Posts from — June 2008

Last week I mentioned that though the G8 conference would impact the US dollar in the short term, the ultimate fate of the USD will ultimately be determined more by Bernanke than by anyone else. The Group of Eight’s meeting has come and gone, offering little good news for the USD. In the FOREX market, that “little good news” led to bad news for the USD, as the greenback surrendered some of the territory it had gained last week. So with the conference in the rear-view mirror… let’s look ahead.

In his most recent column, Robert Novak wrote that despite his publically hawkish stance, Bernanke is more concerned with growth rates. Furthermore, Bernanke feels that oil and gasoline prices, if they continue to rise, could lead to the dreaded state of halted growth in addition to rising inflation. Assuming that what Novak is reporting is accurate, it would seem that Bernanke’s pronouncements last week were a charade. In other words, Bernanke isn’t likely to walk the walk. However, this might not be a bad thing. Many see the economy as not yet ready for a rate hike, and so perhaps holding rates constant for the next several months would be the best thing for the US economy.

The USD has ended the rally it began last week, and while the short term prospects are dimmer than they were several days ago, the jury is still out regarding the long term. On the one hand, disappointing economic data that keeps coming out (most recently in the US: poor manufacturing results) would indicate that the USD is in for more stormy seas. However, analysts are noting that it has been years since people have held such bullish opinions about the USD. Many feel that the dollar is “due,” meaning that after taking its lumps for years, it is poised to finally recover. With the Saudis agreeing to pump more oil, perhaps the stars are aligning for a USD recovery. However, it’s hard to know the future for certain. As it is written in one of the Harry Potter books, we humans are not very good at reading the stars.

Upcoming Figures

AUD Reserve Bank of Australia’s Board Minutes (Jun)

EUR Italian Trade Balance (Euros) (Apr)

GBP Consumer Price Index (May)

EUR Euro-Zone Trade Balance (Euros) (Apr)

USD Current Account Balance (Q1)

USD Housing Starts (May)

JPY BoJ to Publish Minutes of Board Meetings

Fundamental analysis can be daunting, but this is what drives the market. I don’t care how many doji’s or buy signals Deutche Bank saw on the eve of the Russian Debt default. I guarantee they where glued to International news stations not there computer’s technical chart analyzers. That being said, where do traders locate news events that move the market? DailyFX has a great economic calendar to show you what events are coming up and what the numbers are. These numbers move the market and each event is marketed with a simplistic high, medium, low rating as to whether or not traders place trades regarding the outcome

The Fed, the ECB, and the Swiss National Bank (SNB) all have websites. Google them and you won’t be disappointed. I must admit like all things European the ECB and SNB website’s are aesthetically pleasing, but they both hold a plethora of information. The information on these site’s can give you crucial information, easily access statistics and other information that will help you make informed currency trades. The Fed website on the other hand is a lot like the mid-west, boring but full of endless bounty. There is no window dressing and it gives you links to libraries of statistics complied by the (BEA) the bureau of economic analysis. There are the minutes from each FOMC meeting and statements made by Fed Governor’s regarding the feds directives.

All the sites have a mission statement of each central bank, while the Fed’s is more fluid and allows the Governors to tailor monetary policy to each situation. The ECB in stark contrast state in the second sentence of there mission statement underline that they will ensure price stability at all costs. The SNB otherwise known as the central banker’s central bank have objectives are a hybrid like the Fed, they acknowledge that price stability is key but other developments may prevent the feasibility of this objective. Basically the SNB and the Fed are free to conduct responsible monetary policy at their discretion. While the ECB’s independence is mandated by the Maastricht treaty they are treated like children when it comes to monetary policy. Germany made this a pre requisite for signing the treaty because they feared the monetary irresponsibility of there Southern brethren notably Italy and Spain. The ECB must keep inflation below 2%, good luck in the coming years. Good for traders to know because over the last year the Euro has killed the dollar. I’m not going to give you a homework assignment that will benefit you in your trading but if I’m placing money on the Euro, US dollar, or Swiss franc then I’d want to have an intimate relationship with their central banks.

The surprising rally of the US Dollar this week has inevitably led to what seems like everyone and their niece predicting just how long it will last. My 10-year old niece doesn’t like the dollar, and though she’s a very bright girl, please note that she based her reasoning on the Canadian dollar looking a lot cooler than its American counterpart. Given that for several years the USD has done little but suffer, it’s of little surprise that few people are giving the greenback a chance.

Predicting the future can be a tricky business, so it’s important to follow some upcoming events that could determine the USD’s long term prospects. Some people throw caution to the winds regarding the future, such as Doc Brown, “Roads? Where were going, we don’t need roads.” In the world of Foreign Exchange, however, should you find yourself without a Flux Capacitor, it is very important to look at these events. They have guided currencies for as long as the market has existed.

In the short term, the upcoming G8 meeting could set the tone for the USD’s future. Should the USD become a focal point at the meetings (as it is expected to), one possible outcome would be a new dedication to strengthen the USD. There is a history of nations working to correct currency weaknesses, such as the Plaza Accord. However, while that agreement was aimed at the US facilitating the recover of the Japanese Yen, the tides have now turned.

Two more reasons for foreign countries to aid the USD are that commodities (such as oil!) are generally priced in dollars, and that the many countries holding dollar reserves would love to see those reserves have higher value. However, the results of the G8 will not be the only piece in shaping the USD’s future. The most important factor rests in the hands of Chairman Bernanke, and whether or not he can walk the walk as much as he has talked the talk regarding interest rate hikes.

