Growth By Contraction!
By Mike Conlon | September 2, 2010
In what seemingly is a contradiction, Europe is proving that you can grow by shrinking. If you don’t believe that’s possible, look no further than the EU GDP figures reported this morning. GDP figures came in showing growth of 1.9% vs. an expectation of 1.7%. But wait a second, isn’t the EU enacting austerity measures?
Yes, they are enacting austerity measures but they are not experiencing the crisis of confidence that we have here in the US. This allows for more active participation in the economy, as fears have been removed about the future of policy. In other words, they are taking their medicine. In addition, the ECB left rates unchanged at 1% which was no surprise to anyone and will most likely remain in “crisis mode” until next year.
Conversely, here in the US companies are still afraid to hire employees as they are fearful over the economy and government policy. With no end to the spending in sight, the “extend and pretend” policies and looming deficits and taxes and regulation and healthcare (oh my) make even the boldest of businessmen appear more scared than the cowardly lion!
As a result, Initial Jobless Claims came in slightly better than expected, showing new claims of 472K vs. an expectation of 475K. Home sales figures are due out later this morning and my guess is that this figure is not going to be encouraging either.
In the UK, housing prices came in lower than expected which may help inflation come back down and allow the BOE to maintain accommodative policy measures throughout the austerity measures.
So this morning’s currency market action is a bit of a mixed bag, as the market can’t decide if the fundamentals support risk-taking.
In the forex market:
Aussie (AUD): The Aussie is lower this morning as the trade balance figures came in worse than expected. The Australian trade surplus shrank to A$ 1.89B vs. an expectation of A$3.1B. This comes a day after better than expected GDP figures were reported yesterday.
Kiwi (NZD): The Kiwi is actually higher this morning on—ready for it—higher powdered milk prices!! If I had any sort of journalistic integrity I wouldn’t even mention this but the higher Kiwi seems like an anomaly to me so I’m going to go with it. If I had to guess what is going on, I would blame stealth Chinese currency diversification. (Click chart to enlarge)
Loonie (CAD): The Loonie is lower as crude oil prices have pulled back to 73.25 and the market prepares for tomorrow’s US Non-Farm Payrolls report. Canada is particularly sensitive to US economic data as the US is its largest trading partner.
Euro (EUR): The Euro is mixed this morning as the GDP figures and steady monetary policy are encouraging despite the known debt problems and commitment to austerity. Just goes to show sound economic policy goes a long way to helping in recovery. (Click chart to enlarge)
Pound (GBP): The Pound is mostly lower as home prices fell signaling that inflation may again fall below the BOE upper band of 3%. This may allow the BOE to maintain accommodative policy as austerity measures help tackle the deficit.
Dollar (USD): I’m starting to sound like a broken record here so I’m not even going to say it. I’m just waiting for tomorrow’s NFP figures which they market will use as a true gauge of whether or not jobs are being added to the economy. Government models and proclamations of jobs “created or saved” ring hollow. The proof is in the pudding, as they say.
Yen (JPY): The Yen is showing strength again, as the market is going to test Japanese policy-makers over intervention. The Nikkei was higher overnight so the inverse correlation of Yen to the Nikkei is not holding up today. As the rhetoric heats up, what will Japan do? (Click chart to enlarge)
It is becoming more and more apparent that things in the US are not getting better. While they may not be getting worse (yet), I think we may be in a holding pattern until the November elections where hopefully the “bums get thrown out”.
There has been much talk recently that a lot of the damage has already been done and that political gridlock may not be seen by the market as a good thing. My guess is that any change in leadership at this point is going to be viewed as positive, and if we can actually change the collision course our economy is on people might actually be able to get back to work and help the economy grow again.
Until then, expect fear to rule the markets and tomorrow’s NFP number could be the continuation of last month’s fear driven market action.
I never thought I’d say this as an American but perhaps we should be taking economic direction from the Europeans! For their realistic assessment of how to recover while not popular is the right thing to do.
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Who’s Stressed?
By Mike Conlon | July 21, 2010
Well apparently it’s not the ECB. However the market is a bit more concerned about the results of the bank stress tests which are due out on Friday. The Euro is lower this morning as ECB President Trichet is having a “behind closed doors” meeting with the banks in question today, presumably to get everyone on the same page when the results are released.
This is causing a mild bout of risk-aversion, as there is some concern that perhaps they are working on how to “spin” the results, which may not be as rosy as they have been saying. Or it could just be much ado about nothing.
Earlier today, the Bank of England released the minutes of its policy rate policy meeting which showed a heightened concern about UK inflation. This provided the Pound with a bit of a bounce, but it gave back gains as the ECB meeting came more into focus.
