Yen in Focus!
By Mike Conlon | August 30, 2010
CURRENCY WEEKLY OUTLOOK
by Abe Cofnas
FOCUS ON USDJPY
The theatre of action for this week is first and foremost the USDJPY. What happens there will be a major landmark of global market direction. The Yen is clearly a barometer of risk aversion versus risk appetite. Japanese economic weakness, while clearly a function of a multi-decade consumer risk aversion and economic stagnation is also a barometer of global risk aversion. Japanese growth is nearly 0% GDP and a strong Yen is no help at all. We have witnessed a lot of chatter about intervention by the Bank of Japan. In any case, whether the intervention will be real action or simply verbal “jawboning” this week trading the USDJPY pair will provide a lot of action. Let’s take a closer look.
The 4 hour USDJPY chart tells us a great deal about the nature of the price action. We see that the USDJPY pair has an ability to go to extremes. It went to a lower and Extreme Lower Bollinger Band at 83.6 last week, and then reversed to an upper Extreme Upper Bollinger Band at 85.89. This pair is swinging! This suggests being agnostic as to intraday direction and trade the breaks of the Fib levels.
It’s important to keep a very tight watch on this pair, because the event risks are very high with any statements coming from the BOJ or the Finance Minister can cause a large movement. (Click chart to enlarge)
The 15 minute chart is instructive and quite spectacular. Observe an almost perfect upside down V. The symmetry is apparent - the time it took to go up is equal to the time it took to come down! Traders need to watch for a confirmation of a break of the downtrend. Fundamental traders will want to hold a long position in the Yen and that could be put on the break of the down trend line, however, be prepared for whiplash! It could go further down if any news is disappointing. (Click charts to enlarge)
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!
Tags: account, blog, cad, course, currenc, currency, currency market, currency trading, dow, economic, forex, forextrading, free, fxedu, Il, Japan, jpy, live, lower, news, pair, practice, practice account, time, trade, trader, USD, Yen
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Three to Watch!
By Mike Conlon | August 23, 2010
WEEKLY OUTLOOK 8/23/10
By Abe Cofnas
THREE CURRENCY PAIRS PROVIDE GOOD TRADING THIS COMING WEEK
USDJPY
The Dollar Yen has been facing major support at the 85 level. While chatter is increasing about Bank of Japan intervention, the geometry of the price action suggests that there will be a lot of oscillation around 85. This represents good short term scalping when it reaches resistance or support. We can also make a good case for taking a Long position and playing a breakout on the long side. If the USDJPY moves it will move strongly. (Click chat to enlarge)
This pair is right at Weekly support. Traders should focus on a confirmed breakdown or failure to break the 1.0250 support. (Click chart to enlarge)
Notice the tight fib range of the weekly AUDNZD pair. It is between the 50% and 61.8% weekly Fib ratios. This is not likely to last. A breakout in either direction is a likely result and offers good trading potential. (Click chart to enlarge)
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!
Tags: account, AUD, bank, blog, course, currenc, currency, currency market, currency trading, dollar, dow, forex, forextrading, free, fx, fxedu, Il, Japan, jpy, live, nzd, pair, practice, practice account, time, trade, trader, USD, Yen
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How to Play the Bounce!
By Mike Conlon | August 20, 2010
CLASSICAL BOUNCE TRADE SET UP
by Abe Cofnas
This morning I saw a classical set up for a bounce trade and I can’t resist providing it to you.
Using a 15 minute chart on the USDJPY we see two Bollinger Bands. The standard band has a 20 and 2 set up. The additional band, I am calling the Outer Bollinger band has a 13 and 2.618 set up. The set-ups represent two technical metrics. First, the simple moving average. So the standard band as a simple moving average of 20 periods and the Outer band have a simple moving average of 13 periods. The second part of the set-up represents Standard Deviation. Simply put 2 standard deviations means that the price is about 97% of the time between the two bands. The Outer band has a 2.618 Standard Deviation which means that the price is about 99% of the time between the two bands, if you use the 13 moving average.
