Fed Surprise!
By Mike Conlon | February 19, 2010
Just when you thought the markets were starting to calm down and that the news out of the Euro zone was beginning to fade, the US Fed dropped a bombshell on world markets last night at 4:30 PM EST, just after the US stock market closed. The Fed announced to everyone’s surprise that they would be raising the rate at the Fed discount window 25bp to .75%, effectively charging banks more for Fed borrowing.
The markets immediate reaction was to buy dollars and cover dollar shorts, and stock futures tanked. Asian equity markets were down big last night and Europe looks to be bouncing back from earlier lows.
This move was the dominant theme in the overnight market, as retail sales figures in the UK and Canada are taking a back seat, as is the US CPI report which came in less than expected showing that inflation may still be at bay.
The two major things to take away from this move are: 1) the Fed is stressing that this move is not to tighten credit on consumers and businesses, but is merely trying to remove some over the overly-accommodative measures they have taken, and 2) investors need to be wary of the fact that the Fed may continue with these “sneaky” off-hours moves to try to avoid inter-day market Armageddon. It will be interesting to see how the market reacts to this move once trading begins today.
In currencies:
Aussie (AUD): The Aussie is down this morning as it is the currency that is most likely to be affected by this move, all other factors being equal. While I wouldn’t classify today as a risk-taking or aversion day, this is the third day in a row that the Aussie is down against USD.
Kiwi (NZD): Like the Aussie, the Kiwi is down 3 in a row. In addition to being affected by the discount rate hike, New Zealand has just reported the widest budget cash deficit in almost 9 years on lower tax receipts and increased government spending.
Loonie (CAD): The Loonie is lower this morning on lower commodity prices and the US discount rate hike. Also, Canadian retail sales figures came in slightly less than expected, but were at least positive. This could be a sign that economic growth is not as strong as investors may think, and everyone is anticipating the inevitable “Olympic Hangover” as the one-time economic windfall goes away.
Euro (EUR): The Euro is at nine-month low to the Dollar after the discount rate hike in addition to all of the problems coming from the Euro zone. Now speculation is heating up that perhaps Italy used the same sort of derivative maneuver to conceal debt that allowed them to enter the EU as well as Greece. There’s a lot of tension and in-fighting right now among EU members. This could put further pressure on the Euro in weeks to come.
Pound (GBP): The Pound is also at a nine-month low to the Dollar as fiscal concerns continue that the UK may need to continue accommodative measure to revive their economy. Retail sales figures came in at a disappointing -1.2% vs. and expectation of -.5%, showing further economic weakness.
Dollar (USD): It is going to be interesting to see how the market reacts to the discount rate hike today. Personally, I think that this move shows that the Fed is trying to get the market to believe that economic recovery is taking place. This move is sort of a red herring, which induced a knee-jerk reaction from the market as soon as everyone hears “rate hike”. This move does not affect the Fed Funds Rate so it shouldn’t affect either businesses or consumers. So by the end of the day I expect that we’ll see some risk-taking as economic strength in the US is good for world economies and inflation is lower as reported by the CPI.
Yen (JPY): The yen is higher on risk-aversion, however I think the market may “have it wrong” as its gotten used to the risk-on, risk-off mentality. Let’s see if the Yen gives back some gains by day’s end.
In overnight markets, the Hang Seng and Nikkei were down over 2% and European markets have reversed prior losses and are trading higher. US futures are still negative, but trading well off their lows in the overnight session. Oil has reversed earlier losses and is trading around 79.5, and gold is back to around 1115.
When I saw the charts last night immediately following the Fed move, my initial reaction was similar to that of much of the market—sell everything, buy dollars and yen. However, as I thought about the implications of the move, I’m actually quite impressed with the timing of the move and think the Fed did a great job implementing this. And I haven’t been a big fan of the Fed as of late! In my view, this is positive for world markets.
Also, watch out for volatility as today is options expiration.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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More Problems for the Euro!
By Mike Conlon | January 19, 2010
The Euro (EUR) is down again today against the US dollar (USD) and looks ready to test support at 1.42. The problems in Greece may have a carry-over effect which will diminish the Euro as a viable alternative to the US dollar.
The problem in the Euro Zone is two-fold: either the other Euro nations come to Greece’s aid and bail them out which will in turn send the wrong message to the other PIIGS countries, or they allow Greece to exit and risk possible defaults as credit spreads widen because of the increased risk. Either way, the solution for the Euro is not easily rectified and how this plays out will be interesting to say the least.