Fed Chairman Bernanke is going to speak later today and is expected to maintain a dovish interest rate stance, which could put further pressure on USD/JPY as the Dollar weakens vs. the Yen.
In the forex market:
Aussie (AUD): The Aussie is mostly lower this morning as mild risk-aversion is causing some selling in all pairs but the Euro and Pound. CPI data due out will provide more clarity into whether or not the RBA will consider a rate hike next month, assuming the European banks “pass” the stress tests.
Kiwi (NZD): The Kiwi is actually sporting some strength this morning despite the mild risk aversion as year over year credit card spending increased for the third month in a row. While I’m not necessarily sure this is a good thing—the Kiwi is higher against USD.
Loonie (CAD): The Loonie is higher this morning after yesterday’s rate hike despite the dovish comments from the BOC which initially sent the Loonie lower yesterday. In addition, oil is higher to around 78.50, providing a bid to the Loonie.
Euro (EUR): The Euro is lower across the board in advance of the stress tests as today’s ECB meeting is causing some traders concern. Today’s meeting is most likely to just provide a unified response to the stress tests as they don’t want anyone going “rogue”. So while some might feel this is because the results may be less than desired, I feel it is more of a coordinated action plan which unfortunately is necessary as the slightest misconstrued comment could send the markets reeling.
Pound (GBP): The Pound is giving back some earlier gains and has gone mostly negative as the market is focused on the ECB meeting taking place. This is causing some risk-aversion to start the day despite the fact the BOE policy meeting minutes showed that there is a heightened concern for inflation. At this point, they are not sure how higher taxes and austerity measures are going to affect prices going forward, but a policy adjustment may be in order if CPI data remains above the target range.
Dollar (USD): The Dollar is mixed today in advance of Bernanke’s speech later today which is all but guaranteed to remain dovish regarding interest rate policy. The Dollar is catching a bit of a safe-haven bid; though it is lower vs. the Loonie and Kiwi as the birds are showing strength this morning.
Yen (JPY): The Yen is showing strength across the board going into the Euro bank stress tests as demand for carry trades has weakened.
We were bound to see some Euro weakness going into the stress tests as the market is unsure of what to expect. While all of the chatter leading up to the meeting has been positive, there is still reason for concern.
Today’s private meeting has led some in the market to believe that they are attempting to “spin” the news, however I think it’s probably more of forming a plan to provide one clear, concise message.
The Euro has seen good gains over the last 6 weeks as we no longer hear chatter about Euro-Dollar parity. It is no secret that A LOT of banks have problems, both in the Euro zone and elsewhere, so this really should be a non-event.
Nevertheless, in todays media-centric gotta have every detail every second society, these tests will picked over with a fine-tooth comb and a microscope.
So it will be interesting to see if both the Euro and Pound can turn it around today after the ECB meeting concludes (with no negative news releases). Stocks markets are higher across the board, and Bernanke will likely contribute to further Dollar weakness today.
Keep an eye on Japan for potential intervention as continued Dollar weakness vs. the Yen is highly undesirable.
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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US Earnings On Tap!
By Mike Conlon | July 12, 2010
This week starts earnings season for US companies and, rightly or wrongly, will help show whether or not economic progress is occurring. We’ve witnessed the disconnect between corporate profits and the “real economy”—namely jobs—and good corporate earnings will give the unemployed hope that hiring may be soon to follow.
In the UK, GDP figures came in as expected showing slightly positive growth for the quarter, and there was an article over the weekend claiming that the UK’s proposed bank requirements would lead to a double-dip recession.
In the Euro zone, potential fears of bank solvency issues were balanced out by German economic strength measured by employment and industrial production figures. A lower Euro had helped German exports and if the banks can “pass” the stress tests without setting off a chain reaction, then the Euro could stabilize near these levels.
In Japan, the ruling party lost control of the upper house in elections, providing political uncertainty and causing the Yen to sell-off overnight. However, overall risk aversion has brought strength back to the Yen.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion, despite the fact that home loans rose for the first time in 8 months. However, futures are showing that traders are decreasing their bets for an Aussie rise vs. the Dollar. US corporate earnings will be the major driving force this week, with better numbers encouraging risk appetite.
Kiwi (NZD): The Kiwi is also lower on risk fears despite the fact that the NZ budget deficit came in narrower than expected. Home prices came in slightly lower, but still posting gains of 5.2%. Inflation figures are due out later this week.
Loonie (CAD): Not a lot of news for the Loonie this week but expect it to be extra sensitive to US corporate earnings this week. The US is largest importer of Canadian goods and services.
