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Posts Tagged ‘interest rates’

The Federal Reserve moved today to add liquidity to the markets by announcing a series of actions with other central banks to help improve liquidity and lending for the markets. The Fed are taking this coordinated action without cutting interest rates due in part of rising inflation. US markets showed instant gratification in pre-market trading. and the Dollar rose in strength. The EUR/USD reversed an earlier move 150 pip run up right after the announcement. The USD/JPY ran up 120 pips after the announcements. With all this good news, the bulls may be back for the dollar.

This coordinated effort with the other central banks is being excepted very well with the ECB because it falls in line with what they are trying to achieve. Time will tell if it is a good move for the US markets and other markets around the world.

~G

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bernanke-helicopter.jpg The scoop on the Fed is that they lowered rates 0.50% and said more were to come. Obviously that is bearish for the dollar and can be bullish for carry trades too since it is a balm for economic pain. Were it so simple to “fix” economies. Yesterday afternoon U.S. stocks sunk as bad news came out about some bond insurers – more weakness in the financial sector.

So now the big “event” (Fed) is out of the way and what are we left with? Carry pairs and others which benefit from growth are at resistance. You’d think the Fed could have obliged by being more hawkish to help a pair out!

Case in point, two pairs we’ve looked at lately: AUD/JPY and EUR/USD. My opinion on which way they’ll go? Down, following continuing economic weakness. But, opinions are irrelevant (and often wrong, the world is complex) and we follow that which we see happens.

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georgio-stoev.jpg     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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don_kohn.jpg    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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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.

 vix.jpg

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201px-ben_bernanke.jpg 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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