Me and Ze Capital Management

USD Heavy Ahead Of Non-Farm Payrolls: Intervention Threats Subside

2012-02-02T09:39:00.000-08:00

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9708.63	9738.71	9692.57	-0.14	62.91%

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.15 percent lower from the open after moving 63 percent of its average true range,
and the greenback may continue to push lower ahead of the highly anticipated Non-Farm Payrolls report as it continues to trade within the downward trending channel carried over from the previous month.
However, as the world’s largest economy is expected to add another 145K jobs in January,
the ongoing improvement in the labor market should help to increase the appeal of the USD,
and index could be putting in a short-term bottom around 9,700 as there appears to be a bullish divergence in the 30-minute relative strength index.

Indeed, Fed Chairman Ben Bernanke maintained a cautious outlook for the world’s largest economy amid tight credit conditions paired with the protracted recovery in the labor market,
while the central bank head expectations inflation to stay subdued in light of the ongoing slack within the private sector.
Nevertheless, U.S. policy makers spoke out against the zero interest rate policy, stating that the very accommodative stance curbs incentives to save while raising the risk for another asset bubble, and the central bank may come under increased scrutiny should the FOMC look to expand its balance sheet further. In light of the recent developments,
it looks as though the Fed will maintain a wait-and-see approach throughout 2012, and we should see the central bank soften its dovish tone for monetary policy as the more robust recovery dampens the risk of a double-dip recession.
Nevertheless, we expect to see a rebound in the USD as long as the relative strength index holds above 30, and the non-farm payrolls report on tap for Friday could serve as a catalyst to strengthen the dollar as it raises the outlook for growth and inflation.

The U.S. dollar continued to weaken against its major counterparts, led by a 0.21 percent in the Australian dollar,
while the Japanese Yen continued to gain ground despite speculation for a currency intervention.
Indeed, the DailyFX Speculative Sentiment index for the USD/JPY advanced to 16.89 as the retail trading crowd sees Japanese policy makers increasing their effort to stem the recent appreciation in the local currency,
but it seems as though the Bank of Japan will continue to sit on the sidelines as the central bank wants more time to assess the potential impact to the real economy.
As the USD/JPY fails to break below 76.00, the risk of seeing an intervention has certainly diminish, and we should see a near-term correction in the exchange rate as the relative strength index holds above oversold territory.

EURO/U.S.D and G.B.P/U.S.D SSI: The Speculative Sentiment Index

2012-02-02T09:14:00.000-08:00

Symbol	LastWeek	Present	%Long	Change: Open Interest	Signals	Chart Links
EUR/USD	-1.67	-1.67	37.0%	2.9%	bullish	View Chart
USD/JPY	7.49	16.55	94.0%	66.9%	bearish	View Chart
GBP/USD	-3.43	-2.37	30.0%	-32.2%	bullish	View Chart
USD/CHF	1.24	2.49	71.0%	2.7%	bearish	View Chart
USD/CAD	2.44	2.01	67.0%	0.5%	bearish	View Chart
GBP/JPY	2.22	3.01	75.0%	-1.0%	bearish	View Chart

Fresh Euro Highs Favored on Sentiment

EURUSD

Trading crowds turned aggressively short the Euro against the US Dollar as the pair broke above 1.2700, and fairly consistent selling suggests that the EURUSD could yet trade to further highs.
The pair has recently consolidated and has yet to break convincingly above the psychologically significant $1.3200 mark. Yet the trend favors further short-term gains and trading crowd sentiment leaves us in favor of further highs.

Our SSI ratio of long to short positions in the EURUSD stands at -1.67 as nearly 63% of traders are short. Although past performance is no guarantee of future results, such one-sided extremes can often come at major turning points.

Near-term resistance remains at recent multi-month peaks of $1.3220, while support is at 2/1 lows of $1.3025. The next move may be pivotal, and we expect that a break to further highs remains more likely.

How do we interpret the SSI? Watch an FXCM Expo Presentation that explains the SSI.

British Pound Targets Peaks

GBPUSD

Forex trading crowds have turned aggressively short the British Pound against the US Dollar since it traded above $1.5400, giving us consistent contrarian signal that the GBP/USD may in fact continue onto fresh highs.

Our SSI ratio of long to short positions in the GBP/USD stands at -2.37 as nearly 70% of traders are short. It is worth noting that short interest is down an important 38% since last week, while long interest fell a lesser 11% through the same stretch.

The significant week-over-week slowdown in selling warns that the pace of gains may slow.

Yet trading crowds remain aggressively net-short, and we see few signs of imminent reversal. Our bias remains bullish until further notice.

US Dollar Targets Fresh Lows on Forex Crowd Sentiment

2012-02-02T09:10:00.000-08:00

Forex trading crowds continue to buy into US Dollar (ticker: USDOLLAR) losses against the Euro, British Pound, Japanese Yen, Swiss Franc, and Canadian Dollar. We continue to call for fresh lows as our own Dow Jones FXCM Dollar Index trades near its lowest since November and remains at risk of further losses.

The pace of USD buying has somewhat slowed, which suggests that the rate of US Dollar declines could likewise moderate. Yet we see little risk of imminent reversal, and consistent crowd sentiment leaves us in favor of further weakness.

We will keep a close eye on the Dow Jones AvaFx Dollar Index for any signs of potential reversal. Yet the Dollar’s break below important support suggests that we could see fresh Greenback losses before any real chance of reversal.

How do we interpret the SSI? Watch an FXCM Expo Presentation that explains the SSI.

Fed’s Bernanke Testifies Before House; USD Drops on Dovish Tone

2012-02-02T08:44:00.000-08:00

THE TAKEAWAY: [Fed’s Bernanke Testifies Before House] > [Urges Caution in Overly Rapid Deficit Cutting] > [USD Weakens]

Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee on the U.S. economic outlook today. The appearance comes just a week after the Fed’s announcement that it is likely to keep interest rates near zero until at least late 2014, extending its previous time frame by at least a year and a half.

At the testimony, Bernanke began by defended the FOMC’s decision to maintain its highly accommodative stance of monetary policy and to maintain its program to extend the average maturity of its securities holdings. Bernanke reiterated a bearish tone on the U.S. economic recovery, describing the pace of recovery as “frustratingly slow”, although the Fed is indicating that expect a somewhat stronger growth this year than in 2011.

Moving onto fiscal policy challenges, Bernanke warned against overly rapid deficit cutting, appealing to lawmakers that “even as fiscal policymakers address the urgent issues of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible--indeed, they are mutually reinforcing.” Even after economic conditions have returned to normal, the Fed cautioned that the nation will still face a sizable structural budget gap if current budget policies continue. Even assuming that the economy is close to full employment, the Fed anticipates that the budget deficit would be more than 4 percent of GDP in fiscal year 2017.

US Dollar 1-minute chart: 2 February 2012

Immediately after the release of Bernanke’s testimony, the U.S. dollar pared back recent losses, with the U.S. Dollar Index (Ticker: USDOLLAR) reaching 9723 before tumbling down towards 9706 at the time of this report. The U.S. dollar fell against major currencies including the euro, Australian dollar and Canadian dollar.

The U.S. dollar declined sharply as the markets viewed the FOMC’s announcement as “dovish”, allowing a third round of quantitative easing to remain on the table for some time this year.

In his testimony, Bernanke noted the following outlook on the U.S. economy and fiscal policy challenges:

Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth. To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt. High levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events.

Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.

To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. Attaining this goal should be a top priority.

Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible--indeed, they are mutually reinforcing. On the one hand, a more robust recovery will lead to lower deficits and debt in coming years. On the other hand, a plan that clearly and credibly puts fiscal policy on a path to sustainability could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today.

Fiscal policymakers can also promote stronger economic performance in the medium term through the careful design of tax policies and spending programs. To the fullest extent possible, our nation's tax and spending policies should increase incentives to work and save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. Although we cannot expect our economy to grow its way out of our fiscal imbalances, a more productive economy will ease the tradeoffs that we face and increase the likelihood that we leave a healthy economy to our children and grandchildren.

Forecast (Me and Ze Capital Management): EUR/USD to Fall to 1.15 in First Half of 2012

2012-02-02T02:52:00.000-08:00

The Euro finds itself at a potential crossroads.
Does the single currency zone remain intact and prove that the Euro itself is a viable currency?

Do Germany and other core nations come in to rescue the periphery despite significant domestic opposition?

As it stands, recent trends plainly point to continued turmoil and further Euro losses.

Yet a lot can happen in six months, and it will be crucial to monitor developments in the Euro Zone in the first half of 2012 and how it affects the Euro exchange rate.

We foresee Euro declines in the first half of 2012.

How low can we go?

Many factors will affect this, but we expect to see Euro/Dollar (EUR/USD) to reach at least 1.20 in the next six months, and perhaps even touch 1.15.

Debt Crisis Front and Center

The current European debt crisis started with serious doubts over Greek debt as early as 2009, but 2011 marked the year in which worries over the periphery spilled into the Euro Zone core. Whereas previous debt problems had been limited to the comparatively small Greek, Irish, and Portuguese economies, trader worries transferred into core nations as tensions hit fever pitch.

Investors aggressively sold Italian and Spanish bonds as they doubted the solvency of governments in the Euro Zone’s third and fourth-largest economies. Italy, the Euro Zone’s third-largest economy, has total public debts representing over 120 percent of domestic Gross Domestic Product. With such an enormous debt load, it is important to watch the interest rates that Italy must pay on its debt. If it must pay unsustainably high interest rates – believed to be around 7% for 10-year bonds, which was seen on several days in November and December – Italy may be pushed beyond the point of “no return”. That is to say, it will depend on external aid to remain fully solvent.

What could conceivably put Italy on the right path and stave off a fiscal crisis on a scale few could imagine? The first step must be a credible plan for Italy to meet its debt obligations—likely led by strong fiscal austerity and real commitment to economic reforms to enhance productivity. The new Italian government has announced measures to cut deficits via increased taxes and reduced spending. Of course such deficit-cutting measures are complicated by the fact that the Italian economy remains stuck in a period of extremely low growth. In the period from 2000 to 2010, Italy held the third-lowest GDP growth rate in the world behind Haiti and Zimbabwe.