But let’s get to the meaning of this without too much fuss over the statistics. Tactically, when we see a price point move near or outside both bands, we can conclude its doing something quite extreme. The implication is that the price can’t stay there too long. Either it’s going to keep going up, or reverse. Keep in mind that in currencies, the price probing an extreme is not in itself a reversal signal. It got extreme for a reason! The reason or sentiment has to change for a reversal to occur. But there is a clue, to the set-up as to whether we have a bounce or reversal scenario. The clue is the shape of the Bollinger Bands. If the bands are flat or sideways, it is a good geometry for bounces. Think of a ball bouncing off a floor. A flat floor generates a straight up bounce! (Click chart to enlarge)
Let’s go back to the chart. You can spot bounce points in either direction after the price went outside the first band, rose to probe the second and penetrated the second outer band, but then reversed back in! Traders using one band don’t get the added perspective of two bands!
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!
Tags: account, blog, course, currenc, currencies, currency, currency market, currency trading, data, dow, forex, forextrading, free, fx, fxedu, Il, jpy, live, pair, practice, practice account, rate, ssi, technical, time, trade, trader, USD
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Is the UK OK?
By Mike Conlon | August 11, 2010
Earlier this morning, the BOE came out with their quarterly inflation report and predicted that inflation will slow below the bank’s target rate. They also said that they are expecting slower growth and that they are prepared to add further stimulus if necessary.
Meanwhile, the UK economy reported that it added jobs at the fastest pace in over 21 years, handily beating jobless claim estimates. In addition, average weekly earnings came in slightly higher than expected.
So it’s the UK economy is questionable right now, as data is not supportive of the weaker view of the economy, but the BOE may be hedging its bets in the event they experience a major downturn.
So far this morning we are seeing major risk aversion, with world stock markets lower, US equity futures lower, and both Dollar and Yen strength. This comes on the heels of the FOMC meeting yesterday, which the market initially read as positive as it pared losses and finished down marginally after having been much lower.
But as I said yesterday, it would be difficult to predict the market reaction to the Fed announcement, with competing views jockeying for position. So while yesterday appeared to be favorable, today is showing just the opposite. Global growth is slowing, and more negative economic forecasts from Central Bankers could induce a further round of risk aversion.
Adding to the mix was a report that Chinese industrial growth slowed even further, and inflation spiked to its highest levels this year.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion and slower Chinese growth despite the fact that consumer confidence figures came in at 7-month highs. The sentiment index gained 5.4% after the RBA left rates unchanged as inflation remains in check. The Australian employment report comes out tomorrow.
Kiwi (NZD): The Kiwi is lower on risk aversion as well, with no major news on the docket until Thursday’s housing price index and retail sales figures.
Loonie (CAD): The Loonie is also lower this morning, being hit by the double whammy of risk aversion and lower oil prices, breaking the 80 dollar mark down to 79.50. In addition, the trade deficit widened as exports declined, most probably a function of a slowing economy here in the US.
Euro (EUR): The Euro is also lower as its status as the “anti-dollar” is in full force this morning. There is no major news on the docket today for the Euro; however Friday will bring the Euro zone GDP report which will show the status of the economy. (Click chart to enlarge)
Pound (GBP): The Pound is mixed this morning trading as would be expected in a full blown risk aversion scenario. The BOE cut growth forecasts, but employment figures came in better than expected. (Click chart to enlarge)
Dollar (USD): The Dollar is enjoying its status as the world’s reserve currency this morning, showing strength despite the fact that world markets have reacted negatively to yesterday’s Fed announcement. US trade balance figures came in worse than expected, but that should come as no surprise.
Yen (JPY): The Yen is the big winner this morning as is typical under risk aversion scenarios. The USD/JPY pair broke the “line in the sand” of 85, and it will be interesting to see if the BOJ does anything to halt Yen strength. We did get comments from the Japanese Finance Minister, who said that they would closely monitor “one-sided” yen moves. (Click chart to enlarge)
It what may seem like a cruel irony to some, the US reports a slowing economy and potential further easing, and the Dollar is “rewarded”. While additional liquidity may make its way into the economy, overall negative sentiment may not turn around.
