The exact opposite occurred!

Here’s a quick chart of Kiwi/Yen (NZD/JPY):

(click to enlarge)

My logic this AM was that barring some sort of news for Aussie/Kiwi strength, I figured that someone “knew something” about Japanese yen and why it was moving.  Looks like that guess was wrong and this trade almost certainly would have ended in losses.

Just goes to re-enforce what I preach (but don’t always practice LOL) all the time– trade what you see and not what you think you know!

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Under “normal” circumstances, these currencies are on opposite ends of the spectrum so to speak.  The Japanese Yen benefits the most from the risk-aversion trade, and the Aussie and Kiwi benefit the most from risk-seeking.  So which is it?

Well today its a little bit of both!  Now we all know that Obama is over in the neck of the woods trying to get everyone on-board with US, but this market action is interesting to me.  Now, Japan did just report good growth numbers, but they risk economic slowdown as reported by Bloomberg here.

Why this is strengthening the yen while traders are seeking higher yields is a mystery to me (if anyone knows– feel free to chime in;)

In any event, when I see a situation such as this one, I usually feel that something “has to give”.  So I am anticipating a little bit of reversion to mean here, and am thinking that both the Aussie (AUD) and the Kiwi (NZD) might go negative before today’s session is over.

Unfortunately, I am having MT4 issues this morning so I may just sit on my hands, but will be keeping an eye on Yen crosses and Aussie and Kiwi.   You should as well.

Check back later to see how this pans out and wish me luck with my MT4!

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Readers of this blog know that I tend use a combination of fundamental and technical analysis, but normally I’ll find a technical set-up that I like and then do some research to see if there are any possible fundamental reasons that support my conclusions.  Well now I’m searching high and low (pun intended) to find a technical set-up to support a hunch.

Not seeing the set-ups that I like.  The nice thing about technical analysis is that you can ALWAYS find some sort of pattern or indicator that will confirm one direction or another, but its more important to have the patterns that you KNOW work time and time again.

We all know about the Fed’s commitment to keep rates low and therefore depressing the dollar, but the dollar could benefit from the risk-aversion trade if worries about falling into the dreaded double-dip recession ramp up.  One of the main reasons why this fear may pick up is because of the removal of the stimulus programs and the pull back in quantitative easing.

In other words, the economy is going to have to stand on its own two feet.  Much like a baby who’s taking his first steps, you’re always concerned about the inevitable fall.  And with all of the fear out there, a fall is inevitable.  How bad it is going to be is anyone’s guess.

I’ll be watching closely for technical set-ups in the dollar that may foreshadow this move, but will not be acting on the hunch.   So, check back to see if I find any, and if you see your own, well you know what to do.

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Sound As A Pound No More!

The British pound (GBP) is weak across the board today as BOE Governor King re-iterated that a weaker currency should lead to a recovery in the economy.   This comes on the heels of a better than expected unemployment report, though not enough to buoy the sentiment for a rapid economic recovery.

As a result of subdued growth prospects, the BOE increased its quantitative easing program to $200 billion pounds last week to pump liquidity to the financial system.  Some have argued that their conservative, controlled approach to asset purchasing was a major reason why GDP shrank an unexpected .4% back in October, as other nations were exiting recession. 

Also to note was that the BOE said that inflation will stay below it 2% target for the next three years, thereby all but confirming that deflationary pressure is the concern for today.  As a result, don’t expect any interest rate hikes anytime soon.  In fact, a Bloomberg survey of economists showed that the median thinks they will maintain rates at .5% until the Q3 of 2010.  This also leaves open the door for increased asset purchases going forward.

As I wrote in an article back in September, I couldn’t envision the pound falling against the US dollar in the near-term as, “Bernanke’s path to dollar destruction has been well-documented”.  But I did caution against the pound in the long-term as the problems that are inherent in the British economy are coming into play today.  Since that time, GBP/USD did decline further before going on a tear from mid-October until now.

Here’s a good article from BBH’s Marc Chandler from yesterday presciently calling for GBP weakness.

One of the other things I talked about in my previous article was the pound’s positive correlation to the S&P 500.  Here’s a chart of the British Pound ETF (FXB) and the S&P 500 (SPY). (click chart to enlarge)

Well since that time, it looks like this correlation has stalled and we could be in for a possible decoupling of this correlation. (click chart to enlarge)

Or could this move down in the pound be foreshadowing a move down for the US equities markets?  Now that earnings season is over, there doesn’t appear to be a catalyst that will move the stock market higher other than Bernanke’s commitment to dollar weakness.

If we do see a pullback in the US equities market, then expect the US dollar to strengthen as the risk aversion trade is sure to hold up.

Either way, I expect a bit of fireworks in the New Year!

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Why is this important?  Well, when North Korea starts messing around in the region, that usually means volatility for the Japanese yen.  Here’s a quick chart of the yen when this news hit the wires (click chart to enlarge)

This appears to be a common tactic for N. Korea when they are about to meet on the World Stage.  Obama will be there sometime next week to try to talk them into nuclear reduction.  So we’ll see what (if anything) happens there.

Meanwhile, keep an eye on the yen as any further aggression or conflict in the region will increase its volatility.

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“Fitch stressed after the statement that there were no plans to change the U.K. rating. Other news has been more positive”

It’s amazing to me that investors actually still listen to these ratings agencies.  I don’t trust the ratings agencies as far as I can throw ‘em.  I did a video blog about them which you can see here. 

In the meantime, the British pound (GBP) is off slightly across the board in what can be viewed as a minor move in light of the news surrounding it.  It appears that someone is trying to slow down the strengthening of the pound.  The fact that Fitch has a strong UK presence didn’t escape my attention.

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So what does this all mean?  GAME ON!

News outlets are reporting that the tacit approval and continued commitment to global stimulus will embolden traders to sell US dollars and seek out riskier assets.  The US dollar has been re-confirmed as the currency of choice for carry trades, and the Aussie is the main beneficiary of this trade.

Let’s take a look at a chart of AUD/USD on the daily chart (click chart to enlarge)

As we approach year highs in AUD/USD, expect some choppiness as this pair fights to break-out to the upside.  As long as traders are convinced that the Fed won’t change its stance, expect to see some turbulence in commodities and commodity currencies.