The short-term budget cutting measures that have been taken thus far have proven insufficient and perhaps even counterproductive. The entire Euro Zone is now expected to enter a recession through the first quarter of 2012, and any aggressive spending cuts and/or tax increases from Spain and Italy could exacerbate the downturn.

The new conservative government in Spain has announced fairly aggressive deficit-cutting measures that have been met with noteworthy improvements in domestic bond prices, and hence lower interest rates. Yet the spread between 10-year Spanish bond yields and the benchmark German equivalent continues to trade near its widest levels since the Euro’s inception. Markets seem more optimistic, but the overwhelming theme is pessimism over the solvency of key Euro Zone governments.

The unvarnished truth is that an orderly solution to Euro Zone fiscal woes seems exceedingly unlikely. Ideally we would see commitments to real structural changes in regional governance. For example, markets might be more likely to lend to Italy and Spain if all Euro Zone nations were prohibited from running budget deficits beyond a certain level. Such rules have existed for years in the form of the Euro Zone’s “Growth and Stability Pact”, but the missing link remains the lack of real consequences for non-compliance. We foresee a continuation of the trend of patchwork short-term solutions that continue to roil financial markets. Such initiatives may involve attempts at Italian fiscal austerity, European Central Bank aid, and/or international aid. Yet the problems of Euro Zone debt and competitiveness will remain significant.

As traders, we will look for opportunities to play ongoing crises through the Euro/Dollar (EUR/USD) exchange rate. Although shorter-term rallies as high as $1.3500 seem possible, the overall trend favors further EURUSD weakness.

Medium-term technical studies point to more Euro weakness

A closer look at the longer-term chart shows the market locked in a well defined downtrend since posting record highs just over 1.6000 back in 2008. An initial low was recorded in October 2008 by 1.2330, followed by a lower top at 1.5145 in November 2009, a lower low at 1.1875 in June 2010 and the latest anticipated lower top by 1.4940 in April 2011. The failure to move higher in 2011 opens the door for the current downside extension which should ultimately look to retest and eventually break below the 1.1875, June 2010 lows. This would confirm the next lower top at 1.4940 and potentially point towards a deeper drop towards 1.1500.

As such, our outlook for the first half of 2012 is predominantly bearish while the market adheres to the broader underlying downtrend, and we would expect to see a move towards 1.1875 at a minimum before considering the potential for any meaningful recovery. In the interim, any rallies should therefore continue to be very well capped, with overbought short-term rallies viewed as compelling opportunities to look to build on short positions. Ultimately, only a 2-week close back above 1.3500 would bring this outlook into question and give reason for concern.

Trading the U.S. Non-Farm Payrolls Report

2012-02-02T02:49:00.000-08:00

What’s Expected:

Time of release: 02/03/2012 13:30 GMT, 8:30 EST

Primary Pair Impact: EUR/USD

Expected: 145K

Previous: 200K

DailyFX Forecast:135K to 160K

Why Is This Event Important:

Employment in the world’s largest economy is expected to increase another 145K in January, and the ongoing improvement in the labor market may prop up the U.S. dollar as the data dampens the scope for another round of quantitative easing. As the economic recovery gathers pace, we should see the Federal Reserve continue to soften its dovish tone for monetary policy, and the central bank may endorse a wait-and-see approach throughout 2012 as the risk of a double-dip recession subsides. However, as Fed Chairman Ben Bernanke continues to highlight the ongoing slack within the real economy, the central bank head may keep the door open to expand the balance sheet further, and increased speculation for QE3 will dampen the appeal of the reserve currency as the highly accommodative policy encourages risk-taking behavior.

Recent Economic Developments

The Upside

Release	Expected	Actual
Durable Goods Orders (DEC)	2.0%	3.0%
NFIB Small Business Optimism (DEC)	93.8	93.8
Consumer Credit (NOV)	$7.000B	$20.374B

The Downside

Release	Expected	Actual
ISM Manufacturing – Employment (JAN)	--	54.3
ADP Employment Change (JAN)	182K	170K
Consumer Confidence (JAN)	68.0	61.1

Increased demands for U.S. goods paired with the rise in business sentiment certainly bodes well for the labor market, and a marked rise in hiring could lead the EUR/USD to work its way back towards the 20-Day SMA (1.2912) as market participants scale back bets for a large-scale asset purchase scheme. However, we may see a slowdown in hiring amid the ongoing slack within the private sector, and the FOMC may preserve a cautious outlook for the region as the fundamental outlook remains clouded with high uncertainty. In turn, a dismal NFP report could spark another short-term rally in the EUR/USD, and we may see the exchange rate work its way back towards the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as market participants raise bets for QE3.

Potential Price Targets For The Release

How To Trade This Event Risk

As U.S. policy makers strive to strengthen the labor market, a positive employment report is likely to dampen expectations for additional monetary support, and the development could pave the way for a long U.S. dollar trade as the fundamental outlook for the world’s largest economy improves. Therefore, if NFPs increase 145K or greater in January, we will need a red, five-minute candle following the release to establish a sell position on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to protect our profits.

In contrast, the slowdown in private sector consumption paired with weakening outlook for global growth may lead business to scale back on hiring, and a dismal employment report could strengthen the case for QE3 as the central bank aims to encourage a sustainable recovery. As a result, if NFPs miss market expectations, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. Non-Farm Payrolls report has had on USD during the last month

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
DEC 2011	01/06/2012 13:30 GMT	155K	200K	-35	-55

December 2011 U.S. Non-Farm Payrolls

The U.S. Non-Farm Payrolls report showed a 200K rise in employment following the 100K expansion in November, while the jobless rate unexpectedly slipped to 8.5% from a revised 8.7% as discouraged workers continue to leave the labor force. The breakdown of the report showed a 212K rise in private payrolls, with manufacturing jobs advancing 23K, while public sector employment weakened another 12K during the same period after contracting 20K in the previous month. Indeed, the more robust recovery in the labor market will dampen the Fed’s scope to push through another large-scale asset purchase program, and we may see the FOMC preserve a wait-and-see approach in 2012 as policy makers see the economic recovery gradually gathering pace over the coming months. Indeed, the better-than-expected employment report propped up the greenback, with the EUR/USD slipping below 1.2700, but we saw the pair consolidate going into the end of the week as the exchange rate settled at 1.2714.

Written by: Zeshan Muhammad Ali Awan

Director Technicals

Are You Struggling With The Technicals.? The Moving Averages?

2012-01-31T07:32:00.001-08:00

The Moving Average... It is a tool that is talked about in almost every trading book that has ever been written. Every day on TV, CNBC, Bloomberg, and others are telling us where the S&P and other key markets are in relation to the 200 day moving average, for example. Every charting package on the planet comes with every possible configuration of a moving average for you to use. Because of all this, moving averages must be one of the most important tools for traders and investors, right? You start to think that it must be impossible to make money in the markets without using moving averages. When we take a deeper look into the purpose and result of using moving averages, you start to see that not only do you not need to use them, but more importantly, they can actually hurt you if you don't understand the risk that comes from using them as a primary buy and sell decision-making tool and that is the focus of this piece.
Instead of going through many charts to find the perfect picture to use as an example to illustrate my logic, I like to use real trading examples from our live trading rooms in the Extended Learning Track (XLT) program. In our live Futures trading XLT, January 13th, we identified a demand level for our students during our pre-market analysis. This was a demand level in the S&P Futures of 1271.50 - 1274.50 (red box). Once price declined in the S&P to our demand level, the plan was to buy it when it reached our demand level with a protective sell stop just below the level to manage the risk and have our profit targets above the level.

Figure 1

Shortly after the stock market opened, price declined to our demand level where our students were instructed to buy. Price moved higher and the trade worked out very well for our students; they executed our rule-based market timing strategy. Now, let's go over the same trading opportunity, but instead of applying our strategy, let's use a moving average which again, is a tool talked about in almost every trading book ever written. Most people are taught to buy when the moving average turns higher. As you can see here, by the time the moving average turns higher, price has rallied quite a bit already which means high risk and lower reward if you use your moving average as a buy signal. Furthermore, notice that the moving average was sloping down when our rules gave the buy signal. Have you ever read a trading book that said buy when the moving average is sloping down? Also, notice that the short-term trend of price was down when our strategy gave us the low risk buy signal. Again, have you ever read a trading book that said to buy in a downtrend? Of course not, yet this is the action you take when you properly buy and sell anything in life, don't you? This is exactly how you make money trading as well, but the trading books almost teach you to do the opposite which is very flawed. Many of the traders following indicators such as moving averages are really smart people who have the best of intentions, they've just been taught wrong. It's not rocket science; traditional technical analysis can be overly complex, often inaccurate and may cause "paralysis by analysis." This is why we focus on teaching students our simple rule-based strategy using the principals of supply and demand aimed to help them find "real" low risk, high reward, and high probability trades. Waiting for the moving average to turn higher, you certainly get confirmation, but at the cost of extremely high risk and lower reward. Furthermore, that confirmation is an illusion because you still don't know exactly what price will do next; this is all about probability and entering a position when the odds are stacked in your favor.

Figure 2

Again, there are so many books on trading and most people start the learning process by reading the trading books, yet the vast majority of traders and investors fail when it comes to achieving their financial goals. For the most part, the books say the same thing and teach the same conventional concepts. Specifically, most of what those books teach is conventional technical analysis including indicators and oscillators such as Stochastics, Mac-D, moving averages and so on. Here is the problem... Conventional technical analysis is a lagging school of thought that leads to high risk, low reward, and low probability trading and investing. All indicators are simply a derivative of price meaning they lag price. By the time they tell you to buy or sell, the low risk, high reward opportunity has passed. They have you buying after a rally in price and sell after price has already declined. At Online Trading Academy, we don't use conventional indicators, oscillators, or chart patterns that you read about in the trading books as primary decision-making tools because adding any decision making tool to our analysis process that lags price only increases risk and decreases reward. Why would we ever want to do that? I know the information in trading books has been around for many decades, but that doesn't mean it works or helps people. Like learning anything else in life, there is the book version way of learning it and the real world learning. At Online Trading Academy, we focus on how proper trading and investing works in the real world which is what our core strategy is made of. Again, if you think about it, most people read trading books and most people lose money; maybe they should stop and consider how flawed the logic is in that conventional thought and action. My goal in this piece is not to beat up books and theories, it is simply to open your mind to a lower risk, higher reward way of trading and investing.
Hope this was helpful, have a great day.