I mentioned yesterday that we could be looking at “Japan 2.0” which is now looking more and more like a reality. As everyone around the globe scrambles to act in their own best interests, there are going to be clear winners and losers. However, as forex traders we must be prepared to follow the market regardless of how things look.
Things can change quickly very quickly in financial markets, so it is important to keep an open mind and trade what you see and not what you think you 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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Bye-Bye Dollar!
By Mike Conlon | August 6, 2010
This morning’s much anticipated Non Farm Payrolls report disappointed the market which sent the US dollar careening lower. While the unemployment rate held steady at 9.5%, this is probably more of a function of discouraged workers leaving the workforce. For the month of July, the US economy lost 131K jobs, nearly twice the expectation of a 65K loss.
In addition, the revisions to last month’s data came in nearly twice as bad as reported in what is becoming a familiar pattern. But the US isn’t the only country with bad employment figures today.
In Canada, the unemployment rate rose .1% to 8% as the Canadian economy lost 9.3K jobs, which is the first loss in 2010.
This report sent equity index futures and commodities lower, as well as the US dollar. Under a “normal” risk-aversion scenario, one might expect Dollar strength. However, there may be a “silver lining” in this jobs report, as the creation of private sector jobs came in higher.
So what started out as risk aversion, may be flipping around to risk appetite due to Dollar weakness.
In the forex market:
Aussie (AUD): The Aussie is actually higher after the initial downturn due to risk aversion, but now Dollar weakness is driving the market. (click chart to enlarge)
Kiwi (NZD): The Kiwi is taking back some of yesterday’s losses after their bad employment figures. Money that flowed from the Kiwi to the Loonie is slowly making its way back. (click chart to enlarge)
Loonie (CAD): The Loonie is the biggest loser this morning as they lost jobs last month for the first time all year. As seen in the above chart, the Loonie benefited yesterday from Kiwi weakness, but is now giving it all back as the situation looks weaker in North America. Adding to Loonie weakness is lower oil prices, though it is rebounding as I write.
Euro (EUR): The Euro started the morning session somewhat weaker but quickly grabbed a bid on the NFP report and is now higher. German industrial production figures came in lower than expected, but that news quickly took a back seat to Dollar weakness.
Pound (GBP): The pound is trading much like the Euro this morning after the UK reported their own weaker industrial production figures.
Dollar (USD): If it weren’t for the Loonie, the Dollar would be the worst performer this morning. Keep in mind that as the US economy weakens, so will the Canadian economy as the US is the largest importer of Canadian goods and services. NFP data was disappointing, but the silver lining I mentioned above could provide hope.
Yen (JPY): The Yen is the strongest pair today as risk aversion and Dollar weakness is driving the markets. USD/JPY is approaching the 85 “line in the sand” level—the place most think will encourage intervention.
As you can tell, the jobs reports in the US and around the globe are important drivers of economic growth and the picture is beginning to look more bleak as uncertainty over government decisions has induced hesitancy.
Until we adopt pro-business policies here in the US, it’s going to get worse. Just as the Treasury Secretary “predicted” the other day. This is akin to jumping off a building and stating, “this might hurt”.
However, there is still some good economic news around the globe, and in the end, the fiscally responsible will be rewarded. If the US doesn’t want to be the recipient of it, so be it.
Thankfully, the forex market allows me to move money quickly to those regions that deserve it!
Tags: AUD, Aussie, blog, cad, dollar, dow, economic, economy, EUR, Euro, forex, forex market, forextrading, gbp, Il, jpy, Kiwi, loonie, lower, news, nzd, oil, pair, pound, rate, ssi, time, USD, Yen
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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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Japanese Intervention?
By Mike Conlon | July 20, 2010
This morning, the Japanese yen is lower despite the fact that US corporate earnings are lower this morning, sending stock futures lower. Under a “normal” risk-aversion scenario, we would be seeing Yen strength, however there is some speculation in the marketplace that Japan is getting ready to intervene in its currency as recent Yen strength has been an impediment to exports and thus economic growth.
US corporate earnings are starting to show declining revenues, which is not a positive sign for economic growth. While stock investors may be mesmerized by profit beating estimates, one must consider that profit is being driven by cost-cutting and not expansion. This does not bode well for jobs growth.
