fundamental Posts on Forex Blog
Assessing FX Trades After a Crazy Day in America
Jul 11, 2008
Unless you have had your head buried in the sand, the multiple crises of the day have not escaped you attention.
On the one hand, we have a continuing credit crises in America, (Fannie, Freddie, and Lehman Bros). On the other hand, we have major global political instability (Iran, Nigeria, likely Sudan indictment, failed Zimbabwe sanctions, Russia trying to buy Libyan oil).
So what is a forex trader to do?
Going long the Euro seems like a safe heaven. But did it move on Euro strength, or perceived Dollar / Pound / Yen weakness? I think the answer is the latter.
So what trades do we take on?
At the end of the day, FX prices are largely determined by 2 factors - interest rates and economic outlook. So let's take a look at these 2 factors compared to some of the majors.
USD - Interest rates remain low. And after this week, it is hard to believe the Fed will raise rates in the next few meetings.
OTOH, jobs, trade balance, and the preliminary Michigan consumer sentiment all beat expectations. It is far too soon to have a rosy outlook on the economy, perhaps a slew of earnings next week will help establish some clarity on that factor. Merril, Citigroup, JP Morgan, Intel, and Google will report earnings.
EUR - Trichet has 'no bias'. Several prominent Euro finance ministers and the vice president of the ECB have stressed the need for a balancing of growth and inflation. One can not say with any definitive certainty that interest rates will rise.
On the economic front, the situation continues to deteriorate (though nowhere near as fast as in the US). Trade balances disappointed this week. Production and confidence is falling.
The currency will almost certainly pass 1.61 in the next week, but beyond that the future is uncertain.
GBP - Interest rates remain at 5%. However, many traders and economists actually speculated they would cut rates at their meeting on Thursday, despite their inflation problems.
Like the US, their economy is struggling amidst a credit crunch. Housing continues to fall. Relative to the US, housing may prove to be a bigger problem for the Brits, as they have a higher percentage of toxic debt, and more personal indebtedness.
AUD - Interest rates remain at an astounding 7.25%. And speculators constantly suggest the bank may still raise rates again.
This week, jobs come in positively at almost +30k, wiping out last month's losses. Overall, the economy seems to be humming along. And why shouldn't they? China and India have been great export customers in a commodity driven environment.
NZD - While interest rates remain high, pressure is building for cuts. They certainly won' raise rates anytime soon.
On the economic front, things are worsening as they too suffer from a decline in housing, reduced consumer confidence, and a declining trade balance.
CAD - Interest rates remain stable at 3%, and are unlikely to change next week. That they did not cut as expected by many last month suggests their bias may be to raise rates. Look for any BoC comments next week for guidance.
On the economic front, they continue to do well. Being a large oil exporter with these record prices certainly doesn't hurt. Building permits and trade surprised to the upside this week.
JPY, CHF - No comment.
By my assessment, long term trades should focus on:
go long the AUD and CAD.
short the GBP and NZD.
avoid EUR and USD for anything but short term scalps as their is distinct lack of clarity.
My recommended trade would be long the AUDNZD
CAD, trade balance, AUD, fundamental, EUR, GBP, USD
A Fundamental and Technical Look at the GBPUSD
May 17, 2008
Starting in early March (right around the time Bear Stearns was bought by JP Morgan), the USD staged a comeback against the Sterling. And then negative US data last Thursday and Friday - contraction in manufacturing, weakest consumer confidence number in 28 years - combined to slam the dollar.
From one fundamental perspective, things look bad for the dollar. While the cheap dollar is definitely helping to boost exports, the trade imbalance hurdle is very high. In 2007, the deficit ran at a whopping $738.6 billion! And that is down -9% from 2006 ($811.5 billion). In addition, other major central banks remain reluctant to cut rates, as was reinforced by the May 8th BOE and ECB decisions to hold interest rates steady. Indeed, Trichet was very clear that inflation - not economic slowdowns - remained the number 1 concern.
Yet glimmers of hope remain for the greenback. Foreign inflow has risen from $56.7 billion in January to $80.4 billion in March. And futures markets show an expectation that the US Fed is done cutting rates, with a 50-50 chance of a hike by October.
It is at confusing times like these that Chuck turns to his good friend - technical analysis. Recently Chuck has became an ardent fan of MarketClub's Trading Triangle. They offer a lot of the standard stuff - a trade score based on common indicators, quotes, and tutorials. But the real meat and potatoes of their analysis suite is their trés cool charting tool. Not only does Cash find this to be a highly intuitive and easy interface (see below), but the indicators are working great. On April 1st, they put out this great video analyzing the GBPUSD pair. Using fibonacci retracements and weekly indicators, they called for a downturn to the 38% retracement level of 1.951 (from the high of 2.10) And low and behold, where did the GBPUSD hit? Just under 1.95. If you are unsatisfied with your current indicators, or just looking to try out a new set, definitely check out Market Club
Greenback, technical analysis, fundamental, GBP, USD