How fast will the dollar tank and how long will Bernanke let this go is anyone’s guess.  But at this point expect to hear some noise out of the Eurozone and Japan, who will not be happy at their own currency’s strength.

I’m still trading cautiously here at the top of the range, as I worry that the lack of concern out of this G-20 meeting may lead to increased chatter from the peanut gallery this week, which in turn could mean increased volatility.  And if there’s no jaw-boning from anyone– then I’ll really be concerned!

So my stance is short-dollar but am remaining very cautious.

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The Kiwi, a flightless bird, is down .66% vs. JPY and .42% vs, USD.  What’s important to note here is that a lot of times we just group some of these currencies together as the “risk trade” or as the “commodity currencies”.  The reason I note this is because as of this writing, the Australian dollar or Aussie, is positive against most other currencies.

So even though the US stock market is up and the risk-taking trade appears to be in effect, it is important to remember the ffundamentals of individual currencies as well.

My guess is that sometime today, the Kiwi will trade back to fall in line with the overall risk trade.  I’m going to look at some charts in a bit to see if there is anything to note.

So check back later!

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So basically, the market is waiting to hear those 2 magic words:  EXTENDED PERIOD.

What happens if we heart those words again?  Consensus is that the stock market and commodities will rally at least in the short-term, as will the commodity currencies (AUD, NZD, CAD) and the US dollar will fall against all but the Japanese yen (JPY).  In other words, the risk-taking trade that I talk about so much.

Should the language change, then expect the risk-aversion trade to be on.

Either way, there are some encouraging signs that the economy is stabilizing if not improving, so rate hikes like the ones seen in Australia and Israel may be coming in the not-so-distant future.

So far in this mornings action, it looks like traders aren’t expecting any change in the language and haven’t waited, as JPY and USD are the biggest losers so far this AM.

So if your day-trading, remember to be careful around this announcement as the action can get VERY volatile in the minutes preceding and following the announcement.

Good trading to all.

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Well, tommorrow its expected that Reserve Bank of Australia (RBA) is going to raise rates another 25 basis points to 3.5% on its benchmark rate.  While this is good news for those who hold Australian dollars, my contrarian nature tells me that it may be time to lighten the load a bit.

Generally speaking, when everyone else wants to be a buyer, I want to be a seller.  And vice-versa.  So I’ll be keeping an eye on the Aussie pairs.  While we’ve gone over the risk trade ad nauseam, because the forex market is forward-looking (most are), this rate hike may very well be priced in.

Also to note is that while Australia appears to be exiting the recession, other countries are sure to follow suit and may begin raising rates as well.  So there are alot of factors going on here which could affect this currency.

So its when things appear to be rosiest is when I tend to exercise caution.  Will be interesting to see how this plays out!

One thing I did want to note about the review is that while I typically don’t offer tutorials on the blog for newbies, I do assume that my readers have a certain level of currency understanding and basic knowledge.

And that’s my role here at FXEDU.  I am an instructor.  It is my job to make sure that you, the reader, understand the currency market and are comfortable placing trades and participating in the largest financial market in the world.

It is my opinion that a little bit of knowledge can be dangerous in the “wrong” hands.  And by wrong I mean “uneducated”.

It is very true that there is a lot of good, free information out there on the internet.  But the problem for the novice trader is that it is very unorganized.  Because of the nature of being new to something, one might not necessarily know what they should be looking for and could miss very basic, fundamental information that could be critical for their success.

And that’s what we do in our courses.  I’m not here to act like some big-shot guru and promise you wild success and if you follow my methods that you’re going to be rich, etc. like you see out there on the internet.

What you’re going to get in our courses is a step by step plan that will take you from start to finish, and help you put together a trading plan that is right for you.  The course is an online format, and you have access to our instructors 24-hours a day to ask as many questions as you like.  So you can take the course on your own time, at your own pace.  And its affordable.  Only $100.  If you are serious about getting started in forex, our course is the greatest value out there on the internet.

And it won’t cost you an arm and a leg.  But it just might save you one.  So what are you waiting for???

Get enrolled in a course today!!!

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JPY is up today, most notably against the commodity currencies.  What’s going to be interesting is how far the BOJ will let the yen strengthen before the talks of intervention begin to surface again.  There is still lingering deflation in Japan, so don’t expect an interest rate hike anytime soon.  However, Japan appears to be emerging from the recession as unemployment has fallen to a 4-month low and household spending has impoved.

But a strong yen affects Japanese exports so it will be interesting to see the battle between the philosophies of the BOJ and the finance ministry play out.

So I’m watching and waiting!

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BOC Governor Carney has been talking down the Loonie as it came close to parity with USD in mid-October; I guess this was a little more than just jaw-boning.   So while the Canadian economy is still technically contracting, this doesn’t appear to be a major miss that is going to send them down further.  If they get a bit of currency relief, that will help their exports so look for them to exit recession next quarter.

So with the “fear” from this number abated, stocks up, US dollar (USD) and Japanese yen (JPY) down as risk-taking is back in play!  Top gainers so far are Aussie (AUD) and Kiwi (NZD), as should be expected.

Take a look at the 5-min chart of AUD/USD (click chart to enlarge)

Having fun yet?  Now up 60 pips in 20 minutes!

Now that the US economy appears to be recovering, with the first quarter over quarter growth in nearly a year, the carry trade is back on in full force as Australia is the place to be for yield seeking investors.

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Stay tuned!

One of the reason’s (outside of the technicals- which I’ll get to in a minute as I DID promise you charts today) for such weakness today is the inflation reading which came in last evening.   While inflation did check in higher than expected, the increase was not enough to warrant a 50 basis point (bp) rise in rates, so now the expectation is for “only” 25 bp when the RBA meets next week.

Considering the interest currently being offered in other parts of the world, this is STILL pretty good for savers seeking higher yields.

So let’s look at the updated charts for 2 short-term trades I called out last week, long GBP/AUD and short AUD/USD.  While the trades were intended to be short-term in nature (the AUD/USD being a day-trade), I probably would have held a little longer had the stock market responded a little more negatively.

So here’s GBP/AUD (click chart to enlarge):

Last week I called a possible reversal on this trade when the trend was clearly down on the daily charts, then mentioned a cup & handle formation on the 4-hour chart.  When I saw the bullish pattern on the shorter time-frame, I reduced my holding period for the trade and was able to take some profits before being stopped out.