The Aussie and Kiwi are higher as Chinese stocks were higher overnight. There is also speculation that China will relax tightening measures.
The Euro is mostly lower to start the US session, as is the Pound. German Producer Prices came in higher than expected, yet the ECB will maintain its asset purchase program as a “security measure”. The results of the bank stress tests are due on Friday.
Lastly, the Canadian rate decision is due out later this morning. The market is expecting a 25 bp hike to .75%, though recent global economic weakness could cause a retreat from a hawkish stance.
In the forex market:
Aussie (AUD): Minutes from the RBA board meeting showed that the Central Bank will wait for the results of the European Bank stress test as well as inflation data to determine whether or not to raise rates at the next meeting. The Aussie is higher this morning despite the risk aversion in the market this morning.
Kiwi (NZD): The Kiwi is higher as Chinese stocks were also higher overnight as there is increased chatter that the Chinese will back off the tightening measures which were intended to slow the rate of growth. If this should occur, then demand for NZ good will increase. However, the commodity currencies are giving back some gains as risk-aversion is apparent to start the US session.
Loonie (CAD): The Loonie is mixed this morning as the BOC rate decision came in with a 25 bp rate hike to .75%, as expected. However it looks like the initial reaction was somewhat negative to the news, as a potential dovish stance going forward may be weighing on investors.
Euro (EUR): The Euro is lower across the board as German PPI figures came in hotter than expected at a .6% monthly increase vs. an expectation of .2%. The results of the bank stress tests are due out on Friday so the market may be jittery despite the positive comments the ECB has been providing. I’m always a skeptic by nature, so put me in the camp that thinks this might not be as rosy as we are being led to believe.
Pound (GBP): Mortgage approvals fell last month as tighter lending standards have discouraged demand as consumer confidence plummeted last month. In addition, CBI business optimism figures came in less than expected as the UK gets ready for announced cut-backs to deal with the ballooning deficit.
Dollar (USD): The Dollar is also mixed today as it is seeing strength vs. all but the Kiwi and Aussie. US housing starts came in less than expected showing a decline of 5% vs. an expected decline of 2.7%. The Dollar is higher against the Yen as speculation of a BOJ intervention is starting to pick up.
Yen (JPY): The Yen is showing some weakness this morning as speculation is that Japanese authorities will attempt to weaken the Yen after it climbed to 7-month highs. A stronger Yen hurts Japanese exports as goods become more expensive. The Japanese have been known to intervene in the past, though they may want to proceed with caution as the market has been driving Yen close to all-time highs.
This morning is a bit of a mixed bad as we see the different pairs trading by region and not necessarily on risk themes.
There is clear weakness today in the Europe, as both the Euro and Pound are lower. The Aussie and Kiwi are higher on higher Chinese stocks and the possibility of weakening policy.
The Dollar is trading somewhat higher, as it is trading inversely to stock markets futures which are lower due to declining corporate revenues.
So at the end of the day, we are definitely in for a global economic slow-down. Results of the European banks stress tests will guide policy around the globe as systemic risk will out-weigh economic conditions in the near-term.
However going forward, some countries may be in better shape to weather any potential economic storms.
So I will continue to remain cautious until Friday and keep my trading short-term.
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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Interview with a Forex Master
By Mike Conlon | June 23, 2010
Every once in a while, my status as a blogger gives me access to resources that otherwise might not be available to me. One such “perk” of the job is that I get to meet experts in the forex field and have an opportunity to pick their brain.
One such opportunity just came about with Abe Cofnas, one of the original pioneers of retail forex trading and author of three books on the subject. I first had occasion to run across Abe’s work when I started my own journey into forex. At the time I was trading futures and stocks, and came across Abe’s column in Futures magazine.
I was impressed by his straight-forward approach and ability to explain the intricacies of the forex market. I was hooked. So I went out and bought Abe’s book and dove right in and it was instrumental in my development as a forex trader.