Today in A Short Recap with Me and Ze Capital Management

2012-01-31T07:12:00.001-08:00

Chancellor Merkel indicated yesterday that there may be a delay in finalisation of a debt deal for Greece by saying "we won't have a thorough discussion of Greece because the troika is in Greece and we don't have a result of the talks with the banks." Fundamental cracks are appearing between Greece, where opposition is growing to German led calls for increased oversight and veto powers for Greek budget decisions, and other European leaders. European leaders want to be able to enforce budget decisions on the Greeks while the nation see such moves as an attack on their sovereignty.

President Nicolas Sarkozy of France said yesterday that "Europe is no longer at the edge of the cliff." The question has to be 'what has changed since Europe was at the edge of the cliff?" We fear not much. Certainly markets have been less volatile in response to news developments in the new year. However, even as European leaders work towards rules that are designed to bring about greater fiscal union and budgetary control, member states such as Greece want to play by their own rules. The talk is becoming increasingly tough with the the economic spokesman for Merkel's Christian Democratic Union saying, "The free lunch is over: no external controls, no money." European history shows that the continent is least united when nations try to exert their influence on each other. Attempts to "unify" the continent have always led to conflagration.

Yet markets have been once again been gripped by europhoria surrounding EU summits and more announcements surrounding plans to save Europe. European Union leaders meeting in Brussels have agreed on a fiscal treaty that will allow for action against high deficit states and calls for members to introduce legislation to limit budget deficits. Markets have rallied on the news even though these reforms actually do nothing to resolve the current debt crisis. Britain and the Czech Republic have declined to sign the pact. The EUR has rallied above 1.3200 after having traded closer to 1.3100 in early Asian trade.

Equity markets have recovered from a soft start to the week with Asian shares rising on optimism surrounding the latest EU summit. After falling yesterday over Greek resistance to outside influence in its budgetary affairs, rising bond yields and the collapse of Spanair, European bourses are now higher by 1% mid session today. After losing ground yesterday for the third day as European leaders lectured to Greece over the nation's second rescue package, S&P 500 futures are signalling a rise in trade today.

Commodities News

Commodity prices moved lower yesterday with the CRB index losing more than 1% to 313.91. Today, there has been a broad recovery. WTI Crude oil has gained 1% to trade at $99.85 as tensions in Iran once again dominate trader's mentality. Precious metals have recovered from yesterday's falls with gold rising 0.4% to $1,742 while silver has gained 0.7% to $33.75. Soft commodities are broadly stronger while copper is higher by 0.8%.

GOLD

GOLD continues to consolidate after last weeks boost by the Fed Reserve which now sees gold firmly in the $1,700 territory. The range last night was $1,716 to $1,733. Gold opens the morning just below $1,730. As we had suspected gold held up much better than other commodities overnight as markets jitters surrounding Europe resurfaced. We took up our own advice to buy the metal on the dip to $1,720 overnight. This position now has a stop loss at entry and we will seek to trail this stop higher as the market continues take gold higher. We maintain our bullish bias in the short term and medium term for gold although we are currently reviewing our view on commodities in general. An escalation of the European debt crisis is increasingly likely and this will have a negative impact on commodities in general. However, even last year we saw both the USD and Gold manage to gain and expect that this trend will continue especially in the event of a meltdown in Europe.

FX News

EUR/USD

The Brussels Summit ended yesterday with no favourable resolution for the Greek saga leaving the market showing its frustration on the EUR/USD driving it down to 1.3075. Apparently German Chancellor Angela Merkel shared the same frustration with the Greek government's failure to carry out its economic reform. Euro found its base at 1.3135 during early Asian session and the theme today for Asia was sell dollar. However moving towards the London session we may see EUR/USD take on a different theme in the form of volatility. With a whole battery of macro data expected today from the Euro zone, it may be touch and go. We have German retail sales (MoM); French Consumer Spending (MoM); German Unemployment Change; Italian Unemployment Rate; Eurozone Unemployment Rate. In New York expect Chicago PMI and more importantly US Conference Board Consumer Confidence. Euro support is seen at 1.3120 but the psychological level of 1.3000 is possible if all the 'bad' stars align. Top side try for 1.3230.

USD/JPY

USD/JPY tested 'BOJ waters' as we predicted yesterday when it broke the76.55 base today reaching as low as 76.16. At the time of writing USD/JPY is trading at 76.20. We are once again approaching the post war low of 75.35 prompting Finance Minister Azumi to say "we are ready to act decisively against excessive and speculative currency moves if needed". Factors which sent the yen on a three-day rally include industrial production rising more than forecast in December and unresolved Greek debt restructuring which triggered yen buying as a safe haven. In other news the nation's jobless rate rose to 4.6% in December from 4.5% the previous month. For Tuesday, we are cautiously bearish on the USD/JPY with top side limited to 77.01 without BOJ intervention or 'rumoured' intervention. Downside 75.76 may be first support level. Then it will be exciting to see if we will test the post war low.

2012-01-27T07:08:00.000-08:00

Too many young people rarely, or never, invest for their retirement years. Some distant date, 40 or so years in the future, is hard to imagine. However, without investments to supplement retirement income, if any, retirees will have a difficult time paying for life's necessities.

TUTORIAL: Stocks Basics

Smart, disciplined, regular investment in a portfolio of diverse holdings, can yield good long-term returns for retirement and provide additional income throughout an investor's working life.

An often stated reason for not investing is a lack of knowledge and understanding of the stock market. This objection can be overcome through self-education and step-by-step through the years, as an investor learns by investing. Classes in investing are also offered by a variety of sources, including city and state colleges, civic and not-for-profit organizations, and there are numerous books targeted to the beginning investor.

However, you've got to start investing now; the earlier you begin, the more time your investments will have to grow in value. Here's a good way to start building a portfolio, and how to manage it for the best results. (For related reading, see Top 5 Books For Young Investors.)

Start EarlyStart saving as soon as you go to work by participating in a 401(k) retirement plan, if it's offered by your employer. If a 401(k) plan is not available, establish an Individual Retirement Account (IRA) and earmark a percentage of your compensation for a monthly contribution to the account. An easy, convenient way to save in an IRA or 401(k) is to create an automatic monthly cash contribution. Keep in mind, the savings accumulate and the interest compounds without taxes, as long as the money is not withdrawn, so it's wise to establish one of these retirement investment vehicles early in your working life.

Another reason to start saving early is that usually the younger you are, the less likely you are to have burdensome financial obligations: a spouse, children and mortgage, for example. That means you can allocate a small portion of your investment portfolio to higher risk investments, which may return higher yields.

When you start investing while young, before your financial commitments start piling up, you'll probably also have more cash available for investing and a longer time horizon before retirement. With more money to invest for many years to come, you'll have a bigger retirement nest egg.

To illustrate the advantage of value investing as soon as possible, assume you invest $200 every month starting at age 25. If you earn a 7% annual return on that money, when you're 65 your retirement nest egg will be approximately $525,000. However, if you start saving that $200 monthly at age 35 and get the same 7% return, you'll only have about $244,000 at age 65. (For additional reading, see Accelerating Returns With Continuous Compounding.)

Diversify Select stocks across a broad spectrum of market categories. This is best achieved in an index fund. Invest in conservative stocks with regular dividends, stocks with long-term growth potential, and a small percentage of stocks with better returns, along with higher risk potential. If you're investing in individual stocks, don't put more than 4% of your total portfolio into one stock. That way, if a stock or two suffers a downturn, your portfolio won't be too adversely effected. Certain AAA rated bonds are also good investments for the long term, either corporate or government. Long-term U.S. Treasury bonds, for example, are safe and pay a higher rate of return than short- and mid-term bonds. (To learn more on investing in bonds, read Bond Basics: Different Types Of Bonds.)

Keep Costs to a Minimum
Invest with a discount brokerage firm. Another reason to consider index funds when beginning to invest is that they have low fees. Because you'll be investing for the long-term, don’t buy and sell regularly in response to market ups and downs. This saves you commission expenses and management fees, and may prevent cash losses when the price of your stock declines.

Discipline and Regular InvestingMake sure that you put money into your investments on a regular, disciplined basis. This may not be possible if you lose your job, but once you find new employment, continue to put money into your portfolio.

Asset Allocation and Re-Balance Assign a certain percentage of your portfolio to growth stocks, dividend paying stocks, index funds and stocks with a higher risk, but better returns.

When your asset allocation changes (i.e., market fluctuations change the percentage of your portfolio allocated to each category), re-balance your portfolio by adjusting your monetary stake in each category to reflect your original percentage. (For more information, read Five Things To Know About Asset Allocation.),

Tax ConsiderationsA portfolio of holdings in a tax-deferred account, a 401(k), for example, builds wealth faster than a portfolio with tax liability. You pay taxes on the amount of money withdrawn from a tax deferred retirement account. A Roth IRA also accumulates tax free savings, but the account owner doesn't have to pay taxes on the amount withdrawn. To qualify for a Roth IRA, your modified adjusted gross income must meet IRS limits and other regulations. Earnings are federally tax free if you've owned your Roth IRA for at least five years and you're older than 59.5, or if you're younger than 59.5, have owned your Roth IRA for at least five years and the withdrawal is due to your death or disability, or for a first time home purchase.

The Bottom LineDisciplined, regular, diversified investment in a tax deferred 401(k), IRA or a potentially tax-free Roth IRA, and smart portfolio management can build a significant nest egg for retirement. A portfolio with tax liability, dividends and the sale of profitable stock can provide cash to supplement employment or business income. Managing your assets by re-allocation and keeping costs, such as commissions and management fees, low, can produce maximum returns. If you start investing as early as possible, your stocks will have more time to build value. Finally, keep learning about investments throughout your life, both before and after retirement. The more you know, the more your potential portfolio return, with proper management, of course.