Based on today’s action, tightening my stop was clearly a mistake.  And while you’re never going to go broke taking profits, missing the big moves can sometimes be as equally painful as losing.   Looking at this chart, the first fibonacci level at 38.2% is just above 1.84, and I called my original target at 1.835.  So those would be the first two levels I would look to take profits on.

The second chart I want to look at is the short on AUD/USD (click chart to enlarge)

I’ve been in two short trades of this pair in the last two days, each for different reasons, and you’d think that I would have put 2 and 2 together!  Part of the reason why I was reluctant to sit in this pair was because of the CPI number coming out last night.  Dumb. Should have just stayed in from the beginning and kept my buy stop just above the .93 level, which looked like an obvious place of resistance (and my initial stop on the first trade).

Since putting this chart together, this pair has in fact traded below .90 (currently at .898), so I expect this pair to pull back to about .8875 at that first Fib retracement level.

This also goes hand-in-hand with the idea that the stock market and commodities market are due for a pull-back.  I will be watching these levels very closely, for if they hold and bounce higher, then it could be a good short-term buying opportunity for stocks.  If the Aussie continues lower, then it could be goodnight Irene for stocks and commodities.

The S&P 500 index is trading around 1050, which is medium-term support.  If that level holds, then risk-taking may resume again and look for the Aussie to rise.

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Usually, a strong move in JPY and USD will accompany a larger sell-off in the equities indices, and vice versa.  Yet the stock market “sell-off” is well within its normal daily trading ranges.   The charts on the Aussie look like its poised to go down further, so could this be foreshadowing the stock market sell-off everyone seems to now be predicting?

One of the strange “ironies” about the currency market is the difference between risk-taking and risk-aversion.  Take the current market, for example.  When trading currency pairs, you are essentially trading one currency in relation to another.  So in this regard, you typically want to own the stronger pair and sell the weaker pair.  Usually the stronger pair is paying higher interest than the weaker pair, so you actually earn interest in this type of situation, otherwise known as a carry trade.

So let’s take a look at two “hypothetical” countries and their respective currencies.

Currency A: This country’s currency is very weak, yields almost no interest (ZIRP), its banks are questionable as to solvency, its economy is teetering on the brink of disaster, it is taking on debt like its going out of style, and confidence is near an all-time low.

Currency B: This country was largely unaffected by the credit crisis and the Great Recession, just raised its benchmark rate 25 bp to 3.25%, is currently worried about too fast a recovery and inflation, and appears to have its fiscal house in order.

So which currency is “riskier”, A or B?  If you said ‘A’, then you are WRONG!

In this example, Currency A is the US dollar and Currency B is the Aussie.  So it sometimes seems comical that in order to avoid risk, you would sell a higher yielding currency from a financially sound country in favor of a declining wreck with no interest from the country with possibly the worst fiscal situation on the planet!

Yet that’s how it goes.  For now.  Obviously its because of the status of USD as the world’s reserve currency that makes this “flight to safety” trade happen, but I wonder at what point people start to realize that earning interest in Australia is the real “flight to safety”.

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A little later on I’m going to look at some charts, to update some older trades I talked about and to show some new ones and the effects these are going to have on other markets as well.

So check back later today!

I took small short positions in AUD/USD, EUR/USD, and GBP/USD, as well as a long in USD/CAD.   Then the consumer confidence number came in at 47.7 vs. and expected 53.1. , and the Dow sold off about 80 points in 10 minutes, thereby giving me gains in all of my currency positions.  Exactly as expected.

Unfortunately, the action was just too fast for me to even get my charts posted!  Here’s one chart of the GBP/USD short. (click chart to enlarge)

But this also brings on another trading “dilemma”.  With consumer confidence shrinking, some might say that this will embolden Bernanke to keep interest rates low, thereby causing money to move out of USD into the stock market, commodities, and other hard assets, as well as higher-yielding currencies.

Thursday’s GDP report is up next, so check back for my analysis going into that number.  I will be looking at the charts very closely to see how this GDP situation may be managed.

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Today’s such event is the US Consumer confidence numbers that come out at 10AM EST.  How do I know that this number may be significant?  Well, call it just a hunch, but yesterdays price action in the US stock market and its corresponding effect on both the currency and commodities markets has led me to believe that that there is some rising fear out there.

Early this morning, the US equity index futures are flat, meaning there is indecision over which way the market might go today.  Chances are the market will trade that way until this announcement at 10AM.  And then the fireworks could begin.

While I don’t like to “guess” what will happen or “wager” on the number, I do like to use technical analysis to guide what I think may happen.  This helps me form a general market thesis that gives me a short-to medium term macro view that can provide me with all kinds of opportunities in many markets.  Because the different asset classes and instruments are both positively and inversely correlated, I can extrapolate what may happen today.

So what does that mean for today?

Well, the first thing first I am seeing is US dollar strength and a potential trend reversal.  Dollar strength usually means weakness for stocks and commodities, as well as all of the “risk-seeking” currencies.  When there is increased fear in the market, risk-averters sell higher yielding currencies and move back to the dollar, in the “flight to safety” trade we speak of so often.

So if the consumer confidence number comes in worse than expected, then expect dollar gains and equity market losses.  I will be back a bit to later to see how this plays out, but I have orders place to sell non-dollar currencies below resistance, and to buy dollars above support.  Tight stops are placed just below support and above resistance.

Check back later to see what happens!

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It looks like the equities market has reversed course, with the Dow 30 going from up +100 or so points this AM to down -100 or so points.  So as equity markets went from gains to losses, the currency trades went from risk appetite to risk aversion.  Also to note is that oil is now trading down to under $80, and gold is off a little as well.

The Canadian dollar is also getting hit a bit harder than earlier, as it can be influenced by gold and oil prices.  CAD is down roughly 1.00% today so far vs. USD and JPY.

I’ve actually had a small short traded triggered in AUD/USD as I was thinking that with gold down this AM that either gold would go positive or AUD/USD might fall.  I set up at limit sell that got triggered with a tight stop, for a short-term day trade.

Because of the inter-relationships between currencies, commodities, stocks, and interest rates, it is sometime easier to “telegraph” a move in one when you have a decent idea where the other is going (or might go).

To learn more about these inter-relationships, known as correlations, get educated here.

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So just watching and waiting….. major themes are still in place and looking for low-risk entry points to get back in some trades.