Euro (EUR): The Euro is also lower as the policy makers are already calling for better capitalization of the banks before the results of the stress tests are released. It is no secret that banks would be better off with more capital; the problem is whether or not increased capital requirements will hamper growth. Germany is showing that its economy is still strong, and that may be enough to out-weigh the negativity surrounding the Euro.
Pound (GBP): The pound is lower as DGP figures showed .3% growth in the first quarter; however the current account deficit is at its widest margin since 2007. Economists are expecting better growth in the 2nd quarter, before the impact of fiscal tightening takes place. The Pound traded below 1.50 earlier but has since rebounded higher.
Dollar (USD): The Dollar is seeing some strength this morning as risk aversion is present at the start of the US session. US CPI and PPI figures are due out later this week, but all eyes will be on the US corporate earnings reports. Good earnings will provide hope that hiring may be around the corner, but at the end of the day we may still be in the “tale of 2 economies”, with companies thriving while the unemployed are crying. Bad corporate earnings could send the markets reeling, so expect volatility in the short-term.
Yen (JPY): Overnight, the ruling party lost control of the upper house of government, providing political uncertainty and the fear that Japan may have trouble attempting to tackle its deficit. The Yen was lower, but is now seeing strength on risk aversion. The Bank of Japan Monetary policy meeting is taking place this week but don’t expect them to move on rates. Japan will trade this week on risk themes.
So the market and the US government are counting on good corporate earnings to provide confidence that the economic picture may be improving. With higher profits, the likely conclusion is that companies will begin hiring again which will hopefully help lower unemployment.
However, this may not necessarily be the case. Companies are fearful of the current economic climate as potential new rules, regulations, and taxes spur hesitation. Companies will be very cautious when looking to expand and could be quite content with their present situation.
Whether or not this is the case remains to be seen as the market expects good earnings. Should the numbers be average or even bad, then that could open up a whole new can of worms.
So expect volatility this week, and be ready to profit from short-term fluctuations should the situation present itself.
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Follow Up With Abe!
By Mike Conlon | July 8, 2010
As a follow up to my original interview and due to overwhelming viewer response, Abe Cofnas has provided the answers to your questions. You can view that interview here. In addition and going forward, Abe has graciously agreed to provide forex trading blog with a weekly feature, giving us insight into his unique perspective accumulated through years of forex trading.
So I’d like to extend a warm welcome to Abe and look forward to his weekly feature.
QUESTION: HOW DO YOU SUGGEST TRADERS SCAN THE MARKET AS THEY START THEIR TRADING DAY?
The best approach is first to have a mind-set that realizes that there is a lot of volatility in forex and therefore it is important to get a top-down viewpoint of what is happening. So one of the first things to do is to use multiple time frames.
When you are looking at a currency pair, look at three time frames at once. I suggest a 4 hour, 15 minute, and 5 minute time frame. The example below shows this for the EURUSD.
(click chart to enlarge)
Now follow that and the 15 minute chart offers a lot more granularity. Of course we have swings down, but the prevailing sentiment from the 4 hour was up and this means that the trader should only look for buy situations.
QUESTION: WHAT ROLE DOES THE 5 MINUTE CHART PLAY?
The 5 minute chart acts like the local traffic guard. If you want to go long, then you need confirmation on the 5 minute chart.
QUESTION: ARE THESE THE ONLY TIME FRAMES ONE SHOULD USE?
The concept is 3 time frames. One can use a 2 hour, a 15 minute, and a 3 minute chart. The essential feature is to never only look at one time frame.
QUESTION: WHEN DO YOU GO COUNTER-TREND?
Counter-trend moves can make you money, but a starting trader should not go against the trend. It’s a numbers game and the trend is your friend because it can provide you with more winning trades if you go with it.
Having said that, if the 4 hour breaks down support- or, I will be flexible - the 2 hour breaks support, you can look to the 15 and 5 to confirm it. The 2 hour chart below shows support at 1.255. So if the EURUSD broke through this- even though the 4 hour chart is still not broken looking for a sell is legitimate.
QUESTION: WHAT ELSE IS GOOD TO LOOK AT ?
Definitely look at the Dollar Index (DXY). It provides a quick look at global sentiment. So make sure you’re trading WITH the sentiment
QUESTION: ARE THERE ANY OTHER GOOD INDICATORS YOU LOOK AT?
Let’s deal with that on the next blog.
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Volatility Rules!
By Mike Conlon | July 8, 2010
Yesterday, the markets started off in risk-taking mode and that quickly reversed to post huge gains as the market flipped to risk-taking. As I mentioned yesterday, there was no real reason to induce risk-aversion as the there was no news driving fear. That proved to be prescient. This goes to show how the 24-hour nature of the currency market can provide opportunities as different markets gauge risk.