Recap of the Latest Global News and Today's F.O.M.C

2012-01-25T09:01:00.000-08:00

Investor optimism was dented yesterday after European finance ministers failed to agree on the Greek debt swap deal and called for a greater contribution from debt holders. Finance ministers are pushing bondholders for greater debt relief by asking them to accept lower interest returns in the proposed debt swap deal. The stalling of negotiations has fuelled concerns that Greece will fail to make a bond payment due in late March. The EUR fell from a high of 1.3065 during the Asian session yesterday to as low as 1.2948 in early European trade today.

In more sobering news, the IMF has cut global growth forecasts and warned that the "epicentre of the danger is Europe but the rest of the word is increasingly affected." It cut global growth for 2012 from a September forecast of 4 percent to 3.3 percent and predicted a recession in Europe. The IMF called for an increase in the eurozone's rescue fund and a more active role from the ECB to address the crisis. In a dire warning, the IMF warned of a 1930's style worldwide depression unless more countries play their part and identified a possible global financing need of over $1 trillion in the next few years. Inflation in the UK for December fell to its lowest level in 6 months at an annual rate of 4.2% and the economy contracted in the fourth quarter which saw the GBP fall to as low as 1.5528.

Yesterday, US equities fell after advancing for five consecutive sessions as negotiations stalled in the proposed Greek debt swap deal. Furthermore, the IMF warned that there was potential for "political paralysis" in the United States that could lead to an unwinding of stimulus spending. Asian markets there were opened today closed higher while European shares are down about 1% mid session, falling for the second day, as Ericsson and Novartis missed earnings estimates.

FX News

EUR/USD

EUR/USD traded within a narrow range during Asian session (1.3014 - 1.3041) today perhaps due to the Lunar Year celebration. The same could be expected for the rest of the week for Asia if no surprises hit the market. At the time of writing, euro spiked up to 1.5050 as German IFO was released. Market was expecting 107.6 but actual came out as 108.3 (last 107.3). But the spike was very short-lived as it pulled back to the comfortable 1.3020 - 1.3040 zone awaiting for the US FOMC rate decision. Economists expect no change from 0.25% but the risk may be that if the Fed is more dovish than what the market thinks, then you may see dollar selling in the pipeline. For the rest of London and New York session, we are still waiting for 1.3145 and support at 1.2983.

USD/JPY

USD/JPY reached the highest level since Dec 28 at the time of writing to 78.10 in London time. The headline news was that Japan reported its first annual trade deficit in 30 years raising concerns about its fiscal health. The data also showed Japan's exports declined for the third consecutive month - dropped 8% in Dec from a year earlier. JPY traders no doubt will now monitor if the deficit will continue to rise or if Japan's sovereign rating is in question. Any hint of that should result in shorting the JPY. For the rest of the day and subject to FOMC release expect 77.60 (61.8% fib) to 78.25 trading range.

U.S. Dollar on Top Ahead of Critical FOMC Meeting

2012-01-25T08:50:00.000-08:00

Fundamental Headlines

• Economy in U.S. Preferred by Investors – Bloomberg

• Obama Calls for Higher Taxes on Wealthy – Bloomberg

• Fed Set to Push Back Timing of Eventual Rate Hike – Reuters

• German Bunds Draw Strong Demand – WSJ

• Obama Makes Populist Pitch – WSJ

European Session Summary

Price action was very choppy in the overnight, though, for the first time in what has seemed like weeks, the Asia sell-off / Europe rally trend was broken. Following Australian inflation data last night, market participants bid higher yielding currencies and risk-correlated assets higher, though the rally stagnated by the European session open. The sell-off in the first part of European trading is rooted in two causes: poor British growth figures; and a further breakdown in the Greek bondholder negotiations.

Not much needs to be said about the poor British gross domestic product reading for the fourth quarter; I have long stated that the British economy is stagflating. While inflation has eased in recent months, it remains above the two percent threshold set by the Bank of England; the labor market continues to weaken; and now growth has turned negative.

In terms of the Greek bondholder swap negotiations, it appears that both the Institution for International Finance (IIF) and Greek officials have walked away from the table. The major sticking issue appears to be whether or not the European Central Bank will participate in the haircuts being levied on private sector bondholders. It’s been established that no such event will take place. This, being the main sticking point, is creating more than a stir; the International Monetary Fund (IMF) today suggested that the ECB agrees to the haircut so that the issue is finally resolved.

Taking a look at credit markets, risk-appetite appears to have been stemmed across Europe, with German bunds approaching all-time record low yields (higher prices) while French and Italian 10-year bonds widened against their German counterpart. The Portuguese 10-year bond is under substantial pressure, with the yield moving up to 13.492 percent, as the country mulls options, including requesting another bailout, to help the economy turn around. This situation will only get worse without further intervention; and I would argue that Portugal is close to becoming the next major issue in Europe, ahead of Italy and Spain.

NZD/USD 5-min Chart: January 24 to January 25, 2012

Overall, it appears that some of the typical correlations have broken free, with the commodity currencies and European currencies mixed across the board. While the New Zealand Dollar was the worst performing major against the U.S. Dollar, down 0.75 percent at the time this report was written, the Australian Dollar was down a mere 0.22 percent. Similarly, the Euro underperformed the Greenback by 0.50 percent, while the British Pound was off a slight 0.20 percent despite the country’s dismal growth reading released earlier today.

24-Hour Price Action

Key Levels: 14:05 GMT

Thus far, on Wednesday, the Dow Jones FXCM Dollar Index is higher, trading at 9915.71, at the time this report was written, after opening at 9884.24. The index has traded mostly higher, with the high at 9931.27 and the low at 9872.68.

USD Index Points To Additional Strength

2012-01-25T08:48:00.001-08:00

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9921.14	9931.27	9872.68	0.36	90.93%

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.36 percent higher from the open after moving 91 percent of its average true range, and the bullish divergence in the 30-minute relative strength index instills a bullish outlook for the greenback as it breaks out of the downward trending channel from earlier this month. In turn, the rebound from 9,837 should continue to gather pace, but the reserve currency may face whipsaw-like price action later today as the Federal Open Market Committee interest rate decision takes center stage. Beyond the rate decision, the first batch of interest rate forecast will be closely watched across the financial market, but the Fed’s fundamental assessment of the world’s largest economy may play a greater role in driving price action as investors weigh the prospects for future policy.

As we look for a higher high in the USDOLLAR, the FOMC rate decision could pave the way for a major rally in the reserve currency as the more robust recovery dampens the central banks scope to push through another large-scale asset purchase program. As economic activity gradually gathers pace, we anticipate the Fed to strike an improved outlook for the region, and the central bank may continue to soften its dovish tone for monetary policy as the risk of a double-dip recession subside. However, Chairman Ben Bernanke may keep the door open to further expand the balance sheet in light of the ongoing weakness in the housing market, and the USD may come under pressure should the committeefloat the idea of purchasing mortgage-backed securities (MBS) to stimulate home purchases.

The greenback rallied against all four components on Wednesday, led by a 0.75 percent decline in the Japanese Yen, and the low-yielding currency may weaken further over the near-term as market participants increase bets for a currency intervention. As the Bank of Japan refrains from taking additional steps to shore up the ailing economy, there’s speculation that the Ministry of Finance will once again step into the FX market to stimulate growth, but Japanese policy makers may put additional pressure on the central bank to further expand its asset purchase program as the fundamental outlook for the region deteriorates. As BoJ Governor Masaaki Shirakawa continues to highlight the threatens of a stronger Yen, speculation for another currency intervention will certainly be a major theme in 2012, and the central bank may have little choice but to expand its balance sheet further as it lowers its growth forecast for the world’s third-largest economy.

S&P 500 Chart Warns of Indecision, Dollar to Challenge Key Support

2012-01-23T06:02:00.000-08:00

S&P 500 – Prices put in a Doji candlestick below resistance at the top of a rising channel set from late December, pointing to indecision and hinting and move lower may be ahead after two consecutive days of gains. Initial support lines up at the 1300 figure. Channel resistance is now at 1322.40.

CRUDE OIL – Prices are once again testing support at 97.70 following a rejection at familiar resistance in the 101.28-103.35 region. The downside is reinforced by resistance-turned-support at the top of a falling channel set from mid-November, now at 96.85. A break below the latter boundary initially exposes 95.78, the November 23 close.

GOLD – Prices are testing support-turned-resistance in the 1666.37-1677.05 region, with a break higher exposing the 1700/oz figure. Near-term support lines up at 1638.84, with a break below that initially targeting 1615.65.

US DOLLAR – Prices broke below the midline and top of a falling channel in place since mid-December, exposing a former Head & Shoulders neckline at 9823 as sellers’ next objective. A breach of this level on a daily closing basis would amount to a meaningful bearish change in tone for the greenback. The channel midline, now effectively at the 9900 figure, has been recast as near-term resistance.

EUR/USD: Remain Short Through Upswing

2012-01-23T03:53:00.000-08:00

I entered short EURUSD at 1.3526 on November 9 expecting the Eurozone debt crisis to continue to spread and moved my stop to 1.3231
 after the pair met my secondary objective at 1.2872, aiming for the 
next target at 1.2586. Prices took out resistance at the top of a 
falling channel set from early November last week, hinting the correction I was waiting for
 is gaining momentum. Near-term resistance begins at 1.3144. I will look
 for the upswing to yield an opportunity to add to the trade, aiming for
 renewed selling in the weeks ahead. 

MARKET VIBRATIONS: DYNAMIC INTRADAY NEWS COMMENTARY

2012-01-23T03:47:00.000-08:00

OVERALL RISK: bullish

US EQUITIY FUTURES: Slightly bearish

CURRENCY WINNER/LOSER: +NZD, -GBP

1010 GMT French Presidential election frontrunner Hollande is talking tough on banks, pledging if elected to separate investment activities from other activities as well as ban them from tax havens. He has also proposed a new Franco-German treaty to increase cooperation. Geopolitics has dominated headlines this morning with the German Foreign Minister pledging to increase EU pressure aimed at stopping funding that the EU suspects is being used to develop nukes.