Check back later to see if anything picks up.

As a result, the AUD/GBP trade I’ve been in for the last few days is still hanging on by a thread and about to get stopped out.  But I wanted to just show on the chart how picking out points of technical significance can help you place stops that will allow you to stay in trades longer.  Let’s look at the chart from this morning (click chart to enlarge).

By placing your stop just below technical support, you give the trade a better chance to succeed.

**edit** trade stopped out.

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A note out of UBS today stated that, “If euro-dollar continues to gain in a volatile manner ahead of the November Group of 20, action at that meeting can be expected”.  That action could be a concerted effort to weaken the EUR/USD.

So keep I’ll be keeping an eye on this pair to look for clues that would indicate that a reversal may be imminent.  But for now, US dollar weakness rules “supreme”!

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Since that time, GBP/AUD has traded down and is now at 1.782.  Anytime I am in a position that has a significant move, the DAY AFTER, I enter a new or confirm an older position, I will always take some profits.  150 pips looked good to me.

The commodity currencies, particularly NZD and AUD, are having good days as  Reserve Bank Governor Bollard stated that the fact that the Kiwi is already strong would not preclude them from raising interest rates.  Similar thoughts were made by Australia’s Glenn Stevens as well.

So while that all but kills any further chance of this trade succeeding more than it already has, I’m still going to sit in this last piece and see what happens.  So my stop is at 1.766, my entry price on the initial trade.

Let’s see what happens as the all bank-talk seems to be heating up!

Currency Markets, Vegas-Style!

Let’s face it; the currency market is akin to the ultimate final table in the World Series of Poker.   At that table, you have eight people sitting around, all trying to bluff one another.  Some have large stacks of chips, while others are short-stacked.  Some like to talk a little more than others, while others prefer to let their cards do their talking.  Ultimately, there will be one winner.

And that is where the similarities end.  For in the currency market, there are many winners and many losers.  But depending upon the actions of one player, a lot of money hangs in the balance.   Imagine if every time Phil Helmuth blew up, you just lost some of your purchasing power.  Also imagine that you had no choice in which player you were backing and that the player you have to back was based solely on where you live or work.   And you’re watching in disbelief as the player you are forced to back is making dumb move after dumb move and slowly running out of chips.  Sounds frustrating and scary, doesn’t it?

Welcome to the world as we know it.

And be thankful that the currency market exists!  Why?  Because even though you may be forced to cheer for the worst player in the room, you can still vote as to who you think is doing the best.  You do that by buying the currencies of the strong players, and selling currencies of the weak ones.  This is essentially known as a carry trade.   

And in executing a carry trade, you also get rewarded by receiving the difference between the higher yielding currency (the one you buy) and the lower yielding currency (the one you sell) in the form of interest.  

And just who are these players whose prowess or lack thereof affects the lives of so many?  Why it’s the finance ministers, Central bank governors, and monetary policy makers of the most commonly-traded world currencies out there!

 (Cue Michael Buffer voice) Representing the Euro-zone is Jean-Claude Trichet.  From Japan, Hirohisa Fuji.  From New Zealand, Allan Bollard.  All the way from the outback of Australia, Glenn Stevens.  Hailing from Canada, Mark Carney.  Representing the UK, “Swervin’” Mervyn King.  And last, but certainly not least, from the United States, Helicopter Ben Bernanke!

So how do you know who is winning (besides looking at the cards or the amount of chips)?  Well that’s easy.  Look for the guy who keeps raising the pot, and stay away from the guy who keeps telling you he has the best hand, yet keeps folding and has to borrow money to stay in the game.  Also, be conscious of who is speaking the loudest but doing the least.

What you also may notice, is that there appears to be one empty seat at the table, as if there should be someone else playing in the game.  This person holds a lot of chips, and can be seen giving them to one specific player time after time. 

So when the WSOM (World Series of Money) rankings come out, can you guess who’s atop the leader-board and who is at the bottom?

1^st Place: Glenn Stevens, Australia.  Shows his willingness to raise the pot and actually does it.

2^nd Place: Alan Bollard, New Zealand.  Shows his ability to stay in hands by talking up the pot and may be very close to raising.

3^rd Place: Jean-Claude Trichet, Eurozone.  Keeps winning hands because others keep folding to him.

4^th Place: Mark Carney, Canada.  Also winning hands because others keep folding, but his talking down of his cards haven’t fooled anyone yet of his strength.

5^th Place: Mervyn King, UK.  Not winning many hands, but his erratic play is keeping everyone on their toes.

6^th Place: Hirohisa Fuji, Japan.  Just folds every hand and loses his blinds.

7^th Place (Last): Ben Bernanke, USA.  Continued bluffing has fooled no one, and is losing hand after hand and has to keep borrowing chips to stay in the game from the player who is not at the table.

Mystery Player:  Zhou Xiachuan, China.  Doesn’t sit at the table and therefore isn’t bound by its rules.  Keeps lending chips to Bernanke and engages in backseat poker playing.  Outcome is uncertain as he has never actually ever played a hand.

So, if you are forced to wager and bet on who the winner might be, you just may want to consult these rankings!

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The reason I say this (and have disclaimers LOL) is because right after I posted this initial trade idea, I got a call from a good friend of mine who asked me in no uncertain terms, “Are you Nuts?”  When I asked what he meant he gave me the usual response of don’t fight the trend, the fundamentals don’t add up, the Aussie is benefiting from the carry trade, BOE trying to keep GBP low through further threats of more QE, etc.  And while I was aware of all of these factors before I picked this trade, something told me I should investigate this a little further.

Perhaps it was yesterdays sell-off of this pair that had me second guessing myself, but I realized that when dealing with trend-reversals rarely do they happen and then go strait up.  So I decided to do some multi-time frame analysis.

Now you may be asking yourself, why don’t you use technical indicators?  Well, I do, but do after the fact as confirmation to see if it matches up with what I’m seeing from the price action on the chart.  What I’d rather do is begin looking at shorter time-frames to see if any discernible patterns are emerging.

Voila!  I dropped down 1 time-frame (which for me is the 4-hour chart) and noticed what I thought to be a possible cup & handle formation.  This is a very bullish pattern if it completes properly.  Let’s look at the chart (click to enlarge):

Now you’ll have to forgive my awful chart-drawing skills, but as you can see, there is a very rudimentary c&h formation in progress.  Should this pair breakout above the “brim” of the cup at around 1.785, then we could see some momentum to the upside.

