I wrote to yesterday to one of my friends that I thought if the UK employment data came out strong, that it might propel the usd/gbp higher to 1.5300. It appears we came within 5 pips or so of that target before pulling back. We are now right at the big figure of 1.5200 and hopefully everyone has had a chance to get in on the second entry recommended 12 hours or so ago.
The news during the early London session was positive for the UK. Jobless claims were forecast to fall by 20K, and that was bested (slightly) with a print at 20.8K. The unemployment rate was also slightly better at 7.8% as opposed to 7.9% forecast. The news pushed the pair higher as expected.
On the euro side, news was not quite so ebullient. While the CPI (Consumer Price Index) was flat, the Industrial Production figures were a good bit weaker than expected---missing the 11.4% figure with a release of 9.4%. The euro pulled back and fell below the key level of 1.2700. Some weakness seems inherent in the liquidity leading pair. Meanwhile the RSI has continued to fall as well.
But we'll look to the franc today for our short term trade. Having fallen more than 10 cents in the last month. The drop was stopped by support from back in March. We'll look for a bounce from here.
On the macro perspective, US retail sales fell slightly, -.5% as opposed to -.3 expected. And China's GDP figure which is due out on Thursday with expectations of 3.1%, has been rumored to see a revision down to 2.8%. Should that be true, it may really affect risk appetite.
So let's look forward to the day with the positions we have and see how the market reacts. Remember to keep your leverage as recommended, in case things don't pan out as expected.
The alert will be later tonight than usual, as I am planning dinner with my in-laws this evening, and will most certainly be back at the office rather late.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
Wednesday, July 14, 2010
Tuesday, July 13, 2010
Daily Forex Update 7-13-2010
Yesterday's action could not have been more dull, today's action features a gigantic whipsaw!
Let's begin with the euro, which was traveling nicely down to our profit target area, due in large part to a Moody's downgrade of Portugal's debt. Having lowered it 2 notches, the euro came under pressure by increased default fears in the entire region. In theory, the rating agencies timing could not have been worse; making their statement just before a "critical" debt auction by Greece. However, Greece's auction went off without a hitch, with bonds being well bid, and plenty of cover. However, in the longer term scheme of things, we must always be wary of modern debt auctions and the "secret" machinations of central banks. The US could not have covered anywhere near all of it's debt requirements if it weren't for a large group of "undisclosed" bidders. Basically, it appears the Fed comes in on the sly and purchases what the treasury needs to sell, that has not been purchased by others. This is basically printing money to cover the debt. There were rumors about the ECB doing this for the last last Greek auction, and they are already flying around now about this one. Unfortunately as Central Banks are not open to audit, we can have no verification of these facts. But the rationale is pretty condemning.
The last several minutes as I write this have seen stellar moves in the pound and the euro, hopefully everyone was able to get their pound exit in.
So what has caused this massive move in the light of the Euro downgrade? Remember how I said yesterday that inflationary data can move markets? And that while the UK's current inflation reading was above the central bank target that they expected it to continue to fall? WELL, it didn't. The core CPI which was expected to come in at 2.8%, jumped to 3.1%, a very strong increase. In theory, that would lead the BoE (Bank of England) to consider raising it's interest rate in order to fight off inflation. The problem is, how can they possibly raise rates in the middle of a stalled recovery? Remember, the UK economy is no better off than the US or Europe, and could be arguably in worse shape. So how could the Central Bank raise rates now? We all have a pretty good idea of what that would do. Stocks would tank. Bonds would soar, and the US dollar would become the currency of favor as fear grips the heart of the financial world again. Remember, each month as the economies of the world look at their bond auction data, they are holding their breath with their fingers crossed that their interest rates are not going to increase. I'll be honest with you folks, these things are pretty scary. As I've often said, we have never been at a juncture like this in world history. It is entirely possible we could see orchestrated massive defaults by huge economies all at the same time. While I am by nature a currency trader, I would also advise you to have lots of gold, and if you can't afford that, then lots of silver near at hand. Just in case...
On the technical side of things, the GBP is putting in a big divergence on the hourly stochastic, with this latest move higher in price, not going higher on the stochastic indicator. This generally signals more downside ahead. Also, if we fail to trend much higher from here, we may have the 4H head and shoulders formation we were looking for last week. If so, a validation of that pattern would target 1.4675. Tomorrow's UK unemployment report should give us some idea of the next move in the sterling. For now we will continue to hold our first position, and look to enter a second a soon as possible.
The EUR is struggling now to get to 1.2650. We will keep our stop in place, as the downtrend is still intact, and we will look for more fallout from the Portugal downgrade to filter through the market after all the sizzle from the GBP inflation news has gone out.
