Posts from — February 2007

Will the FOMC keep a neutral outlook on the interest rate, or raise it once again?

In Chairman Ben Bernanke’s semiannual monetary policy report on February 15 he outlined several reasons for the FED not to increase or to decrease the interest rate in the near-term. First, the U.S. economy is showing potential for consistent expansion at a moderate pace over the next year, with growth strengthening, imports increasing, and the housing market becoming less of a burden. Second, the core inflationary pressures are showing signs of decreasing. The primary reason for the decline was the drop in the price of crude oil toward the end of last year, which has led to lower prices for fuel at the pump, inputs for producers, and – thus - final products that you buy at the store. Therefore, since the economic growth is continuing at a moderate pace and inflation abating, the need to increase interest rates does not appear to be there.

Now, whether or not this will hold true will be determined by the data published on key economic variables over the next several months. Based on that data, if we can see steady economic growth and a gradual increase in the core prices paid on goods and services, then the FED should be poised for one more interest hike. The sectors – and corresponding indicators - that we will want to follow are listed below.

Housing Sector: New Home Sales, Existing Home Sales, Rent Increase

Consumer Spending: Personal Consumption Expenditures (PCE)

Economic Growth: Real Gross Domestic Product

Inflation: Labor Compensation, Crude Oil Prices, and PCE

We have an early head and shoulders formation on the NZD/USD monthly chart. Many would wait until the bottom of the shoulder before taking a short, but even if you target the middle of the shoulder you have about a 400 pip move possible.

Beware this trade could take a while to develop as we are looking at a monthly chart and the carry is against you on this trade.

Definition: Head and Shoulders

There are numerous methods of trading oil. Futures is the method most commonly used and the most popular. While futures are a pure oil play, there are also drawbacks to trading oil futures. One of them is when you buy and hold oil you pay the carrying charges priced into the oil futures, where most investments have some sort of positive yield. When trading currencies you can earn the yield when doing an oil play and also do it in a low cost, highly liquid market. Take a look at this chart for a comparison.