To come up with a target price, I added the height of the cup to the breakout price of the handle and came up with roughly 500 pips.  But because I am already in this trade (half position- I took some profits), I don’t need to take any action at this point. But if this should breakout above the handle, then one could play the break-out by buying just above that price level.

So while at this point the fundamentals still don’t add up for this trade, stranger things have happened.  Its amazing to watch how the technicals sometimes predict fundamental action.  Whether or not it will in this case is anyone’s guess.  But that is what trading is about, not trying to guess where the market is going, but rather trying to increase your odds that a particular action may take place and having sufficient risk management in place if it doesn’t occur.

So keep an eye on this pair to see if this formation “activates”, and if so, listen to the news to see if anything material has taken place.  Or you can just check back here… as I will be sure to update.

Good trading to all!

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But a good day for Bank of Canada policy-makers.  They have stepped up their own rhetoric to try to talk-down the strength of the Canadian dollar.  They issued a warning that recent Canadian dollar strength will “more than offset” any recent signs of economic growth.   As the Loonie has been approaching parity (1=1) with the US dollar, it appears that the BOC wants to halt that progress any way possible.

Will their efforts work?  Stay tuned!

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This means its game on for the commodity currencies, who benefit from the carry trade as investors seek out higher yielding currencies.  As a result, both the Aussie and the Kiwi have traded to 14-month highs, back to the levels pre-credit crisis collapse which sent investors back to the US dollar in a flight to safety.

As confidence rises here in the US, (a rising stock market will do that- recent history be damned), investors will seek out more “risk” and move to the currencies that will benefit from strong commodities prices and higher interest rates.

Let’s take a look at a daily chart of Kiwi vs. US dollar (NZD/USD)  (click chart to enlarge)

While this chart is a trend followers dream, its always difficult to jump in as it may seem close to a top.  I usually like to wait for a pullback or for a sideways move (consolidation) before attempting to initiate a new trade, although I’m not certain that I will get one.

But for now, it looks like Bernanke is going to continue to get away with his “strong dollar policy” as the US dollar continues to tank against all currencies (except maybe the Yen- but that’s another discussion).  If US stock earnings continue to “surprise” (meaning beat analyst low-ball expectations) and commodity prices  hold up, expect Bernanke to sit idly by and do nothing as the US dollar continues to get crushed.

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(click charts to enlarge)

As you can see, this trade is up about 169 pips from yesterdays entry price (1.7828-1.7659=169 pips).  While you’re not going to be able to retire just yet LOL, this high probabilty set-up is showing some initial gains and looks promising going forward.  To give you an idea of what this means, with just one lot, you would have made $169 if you were in this trade.

And the cost to get into this trade?  Just $50 in margin.  So in theory, you put up $50 to make $169.  That’s pretty good coin!  Now imagine what happens when you use the multiplier effect of leverage!

While its never a good idea to over-leverage your account, taking high probability trade set-ups can be extremely profitable if you know what you’re doing!

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Rising asset prices and an improving unemployment picture in addition to increased confidence are fueling the rally.  There is also signs of short-covering, as pound bears take profits.

One chart that looks interesting to play pound strength is the daily chart of GBP/AUD.  Normally, I wouldn’t chase a pair that has already had this strong a move, but GBP/AUD hasn’t exploded like the rest of them.  One of the reasons for this is because the Aussie has benefited from a rising interest rate environment and the RBA’s Reserve Bank governor Stevens has maintained that they can’t be timid on rate hikes to combat inflation.

As a result, the Aussie has benefited as being the destination for funds in the carry trade.  Lets look at  the chart. (click to enlarge)

While the trend for this pair is CLEARLY down, the action on the chart represents a low risk entry point for a possible trade.  When I speak of trades, I’m talking about the short- to medium term timeframe.   This is considered a counter-trend trade, which hopefully turns into a trend reversal (start of a new trend).

If you go long this pair (buy it), you would want to place your stop just below the 3 day low, which would be at around 1.73.  While you never want to fight the trend (as it is your friend), there are times when a low risk entry can prove to be profitable.  Should this pair continue to move higher, I will move up my trailing stop to just below the low price of the last three day.

Check back to see how this trade works out!

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Market Shows Little Fear.  Time to Be Worried?

The CBOE Volatility Index, otherwise known as “the Vix”, is commonly referred to as the fear index as it measures the market’s expectation of volatility using S&P 500 index options.  Generally speaking, the value of the Vix at any given moment is the amount that the market thinks the S&P 500 can rise or fall over the next 30 days. 

While the Vix (VXX, VXZ) can measure uncertainty over market gains or losses, it is typically associated with bear markets, as investor psychology tends to worsen when the market is falling as opposed to rising.  To see proof of this, look no further back to October of 2008 when the stock markets were collapsing during the height of the credit crisis.  It was at that point that the Vix reached its highest levels by far, and justifiably so.

Since that time, the equities markets have rebounded from their March lows, and the Vix has returned “to earth” from its stratospheric levels of last October.  But has it come back too far?  Is this Vix telling us that we’ve now returned to reasonable levels of uncertainty, and that market conditions have stabilized? (click chart to enlarge)

There are two major reasons why the equity market should be more “fearful” than it is right now.

“Strong Dollar Policy”.  In what has become somewhat of a running joke, the Fed’s stance that the U.S. has a strong dollar policy despite having record low interest rates, quantitative easing programs which probably should show negative interest rates were it possible, and ballooning deficits is the greatest threat to market stability. 

This joke might actually be funny, were it not so serious.   Increased calls from China, Russia, et al. for a new world reserve currency haven’t phased Bernanke in the least.  Should you be worried when the equity markets don’t appear to be?  Absolutely.   Especially when you see headlines like this one.

One of the reasons why the equity markets seem to be shrugging off this news is because a weak dollar has been good for the equity and commodity markets.  A quick look at this chart shows the inverse correlation between the US dollar (UUP) and the S&P 500 Index (SPY). (click chart to enlarge)

 So as long as Bernanke keeps on printing dollars, the markets should continue to go up, right? 

