Monday’s InvestoolsFX audio commentary

Monday 04/14/08

• Currency trading end of last week into this week is like the Abbet and Costello “Who is on first and what’s on second” bit, confusing and violent.
• G7 Language was purposefully vague not referencing China’s currency but general currency fluctuations- market tried to anticipate intervention action which caused more violent price action overnight and through today’s trading sessions.
• Sunday Asian and European markets took the time to reduce risk led by Fridays’ GE news and US equities had potential and going into today to sell off dramatically – WAMU posts poor earnings prompting dollar selling and JPY holding steady while SKF rises. While US markets holding up steady as well – By commodity stocks and a weak dollar
• Commodities rally while the currencies struggle??? Re-iterate the strong correlation between $ and Commodities. Highlighted by NY trading session.
• Promptly discount US retail sales – housing later on this week could be a catalyst
• UK housing tonight watch for a drag on the good news overnight of PPI input
• NZD might be showing some weakness on Retail overnight and then CPI tonight may put a drag on the bear flag on the AUD/USD 4 hr chart
• What are pro CTA’s doing YTD: 2.5% to crack top 10, 27% to be par with #1 ytd leaders managing over a mil and under 10 mil

Audio Commentary Link

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The After Fed Effect

It has been a week now since the Bear Stearns collapse and the Federal Reserve decision to bail them out and lower rates by 75 basis points. Now what??? We see that Oil is starting to head back up and that the rally that we had in the markets were short and sweet. The dollar seems to be getting crushed again and may end up retesting the highs of 1.5900 again. I would like to know your thoughts on the Fed matters. Please fill out the poll so we can get your opinion on what the Fed is doing. Who knows, maybe the Fed will listen this time.

~ G

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While you were sleeping!!

Well, maybe while you were getting ready for bed. The Federal Reserve Bank decided to make an emergency move this evening and cut the bank lending rate to 3.25 percent from the 3.50 percent it was at earlier. This move made by the Fed was meant to “try” and create some stability in the financial markets. Also, at the same time, Bear Stearns (BSC) is being bought out by JP Morgan (JPM) at a steal of a price. This last minute buyout and the move by the Fed (who also approved this buy out by guaranteeing the deal with $30 billion) had an immediate effect on the overseas market and crushed the dollar. The EUR/USD hit a high of 1.5905 and the YEN hit 12 year low against the dollar at 95.74. Gold also was trading (at time of posting) around 1,026 an ounce. (I guess there goes the gold teeth I was considering!)

One way to help you against the falling value of your dollar is to hedge against it with the other currencies like going long the Euro or even long the Yen. Any trading against the dollar seems to be the most logical move. When asked what should be done about the financial crisis in the US, Federal Reserve chairman Ben Bernanke said “I don’t know!” No wonder the dollar is crashing and the basic carry trade is dead.

Well, hedge your bet for now or wait and see if the fed moves some more on Tuesday with another cut of 75 basis point. Bernankes strategy seems to be trying to keep the economy supported and worry about inflation later. We may see on the EUR/USD 1.6000 before Tuesday if the market sees even more weakness. Also, the USD/JPY may see an even lower level below 95.00 as weakness in the dollar continues. Tomorrow is a new day.

~ G

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Year-end in review

Here is the year in review as a comparison chart (left, click to enlarge) comparing the major currencies, in this case versus the euro. The worst performing currencies, the USD and GBP, were down about 9% vs. the euro. The best, the loonie, was up about 9%%.

What happened this year?

The year had a lot of positives for most currencies: the global economy was booming, and so commodity currencies economies sold lots of stuff!

But this always only goes so far. Inflation ramped up, and central banks began lowering interest rates.

Then came the U.S. real estate mess.  Interest rates were higher than they were a few years ago, and lots of folks got hit hard as their short-term get-me-in mortgages forced them to refi at a higher rate. Many defaulted. Supply started flooding thet market and things slowed way, way down in real estate, didn’t they?

Not only that but bond portfolios related to all of this started going bad. Lots of funds with exposure to real estate and mortgages got hit hard. Banks started trusting each other less, making it harder yet to access cheap loans. Fear entered the market and the Fed lowered rates more, the dollar tanked, governments started diversifying out of dollars and into things like euros, economies started showing signs of flagging … ah, ’07!