In addition to his books, Abe is the president and founder of Learn4x.com and has been teaching students the forex market since 1999. I had a chance to catch up with Abe, and here are the highlights of the interview:
(FTB): You’ve seen a lot of traders come and go in the forex market. What is the one common trait all successful forex traders must have?
(AC): When all is said and done it comes down to psychology-the trader’s mindset. Successful traders may have different technical analysis tools, and fundamental views, but they have a mind-set that permits them to survive. The best of us lose money, and maybe even 40% of the time. The mindset is to recognize the opportunity and not dwell on the loss. Also, of critical importance is recognizing just what is driving the currency prices. There is a lot of noise, and you have to filter out the noise as well. The most successful traders “listen” to the market.
(FTB): In your opinion, why is the forex market the fastest growing financial market to trade and what are the advantages over other markets?
(AC): The key reason is that the world is interconnected as never before and forex allows a person to ride what I call, “the light-beam” of the world economy. By trading currency pairs you participate globally immediately and that is exciting.
Also, an average person no matter what their background can trade and win! I see it all the time, the “best and the brightest” often can’t trade better than Mr. Joe Six-pack!
(FTB): How has the industry changed since you began as one of the pioneers in forex trading?
(AC): There is greater awareness of forex. Today forex is considered a legitimate alternative investment and trading medium. The industry was the “wild west” years ago. Spreads were 5 pips and more and today, retail trading offers institutional spreads. The industry has acquired legitimacy and the players are required to be more capitalized.
(FTB): Which is more important, fundamental or technical analysis?
(AC): There is a common notion that it’s a battle between fundamental thinking and technical analysis. I don’t think that is true. Let’s define the terms. Technical analysis is deriving insight into the price action by ONLY looking at charts. Fundamental analysis is detecting the forces that move the prices. So price action is both fundamental and technical. You need to know what moved the price and not just that it moved a certain distance with momentum. The movement of the EURUSD in the next 5 minutes may be a reaction to the words of a central banker, or the release of a budget policy. If the trader doesn’t see what is going on outside the chart, there is exposure to misinterpretation.
(FTB): What is the biggest mistake novice traders make time and time again?
(AC): One word: Anticipation. “Newbies” or novice traders think they can anticipate the price direction. So they assume the currency pair will move to “their” script. The more experienced trader reacts and confirms what the price is doing, and THEN decides to join a direction instead of anticipating one.
(FTB): What advice would you give to new traders looking to enter the forex market?
(AC): Get into the action as soon as possible with real capital. I have found the best traders in the world in virtual trading-until they go live and face the psychodynamics of real trading. Set aside some risk capital and join the action. Put on trades, learn from errors, etc.
(FTB): Do you have a favored style of trading that you use?
(AC): I do have many different styles that fit different goals. But to answer the question, I like what I call “sniper” trading. I focus on entry conditions, and get into the action and ride the predominant wave. A good entry can result in a short grab of 5-10 pips or even more. But you have to catch the momentum and then-get out of the way and protect your profit. I have pioneered Price Break charting and Renko charting for detecting trend variations and what I call the “micro-detection of sentiment”. We can go down to the pip level of granularity in detecting if it’s time to get out!
(FTB): What is the “secret” to making profits in the forex market?
(AC): Hmmm…. ”Pip Accumulation”. What I mean by that is that one can spend an entire day waiting for a big move opportunity or scan about 12 currency pairs for 5 good moves per pair for short term gains. It’s easier to get 50 pips with several trades than with one.
(FTB): What was the best trade call you ever made?
(AC): Long the Aussie at .63 in March 09 and it went to .94 in November 09. I didn’t hold it that long but it was a beautiful move I caught several times in and out on the way.
(FTB): How has becoming a best-selling author impacted your trading?
(AC): My books: The Forex Trading Course (Wiley), The Forex Options Trading Course (Wiley), and my new book Sentiment Indicators (Bloomberg Press) were probably the best source of improving my trading than any other. The reason is that it forced me to be clear in my thinking about how to trade. I learned that if you can teach and tell someone exactly how to do something, the process of doing so forces you to detect your own weaknesses. It was a therapeutic experience.
I’d like to thank Abe Cofnas for speaking with me and providing insights for our readers. He has graciously agreed to entertain questions from our viewers. If you’d like to ask Abe a question, you can email them to me here.