Overnight, the BOE left rates unchanged and did not expand its asset purchase program reflecting a view that their economy may be stabilizing.
The ECB also left rates unchanged, but did begin its own asset purchase program to try to help ease pressure on its banking system.
In Australia, employment figures came in much better than expected showing signs that the economy is not slowing down and bringing back the chance that the RBA could move on rates again this year.
In the forex market:
Aussie (AUD): Overnight, the Australian unemployment rate fell to 5.1% as the economy added 46K jobs vs. an expectation of 15K. This has sent the Aussie higher and has encouraged risk-taking, as the market is increasing its bet that the RBA may have to resume interest rate hikes. The fear of a potential Chinese slowdown had left the market betting that the RBA was finished for the year.
Kiwi (NZD): The Kiwi is higher trading along with the Aussie as risk-taking is continuing from yesterday’s gains.
Loonie (CAD): The Loonie is also higher on risk-taking ahead of tomorrow’s employment report in Canada. Oil is catching a bid and is higher as the demand for risk assets has increased.
Euro (EUR): The Euro is mixed this morning keeping in line with risk-taking. The ECB left rates unchanged at 1%, and showed that it is willing to buy government debt to shore up the banking system. However, there is a sense that the ECB may need to expand those purchases going forward. German industrial production figures came in much better than expected, providing a bright spot to economic health.
Pound (GBP): The Pound is trading lower against all but the Yen, as the BOE left rates unchanged at .5% which the market had been expected. They also left their asset purchase program unchanged, and there may be slight disappointment that it hasn’t expanded. In addition, industrial and manufacturing production figures came in slightly lower and home prices were also lower, showing signs that inflation may be shrinking as the BOE had hoped.
Dollar (USD): The Dollar is lower against all but the Pound and Yen, as initial jobless claims figures came in slightly better than expected. Initial claims were 454K vs. and expectation of 460K, which may be showing that the US is losing jobs at a slower pace.
Yen (JPY): The Yen is lower across the board as risk-taking is continuing from yesterday. In addition, Japan’s current account balance decreased revealing that domestic demand may be picking up. This is seen as positive as it could help fight the deflation they have been experiencing.
As you can tell by now, there is A LOT of volatility in the market and frankly, I couldn’t be happier. Volatility provides opportunities for traders to profit from changes in sentiment worldwide.
Right now this is most definitely a trader’s market, as the short-term movement is out-pacing longer term position-taking. There is still fear in the marketplace and many hurdles to get over to return to global economic stability. I don’t know where the market will be in 6 months from now; let alone 2 days from now!
What I do know is that there will be ample opportunities for me to make money in the forex market as different news events drive sentiment between risk-taking and risk-aversion. My stocks may be flat, and bonds paying no interest, but there are always ways to profit from forex!
Isn’t it time you got involved to find out for yourself why the forex market is the fastest growing financial market in the world?
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Greek Junk!
By Mike Conlon | June 15, 2010
Yesterday, Moody’s ratings agency cut Greece’s credit rating from investment grade to junk, citing the economic risks the nation is facing. This derailed yesterday’s rally, and reversed some of the gains just as the Euro session closed. However, defenders are quick to point out that this news has already been factored in by the market and that conditions in Greece have improved since the data used to make the downgrade.
So it looks like the Euro has dodged a bullet—for now. In addition, German economic sentiment came in well below expectations showing signs that the picture is not as rosy as today’s market would have you believe. However, the Euro is higher vs. the Dollar and European stock markets are higher despite what some would consider heightened risk.
In the UK, CPI data declined for the first time in 3 months though housing prices ticked higher showing mixed results in the inflation picture.
Overnight at the Japanese rate policy meeting, BOJ officials unveiled a 33 billion stimulus program despite the comments that the export-led recovery is starting to spread to private domestic demand.
So this morning is a bit of a mixed bag, with stock markets higher, USD lower, but Yen and Euro higher. It will be interesting to see if these markets fall back in line with their usual correlations, or continue on their own path.
In the forex market:
Aussie (AUD): Overnight, minutes from the Australian central bank showed that concern over the European debt crisis may cause the bank to pause from future rate hikes. The RBA has “flexibility”, as previous rate hikes have appeared to have quelled inflation. In addition, in what some may view as counter-intuitive, an RBA Governor said that he would welcome slower Chinese growth, as it would allow the Australian economy to grow at a more moderate pace.