In either event, I expect continued Euro weakness and if the Euro breaks psychological support at 1.42, then the next stop could be 1.382, back to its 50% retracement levels against the US dollar.
Because of the lack of viable alternatives to the Euro, the British pound (GBP) is seeing some strength today, up across the board against all other currencies.
Until clarity emerges from the Euro situation, the pound appears to be ready to strengthen against the Euro.
Let’s look at 2 quick charts: (click charts to enlarge)
The first chart is of EUR/USD and illustrates the different Fibonacci levels which can act as support or resistance within larger trends. When trends reverse, these levels an act as “magnets”– pushing the prices toward those levels. So if the problems with the Euro persist, then keep an eye on these levels.
The second chart is of EUR/GBP and it shows the current action of the Pound vs. the Euro. The pound provides a viable alternative to the Euro, so even though the UK has their own set of problems, the market may deem the Euro’s to be worse so I’m expecting continued pound strength against the Euro. I’m looking for a move down to .85 for this pair.
To learn more about how you can use Fibonacci numbers or other technical analysis to enhance your trading, be sure to check out our currency trading courses!
If you want to follow these trades live to see how this may play out, get a free, live demo account here!
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Dollar/Yen at 3 Month Highs!
By Mike Conlon | December 30, 2009
The US dollar/Japanese yen (USD/JPY) trade is at a 3-month high as high as 92.5 in today’s session. I’ve been on this trade since early December, when I mentioned in this article about the possible trend reversal that occurred and that the Japanese government was attempting (turns out successfully) to jawbone the yen lower. This also comes about on US dollar strength, which I’ve repeatedly mentioned over the past few trading sessions.
Also interesting to note is some weakness in the Canadian dollar, otherwise known as the Loonie (CAD). Its down across the board, most notably against the US dollar, -1.00%. This is due in part to oil price fluctuation as well as a pullback from the recent strength its been showing.
Because we are at year -end, I tend not to put as much emphasis on the price charts as volumes are lower so the normal patterns and strength and resistance levels that I usually rely on can be compromised. So while I do see some intriguing set-ups, I’m going to keep the rest of my trades very short-term until we start the New Year.
This will allow time for the heavy hitters to come back and decide where they want prices to be. Call it a New Year “reset”. Liquidity risk is sometimes a factor that most traders don’t consider. I tend to become more cautious as the end of the year approaches as I like to hold on to my profits, thank you very much!
So if you are trading now, look to be a bit more cautious going into year end.
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End of the Year Blowout Sale!
By Mike Conlon | December 28, 2009
END OF THE YEAR BLOWOUT SALE! OVER 55% OFF!
As we come to the end of 2009, now is the time to look back and reflect upon this past year and to think about making changes going forward. 2009 was a “roller coaster” of a year for investors and many were left wondering what to do when the markets were collapsing and then missed the rally back.
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FOMC Meeting at 2:15EST!
By Mike Conlon | December 16, 2009
The Fed decision on interest rates is due out at 2:15 EST today. The minutes leading up to and surrounding the decision are usually volatile and currency spreads can widen if there’s uncertainty. So if you do trade around that time, be cautious!
Now no one is expecting the Fed to raise interest rates, but all ears will be on the semantics of the meeting, that is, will they change their language. The Fed’s dovish stance on rates has persisted as the US dollar has fallen against almost all major currencies this year.
The zero-interest rate policy (ZIRP) that they have adopted has been in effect for just over 1 year. Will they tip their hand or provide statements of a more hawkish nature? The PPI numbers came out yesterday and showed a larger than expected degree of inflation, which some see as a sign that Bernanke et al will have to raise rates sooner than later.
In the meantime, the US dollar has picked up some short-term support and has been gaining ground against other currencies, particularly the Euro. But will that mark a trend reversal? Or is it just a brief pause?
As of late, the currency market correlations that we speak of often have started to break down. There are now actually days where both the dollar and the stock market can both be in positive territory. This tells me that we may be seeing a shift in the market response to risk-taking and that a rate hike may not be absolutely necessary for the US dollar to strengthen.
Remember, the forex market is a comparison market; that is, as a currency you don’t have to be the best, just be better than the rest!
