happy that Swine Flu has not evolved into anything as bad as some thought it would. It’s done some damage, and the danger is by no means over yet; but things are better. At least it’s one less thing to worry about in a recession.

In Forex Trading, The dollar did well against the Euro today, along with the Canadian dollar. Not so great against the Pound, but there was a subsequent pullback. There has been a lot of optimism lately. Oil has been picking up as well. Some have said that Oil will need to rise substantially, and hold those gains, for us to feel like we are out of the woods. All of this will be bad for the dollar. However, all of this is still a little premature.

We are seeing a little bit of a pause in optimism…at least until the news is out, or in. We have a European Central Bank rate decision. If rates are cut, the Euro will most likely lose value. Also, more job figures out of the US are expected. There will be large losses, as consistent with all we have seen this year. However, if the figures are worst than expected (bearing in mind that we are all getting a bit optimistic, and therefore have better expectations…a potentially dangerous thing today), then we can expect more negative sentiment. This will be good for the dollar.

One more thing that could cause problems: The results of Obama’s Stress Tests on the Banks. If more banks need more money, then that will be bad. It will undermine some of the progress that people think we have made. And yeah, it will be good for the dollar.

So, the dollar and yen remain the primary beneficiaries of strife and unhappiness. You know that friend you have that just ruins the mood when everyone is having a good time…well, that’s the Dollar.

The Dice Throw…

I have said in at least a couple of the articles I have written about Forex Trading and the Money markets that Trading should be as far from gambling as possible. This rule holds true for all traders, but is particularly important for people who are just starting forex trading…newbies. If it feels like a dice throw, then you’re doing it wrong. Bringing Money Management strategies in obviously helps to mitigate risks, but you want to keep the risk minimal to start with.

The reason I bring this up is because of an article on Five years ago, Alan Greenspan said that predicting currencies is no better than tossing a coin. It’s true that things have a been a tad unpredictable lately. However, that comes with the territory. We’re in the midst of an economic upheaval. A lot is driven by fear or lack of it. Still, you can still make a decent play, even in this condition, as long as you stick with the rules.

The currency pairs haven’t changed much against the dollar in the last 2 days. Well, that’s not exactly true. There has been quite a bit of movement. It’s just that we are back to where we were at the start of the week. It’s the same story. It’s starting to get old now. Fear = Dollar Strength. The changes to that are proving hard to sustain in this climate.

A further complication is that Swine Flu pandemicoutbreak which is spreading all over the world. Trying to contain it at this point is…well…pointless. The cat is out of the bag. The possible scenarios are quite scary. For now, it seems that almost all the reported deaths have occurred in Mexico, where this whole thing began. I think it’s safe to say that some of that is going to start spreading around. Predictably, the markets reacted with apprehension. More Dollar strength. That abated today because of confidence in the US. If things get worse with the Swine flu, expect more Dollar strength. Everything affects everything.

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