Loonie (CAD): The Loonie is higher this morning as oil has gained to $75.75 due to an increase in demand and a potential supply shock due to the gulf oil spill. In addition, there is a report out that corporations are diversifying away from the Euro and are issue bonds in Loonies, which could be a driver of demand.
Kiwi (NZD): From the not-so-fast department, the Kiwi is lower across the board after 4 days of gains following its rate hike. Overnight, home prices came in lower than expected, falling 1.4%. This may give the RBNZ a reason to pause rate hikes and to move slowly. The RBNZ would like to see a weaker Kiwi to help exports, and this housing figure may be a harbinger that inflation is tame in NZ.
Euro (EUR): So it looks like the Euro is brushing off the Greek credit downgrade as it is trading higher this morning. In addition to the downgrade, German business sentiment came in way below expectations, yet the Euro is higher. There are rumblings around the market of other potential downgrades and measures that other countries should be taking. In my mind this is heightened risk, but the market isn’t seeing that way. Remember to trade what you see and not what you think you know!
Pound (GBP): The Pound is mixed this morning as inflation data slowed for the first time in 3 months. CPI figures came in at 3.4% vs. an expectation of 3.5%. This is higher than the government target figures of 3%, though economists are predicting a decline back below the upper band of the range by mid-year. However, housing prices also rose as demand picked up the most since January. While there is a lot of talk that inflation in the UK is “contained”, only time will tell if this is the case.
Dollar (USD): Stock markets appear to be driving the forex market today, as higher equities prices are reducing the demand for dollars. Empire manufacturing figures came in slightly less than expected but showing growth nevertheless, and import prices came in lower, probably due to recent dollar strength.
Yen (JPY): The Yen is surprisingly strong this morning as risk appetite appears to be happening this morning. Perhaps there is hesitation that carry trades may not be due to advance due to interest rate pauses in Australia and New Zealand. In addition, the BOJ signaled they would be instituting a $33 billion stimulus program to encourage business lending.
So today is kind of an “odd” day, as the currencies are trading more on their own fundamentals and not so much on risk themes. Today is seemingly a risk-taking day, though the demand for carry trades has been reduced due to Yen strength and possible interest rate pauses from the commodity currencies.
The Loonie is catching a bid as oil trades higher and Canada becomes a destination for capital-raising as an alternative to the Euro zone.
The UK is telling us there is no inflation, but the market may be thinking otherwise.
And lastly, the Euro is defying gravity and shrugging off credit downgrades. Perhaps these credit ratings agencies are losing their own credibility, or the market needs to see more from a risk perspective in order to sell-off the Euro. Either way, there is still risk in the market and the market may want to “see” problems occur than “hear” about them.
So don’t fall for the game of “show and tell”—and trade what you see and not what everyone wants you to know!
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Big Ben Is Back!
By Mike Conlon | June 8, 2010
Just when you started wondering where are esteemed Fed Chairman has been, Bernanke gave a speech last evening that helped buoy the markets higher. Bernanke re-affirmed that indeed recovery is intact here in the US; though moderate given the depth of the recession. These comments helped send futures higher, and encouraged risk-taking in the forex market.
Across the pond, Fitch ratings agency came out with comments on the UK saying that the UK fiscal challenge is “formidable”. Perhaps this could be viewed as adding “fuel to the fire”, as these comments came a day after the new British PM said basically the same thing. There is speculation in the market that perhaps a UK credit downgrade is looming. The UK emergency budget is due out on June 22 and that should paint a clearer picture.
Meanwhile, the German trade surplus narrowed, though industrial output increased .9%, besting expectations.
In the forex market:
Aussie (AUD): The Aussie is higher on risk-taking, despite the fact that business confidence fell for the third straight month. Part of this can be attributed to the government’s proposed 40% tax on mining companies as well as Euro zone conditions.
Loonie (CAD): The Loonie is higher as well, catching a slight bid from higher oil prices, despite a housing starts number that came in worse than expected. The number came in at 189K vs. an expectation of 202K.
Kiwi (NZD): The Kiwi is higher ahead of tomorrow’s interest rate policy meeting which the market is expecting will bring at 25bp rate hike, raising the official cash rate to 2.75% from a record-low 2.5%. Inflation is expected to pick up which would outweigh any fallout from the Euro debt crisis. However, as mentioned yesterday, most every country is looking for a weaker currency to export their way to prosperity, so a rate hike may induce carry trades which would push the Kiwi higher.
Euro (EUR): The Euro is higher as there is some risk-taking in the market, though lower vs. the commodity currencies. At this point we all know about the conditions in the Euro zone, so any lack of market-moving news will allow the Euro to drift higher, though without conviction.