0853 GMT EURUSD has rallied strongly above 1.2900 and is now at 1.2930. Sources are saying Middle Eastern buyers are behind the move. German Foreigm Minister Westerwelle is now speaking in Brussels, says Iran sanctions are aimed at cutting funds for nukes, adding that EU will agree to sanctions. NYMEX is volitile on Iran developments. Bonds are seeing some strength ahead of the EU summit with EMU peripheral 10-years looking better.

0745 GMT Greek PSI update: reports are saying bondholders have made their final and "maximum" debt swap offer to the EU and IMF. Italy's Monti and ECB's Draghi have voiced a desire to see the ESM expanded by 100% to EUR 1tln. SNB quashes EURCHF speculation, saying will defend 1.2000 peg with "utmost determination." French BusCon indicator for January comes in at 91, versus expected 95 and previous 94.

0645 GMT In European trade this morning, commodity currencies continue to be strong. The Asian session saw some comments saying that Italy wants an increased EU bailout fund, as well as a vote by Croatia to join the EU. Keep heads up for German and French auction results later today, as well as the EU FinMin meeting.

FOREX: Euro Debt Crisis in Focus as Finance Ministers Meeting Looms

The Eurozone debt crisis remains in focus as traders look to a meeting of the currency bloc’s finance ministers today for details of the much-anticipated “fiscal compact” aimed at introducing structural reforms to restore confidence and rein in borrowing costs ahead of a larger EU leaders’ summit next week. Also on the agenda is a final agreement on the degree of private-sector involvement (so-called “PSI”) in the Greek bailout. The agreement on a 50 percent haircut for the country’s creditors hashed out in October now looks like it may unravel.

The newswires point to a loose agreement whereby private creditors would accept losses of as much as 65-70 percent on their holdings of Greek debt but the particulars of a bond swap exchanging outstanding paper for new longer-dated maturities to help the country finance its immediate obligations remain elusive. If the talks fail, Greece may yet face a disorderly default that threatens to throw credit markets at large into turmoil. Indeed, a PSI agreement is vital to releasing a tranche of funding from the second EU/IMF bailout for the beleaguered country needed to cover €14.5 billion in debt maturing in March. The main point of contention is reportedly the coupon rate assigned to the new bonds.

Against this backdrop, France and Germany will tap the markets to sell €7.3 billion and €3 billion in shorter-term debt, respectively. Paris will be selling 91-, 168- and 350-day bills while Berlin will offer 12-month paper. As usual, traders will keep an eye on prevailing yield and bid-to-cover readings following the auctions for a reading on the degree of solvency stress in the markets. On the data front, a quiet European docket is likely to put the spotlight on the Richmond Fed Manufacturing Index reading due out in the US, where forecasts call for the highest print in 8 months.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
0:30	AUD	Producer Price Index (QoQ) (4Q)	0.3%	0.4%	0.6%
0:30	AUD	Producer Price Index (YoY) (4Q)	2.9%	3.0%	2.7%
5:00	JPY	Supermarket Sales (YoY) (DEC)	-0.6%	-	-2.3%

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:45	EUR	French Own-Company Production Outlook (JAN)	-	-2	Low
7:45	EUR	French Production Outlook Indicator (JAN)	-36	-37	Low
7:45	EUR	French Business Confidence Indicator (JAN)	95	94	Low
8:00	CHF	Money Supply M3 (YoY) (DEC)	-	7.2%	Low
8:00	CHF	Real Estate Index Family Homes (4Q)	-	398.6	Low
10:15	EUR	Germany to Sell €3B in 12mo Bonds	-	-	Medium
14:00	EUR	France to Sell €7.3B in 91-350 day Bills			Medium
15:00	EUR	Euro Zone Consumer Confidence (JAN A)	-21.4	-21.1	Medium
16:00	EUR	Euro Zone Finance Ministers Meet in Brussels	-	-	High

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.2883	1.2982
GBPUSD	1.5492	1.5620

Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

2012-01-23T02:08:00.000-08:00

Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

Though the dollar managed to regain a little lost ground against the euro Friday, the currency was still under pressure into the close. For the Dow Jones FXCM Dollar Index, this would lead to a fifth consecutive daily (open-to-close) bearish close – the longest series of losses for the benchmark currency since the run through October 10th. The opportunity to press new 12-month highs has considerably diminished, but it is still early to claim the greenback has made a critical bearish change in trend. Moving forward, there are two key fundamental considerations to monitor for guidance on the dollar: the sentiment surrounding the euro and the progress in underlying risk appetite trends. For the greenback’s most liquid counterpart, the relief of an impending crisis has dissipated, and the euro can continue to draw capital away from the world’s most extreme safe haven. Investor sentiment itself is what we should be most concerned with. The S&P 500 has capped a three-week advance to five month highs, yet conviction is still flimsy. It could find a serious booster however if the Fed hints at QE3 or US 4Q GDP impresses this week.

Euro Advance Takes a Step Back as Market Awaits Word on Greece

Having posted its best rally against the benchmark dollar in three months against a foul-weather fundamental backdrop, it makes sense to have seen the euro ease into the close of this past week. Considering the region’s troubles are so well known at this point, the currency is running fully on speculation of the timing for expected troubles. A side effect of knowing that you are fighting the current, however, is a greater sensitive to holding risk through lockups. With the weekend approaching and negotiations over the discount on private holding of Greek debt ongoing, it is natural to ease the risk of a long euro exposure a little.

Heading into the new trading week, there is a list of potential fundamental threats; but the weight of their influence has lessened considerably from just a few weeks ago. Given expected time frames, the terms of the private sector investors’ accommodation for Greece’s debt burden will be the first concern. The current consensus is still for a 50 percent haircut (essentially debt forgiveness), in a roll to new 30-year bonds with a significantly reduced 3.0 to 4.75 percent coupon. Anything along these lines could buy us a little more time of disregard for real fundamental threats. We have come to expect the same quick-fix and we’ll-fix-it-later policy decisions to follow the EU Finance Minister summit on Monday. A little more open to surprise are the growth-based economic indicators and the ECB’s three-month liquidity tender due in the first 48 hours.

British Pound: Will We See Confirmation of Policy Official’s Recession Warnings

If there is a recession or region-wide financial crisis for the Euro Zone, it is highly likely that the United Kingdom is not far behind (if it is not already suffering the same fate). The relationship between euro and sterling price action against third party currencies is exceptional due to its fundamental connections, but there are still external factors that can offer a degree of separation. Those alternative factors led to the significant swing in EURGBP over the past week. The three-day rally through Thursday was the influence of the euro’s relief rally and the sterling lagging response. Friday’s plunge was encouraged by rising gilt yields but follow through requires something more. A bullish surprise in the face of growing recession fears for the UK could offer a relief rally akin to what the euro has enjoyed. With 4Q GDP seen contracting, the line is drawn.

Gold Working on its Best January Performance Since 2008

So far this year, gold is up 6.6 percent. This represents the first time in three years that we could see a positive opening month and it is generally the best performance for the period since 2008. Under normal circumstances, we could say this strength was guided by anti-dollar capital flows; but the rolling, 20-day (trading month) correlation between the fiat and metal has deteriorated significantly recently. Furthermore, we see that the relationship between the traditionally safe commodity and risk-inclined S&P 500 is tightening (currently 0.83 – 1.00 being perfect). From this, we can are seeing the distribution of speculative capital from absolute liquidity havens to relative (but expensive) safe havens.

ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Producer Price Index (QoQ) (4Q)		0.6%	Another item that will influence the RBA in its decision-making at the Feb 7 meeting
0:30	AUD	Producer Price Index (YoY) (4Q)		2.7%
7:45	EUR	French Own-Company Production Outlook (JAN)		-2	French business confidence has been sliding since mid-2011 on worsening Eurozone outlook
7:45	EUR	French Production Outlook Indicator (JAN)		-37
7:45	EUR	French Business Confidence Indicator (JAN)		94
8:00	CHF	Money Supply M3 YoY (DEC)		7.2%	The 12-month average hit a May 2004 high with the last reading.
8:00	CHF	Real Estate Index Family Homes (4Q)		398.6	Looking for exchange rate influence for growth bearing
13:30	CAD	Leading Indicators MoM (DEC)		0.8%	Will act as a placeholder for year-end GDP speculation
15:00	EUR	Euro-Zone Consumer Confidence (JAN A)		-21.1	Has weakened since mid-2011
23:00	AUD	Conference Board Leading Index (NOV)		0.6%	Signs of a slowing economy coupled with weakening inflation would boost rate cut concerns

GMT	Currency	Upcoming Events & Speeches
10:15	EUR	German Bill Auction
11:45	EUR	Germany’s Merkel Meets with Belgian Prime Minister Di Rupo in Berlin
14:00	EUR	French Bill Auction
16:00	EUR	Euro-Area Finance Ministers Meet in Brussels
17:00	EUR	Germany’s Merkel Speaks in Berlin

SUPPORT AND RESISTANCE LEVELS

EMERGING MARKETS & SCANDIES CURRENCIES 18:00 GMT

Currency	USD/MXN	USD/TRY	USD/ZAR	USD/HKD	USD/SGD	Currency	USD/SEK	USD/DKK	USD/NOK
Resist 2	16.5000	2.0000	9.2080	7.8165	1.3650	Resist 2	7.5800	5.6625	6.1150
Resist 1	14.3200	1.9000	8.5800	7.8075	1.3250	Resist 1	6.5175	5.3100	5.7075
Spot	13.1813	1.8298	7.9516	7.7618	1.2719	Spot	6.7826	5.7501	5.9324
Support 1	12.6000	1.6500	6.5575	7.7490	1.2000	Support 1	6.0800	5.1050	5.3040
Support 2	11.5200	1.5725	6.4295	7.7450	1.1800	Support 2	5.8085	4.9115	4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3096	1.5727	77.65	0.9464	1.0227	1.0620	0.8168	100.92	121.26
Resist. 2	1.3055	1.5689	77.49	0.9434	1.0203	1.0586	0.8142	100.59	120.94
Resist. 1	1.3014	1.5652	77.33	0.9405	1.0179	1.0552	0.8116	100.27	120.61
Spot	1.2931	1.5576	77.01	0.9345	1.0132	1.0484	0.8063	99.62	119.97
Support 1	1.2848	1.5500	76.69	0.9285	1.0085	1.0416	0.8010	98.97	119.32
Support 2	1.2807	1.5463	76.53	0.9256	1.0061	1.0382	0.7984	98.65	119.00
Support 3	1.2766	1.5425	76.37	0.9226	1.0037	1.0348	0.7958	98.32	118.67

Technical Analysis for Currency Markets by Me and Ze Capital Management

2012-01-23T00:11:00.000-08:00

Looking to Buy Euro Dips

The market has finally managed to find some bids and although the broader underlying trend remains intensely bearish, the risks from here are for additional corrective gains back towards the 50 and 100-Day SMAs in the 1.3100-1.3400 area before the next lower top carves out. Some falling trend-line resistance has already been broken on the daily chart and the 10-Day SMA looks to be on the verge of crossing back above the 20-Day SMA to provide added confirmation for short-term bullish structural shift. Setbacks should now be well supported ahead of 1.2800

GBP/USD Classical Technical Report

GBP/USD:The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.