To read today’s blog article on the forex market, click here.
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BOE Not Unanimous!
By Mike Conlon | June 23, 2010
Minutes released from the Bank of England’s rate policy meeting showed that the vote was not unanimous to keep rates unchanged at .5%, for the first time in nearly 7 months. Inflation concerns were the cause of the dissenting vote, as CPI figures in the UK have been above targets. While the BOE expects inflation to subside in the ensuing months, that may not necessarily be the case.
This comes a day after the emergency budget which was announced yesterday, calling for a reduction in spending and an increase in taxes.
In the US, the FOMC rate decision is due out later today, so expect to see some volatility in dollar-related pairs. It is widely held that there will not be a change in policy, but some market participants are betting that we may see a change in the language regarding policy. This would give credence to the rising sentiment that the Fed may raise rates later this year. Personally, I don’t see this happening and I think the Fed will be on hold for the remainder of the year.
Yesterday’s abysmal housing data confirmed that deflationary forces in the housing market may be the start of another leg down.
In the Euro zone, German consumer confidence came in slightly better than expected and PMI figures were largely in line. However, concerns over Greek debt have perked up again.
Overnight, the Yen was higher as the Nikkei was down taking its cues from yesterday’s sell-off in the US stock market.
This morning will bring US new home sales figures as well as Canadian retail sales figures. Any major deviations could send the respective currencies lower.
But expect volatility going into the FOMC announcement at 2:15 EST.
In the forex market:
Aussie (AUD): The Aussie is lower as stocks sold-off in the overnight session but it is gaining back some ground heading into the US session. Risk aversion has driven the Aussie lower, and there is some concern that Chinese demand for metals and energy is causing a rift in the Australian economy.
Kiwi (NZD): The Kiwi is higher this morning in anticipation of GDP figures which are due out later tonight. The expectation of .5% growth will likely be exceeded as demand from China for raw materials has the NZ economy picking up steam. Should the number best expectations, then the likelihood of a rate increase at July’s policy meeting will increase.
Loonie (CAD): The Loonie is lower this morning as oil prices are pulling back from the $78 level, and retail sales figures came in worse than expected. Analysts were expecting a decline of .4% and the figure showed a decline of 2.2%, a big miss. Canada is to the US what Australia and New Zealand are to China. If recovery here in the US is floundering, then it may not bode well for the Loonie and the Canadian economy in general.
Euro (EUR): The Euro is a mixed bag this morning, as it is up against the North American currencies but down against the rest. The EU is considering a bond levy on countries that don’t adhere to debt-to-GDP guidelines which of course brings the Greek debt crisis back to center stage. In addition, business confidence was down in France, though consumer confidence was higher in Germany. Go figure.
Pound (GBP): The Pound is higher across the board, giving a vote of confidence to both the government for their budget and the BOE. The lone dissenter in the rate policy meeting is concerned about inflation, as growth targets may exceed expectations. That’s a “nice” problem to have, considering the economic condition of the US.
Dollar (USD): The Dollar is mostly lower prior to today’s FOMC meeting. Yesterday’s poor housing data sent stocks lower, and today’s new home sales aren’t expected to be much better. This should be enough to keep the Fed unchanged in both language and policy, and the market is starting to catch on to the fact that the smoke and mirrors of government spending may not be enough to stoke the economy. Go back and take a look at my discussion of biflation from a few days ago.
Yen (JPY): The Yen is mixed as well, trading higher vs. USD and CAD (both showing weakness) and the Euro (debt concerns) but lower vs. GBP, AUD, and NZD. So today can neither be classified as risk-taking or risk-aversion, but much of the yen strength was derived from weakness in the Nikkei, which sold off following the US stock market decline.
I think today really shows the difference to how the market reacts to different policy pursuits from around the globe heading into this weekend’s G-20 meeting. On the one hand, you have the EU and the UK who are committed to reducing deficits and trying not to raise taxes too much to discourage business (in fact the corporate tax rate was lowered in the UK), and the policies taken by the US.