Looking forward:

Commodities still look strong. The dollar still looks weak, the euro strong. The carry trade – shorting low interest paying currencies such as the JPY and CHF – may only be just getting started in its unwind. As economies around he world slow, people start peeling their bets back, and many of the bets were paid in yen or francs, so that increases their value as they are bought back up. A little bit of discussion regarding the fundamentals can sure help shed some light on interpreting this comp chart. Remember, though, at the end of the day it simply comes down to following a good trend (ahem, looking for opportunities to buy euros) and using a simple method to time your entry into that.

 ( “The Crystal Ball” by John William Waterhouse: scrying in crystal)

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The Fed disappointeth

     They simply did not drop rates quite as much as many were hoping, today.

    This hit the carry trade hard. The yen and franc rebounded, as did bonds. Part of this is surely the disappointment that the Fed isn’t doing “more” to help the U.S. economy. Worry over the U.S. economy, stocks going down, is sending shivers down the spines of most other currencies.

    Of all the down days this month, this is one to be reckoned with. With no other rate-drop “hopiums” what more can investors expect to buoy carries (beside the famous Santa Claus rally)?

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Tune in to Friday’s audio commentary

     If you missed out on yesterday’s audio commentary, tune to listen to special guest Todd Granthem to talk about trading the current volatility in the markets.

 

    Today, we are discussing the implications of the non-farm payroll numbers and what it means for the Fed and your currency trades. Successful Trading.

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5 min run-down on commodities, Fed, USD etc from Jim Rogers

Jim Rogers is a bit odd (sorry Jim) in some ways, but a pretty sharp crayon when it comes to the markets. First off, I apologize about the crappy quality of this video, I think someone filmed their TV, yuck. But, it is timely since it is from yesterday, and he has some pretty interesting things to say about the markets. He also admits he is “horrible” at market timing, so fear not if you have some trades that have gone bad and think you’ll “never make it”!

This discussion started when some of us coaches emailed about Jim. A month ago Jim said he was selling USD, but with this caveat toward the end of an interview:

If anything, if I were a good trader, I would probably buy the dollar, because it’s probably going to have a rally. But when it rallies, I would suggest you get out of dollars.

And sure enough, Edward Goettig (one of the coaches) said Jim said yesterday that he is buying dollars, until the dollar stops rallying whereupon he’ll sell them again. I totally agree with his posture and have been thinking the same thing. Anyway, the interview:

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Perhaps the ECB will do … nothing?

     As the ECB is due to announce its decision on interest rates, the central bankers face on of the biggest dilemmas. To do it or not?

    On one side is the pro-inflation factor of the growing petrol prices, as the inflation in the eurozone reached 3% in the November. On the other, the concern of the credit crunch on the other side of the Atlantic spreading over in Europe and thus threatening the economic growth. Granted, European officials expect slower growth next year.

    The credit crisis, the petrol prices and the strong euro are seen to moderate this expansion.

    Therefore some economists are calling for the central bank to lower rates. They also indicate that the Fed has done it twice and it’s about to do it again in December. The fear is the USD will move lower as a result, thus, further increasing the chaotic movement of the currency in the market. This of course, may lead to a further slow down for the exporting economies of the EU.

– Georgio Stoev

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Fed be nimble, Fed be quick

    The Fed (VP Donald Kohn) said today that they would be using

 

“(these uncertainties require) flexible and pragmatic policymaking — nimble is the adjective I used a few weeks ago.”

and carry trades got a shot in the arm as stocks jumped – no matter that durable goods and housing data came in wimpy, all is well apparently(!)

    The test will be if good fundamental (economic) news comes in to support this. Investors shall not live on rate cuts alone.

    Read the whole thing here if you are bored tonight and can’t sleep.

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What’s up with the buck??

A student emailed in and asked:

Hey Michael – I was just curious, why did the $DXY take such a dive yesterday? I’m still trying to keep straight what moves with/leads/follows what.

The $DXY is the dollar index. Basically, an average price of the dollar versus many major currencies, not just the euro, pound, etc. It’s just another way of looking at the dollar, but broader. Here was my reply, so here’s a heads up on the buck this morning:

The big one was that a Chinese politician said some USD negative comments last night. They were to the effect that China needs to get the heck out of the dollar.

Also I think I read somewhere that the Fed’s Lacker was more dovish in the last voting than people anticipated, a ratings agency downgraded U.S. bond insurers which causes a fresh wave of financial panic and there was a news article today that said George Soros (famous money manager) and Alan Greenspan said that the U.S. is in a worse position that the Fed will admit.