USD/JPY Classical Technical Report

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

Dollar to Challenge Key Support

2012-01-22T23:52:00.000-08:00

S&P 500 Prices put in a Doji candlestick below resistance at the top of a rising channel set from late December, pointing to indecision and hinting and move lower may be ahead after two consecutive days of gains. Initial support lines up at the 1300 figure. Channel resistance is now at 1322.40.

Daily Chart - Created Using FXCM Marketscope 2.0

CRUDE OIL Prices are once again testing support at 97.70 following a rejection at familiar resistance in the 101.28-103.35 region. The downside is reinforced by resistance-turned-support at the top of a falling channel set from mid-November, now at 96.85. A break below the latter boundary initially exposes 95.78, the November 23 close.

GOLD Prices are testing support-turned-resistance in the 1666.37-1677.05 region, with a break higher exposing the 1700/oz figure. Near-term support lines up at 1638.84, with a break below that initially targeting 1615.65.

US DOLLAR Prices broke below the midline and top of a falling channel in place since mid-December, exposing a former Head & Shoulders neckline at 9823 as sellers’ next objective. A breach of this level on a daily closing basis would amount to a meaningful bearish change in tone for the greenback. The channel midline, now effectively at the 9900 figure, has been recast as near-term resistance.

Euro Rally Still Has Room to Run Before Broader Downtrend Resumption

2012-01-20T00:36:00.000-08:00

Euro still well bid on IMF and solid auctions
Technical studies showing bullish weekly reversal

The Euro is looking to mount its first major short-term correction in several weeks, with the market attempting to establish back above the previous weekly highs by 1.2880. Market participants have found some renewed confidence in the single currency despite all the troubles in the region with the news that the IMF will be looking to offer another $1Trillion in aid and some very well received auctions out of Spain and France seen as the primary drivers for the renewed bid tone. Technical studies have also been warning of the need for some form of a bounce in this market, and although we continue to see the broader risks tilted to the downside, we would still not rule out the potential for this rally to extend over the coming days into the 1.3200-1.3500 area before underlying bear trend resumption.

While at this point it is still way too early to make any serious calls, we have been projecting relative underperformance in the commodity currencies over the coming months as the fallout from the global recession spreads. Our view from the start of the recession has always been a 3 phase recession view which originated in the United States, spread to Europe, and will soon move on to China, the commodity bloc economies and emerging markets. Although these phase three economies have slowed in the face of the US and Eurozone slowdowns, in our opinion, the intensity of the recession has not been fully realized in these regions. As such, we project relative underperformance in these economies even against the Eurozone going forward and look for crosses that have recently posted multi-year and record lows, like EUR/AUD and EUR/NZD to soon aggressively reverse course.

Data out of China has been less and less encouraging of late, while both Australia and New Zealand produced some extremely discouraging economic data this week, with terrible employment and much softer CPI respectively. With markets, it is also always about what has been priced in and what has not been priced in rather than what actually is at present. We believe that as bad as things are in the Eurozone, there is very little room for additional downside as most of the bad has been priced in, while in Australian and New Zealand, there is still a good deal of downside risk that has not been appropriately priced into markets.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market has finally managed to find some bids and although the broader underlying trend remains intensely bearish, the risks from here are for additional corrective gains back towards the 50 and 100-Day SMAs in the 1.3100-1.3400 area before the next lower top carves out. Some falling trend-line resistance has already been broken on the daily chart and the 10-Day SMA looks to be on the verge of crossing back above the 20-Day SMA to provide added confirmation for short-term bullish structural shift. Setbacks should now be well supported ahead of 1.2750, while only back under 1.2620 negates short-term bull bias.

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

GBP/USD: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.

USD/CHF: Although our overall outlook remains intensely bullish, the market is in the process of some interday consolidation before the next major upside extension beyond 0.9600 and towards parity. As such, from here, we see risks for additional setbacks towards 100-Day SMA by 0.9100 from where a fresh higher low is sought out. Ultimately, only a sustained break back under 0.9000 would negate constructive outlook and give reason for pause. Dips towards the psychological barrier should therefore be used as formidable buy opportunities.

Prepared by: Zeshan Muhammad Ali Awan

GBP/USD Classical Technical Report 20th January

2012-01-20T00:20:00.002-08:00

GBP/USD:The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.

EUR/USD Classical Technical Report 20th January

2012-01-20T00:20:00.000-08:00

EUR/USD: The market has finally managed to find some bids and although the broader underlying trend remains intensely bearish, the risks from here are for additional corrective gains back towards the 50 and 100-Day S.M.As in the 1.3100-1.3400 area before the next lower top carves out. Some falling trend-line resistance has already been broken on the daily chart and the 10-Day S.M.A looks to be on the verge of crossing back above the 20-Day S.M.A to provide added confirmation for short-term bullish structural shift. Setbacks should now be well supported ahead of 1.2750, while only back under 1.2620 negates short-term bull bias

Dollar Slides a Fourth Day as Risk Appetite Persists, Euro Rallies

2012-01-19T21:58:00.000-08:00

Dollar Slides a Fourth Day as Risk Appetite Persists, Euro Rallies

On the week, the dollar finds itself significantly lower against all of its major counterparts with the exception of the Japanese yen. This is a move that fits the picture that the broader capital market is painting for us. Among the signs, we find the S&P 500 advancing to fresh five-month highs, volatility indexes are testing lows not seen since July and the euro is charging higher across the board. When the masses are pining for liquidity and safety of funds at the cost of a negative real rate of return, the greenback will shine. And, conversely, when this sentiment extreme isn’t pressuring the masses; funds will seek greater diversity. That said, a move away from an extremophile currency does not necessarily mean that risk appetite will naturally climb to new heights.

Everything we have seen from the capital and FX markets suggests that what we have seen to this point is a pull back or retracement. As the jitters of panic in the spread of a global crisis pass, there is room to unwind positions that look to speculation on or insure against impending catastrophe. Traders must ask: how much premium is there to unwind, and will fear return before this correction is naturally completed?

Euro Marks a Critical Technical Break Higher as Relief Pours In

After a round of Spanish and French bond auctions through Thursday’s session, we have officially closed out the last of this week’s important bond auctions. What started as a period that was destined for disaster after last Friday’s round of sovereign ratings downgrades (including France, Italy, Spain and Portugal), we are ending with a sigh of relief. Objectively, the rates that the various governments pulled from the market are not sustainable for financing deficits and spending over the medium to long-term, but they do ease the threat of imminent doom (a complete collapse of credit and funding). And, risk of uncontrollable financial crisis was what drove the shared currency so low, so quickly. Therefore, it is only reasonable that the immediate pressure relief should lead to near-term recovery. That said, over-estimating the pace (and possibly depth) of the crisis doesn’t imply a recovery with higher yields and non-existent risk.

With the bullish tide that accompanies this corrective rally, we can see optimism stain bond auctions outcomes and expectations for various open-ended problems. A notable example is the negotiations between banks and Greece for a viable agreement to help Greece to a surplus. FT reported a deal was close while the New York Time says Hedge Funds may sue. I refer to Fitch that says: regardless, it would be a default.

British Pound Slow to Follow Euro Higher, Looking Ahead to GDP

The FTSE 100 closed at a five-month high through Thursday’s close in London, but this is yet another example of asset pricing running astray of genuine fundamental potential. Typically, the stock market will follow growth potential through an ‘investment, wage, spending, production, revenue increase’ cycle. Yet, we know that expansion is exactly the opposite of what’s in store for the United Kingdom through the immediate future. In fact, the Bank of England Governor, Chancellor of the Exchequer, World Bank and industry groups have all warned that the country may dip into period of negative growth – if not technical recession. Suggestion an economic slump and all it would entail has already been priced in is preposterous as it entails an indefinite period of little-to-no dividend income alongside rising capital loss risk. This raises a very real red flag for next week’s 4Q GDP reading. Following the euro higher could set the sterling up for a big fall given the correct fundamental winds.

Gold Running at the Same Steady Pace as the S&P 500, With Better Fundamentals

Gold’s advance since the beginning of this year has run at about the same pace as the S&P 500’s gait: consistent but lacking for momentum. IN fact, looking at an intraday chart of the metal overlaid with the index; you would see a remarkable consistency in the two assets’ performance. In fact, the two-week rolling correlation between the two is currently 0.90 (exceptionally strong). That is very unusual given one is a safe haven and the other a risk barometer. We could attribute the general performance to anti-dollar capital flows, but that ignores the underling drive. Moving away from the greenback is essentially moving away from cash. In other words, capital is being reinvested into safe and risky assets.