Pound (GBP): The Pound is lower this morning on the Fitch news, despite the fact that retail sales rose .8% compared to a decline of 2.3%. The UK emergency budget will be released on June 22nd, and will provide further clarity to extent of budget cuts the UK may be enacting.
Dollar (USD): The Dollar is mostly lower this morning, as risk appetite has picked up partly because of Bernanke’s comments last night. Tomorrow will bring the Fed’s Beige Book economic report which should be similar to the comments made last evening.
Yen (JPY): The Yen is lower as carry trades have increased due to heightened risk-appetite. In addition, new PM Kan takes over officially and his new cabinet is seen as one that favors budget cuts and a weaker Yen.
There’s not a lot of fundamental data out this week so much of the movement we’re going to see will be based on various comments coming from around the globe. As a result, the markets can move somewhat erratically, as officials attempt to jaw-bone their various currencies.
Most of the comments due out will not provide official numbers, so sometimes they need to be taken with a grain of salt.
However, you can see how comments from a ratings agency can affect a currency like the Pound, just like a quick speech at Washington event can improve markets as well.
Let’s face it, most of these government types are economic cheerleaders; however they all favor a lower currency to encourage exports. So I expect much of the “news” we hear to counter-balance each other out, and some sideways trading to occur as we go into the summer slowdown.
That is, until you hear something from the Euro zone. Because at this point, the less we hear from them, the better!
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Global Slowdown Threatens Markets!
By Mike Conlon | May 14, 2010
In this era of globalization, the reliance on the inter-connectivity of markets has induced what is known as the “butterfly effect”. That is, when something happens in one area of the world, it has the potential to pervade and send shock waves throughout the rest of the world. And this is where we are today.
You may be asking yourself, “How can the debt problems of an economically tiny nation thousands of miles away influence your day-to-day decisions?” Well, Greece is basically a microcosm for the world economic system in that if one part fails, it causes a chain-reaction (contagion) which causes other failures. Once failures occur, confidence is shaken and fear pervades the marketplace.
Have you seen the price of gold lately? Gold is a safe-haven asset that is known to store value and hedge against inflation. Gold is currently in $1240 range and has been in high demand since the Euro debt crisis has picked up steam.
At the forefront of the Euro debt crisis is the structural issues surrounding the viability of the Euro has a single currency. Many are starting to believe that this experiment has failed. Earlier this morning, the Euro tested 1.24 vs. USD.
However, luckily for the markets, the US retails sales figures came in better than expected, showing signs that the US consumer couldn’t care less what is happening abroad. Will a US-led recovery save the global marketplace? Only time will tell.
In the forex market:
Aussie (AUD): The Aussie is lower this morning on risk-aversion, but has bounced back from its lows of the morning. While the economic story in Australia is a good one, the Aussie will continue to be ruled by risk themes in the market and not its fundamentals.
Loonie (CAD): The Loonie is lower this morning as it has been trading as a proxy for oil prices for some time. Oil is now trading at a 73 handle, and Euro zone and UK austerity measures are predicting a slowdown which dampen demand for oil. This could have a negative effect on the Canadian economy, but for now the market is still betting that they will hike rates at the June meeting.
Kiwi (NZD): The Kiwi is an interesting story this morning as I’m reading the economic data that came out earlier this morning and I can’t figure out why the seemingly disappointing data and risk aversion in the market aren’t affecting the Kiwi in a negative way. Retail sales figures rose at the slowest pace in almost a year, and housing prices fell which is weakening the case for a mid-year rate hike. Nevertheless, the Kiwi is higher against all currencies but Dollar and Yen, being only slightly down against the former. My only guess is that it is getting a bid because of higher gold prices, but that is a tenuous guess at best.
Euro (EUR): Yes the Euro is lower again this morning, reaching a one-year low of near 1.24 vs. USD. It has rebounded some, buoyed by the correlative effects of dollar weakness due to US stock futures gains, though the gains off of the lows seem to have been short-lived.
Pound (GBP): The Pound is lower this morning again as well, as belt-tightening in the UK is predicting a continued accommodative monetary policy as I outlined yesterday.
Dollar (USD): The Dollar is higher on the flight-to-safety trade and retail sales did come in better than expected (.4% vs. .2% expectation). However, the market may be skeptical that a US consumer-based rally may not be enough to keep the global economy afloat.
Yen (JPY): Yen is strong due to risk aversion and the un-wind of carry trades as the AUD/JPY pair is the biggest loser this morning. Asian stock markets were down big overnight.
Heading into this weekend, there is a lot of fear in the marketplace. Investors are not comfortable holding risk assets as there is no telling what may happen over the weekend. The general attitude is better to be safe than sorry.