Upcoming Figures

CHF Adjusted Real Retail Sales (Apr)

EUR Euro-Zone Consumer Price Index (May)

USD Net Long-term TIC Flows (Apr)

USD Total Net TIC Flows (Apr)

JPY Tertiary Industry Index (Apr)

Leverage allows any trader to control large amounts of capital; it is every trader’s best friend and worst enemy. We all realize that investing involves risk, and no one makes money without some degree of risk. That being said excess risk has another name: margin call. This isn’t the CME were your broker gives you a courteous call saying “pay up sucker,” no this is online currency trading. Or maybe you’re so confident in your trades that you never lose. Probably not if you’re like the rest of us then listen up, anything over 8:1 leverage is not smart. Some term it irrational exuberance, froth, or undue risk I call it stupidity. Moral of the story is, don’t swing for the fences. Chances are you’re a new trader and you have this wow I can control 1 contract with one thousand dollars feeling. Let me tell you there is only one George Soros, and you’re not him. Listen kimosabe go 100:1 and odds are tomorrow you will be margin called and have to explain to your self how you lost $1,000 in less than an hour. What’s worse you’ll stop trading leaving all the profits to the gnomes of Zurich.

Here are some rules to live by the first rule is 100:1 is a sucker bet don’t do it. The second when you start on margin know Wall Street almost never goes above 8:1. Be humble because the currency market is a 24 hour market so you’re competing with the legendary gnomes of Zurich, the PRC, and hedges funds on Wall Street. While something may seem obvious to you, there is probably a counter argument developed by someone with a lot more money to allocate and therefore leverage than you. We can’t forget what Keynes said regarding the market, “The market can stay irrational longer than you can stay solvent.” Do your self a favor stay solvent long enough to gain market experience because once you’ve become hooked it’s better than heroin and you have a good chance of making money too. The best way to stay solvent long enough to enjoy the market is let me hear you yell, “…..” you should know but if you’re the slow type it’s supposed to be, don’t over leverage.

Something monumental has happened: the US dollar has done well, and it didn’t require a divine intervention.

With most of the trading week gone, the USD has walked all over the Euro to the tune of over 2%. And perhaps the most interesting detail was that this rally did not start on the heels of some unexpected economic recovery; it started with Bernanke finally utilizing his clout. When he became Chairman, he stated that inflation would be his foremost concern. Two years later, after letting Wall Street bully him into a series of rate cuts, Big Ben has finally dug his heels into the sand.

Among other events, this week has witnessed dramatic rise in US unemployment, the ECB announcing that a rate hike is coming soon, and oil prices hovering around all-time highs. So, what does Bernanke do? He goes out and says that inflation is his top priority, the US economy will avoid recession, and the USD’s strength is also a focus for the Fed’s future actions. Are things actually turning around? Will the Fed really raise rates soon? I don’t think that anyone is certain… but that’s largely irrelevant. What is relevant is that Bernanke put on a brave face and exuded optimism, and the markets responded in a big way.

Elsewhere, the big players in the Euro zone are still trying to figure out what the best move is. First Trichet said that hikes are coming, and then several other ECB figures have clarified that announcement. Now the French Finance Minister has publicly pleaded with the ever-hawkish Trichet to rethink his coming actions. The uncertainty and lack of unity over the future (unlike the Fed, which has displayed a unified stance) has likely been a contributing factor to the USD sticking it to the EUR. As we move towards the close of the week, it will be interesting to see if Bernanke’s words (along with any forthcoming data – see below) are enough to fuel the USD’s surge.

Upcoming Events

EUR Italian Consumer Price Index (May)

EUR Italian Consumer Price Index – EU Harmonized (May)

USD Consumer Price Index (May)

USD Consumer Price Index Ex Food & Energy (May)

The US Dollar ended its rise against the Euro, as the ECB had several officials speak out in predicting future rate hikes. It is unclear if the ECB is planning a single increase (likely in July), or a series of hikes, as the officials volunteered differing opinions on the subject.

One continuing storyline is how markets worldwide are responding to central banks’ suddenly hawkish tones. Interest rate hikes have already occurred in countries such as India and Denmark, and larger players such as the ECB and the Fed are sounding like they may also raise rates in the near future. Some economists, such as Harvard’s Martin Feldstein, are worried about the possibility of minor stagflation arising from these policies.

In other news, the Swiss has rallied against the USD and the euro. Crude Oil futures are up almost 5%, and Bernanke cautioned that further price pressures could cause problems for the entire world.

Upcoming Events

USD Fed’s Beige Book

USD Advance Retail Sales (MAY)

NZD Retail Sales (APR)

JPY Bank of Japan Monthly Report

EUR German CPI (MAY)

EUR German CPI – EU Harmonised (MAY)

Euro zone growth has exceeded the US contributing to the appreciation of the euro but after a closer look the EZ doesn’t look that healthy. Essentially Germany has pulled the Euro Zone forward for the past year while the PIGS otherwise known as Portugal, Italy, Greece, and Spain have stagnated or gone in recession. So to answer my own question, I seriously doubt the Euro will break 1.60 if Germany stagnates. The German current account was reported on Monday and it was slightly lower than expected at 14.5 billion instead of 14.7 billion expected. It is a small gap but the number that should alarm traders is the fact that the current account dropped by 3 billion from the previous month.

Does this point to a trend? Are high exchange rates hurting Germanys export lead growth? Perhaps and this will weigh on the ECB come June when they make their rate decision. The engine to European growth may be running out of gas, and the PIGS are not going to rescue Europe in the future sp we can look for a lot of range trading between 1.50 and 1.60.