Wrong.  Should the major holders of US dollars abroad (China)get Fed Up (pun intended) start dumping dollars and the dollar loses its status as the world’s reserve currency, tangible assets and physical goods and commodities will benefit in what would become a hyper-inflationary environment.   Would you want to own shares in a US company, which trades in dollars?  Me neither. 

While this scenario is highly unlikely, the only way to prevent this from happening is for the Fed to raise interest rates.  And while they are loathe to do so in the face of rising unemployment, pretty soon the tactic of jaw-boning of the dollar higher will no longer work and they will not be able to control the massive sell-off.  This leads to the second scenario which should cause fear in the equity markets.

A rising interest rate environment.  It is become apparent that Bernanke is running out of time and there are too many holes in the dam for him to plug.  To think that he is going to be able to control inflation and dollar devaluation when he does decide it matters by raising interest rates 25 bp at a clip is naïve.   Once the ball gets rolling, he will have to take drastic action and this could mean major rate hikes.  Thus we would see a move out of equities and into bonds, which could also derail the gains in the stock market and could push us towards the dreaded ‘W’ market recovery.

Either way you slice it; these are two “doomsday” scenarios which could have major negative implications for the stock market.  Investors and traders alike will have short memories this time and rush for the door at the first sign of panic, which will in turn help move the market lower.

This brings me back to the current level of the Vix, which is sitting somewhere around 22.5 at the time of this writing.  If the high of the Vix reading was 89.53 last October, then shouldn’t it be higher considering all of the negative factors facing the market?

Yep I thought so too.

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The Euro is known as the anti-dollar, so this makes a bit of sense.  However, with US dollar weakness, one would expect the equities markets to be up today, and so far they are negative. Both gold and oil are up marginally, although off of their earlier highs.

So perhaps the US stock market weakness is contributing to yen (JPY) and dollar (USD) paring back losses against the Euro.   As earnings season is in full effect for US stocks, keep an eye on the Euro.  If stocks stay negative, then the Euro may give back some gains as we expect the correlations to hold up.

Check back later to see how the Euro fares!

Considering the unemployment figures they reported last week, this makes sense.  However, I still have a concern about  whether or not the Fed is going to be forced to take action with regard to it’s ahem “strong dollar policy”- that is the debasement of USD.  Should Central Banks start dumping dollars, this could set off a nasty chain of events.

Obama is the “populist” President (see winning Nobel Peace Prize); I wonder at what point he will have to change tactics to prevent a total US dollar collapse.

While this appears to be “the trade”, when everyone and their brother screams sell dollars my natural contrarian disposition is to do the opposite.  However, I don’t want to fight the trend (which is clearly down for USD) but I will be keeping close watch for the first signs of a reversal.

So my short-term outlook is dollar negative, but my longer-term thesis is that I’m looking for buying opportunities and signs that Fed may have to step in to support the dollar.  Something’s gotta give here, I just hope its not support that send the dollar into free-fall!

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Its also up against the US dollar (+.81%) as the dollar has found its own strength with some jaw-boning from Ben Bernanke early this morning.  The dollar is up most vs. the yen (+1.32%) as well as the other Majors.  This also falls in-line with with my previous commentary on the Yen, that 88 appears to be a short to mid-term bottom.  Rumors that the Japanese would intervene at that level are also contributing to Yen weakness today (see CAD and all other crosses).

Questions remain about when the Fed might act, but don’t forget that the currency market is forward-looking, so any indication that Bernanke may be willing to raise rates or remove QE is seen as positive for the US dollar, despite the fact that Big Ben maintained the Fed Mantra “for an extended period” in his statement regarding accommodative policy.

One thing to note about Bernanke’s comments is that he will tighten when the economy “has improved sufficiently”.   What this means is anyone guess but as I have stated in other comments, this could be sooner than later.

The other side of the coin is that the US economy is NOT recovering, which could lead to further dollar declines.  However, pressure coming from abroad may force Bernanke’s hand sooner than he’d rather move.

So once again all eyes are on Bernanke.   Let’s see what happens.

There was some fear that the BOE would have to take further action, as Mervyn King had called for greater measures back in August, which was defeated.

With Australia leading the way and raising rates this week, it may be difficult for Bernanke and the Fed to maintain its “overkill” policy of ridiculously low rates and Q.E.  Meanwhile, the US dollar continues to weaken, down across the board most notably weak against the Aussie ( AUD/USD +1.47%) which comes as no surprise to anyone.

It looks like the USD carry trade is in full effect, as a strong overnight move pushed this pair through .90 level.

Here’s a 3 month chart of the AUD/USD– I’m seeing LOTS of green– (click to enlarge)

I’m starting to get the “feeling” that the Fed is going to act soon.  While the economy may be improving ever so slightly, we really need to see that the Fed believes we are recovering as well.  A token rate-hike would actually be seen as a sign that the economy is on the mend, which could inspire confidence in all markets.  While there may be an initial reaction that is negative, in the long run this would be the best course of action.  I just hope the Fed is not too short-sighted to see it.

So from here on out, expect the dollar to weaken unless the Fed does something to halt its decline.  It may be coming EXTREMELY soon.

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It has become apparent to me that the Fed and Bernanke need to do something (raise rates even a token 25 bp) to defend the dollar, even at the risk of a housing price decline.  While this move may not be popular here in the US, it would be welcomed by the rest of the world.

Because as of right now, it looks like the US dollar could get a whole lot worse.  And my experience has taught me that its when things look the bleakest that we should be the most optimistic.  So I’m hopeful that the Fed will move soon.

So USD is up marginally today, most probably due to short-covering or what looks like the infamous “dead-cat bounce”.

Also to not is that USD/JPY tested 88 in the over-night session.  Many believe that the breach of that level would cause the Japanese to intervene.

Stay tuned– because it looks like the fun is just about to get started!

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As a result of this speculation, the US dollar is down and gold is up pretty big today (+2.53%).  The talk is that they are looking to establish a basket of world currencies plus gold as payment for oil.  While foreign dis-satisfaction with the devaluation of the US dollar is nothing new, should these nations pull this off it could have serious repercussions for the US dollar.

Now I don’t want to speculate what would happen if this were to be true, but this appears at least on the surface to really put pressure on Helicopter Ben and the Fed to do something about the falling dollar.  But at this point it doesn’t look like that’s going to happen.

Until global account balances come back into more of a balance, expect this to be nothing more than rhetoric as foreign nations like China and Japan (who have major dollar reserves) have way too much to lose should the US dollar decline further due to losing its reserve status.