The US is going the other way, expanding deficits and throwing good money after bad at our financial problems which can only result in higher taxes when it comes time to pay the piper. President Obama was rebuffed by Chancellor Merkel of Germany with regard to how to best combat the global financial crisis, and it appears as though the market agrees with the EU.
Weak housing data here in the US show that the stimulative effects of government spending may have slowed a decline in the economy, but have not fixed the problem. Now taxpayers (and their children and grandchildren) face an enormous burden for what adds up to temporary conditions.
The change people voted for was for less government spending and indeed we’re seeing change—even more and more spending! Hopefully this course can be reversed before it’s too late. I never thought I’d say this but now is the time we should be taking our economic cues from Europe, and not their prior policies that landed them in this mess.
Those who don’t learn from the past are doomed to repeat it.
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Ban The Shorts!
By Mike Conlon | June 9, 2010
Both France and Germany have called on the EU to ban short-selling on certain stocks and government bonds with the intention to curb speculation in the market. While I am never a fan of this type of regulation, there does need to be some sort of “fix” for the market as speculation has gotten a little out of hand.
However, there are always unintended consequences to this type of action, and this could end up hurting their ability to raise capital. This could also hurt the forex market, as Euro-related pairs lack the volume to trade orderly. Nevertheless, there still is a ton of risk related to the Euro, with sovereign debt defaults the primary driver.
In addition, ECB President Trichet helped push the Euro higher with comments on the state of the Euro. As I mentioned yesterday, expect the game of “show and tell” to pick up, with officials telling us how great everything is but showing us little.
Also today, the US Fed Beige Book report comes out, with Bernanke expected to echo his comments from the other night.
In the forex market:
Aussie (AUD): Consumer confidence fell for the 3rd straight month down under, nevertheless the Aussie is higher on risk appetite. Fears of a global slowdown (particularly in China) and the raising of interest rates have added to the sentiment that the economy will slow in Australia.
Loonie (CAD): The Loonie is also higher this morning as oil prices have bounced higher and equity futures are set to open higher on risk-taking in the market.
Kiwi (NZD): The Kiwi is higher ahead of its interest rate policy meeting tomorrow, where the market is anticipating a 75% chance that the RBNZ will raise rates 25bp to 2.75%. Put me in the camp that is betting against the rate hike, as I feel the NZ economy rides on the coattails of Australia, and that the risk in the market may be too great to warrant a hike just yet.
Euro (EUR): The Euro is mixed this morning, trading higher against the safe-haven currencies, but lower against the commodity currencies. Comments from the ECB have helped push the Euro higher slightly, but let’s not forget about the huge risk the Euro poses as they struggle to get their fiscal houses in order.
Pound (GBP): The Pound has a bid this morning after a 4-day decline as investors seems more confident in the UK’s ability to combat their fiscal woes, much more so than the EU. The UK trade balance missed estimates, but narrowed from last month’s reading.
Dollar (USD): Today we get “Fedspeak”, as Bernanke gives his beige book report to Congress. I do not expect any change in language from the Fed Chief, and at this point I’m guessing that we will not see a rate hike this year. The Dollar has been higher this year on the flight to safety trade, and at this point I believe that inflation is a non-issue.
Yen (JPY): The Yen is lower this morning as risk-taking inspired carry trades are taking place ahead of the New Zealand rate decision. Japan will report its own GDP figures tomorrow, which are expected to show moderate but steady growth. In addition, new Finance Minister Noda said he would like to see price gains above 1%, but didn’t make that an “official” inflation target. Japanese deflation has plagued its economy for some time.
As I mentioned yesterday, this is “cheer-leading” week for the various markets, as the lack of hard economic data is supplanted by discussions of various economic situations.
I am always skeptical when it comes to government announcements and prefer to analyze the hard data myself. But with that in mind, you have to pay attention to what they are saying.
As a trader, it is important to trade what you see and not what you think should happen. If Bernanke wants the market to go up, you should play along even if you think the fundamentals don’t match. However, be sure to exit quickly at the first sign of market sentiment change as the market is always right, regardless of what is said.
So pay close attention to the technicals as the various market participants digest the rhetoric.
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