So let’s see what Bernanke does today, but my feeling is it won’t be much. Weakness coming out of the Euro Zone in addition to Australia’s may be enough to see the dollar strengthen. Should he take a more hawkish stance, then expect the dollar to take off!
I’ll be following this event live and will hopefully have some charts to see what, if anything, takes place.
And of course you can follow this event on your own, by signing up for a free, live practice account here!
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US PPI A Little Hot!
By Mike Conlon | December 15, 2009
At 8:30 this morning, the US PPI (producer price index) came in a little hot at an increase of 1.8% vs. expectations of .8%. In addition, the Empire Manufacturing Index came in at a disappointing 2.55 vs. an expectation of 24, missing by a wide margin.
What does this all mean?
Well there are a few takeaways from this. The first is that PPI is showing that inflation is heating up faster than expected which could cause the Fed to have to think about a rate increase sooner than they wanted. All eyes are on the Fed this week for tomorrow’s FOMC meeting, and now there is an increased possibility that they may change their language regarding rate hikes. Because we are near year end, many traders are on the sidelines, content to hang on to gains from earlier this year. This could be a time that the Fed could try to “slip one in there” while market impact could be minimized.
The manufacturing index number is disappointing because it shows that the temporary pick up we have had may have been due to the stimulus packages and that the economy may not be ready to stand on its own 2 feet.
So this could have a negating effect, although if inflation really starts to heat up, the Fed may have to act quickly to keep inflation at bay.
Another thing to consider is the news out of the Euro-Zone, that Austria nationalized a bank in a multi-billion dollar bailout to prevent further contagion throughout the region.
This all plays in handily to the risk aversion trade, which seems to be the way the market is headed this morning. US stock futures are down this morning, and the US dollar is showing major strength, up .96% vs. the Aussie, .8% vs. the Kiwi, and 1% vs. the Yen.
I’m going to keep an eye on dollar strength today, and will put up some charts later. It is quite possible that we may see dollar strength due exclusively to risk aversion and not interest rate fears, although any change out of the Fed could be the “double whammy”.
To learn more about how to trade currencies, please check out our courses!
To follow these developments in a free, real-time practice account, click here!
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More Problems for the Euro!
By Mike Conlon | December 11, 2009
I wrote earlier in the week in an article titled, Euro Dead Zone, that there is some potentially trouble brewing in the Euro. Part of this is due to structure of that currency, in that it is comprised of different economies at different levels of strength.
Typically, the stronger economies “balance out” the weaker ones, and as I mentioned there are starting to be a lot more weaker than strong. One of the “solutions” that I pointed out is that the ECB might consider a lowering rates to make it more affordable for the weaker countries to gain access to capital. It doesn’t appear that there is going to be inflation there anytime soon.
But today there is another solution being reported on Bloomberg: that perhaps the weak countries, most notably Ireland and Greece, would pull out of the European Monetary Union (EMU). Or they can pray that the IMF will bail them out.
This presents a problem that is two-fold: 1) I can’t imagine that these countries would leave the EMU voluntarily, which would mean that they have become “persona non grata”, namely not welcome or forced out; which would 2) undermine confidence in the Euro as a currency.
And today we are seeing this on the charts. Let’s look at a 4-hour chart of EUR/USD: (click chart to enlarge)
Now while part of this move can be attributed to US dollar strength, I can’t help but think that the Euro is inherently weak due to the competing interests of its members. If they expel the “weak” members every time there is a problem, the Euro is quickly going to turn back into the Deutschmark! As of this writing, EUR/USD is down .68%.
To follow this situation real-time with a free, practice trading account, click here!
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Support and Resistance!
By Mike Conlon | December 10, 2009
You have probably heard the phrase “support and resistance” thrown around with regard to technical analysis and price charts. This is one of the most basic and fundamental concepts in analyzing charts. Support is the area on the chart where there is buying interest, and resistance is the area where there is selling interest.
Why do I mention this now? Yesterday’s trade on the New Zealand Kiwi (NZD/USD) is a perfect example of how support and resistance works. Let’s take a look at what happened yesterday and why support and resistance is such an important concept.
(Click charts to enlarge)
Looking at the above three charts, you can see how resistance was identified at .7185. In the first chart, once the price of the pair traded up to resistance, it paused and consolidated a bit as all of the sellers were absorbed at that level.
In the second chart, once the pair broke through resistance, it settled back down and now used what was formerly resistance as support. This means that there is now buying interest at that level.