To read more of this story of the dollar debacle, the latest in a series and of more to come, read here. That sweet tinder smell you smell is the dollar going up in smoke.

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Maybe the Fed wasn’t such great news after all …

Stocks cratered in today with a resounding thump as investors got thinking about no more rate cuts (per interpretation of the announcement.)

It looks like they may be making lower highs and lows – the Zig Zag indicator is trying to show that objectively. For sure the uptrend is interrupted again.  We’ve talked here about stocks hitting long term resistance before.

The interesting thing is that stocks are only now struggling at resistance, while the GBP/JPY we looked at is already at a resistance level.  Sort of scary if the leader (stocks) are late to the party.

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The Fed saves the day!

Well, Uncle Ben came through for investors and it turns out they were satisfied with the 25 basis point in interest rates. Read the statement here. And everything you want to know about the Fed is here at The Fed 101.

It seems that decent earnings over the past couple weeks and fairly strong economic data are back in focus after the baited breath waiting game.

Here’s another way of looking at this: the VIX. One of the market’s primary fear vs complacency meters described here. Keep an eye on this because after breaking higher, it is coming back down. If it breaks below its trendline (support lines on the chart, the green oval area) , good times are officially back in fashion. If this happens, you can participate in those mad trends going on with much more confidence, or larger positions, because you can more objectively say that glad economic tidings are outweighing negatives.

 

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What to expect tomorrow (psst: the Fed meeting), how to trade it

Tomorrow the Fed steals the show announcing its latest decision on interest rates. Forex basics recap: high rates are good for the dollar, low bad. Low are good for stocks, and stocks still have a leadership cap on, meaning the more rate cuts the better for most currencies out there (the carry, the higher interest payers.)

Here’s the deal. Stock investors have been halfway in a parallel universe of delusion lately! There’s huge expectations of a 25 basis point cut, perhaps 50. I think with this pressure, there is more risk to the downside. What if the Fed only does .25 and everyone is disappointed there’s no .50? What if the .25 doesn’t even come? It’s always possible .50 comes or there is lots ofhawkish pulpit pounding, but I’m a little leery. We’ll see right?

Sooooo, this is called event risk. It’s like super earnings for a stock, but universal. If you’re up a way in a trade, “being careful” here may mean taking some profit off the table. Some tighten stops, whatever that means (I always keep mine as tight as technically makes sense …)

Otherwise, if you trade longer term (daily) it’s business as usual – there just may be a bigger move than usual one way or the other. If you trade long term watch for a break and follow it till it runs out of steam. And enjoy the show!

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EUR/USD raises a flag

It’s been fun to watch the EUR/USD: weeks ago we talked in the Daily Commentary about its trendline bounce up; more recently it surprised me as it broke through rising resistance, and now possibly a flag on the way to a support bounce. There’s a big maybe there, nothing is set in stone but that’s what I’d like to see in my technically-perfect world. Besides, in midst of this nice, orderly consolidation the stochastics reset downward, what more could you want?

 

The mini, rectangular channel falling away from the major trend is a flag. Like a flag at half mast, it suggests the pair may be only half way through its move up. Which is handy because now that we broke the upward channel the pair was in, we’d expect it to move up the distance of the width of the old channel – a snap with the flag’s target. Let’s see if we do get a bounce back upward.

 

It could always fall back in the old channel. People are abuzz about that amazing nonfarm payroll data/revision last Friday. Fed minutes tomorrow and ol’ wily Trichet speaking tonight (downside risk for the euro, as they’ve been yapping about the too-high EUR/USD of late) could send us one way or the other.

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Housing: the gift that keeps giving

Pimco bond legend Bill Gross mentioned today how he thinks the housing mess will be at the focus of Fed decisions for years to come. Yuck, but hurray for stocks (sorry dollar). And hurray for currencies which are correlating with stocks. Mr. Gross’s monthly newsletter is here. Here’s a snippet:

 

 

PIMCO’s view is that a U.S. Fed easing cycle historically has required a destination of 1% real short rates or lower. Under a conservative assumption of 2½% inflation, that implies Fed Funds at 3¾% or so over the next 6-12 months. Actually that’s only two, 50 basis point reductions, something that could, but probably won’t, be accomplished by year-end …

The downward path of home prices, however, will dominate Fed policy over the next several years as will the lingering unwind of related financial structures and derivatives that have yet to be discovered by the public, and marked to market by their conduit holders.

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