In the end, something has to give.  This global game of chicken will not end well if we stay on the same course.  The question is, who is going to swerve first???

Regardless of what happens, it is now more than ever so important that you have an understanding of what goes on in world politics and currency markets.  To learn about it, click here.

Readers of this blog had a one week headstart!

Well enough back-patting for me now, as I’ve made plenty of wrong calls in the past.  But what this means is that there will be further strength for the Aussie (AUD) which also means weakness for the US dollar (USD) and Japanese Yen (JPY).

However, there has been a lot of Yen jaw-boning recently from Japanese officials about possible intervention so be careful with AUD/JPY.  Stick with AUD/USD if you want to participate in the carry trade.

I mentioned recently in another article that the US Fed and Bernanke may have to take action to halt the US dollar decline, but it doesn’t appear that they’re ready to do so.

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Goldman issued a report today recommending  that stock investors should look at the large banks, thereby inferring that the banks were healthy.  They also said that investors should look to invest in riskier assets to diversify away from US dollar weakness.

Thus it is no surprise that the stock market is up and that the commodity currencies are up as well, with the Aussie and Kiwi leading the way (AUD/JPY +1.3%, AUD/USD +1.18%, NZD/JPY +1.4%, NZD/USD +1.1%).

Also to note is that there are comments coming out of Japan that Finance Minister Fuji is stating that the Japanese are not adverse to Yen intervention, furthering Yen weakness.  But readers of this blog knew that already, as I wrote this very thing last week.

Lastly, it’s good to be back from the death rows of the nastiest cold/flu I’ve had in some time.  Apologies to my readers as I was out last week trying to recover fromthis illness.

So remember to stay nimble in this market, as it looks like we might be in for some sideways action for a bit.

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I’ve written recently about the strength of the Japanese yen and some of the reasons behind the move that brought JPY to an eight month high vs. the US dollar (USD).   Last week, Japan’s Finance Minister Fuji had voiced his opposition to government intervention to slow the strength of the Yen, but this week he may be changing his tune.  And all of this comes on the heels of the G-20 meeting which wrapped up last week, where who knows what was actually discussed.

Today, Japan reported that consumer prices fell a record 2.4% as deflation is putting further pressure on an already fragile Japanese economy.   Combined with the strengthening Yen, this could be a recipe for disaster which could derail economic recovery.  It’s no wonder that ex- Bank of Japan Officials and others are back-pedaling from those statements and trying to talk down the Yen, whose strength could harm Japan’s exports.

So what’s going on with the Yen and what does that mean for other currencies and markets going forward?  Well if the current correlations hold up, there could be some interesting times ahead in both the stock and currency markets.

Let’s start with a chart of USD/JPY  (click chart to enlarge):

Well for starters, the trend on USD/JPY has clearly been down (down means up for the Yen for our currency market neophytes) going back as far as April 2009.  However, we’re seeing a huge doji (hammer) on the chart for Monday’s price action which could signify a major reversal.  Also to note is that body of that hammer closed just below the lower Bollinger band, which could also been seen as a bullish reversal signal.

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This falls right in line with the new comments that are coming out of Japan that in fact they may not be as adverse to currency intervention as Bank Minister Fuji had just claimed.  If deflationary pressures increase, then the BOJ may be forced to intervene in order to spur exports to foster growth and increase employment.

This could reverse the notion that the US dollar has now become the vehicle of choice for the carry trade and could send USD higher as the appetite for dollars picks up.  And should the dollar strengthen, than it’s possible that the stock market will decline, as will commodities. 

The stock market has had a nice run from its March lows, so a bit of a pull-back may be welcomed.  Add to the mix the fact that there is increased chatter about replacing the US dollar as the world’s reserve currency and this time Bernanke & Co. may have to take action. 

Just today, Dallas Federal Reserve President Richard Fisher said that the Fed policy reversal could be swift, although he is not an FOMC voting member.  This is yet another vocal attempt to re-assure the other nations to stay the course and that the US is not going to let the dollar completely tank.

So the million dollar question is at what point does the Fed reverse policy?   Well, it may not be as far away as some market participants think. 

Some nations appear to be exiting the recession with New Zealand and Australia leading the way.  The global recovery is dependent upon the United States exiting recession, so any sign that we have stabilized could inspire confidence to act.

So while other Finance Ministers are also concerned with the big picture, they also have to look out for their own interests.   This could force the Fed to act before they are truly ready, which could send the Japanese yen much lower.

With the all of the uncertainty out there, the one thing we can be sure of is a rise in market volatility, and look for USD/JPY to rise.  Let’s just hope this doesn’t take all of the other markets down with it!

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This means that investors and traders will be selling USD and buying AUD in order to profit from the interest rate differentials.   As long as the Australian economy continues to expand,  this will be a profitable trade as they are clearly ahead of the US with regard to having a sound economy which will need to “cool off”.

So keep an eye on Aussie strength and both USD and GBP weakness in the days/weeks to come.

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A few factors helping the yen:

1) Speculation that Japanes companies (exporters) are repatriating their funds (profits).  This is a seasonal factor that is supporting the yen right now.

2) From Bloomberg: “Japan’s Finance Minister Hirohisa Fujii reiterated his opposition to intervention in foreign-exchange markets to curb the yen’s gains yesterday. The yen has added 3 percent versus the dollar this month.”  One of the biggest fears of yen traders is BOJ intervention, so this bodes well for the yen… for now.

3) The yen is being replaced in the “carry trade” as traders are now substituting USD as the vehicle of choice.

Overall, Japan hasn’t been affected as badly as the US and UK in the credit crisis, so look for JPY to benefit from the safe harbor trade.

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Apparently not.  And I highly doubt its because the market reads this blog, though one never knows! LOL

Anyway, GBP is getting slaughtered this morning, with GBP/JPY (-2.30%), GBP/USD (-1.92%), EUR/GBP (+1.64%), and GBP/CHF (-1.73%).

While I initially thought that GBP would remain positive vs. USD, it appears that they may be playing “catch-up” or “catch down” as it were to USD in the Quantitative easing department.

Any way you slice it, it looks like the GBP selling has begun and it could be a while for it to recover.

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Hopefully readers you took my advice and sold USD bought other currencies, or steered clear of the mayhem all together!