Now that the talk of a Euro breakup is heating up, this is adding fuel to the fire as that potential event could be catastrophic for the markets. Equity futures here in the US look pretty ugly, and I’m not certain that there is anything which is going to change that. The confidence survey due out at 9:55 EST is the stock markets only hope today, and that is a long-shot.
So my advice is to do what the market tells you. If the market is showing fear and risk-aversion, then you dear reader should as well.
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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A Recipe for Disaster!
By Mike Conlon | May 7, 2010
With concerns over the Euro and the Greek debt crisis, yesterday’s market action became the “perfect storm” as there was a systematic breakdown in trading technology which sent the markets reeling. The Dow Jones Industrial Average dropped nearly 800 points in less than 10 minutes.
There were major moves in the currency market as well, as investors fled risky assets in favor of US bonds and the dollar. This helped contribute to what looked like a death spiral, as problems with trading technology caused some stocks to trade at erroneous levels, dragging the indexes lower and causing automated trading systems to take action which also exacerbated the problem.
There is still major risk in the marketplace; primarily coming from the Euro zone which some believe is fighting for survival. This morning, the German Parliament approved the Greek bailout, but the ECB still has a long way to go to figure out how to deal with contagion to the rest of the EU. Now the concern has turned to Spain, which may require a bailout as well as borrowing costs have increased dramatically thereby making it harder to service their debt. Unless a comprehensive plan is proposed, we could see continued problems for the Euro. The G-7 is having an emergency conference call to discuss a solution.
In addition, the UK elections took place and the result is the dreaded “hung Parliament”. However, Moody’s did not use this event to downgrade the UK credit rating, and the possibility exists that the government will be able to work together despite the political differences.
On what would normally be the biggest news of the day, the US Non-Farm Payrolls (NFP) report came out this morning and showed a gain of 290K jobs, which was better than expected. However, the unemployment rate ticked higher to 9.9%, showing signs that recovery is fragile.
In Canada, employment grew by 108K and the unemployment rate ticked down to 8.1% showing signs that recovery may be stronger than here in the US.
Lastly, the Yen is lower as the Bank of Japan pumped nearly 22 billion dollars of liquidity into its financial system in response to the Euro crisis.
In the forex market:
Aussie (AUD): The Aussie is higher this morning on yen weakness and is receiving support from a technical bounce as yesterday’s carnage sent the Aussie much lower. Right now there is a ton of risk in the market so at this point I’m not certain I would be looking to establish long trades here.
Loonie (CAD): The Loonie is the big winner today as better than expected employment numbers came in showing signs of economic recovery.
Kiwi (NZD): The Kiwi is trading on risk themes exclusively and getting a technical bounce similar to the Aussie. This is not to be confused with risk appetite, as this is more likely due to yen weakness and short-covering.
Euro (EUR): The Euro has bounced back from yesterday’s carnage as there is hope that the EU can come to some sort of a resolution on how to deal with the sovereign debt problems of its members. Today the first step was taken as German Parliament approved the Greek bailout, but now the larger looming issue of how to reduce borrowing costs for other nations experiencing similar problems is center-stage. They’re not out of the woods yet.
Pound (GBP): Fears of political gridlock due to the “hung Parliament” in the UK has sent the Pound lower, though the UK did manage to maintain its AAA credit rating from Moody’s. However, there is hope that what we are seeing from the EU will serve as a warning of what can happen in the UK if Parliament doesn’t work together.
Dollar (USD): The Dollar is mixed this morning as the NFP report came in better than expected but unemployment ticked higher. The Dollar is giving back some of yesterday’s gains from the flight to safety trade, but there is still major risk in the market.
Yen (JPY): The Yen is much lower this morning as the Bank of Japan added liquidity to the market to the tune of nearly 22 billion dollars. The Yen had major gains yesterday as carry trades we un-wound at break-neck speeds and demand for yen was high prompting this move from the BOJ.
In all my years of trading the markets, I have never quite seen anything like what took place yesterday. When technology fails, it can set off a chain reaction that affects every market. Due to the correlations between market instruments, a breakdown in one area can cause action in others and that’s exactly what took place.
Combine this with the uncertainty due to the risk coming from the Euro zone and you have the perfect recipe for disaster. With such extreme volatility in the markets, a lot of money can be made or lost very quickly. When situations like this arise, I advise to stay on the sidelines or only use risk capital that you are prepared to lose.
Until normalcy can return to the marketplace and confidence is restored, expect major volatility. Trade extremely cautiously if at all.
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Sell in May, Go Away!