In the third chart, you can see the pair extend for roughly another 100 pips.
What these chart illustrate is a classic case of when resistance becomes support. Savvy traders who can identify where these levels are can take advantage of low risk entry points for profitable trades. And the same thing also works on the other side, when support can become resistance.
Knowing how to identify these areas can be the difference between making and losing money. The professionals know how to find these areas, shouldn’t you?
To become more educated about technical analysis, be sure to enroll in our currency trading courses!
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Kiwi Update!
By Mike Conlon | December 9, 2009
As expected the RBNZ kept rates unchanged at 2.5%, but did mention that they would likely be looking at a raise sometime in mid- 2010. It appears as though the economy is on track and that they will meet their inflation targets.
Here’s a quick look at a 1-minute chart of NZD/USD as it was announced: (click chart to enlarge)
I mentioned earlier that resistance was around was around .7175. Well, it looks like I drew the chart correctly, but mistakenly said resistance was at .7175, when it should have been at .7185. If you look at this chart, you can see how the price went up through that resistance, then traded back down and consolidated before moving higher.
It just goes to show how powerful simple support and resistance can be in your observations of charts and in technical analysis.
To learn more about this, check out our forex courses!
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Weekly Outlook from InnerFX 12/07
By Mike Conlon | December 7, 2009
EURUSD
Despite several attempts to breach higher last week, the euro failed to hold gains as the dollar rallied across the board on Friday, as a result of better than expected unemployment figures. The 270 points decline of Friday has cleared half of euro’s gains accumulated during the previous two months, hence December started by favoring the dollar bulls. Is this the time of a prolonged correction? Could be… but I maintain my positive view on EUR against the buck, for now, treating such declines as potential opportunities to re-initiate EUR long positions. Speaking of current market conditions – short-term sentiment is slightly bearish due to recent rejection into the 1.5150 region along with Friday’s collapse below the 1.49 handle, back into the key support region around 1.4850. A rising trend line support coming from July’s low at 1.3830 has been reached and limited intra-day losses but in case of the decline’s resumption within the coming trading sessions, we should focus towards the next support levels – into the 1.4700/30 and 1.4600 regions. In case of a recovery, which at this moment seem more plausible to me, I expect the 1.5000 mark, along with 1.5050, to provide a minor barrier – a lot weaker than before (during October and November). A sustained breach above the 1.5 handle would also turn momentum positive, signaling that the correction is over. Also keep an eye on the S&P500 as important levels are still intact into the upside – the 1113 barrier which is still intact, despite several attempts to breach higher along with false breaks/spikes to as high as 1119. Another key barrier is the median retracement of the long-term decline from 1576 to 666.75 which is set at 1121. Due to the solid correlation between EURUSD and S&P500: no sustained break above 1113 -> no breach above the 1.5100/50 region, simple as that.
(click all charts to enlarge)
Gold
The superior band of the uptrend channel (seen in the chart below) is, once again, providing support on current pullback. In case of a break lower, next downside barriers into the 1126 and 1100 regions may limit losses. Short-term sentiment shows some bearish signs but it was about time to look for a correction – because it can’t just climb to record highs forever, right? However, if the correction continues – below 1100, bulls should start to worry. On a medium term basis – uptrend is intact and extended dips will favor further buying.
GBPUSD
In my previous article, when cable was trying to recover some ground pushing on the 1.6600 handle from below, I pointed out that more selling towards 1.64 was likely – further weakness emerging, as expected, and cable printed session lows around 1.6420 before closing the week .36% lower. Downside remains favored for now, and a break above 1.6700 is needed to confirm the positive bias. Recent hesitation into the 1.6700 zone confirms the indecision of both bulls and bears and the 1.6270-1.6700 range will probably remain valid for now. However, the said 1.6270/00 support region may limit extended losses and provide a reversal point, as that’s quite an important level.
NZDUSD
Former support provided by the rising trend line coming from .6475 of July has provided a stable resistance on last upside attempts into the .7280/00 region. A break was needed to resume uptrend but selling into rallies favored the current decline which extended to as low as .7130 on Friday. Although NZD’s losses have been relatively smaller comparing to EUR (-0.86% vs. -1.37%), there are no signs of uptrend’s recovery yet. Below current market levels, important support is formed around .7050 by the 61.8% fibonacci retracement of .6685 – .7635. We’ll see how it reacts if current decline continues.
Happy trading!
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