ECONOMIC DATA

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Import price index (QoQ) (4Q)	0.6%	0.0%	Terms of trade important for Australia’s export-dependent economy
0:30	AUD	Export price index (QoQ) (4Q)	-2.0%	4.0%
1:35	CNY	MNI January Flash Business Sentiment Survey			Comes after GDP figures showing slowest growth in more than 2 years
2:30	CNY	HSBC Flash China Manufacturing PMI (JAN)		49
4:30	JPY	All Industry Activity Index (MoM) (NOV)	-0.9%	0.8%	Could point to period of slow growth in Japanese economy
7:00	EUR	Producer Prices (MoM) (DEC)	0.1%	0.1%	Price pressures to ease further amid threat of recession
7:00	EUR	Producer Prices (YoY) (DEC)	4.6%	5.2%	Price pressures to ease further amid threat of recession
9:30	GBP	Retail Sales Ex Auto Fuel (MoM) (DEC)	0.7%	-0.7%	Some improvement expected amid holiday season
9:30	GBP	Retail Sales Ex Auto Fuel (YoY) (DEC)	1.7%	0.5%	Some improvement expected amid holiday season
9:30	GBP	Retail Sales (MoM) (DEC)	0.6%	-0.4%
9:30	GBP	Retail Sales (YoY) (DEC)	2.4%	0.7%
12:00	CAD	Consumer Price Index (MoM) (DEC)	-0.2%	0.1%	Price pressures remain weak in Canada; to further dampen expectations of BoC rate hikes
12:00	CAD	Consumer Price Index (YoY) (DEC)	2.7%	2.9%
12:00	CAD	Bank Canada CPI Core (MoM) (DEC)	-0.2%	0.1%
12:00	CAD	Bank Canada CPI Core (YoY) (DEC)	2.2%	2.1%
12:00	CAD	Consumer Price Index (DEC)	120.8	120.9
13:30	CAD	Wholesale Sales (MoM) (NOV)	0.5%	0.9%
15:00	USD	Existing Home Sales (DEC)	4.65M	4.42M	Recovery in US real estate market has lagged behind rest of the economy
15:00	USD	Existing Home Sales (MoM) (DEC)	5.2%	4.0%

GMT	Currency	Upcoming Events & Speeches
1/21	EUR	EU’s Barroso Speaks in Guimaraes, Portugal

SUPPORT AND RESISTANCE LEVELS

\Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3132	1.5640	77.81	0.9442	1.0214	1.0556	0.8136	101.34	120.84
Resist. 2	1.3090	1.5602	77.64	0.9413	1.0191	1.0521	0.8110	101.02	120.51
Resist. 1	1.3048	1.5565	77.48	0.9383	1.0167	1.0487	0.8083	100.69	120.18
Spot	1.2965	1.5489	77.16	0.9323	1.0120	1.0419	0.8031	100.04	119.52
Support 1	1.2882	1.5413	76.84	0.9263	1.0073	1.0351	0.7979	99.39	118.85
Support 2	1.2840	1.5376	76.68	0.9233	1.0049	1.0317	0.7952	99.06	118.52
Support 3	1.2798	1.5338	76.51	0.9204	1.0026	1.0282	0.7926	98.74	118.19

USD Index At Critical Juncture, Euro Correction Eyes 1.3100

2012-01-19T09:46:00.000-08:00

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9921.26	9945.57	9909.47	-0.04	54.96%

Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.04 percent lower from the open, the reserve currency should continue to retrace the decline from earlier this week as market sentiment wavers. In turn, the shift away from risk-taking behavior should prop up the greenback over the next 24-hours of trading, and the rebound looks poised to gather pace over the near-term as the more robust recovery in the world’s largest economy dampens the prospects for additional monetary support. However, as price action comes up against the downward trendline, former support around 9,947 may come in as new resistance, and the reserve currency may ultimately give back the advance from earlier this year should market participants continue to ramp up their appetite for risk.

As the index threatens the upward trend carried over from the previous year, we may see the bearish divergence in the relative strength index spur a sharp decline in the USD, and the dollar may fall back towards the 50.0 percent Fibonacci retracement around 9,828 as it searches for support. In turn, we may see the greenback track within a narrow range over the near-term, but the slew of event risks of tap for the following week could increase the appeal of the reserve currency as the recovery in the world’s largest economy gradually gather space. As we’re expecting to see GDP expand at an annual rate of 3.0% in the fourth-quarter, the Federal Reserve may continue to soften its dovish outlook for monetary policy at the rate decision on tap for January 25, and the central bank may endorse a wait-and-see approach for 2012 as the U.S. skirts a double-dip recession. As a result, the USD looks poised to regain its footing over the following week, and we may see the greenback make a run at the 78.6 percent Fib (10,117) as market participants scale back speculation for another large-scale asset purchase program.

Two of the four components gained ground against the USD, led by a 0.58 percent rally in the single currency, and the technical developments points to additional Euro strength as the exchange rate breaks out of the downward trending channel carried over from the previous year. As the EUR/USD clears the 20-Day SMA at 1.2868, the rebound from the January low (1.2623) may gather pace over the next 24-hours of trading, and the pair may come up against 38.2 percent Fib from the 2009 high to the 2010 low around 1.3100-20 to test for resistance. However, as the fundamental outlook for the euro-area remains bleak, the recent bounce in the EUR/USD could turn out to be a short-term correction, and the single currency remains poised to face additional headwinds this year as the region braces for a ‘mild recession.’ As the euro-area faces an increased risk of a major economic downturn in 2012, we expect the European Central Bank to ease policy further over the coming months, and speculation for additional monetary support continues to cast a bearish outlook for the EUR/USD as the governments operating under the monetary union struggle to address the sovereign debt crisis.

Dollar Salivating For Euro Troubles Or 4Q Earnings To Force Break

2012-01-17T01:44:00.000-08:00

Dollar Salivating for Euro Troubles or 4Q Earnings to Force Break

With the global economy slowing, rates fading and financial instability becoming the norm; my medium-term outlook is for a meaningful risk aversion move. Yet, at this point, I would settle for a short-term rally in risk trends. We have lacked any kind of meaningful momentum since before the year began. Giving us a sense of this inactivity, the equity market’s (my passive barometer for market-wide risk) VIX Volatility reading is plunging its lowest level since late July while the currency equivalent is testing comparative lows. This is a measure of future activity. Those measures of current activity are running at similar levels. If we were in fundamental trough or plateau – or even a mixed scenario – this anchoring wouldn’t surprise me. That said, we are not facing balanced conditions. The threat of financial and economic risk is clearly rising (even politicians are admitting to it), and yet we still lack for conviction.
What is needed is a catalyst that draws investors off of the sidelines and encourages them to be active in this market once again. The European downgrades have so far failed to stoke fears of our next global financial crisis taking root (more on that below) and the steady slide in economic activity across various regions has yielded the same. That is the risk side of the balance, so now we will try the ‘return’ side. With Tuesday’s session, we will kick off the 4Q US earnings season in earnest . Will these figures finally return to reality and offer a spark for broader risk?
Euro has Not Dodged a Bullet with Downgrades, French Bond Auction
The Euro has passed the first opportunity to respond to the Standard & Poor’s round of Friday evening rate cuts , and not only has the currency avoided a strong bearish slide – it didn’t move at all. Neither the shared currency nor risk appetite trends made a meaningful move liquidity filled out once again. Should we take this to mean that the downgrades have no influence? Of course not. Less controversial, does this mean that the downgrades themselves were fully priced in? We could argue this point on price action, but the reality of the situation is that the full impact of this change cannot be fully appreciated due to the complexity of how this can further and accelerate the region’s financial crisis. Therefore, the rate cut to France itself may have been adjusted for, but its influence in undermining the region’s safe haven options, unnerving regional banks and diverting capital flow won’t be known until it is already behind us.
Far more influential in the rating agency’s offensive is the continued degradation of those members that are already on the cusp. Now rated ‘junk’ status, Portugal has seen its 10-year bond yield soar over 225 basis points. This brings up a serious concern of whether another member that is tapping the bailout program could follow down the same path as Greece. More certain in its influence over the region, both Spain and Italy didn’t see significant impact on their respective yields on the day, but the rating hit no doubt weighs the market’s confidence. Spain will find a vote of confidence in bond auctions tomorrow (on 12 and 18 month maturities – short-term usually has less risk). Also of note, we have Greek and EFSF bond auctions. The later will be particularly interesting after the S&P downgraded its ‘AAA’ rating Monday . This didn’t strike the market as much of a surprise however as it was warned well in advance that should France lose its top rating, so too would the bailout program.