By Mike Conlon | May 5, 2010
“Sell in May, Go Away” is an old Wall St. adage that seems to be proving why it has become a popular investing strategy over the course of time. I can’t think of a time when it has been more prescient; in light of the market sell-offs taking place. Yesterday, world stock markets sold off big time, as did commodities prompting the flight to safety trade and the safe haven dash for the US dollar.
There is a lot of risk and fear in the markets right now, as the Euro zone debt crisis is not inspiring confidence. Notice that this crisis is no longer just about Greece, as contagion appears to be ready to complicate matters in the EU.
In addition, China’s intentional slowing of its economy may be a major drag on world demand, which is not good for growth world-wide. This is having a negative impact on commodity prices, which is generally a positive for businesses and consumers alike, but it is taking down the commodity currencies in the process and causing the unwinding of carry trades as investor rush for the door.
On a positive note, the UK elections will be over tomorrow and that may take one risk element out of the equation.
World stock markets are lower again this morning, as are US stock futures and commodities heading into the market open. At this point there is very little that can be done to change the market mood from risk-aversion, and this could be the sell-off that many doomsday economists have been predicting.
So today is an obvious risk aversion day.
In the forex market:
Aussie (AUD): The Aussie has gotten clobbered over the past few days and is rapid approaching .90 vs. USD. Despite good economic prospects at the moment, a reduction in Chinese demand would hurt the Australian economy the most. Despite the doom and gloom, building approvals came in much higher than expected, showing signs that the Australian economy may be more resilient than the market expects. A government pledge to tax mining companies at 40% isn’t seen as positive for business, however. This is one of Australia’s most profitable sectors.
Loonie (CAD): The loonie is lower as expected as well. The Loonie’s high correlation to oil prices has helped drag it lower, as oil has fallen from above 86 to start the week to 81.5 today. No news out of Canada until this Friday’s employment reports, which if not improved, could give the BOC reason to delay their expected rate hike.
Kiwi (NZD): The Kiwi is also lower, as China is New Zealand second largest market for exports. Tomorrow’s employment reports will show whether or not the economy is improving despite the risk-aversion in the markets.
Euro (EUR): I have never in my life seen a bigger mis-management of a crisis than what is taking place in the EU. Sovereign debt is obviously a major problem world-wide, and the inability of individual countries to debase their currency to help themselves is reflective of MAJOR structural problems with the Euro. When a unified government reacts to a crisis swiftly and with confidence, speculators back off as it is usually a fruitless endeavor to try to bet against a government. When a government fails to inspire confidence, the market smells blood in the water which then makes it much harder to deal with the original problem in the first place. This all comes before the German meeting to decide on the Greek bailout which could send the Euro over a cliff if this thing is not dealt with properly and with confidence. Much, much more to come. The Euro is at 1.28 and change and falling like a rock.
Pound (GBP): The Pound is actually showing some life and is positive against all but USD and Yen as risk themes are too much to overcome. The most recent polls suggest that the Conservative Party will be the victor in tomorrow’s elections and that they will be able to put together a coalition government which will avoid the dreaded “hung Parliament”. The Conservative Party has vowed to reduce the deficit more than the other two parties, and this could be a sign of the new paradigm taking place world-wide. Reckless spending has to be reigned in, and I hope that our idiots in Washington DC take note if indeed the Conservatives win.
Dollar (USD): The Dollar is higher on the flight to safety trade, and pending home sales were higher yesterday showing signs that the economy is recovering. What is Europe’s loss may be the US’s gain, as the Dollar is known as the “anti-dollar”.
Yen (JPY): Japan is still closed for the Golden Week holiday, but that hasn’t stopped Yen appreciation as carry trades are being unwound at breakneck speed. They could be in for a very rude awaking when their stock market reopens, especially if the EU doesn’t combat its debt crisis in a meaningful way.
Wow. All I can say is wow. Right now, the confluence of events taking place in the world is adding up to the perfect storm. There is virtually no leadership in politics anymore, and this couldn’t be more true than what’s happening in Europe.
I would not be surprised at all to see a break-up of the Euro going forward. The structural flaws are too many, and populist revolts are preventing politicians from showing some spine. Riots in Greece are typical and not unexpected, and already the streets are being filled with tear gas.
It’s ugly out there. Very ugly. I’m not certain what the EU can do now to prevent a death spiral. The inability to act may have damaged the Euro irreparably.
If you are still in stocks, I’d advise you to use serious risk management, including protective stops.
And if you’re not in the forex market yet, I implore you to get involved. Buying the Dollar could hedge your other investments against potential catastrophic losses.
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!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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