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As I wrote on Monday, its not like that Bernanke will change anything with regard to interest rates or language going forward, but that doesn’t mean that the currency market HAS to respond as expected.  Stranger things have happened.  The dollar is currently positive vs. all currencies except the GBP, but that could change very rapidly if this announcement goes as expected.

This is always a great time to view the market from the safe confines of your practice account.  This will give you a great idea of how much money can be made or lost during these events.

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Good trading to all!

Yesterday, the Bank of England vote unanimously to leave the size of its asset purchase plan unchanged at 175 billion pounds and voted to leave interest rates unchanged at 0.5%.  This is seemingly good news for the Pound in the near-term, as the currency markets are reflecting this morning with the British pound up vs. other currencies.  But what is the outlook for GBP going forward?

Back in August at the BOE, there were some who had wanted even more quantitative easing yet were comfortable with following through with the plans laid out in August, as the September minutes show.  So while economic conditions have stabilized just enough to warrant a continuation of policy, is a full blown recovery already underway?

Methinks Not!

Let’s take a look at a few factors that could “weigh heavily” on the British pound and what this means for other markets as well.

For starters, it is commonly known that the British are more “conservative” than their free-wheeling Yankee neighbors across the pond.  This means that they usually take more thought-out measures and need more convincing that a dire situation may persist.   Thus it is no surprise that they left policy unchanged.  Some would argue though that this makes them more re-active than pro-active, and that by the time increased negative forces come to light, it could be too late.  Quite the opposite of Bernanke et al.  So in this regard, we can’t rule out the possibility of further quantitative easing should conditions deteriorate.

But the British Bankers Association (BBA) just reported that  loans for home purchases declined from the previous month and missed expectations, a sign that perhaps their economy is not ticking up or that the QE measures the BOE has taken haven’t taken hold yet as tighter credit conditions haven’t sparked an uptick in demand.  Should housing demand continue to fall, then this could prolong the economic recovery they are hoping for.

So if housing prices decline as a result of falling demand, then the BOE might just have to deal with deflationary pressures rather than the inflation they are hoping for.  This could mean more QE which would put further pressure on the British pound.

However, in the near-term, I can’t see the GBP falling against the US dollar as Bernanke’s path to dollar destruction has been well-established.   As I wrote on Monday, nothing is going to change at today’s FOMC meeting as Bernanke doesn’t want to spook the stock market.  And the correlation between the S&P 500 index (SPY) and the British pound (FXB) has been pretty tight.   Here’s a 3-year chart (Click to enlarge):

So if we are expecting the stock market to advance on Bernanke’s non-action at the FOMC meeting, then it follows that the dollar should decline and the pound should advance.   

However, should the stock market  run out of gas later this year, this could coincide with British pound weakness as a result of sluggish economic growth in the UK.  This could be the double-whammy that the stock market Bears have been looking for. 

But until that occurs, keep your eyes on the British economy and don’t fight the Fed!

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The only question that remains is whether or not the G-20 meeting at the end of the week will change the course that the US Fed is on.   I’m guessing that outside of the usual suspects clamoring for a new world reserve currency, everyone is going to be on board as they realize that the only way to see dollar strength is to watch all other markets collapse.

So pick your poison, hold your nose, and take a big sip!

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All eyes are on Bernanke and the FED this week as investors are seeking a little more clarity over Federal Reserve Policy going forward and what they plan to do with regard to interest rates.  Couple that with the G-20 meeting this week and growing concerns over the rising US fiscal deficit and you have a potentially explosive situation.

However, if you’ve been watching the markets as of late, you would know that the potential for fireworks is highly unlikely.   The “Ben Bernanke Show” is in full effect and market contrarians and early participants go through this exercise with every FOMC meeting like clockwork.  It basically starts with the US dollar showing signs of early strength, followed by a drop in commodity prices and lower US equity futures.  Next, the claim is made that the “fundamentals” are coming back into play and that inflation may be rearing its ugly head.  This naturally leads to the conclusion that the Fed may have to start raising interest rates, which send the US dollar higher and all other markets lower—temporarily.  I wrote about this earlier as right now there are essentially two trades out there.

Here’s what’s really going to happen:

There is not a snowball’s chance in hell that we’re going to hear anything remotely related to rising inflation.  In Bernanke’s mind, we need to RE-flate before we IN-flate.   There is no chance that the FED is going to raise rates in this session and it is highly unlikely that he’s going to change the language going forward.  Right now the market is still extremely fragile so anything remotely related to the possibility of higher interest rates could send global markets into a death spiral.

Another factor to be considered is that market players are concerned that the FED may signal the end to the stimulus plans.  Again, not gonna happen.  Bernanke is so concerned with avoiding the Great Depression 2.0 that he will not spook the markets.  And even the euro contingent of the G-20 is calling for continued stimulus.  It’s more probable that he is going to try to bore market players and break the will of those who attempt to fight the Fed then take action that will potentially harm markets. 

Lastly, concern about how the FED is going to wind down its quantitative easing and the potential impact it will have on interest rates is causing investors to take some money off of the table.  Bernanke just announced that the recession was likely over last week, so it is also highly unlikely that he would do anything this soon to counter that claim.  Today’s markets are more about perception than reality.

So expect the US dollar to strengthen and equities and commodities to weaken going into the FOMC meeting.  Smart traders are lightening the load and taking profits, nothing more.  While everyone loves to call a market reversal, dollar strength means trouble for stocks and Bernanke just won’t let this happen.

And after the FOMC meeting’s conclusion, be prepared to do just the opposite.  The trend for the US dollar is clearly down and should continue for some time, and there appears to be room for stocks to move to the upside.

We’ve all seen this show before.

Also, yesterday Bernanke suggested that the recession in the US may have ended.  While this “technically” may be correct, I would be a little more cautious before breaking out the pizza and ice cream just yet.

Nevertheless, the currency markets are acting predictably, with the risk trade back on.  As a result, NZD and AUD are the big winners so far today, and USD and JPY the losers.  NZD/USD (+1.14%) and NZD/JPY (+1.19%)  showing good gains for the Kiwi, with Aussie right on its heels AUD/USD (+1.00%) and AUD/JPY (+.98%).

As long as the cheerleading keeps coming and the numbers don’t look too bad, look for these trends to continue.  And hope that the party doesn’t end too soon!