Japanese Yen: Noda Warns Japan Cannot Abide Rates Above 3 Percent

When a currency stands in as a safe haven, it can override a significant number of fundamental concerns . So it is with the Japanese yen. The Japanese markets offer the kind of liquidity and financial structure that resembles the United States’ roll – just in the Asian sector. However, the country never really solved its credit issues of two decades ago and their currency is severely undermining economic activity in the region. Prime Minister Noda warned Monday (it’s an issue if your leader voices it) that they must reign in debts as they can’t absorb even 3 percent rates.
Canadian Dollar Response to BoC Decision Depends on Expectations
What should we expect from the Bank of Canada rate decision in the upcoming session? There may very well be higher expectation for volatility in reaction to this release as the speculative ranks are riding high off their RBA expectations. However, the market and economists are pricing in little to no chance of a move over the coming 12 months (much less this particular meeting). That said, the group has held a dovish tone for months – generally ignored by the market. If they threaten action to that outlook, we have a good risk aversion amplifier to work with.
British Pound Will Try to Look for Separation from Euro with CPI Data
The sterling is still following the track that the euro has laid out for it. Chancellor of the Exchequer reminded us of the two currencies’ fundamental connection when he warned that the Euro Zone’s crisis is “extremely challenging” for the UK (our skepticism should curb the attention we pay to his optimism surrounding certain, recent indicator releases). If the crisis intensifies in the Euro-area, it will certainly spill over to Britain. That said, if we can hold on to quiet markets, perhaps the upcoming CPI data can provide a small, temporary separation.
Australian Dollar Advances before Chinese GDP, Data Impact Reserved
The issue with quiet markets is that the impact from data will be muted whether it releases to the bullish or bearish side. As the most risk attuned commodity currency and an important raw material provider for China, there was an expectation that the Asian giant’s 4Q GDP figures could generate substantial volatility for the Aussie. However, a pick up from a quiet level is still quiet. The economy expanded 2.0 percent on the quarter and a greater than expected 8.9 percent on an annual basis. It’s still a cooling trend, just not at the pace that can spark fear.
Gold Slowly Advances as European Financial Health Deteriorates
While the euro and risk trends remain sedate in the aftermath of the Euro Zone downgrades, there is still a sense of risk aversion related to the development. The currency holds steady as capital circulates to other European members while sensitive assets (like equities) find ill-earned confidence in the promises of stimulus from policy bodies. Nevertheless, the slide into recession and the low firepower for monetary policy officials as their balance sheets balloon aren’t going unnoticed. In this troubled mix, capital will find its way to the non-currency metal.
ECONOMIC DATA
Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
2:00	CNY	Real GDP (YoY) (4Q)	8.7%	9.1%	Expectations are that Chinese growth will be the slowest since 2009
2:00	CNY	Real GDP (QoQ) (4Q)		2.3%
2:00	CNY	Real GDP YTD (YoY) (4Q)	9.2%	9.4%
2:00	CNY	Industrial Production YTD (YoY)	13.8%	14.0%
2:00	CNY	Industrial Production (YoY)	12.3%	12.4%
2:00	CNY	Fixed Assets Inv Excl. Rural YTD (YoY) (DEC)	24.1%	24.5%
2:00	CNY	Retail Sales YTD (YoY) (DEC)	17.0%	17.0%
2:00	CNY	Retail Sales (YoY) (DEC)	17.2%	17.3%
09:30	GBP	CPI (MoM) (DEC)	0.4%	0.2%	UK inflation continues to show signs of easing on austerity and subdued activity, data unlikely to alter BoE’s dovish stance
09:30	GBP	CPI (YoY) (DEC)	4.2%	4.8%
09:30	GBP	Core CPI (YoY) (DEC)	3.0%	3.2%
09:30	GBP	Retail Price Index (DEC)	239.1	238.5
09:30	GBP	RPI (MoM) (DEC)	0.3%	0.2%
09:30	GBP	RPI (YoY) (DEC)	4.7%	5.2%
10:00	EUR	Euro-Zone CPI - Core (YoY) (DEC)	1.6%	1.6%	Expected to ease amid threat of recession in Eurozone
10:00	EUR	Euro-Zone CPI (MoM) (DEC)	0.4%	0.1%	Expected to ease amid threat of recession in Eurozone
10:00	EUR	Euro-Zone CPI (YoY) (DEC)	2.8%	3.0%
10:00	EUR	ZEW Survey (German Current Situation) (JAN)	24	26.8	Data could provide insight into whether Germany slips into recession
10:00	EUR	ZEW Survey (Eurozone Econ. Sentiment) (JAN)		-54.1
10:00	EUR	ZEW Survey (German Econ. Sentiment) (JAN)	-49.4	-53.8
13:30	CAD	Int'l Securities Transactions (NOV)		2.03B
13:30	USD	Empire State Manufacturing (JAN)	11	9.53	Expected to reflect the overall positive direction of US economic indicators
14:00	CAD	Bank of Canada Rate Decision	1.00%	1.00%	No change expected as Canadian economy confronts challenges ranging from uncertain growth outlook to unstable labor market
23:30	AUD	Westpac Consumer Confidence s.a. (MoM) (JAN)		-8.3%
23:30	AUD	Westpac Consumer Confidence Index (JAN)		94.7

GMT	Currency	Upcoming Events & Speeches
9:00	EUR	French Finance Minister Baroin Speaks to the Press
9:30	EUR	Spain Bond Auction (364- and 518-Day Bills)
10:00	EUR	Greece Bond Auction
10:00	GBP	BoE’s King, Haldane, Cohrs, and Jenkins Speak in London
11:00	EUR	EFSF Bond Auctions (182-Day Bills)
12:30	EUR	EU’s Van Rompuy Meets Spanish Prime Minister Rajoy in Madrid
17:30	EUR	EU’s Almunia Speaks in Brussels
18:30	GBP	BoE’s Posen Speaks in London
23:00	EUR	Italy’s Monti Speaks in London

\ Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3193	1.5672	78.76	0.9516	1.0509	1.0054	0.7671	102.87	122.41
Resist. 2	1.3144	1.5629	78.58	0.9480	1.0477	1.0013	0.7640	102.51	122.05
Resist. 1	1.3095	1.5586	78.40	0.9445	1.0445	0.9972	0.7609	102.15	121.68
Spot	1.2998	1.5500	78.04	0.9374	1.0381	0.9891	0.7547	101.43	120.96
Support 1	1.2901	1.5414	77.68	0.9303	1.0317	0.9810	0.7485	100.71	120.23
Support 2	1.2852	1.5371	77.50	0.9268	1.0285	0.9769	0.7454	100.35	119.86
Support 3	1.2803	1.5328	77.32	0.9232	1.0253	0.9728	0.7423	99.99	119.50

Central Banking: A Study of Policy and Market Effects

2012-01-16T09:57:00.000-08:00

Central Banking

Central Banks are institutions are utilized by nations around the world to assist in managing their commercial banking industry, interest rates and currency. The idea of a Central bank is not a new one though. The first examples of a central banking authority were seen in China with the first issuance of paper money nearly 1000 years ago. Other examples date back to the Knights Templar, looking for credit to finance their crusades. Many of the processes being tested in the past have been refined over hundreds of years of practice resulting in today’s modern banking systems.

Examples of Central Banking today include the Federal Reserve of the United States, European Central Bank (ECB), Bank of England (BOE), Bank of Canada, and the Reserve Bank of Australia. There sphere of influence of a central bank may range from a single country such as the Reserve Bank of Australia or, represent policy created for a region or group of countries such as the ECB. To show the effects of Central Banking in a modern society, we will focus on the Federal Reserve of the United States and their policy decisions.

The Fed

The origins of Central Banking developed in the United States as far back as the Revolutionary War. In 1775 the Continental Congress met with the intention of developing a national currency and a plan to finance the developing war effort. The sole value of the “Continental” relied on the future tax collection of the future independent nation. As the revolution drew on with no conclusion, overprinting and counterfeiting brought about the devaluation and ultimate demise of the Continental currency. When the constitutional convention of 1787 convened, one of the first priorities was the discussion of the current financial system. As of 1791 the First Bank of the United States was issued its original charter.

Much has changed since 1787! The Central Banking system of the United States is now known as The Federal Reserve, or simply the “Fed”. The modern Fed was created in 1913 by congress with the intent of providing the United States with a safer and consistently stable monetary system. The Federal Reserve achieves its goals by conducting monetary policy, and supervising and regulating banks.

Bank Regulations

The primary reason for the creation of the modern Federal Reserve System was to stave off banking panics in the United States. This issue came to a head in 1907 during what has been dubiously called the “Bankers Panic”. During this time, stocks on the New York Stock Exchange fell nearly 50% from their 1906 highs. The end result of this crisis is that many banks and business were forced to either close or declare bankruptcy. As people worried they funds were unsafe at local banks, they would rush to withdrawal funds creating a massive shortage of capital.

The Federal Reserve is setup to avert a crisis such as the one experienced in 1907. A system is set in place where short term needs of small local banks can be handled if a “run” on deposits occurs due to unexpected withdrawals or regional emergencies. The Federal Reserve can easily loan money to small regional banks at a nominal charge called the discount rate. Once a run has been met, banks can then return their obligation back to the Federal Reserve. This policy is one of many tools the fed utilizes assuring the solvency of financial markets and bank depositories.

What Exactly is Monetary Policy

Monetary policy is another tool directly at the Feds disposal to achieve its goals. Monetary policy describes the actions that the Fed takes to control the money supply inside of the United States. Depending on the state of the economy, the fed may select to either take an expansionary or contractionary policy, with the supply of money being influenced by two specific methods.

During times of economic slowdown, the Fed often selects to peruse an expansionary policy in the market. This process begins by expanding the monetary base and decreasing interest rates. The theory behind expansionary policy is to make money more available to banks and businesses in an attempt to increase growth and development. As a byproduct of an expansionary policy, fundamental indictors such as GDP are expected to grow and unemployment decline.

As the economy heats up, the Fed will consider taking on contractionary measures. At this point, the monetary base may begin to be restricted and interest rates can begin to increase. These actions make excess investment capital scares, and place a higher premium on lending. With less capital circulating, the economy is expected to contract and slow down. During a time of contraction, GDP is expected to decline and unemployment to contrarily increase.

Effects on Currency Rates

By controlling the money supply, and interest rates, the decisions mandated by the Federal Reserve System have a direct influence to the strength / weakness of the USD. Previously, we discussed that when an expansionary policy is put in place, the monetary base is increased and interest rates decrease. By supplying more money to the market and banks than what is demanded values increase. This over supply of funds creates a flood of cheap dollars onto the open market, effectively diluting their value. The same holds true with Interest rates in an expansionary environment. As interest rates move lower, it becomes easier to borrow funds and the value of a currency tends to decline.

The opposing scenario holds true when the Fed assumes a contractionary monetary policy. A decrease in money supplied on the open market make capital scare. Scarcity drives up value for remaining funds and increases the value of currency. Increasing interest rates also has the same affect. Higher rates make funds more expensive to borrow, the barrier for lending decreases the availability of funds. Again as capital becomes scarce, currency prices are expected to appreciate.

What this Means to Traders

Knowing which policy cycle a central bank is taking can be a fundamental asset to currency traders. One recent example of a bank taking expansionary measures is the European Central Bank. One policy the European Central bank has employed is the lowering of interest rates. From their peak levels of 4.25% in 2008, the rates have declined 3.25% to an effective rate of 1.00%. Factor this in with an expanding monetary base as new debt is extended and refinanced, the Euro has been in a state of decline versus most major currency pairs. Below we can see the Euros descent against the Australian Dollar from 2008 – present. So far this pair has produced a maximum trend of over 8000 pips. We can use this directional bias in the market to then proceed and trade the strategy of our choice.