Drop me a line if you have any questions, and be sure to watch your inbox for another long term entry on the sterling.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
Let's begin with the euro, which was traveling nicely down to our profit target area, due in large part to a Moody's downgrade of Portugal's debt. Having lowered it 2 notches, the euro came under pressure by increased default fears in the entire region. In theory, the rating agencies timing could not have been worse; making their statement just before a "critical" debt auction by Greece. However, Greece's auction went off without a hitch, with bonds being well bid, and plenty of cover. However, in the longer term scheme of things, we must always be wary of modern debt auctions and the "secret" machinations of central banks. The US could not have covered anywhere near all of it's debt requirements if it weren't for a large group of "undisclosed" bidders. Basically, it appears the Fed comes in on the sly and purchases what the treasury needs to sell, that has not been purchased by others. This is basically printing money to cover the debt. There were rumors about the ECB doing this for the last last Greek auction, and they are already flying around now about this one. Unfortunately as Central Banks are not open to audit, we can have no verification of these facts. But the rationale is pretty condemning.
The last several minutes as I write this have seen stellar moves in the pound and the euro, hopefully everyone was able to get their pound exit in.
So what has caused this massive move in the light of the Euro downgrade? Remember how I said yesterday that inflationary data can move markets? And that while the UK's current inflation reading was above the central bank target that they expected it to continue to fall? WELL, it didn't. The core CPI which was expected to come in at 2.8%, jumped to 3.1%, a very strong increase. In theory, that would lead the BoE (Bank of England) to consider raising it's interest rate in order to fight off inflation. The problem is, how can they possibly raise rates in the middle of a stalled recovery? Remember, the UK economy is no better off than the US or Europe, and could be arguably in worse shape. So how could the Central Bank raise rates now? We all have a pretty good idea of what that would do. Stocks would tank. Bonds would soar, and the US dollar would become the currency of favor as fear grips the heart of the financial world again. Remember, each month as the economies of the world look at their bond auction data, they are holding their breath with their fingers crossed that their interest rates are not going to increase. I'll be honest with you folks, these things are pretty scary. As I've often said, we have never been at a juncture like this in world history. It is entirely possible we could see orchestrated massive defaults by huge economies all at the same time. While I am by nature a currency trader, I would also advise you to have lots of gold, and if you can't afford that, then lots of silver near at hand. Just in case...
On the technical side of things, the GBP is putting in a big divergence on the hourly stochastic, with this latest move higher in price, not going higher on the stochastic indicator. This generally signals more downside ahead. Also, if we fail to trend much higher from here, we may have the 4H head and shoulders formation we were looking for last week. If so, a validation of that pattern would target 1.4675. Tomorrow's UK unemployment report should give us some idea of the next move in the sterling. For now we will continue to hold our first position, and look to enter a second a soon as possible.
The EUR is struggling now to get to 1.2650. We will keep our stop in place, as the downtrend is still intact, and we will look for more fallout from the Portugal downgrade to filter through the market after all the sizzle from the GBP inflation news has gone out.
Drop me a line if you have any questions, and be sure to watch your inbox for another long term entry on the sterling.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
Monday, July 12, 2010
Forex Weekly Forecast
As a part of the new service, we'll be making our recommendations on the twice daily alerts and posting commentary and market movements over here on the blog. This is not what we'll do longer term, but for now it will suit us just fine.
As we entere our short term trade in the euro, we can see that Friday gave us a bearish outside day. That occurs when a candle or bar on a chart has a close below it's open, and when the body of the candle is larger than the previous one. In this case, it marks a whole days' activity, which generally gives us a more reliable signal. Remember, the longer term the time frame, the more reliable it is for technical analysis.
Also, the euro bumped up against long term resistance on Friday and was unable to pierce it. This give us another clue that some "down time" ought to be ahead. Of course, we won't reveal our proprietary entries and exits here as this is a public forum, but those of you who have gotten your alert today will know what to do!
For our longer term sterling trade, we began a very nice move on Friday and now find ourselves well in the black by about 1%. Remember, by the time this is over, we want to be looking at something in excess of 5% for just a few weeks work. You can't beat that anywhere. But the current account balance for the UK was released earlier today and was nearly double the rate forecast. This is not good. Remember the CAB, is derived from subtracting imports from exports. As a rule, you weant you account balance to be positive, which means that you are exporting (selling) more than you are importing (buying). If not, then as a national economy, you are spending more than you are making, which is never good. However, the sterling fell sharply and then bounced nearly 100 pips after it hit the 200MA on the 4 hour chart.
We should also note that the price fell below the 200MA on the daily chart on Friday...a bearish signal.
For the rest of the day the news calendar is pretty light; we have some news coming out for Canada. But as the week wears on, we have the Consumer Price Index for the UK. AS the index rises, it is generally thought to be indicative of rising inflation. It is the presumption that a central bank will have to raise interest rates, in order to combat rising inflation. That is generally very bullish for a currency. When CPI is falling, defaltion is believed to be on the rise, and no interest rate hike will be forthcoming. That continues to depress a currency. The CPI is expected to be above the target rate of 2% ( and has been for a little while), but no major economy is in a position to raise rates, especially not the UK. However, even though the CPI is above the target rate, the rate is projected to fall on a monthly basis and a yearly one as well. On Wednesday the UK will be releasing it's unemployment figures, which are also expected to fall, and could be a bullish effect on the currency. Wednesday will also bring US Advanced Retail Sales. Traders look to these numbers to see how consumers are spending, and if they are bringing their dollars back into the market. Until they do, it is impossible to expect a real recovery. (Don't hold your breath!) We will also get the minutes of the US Fed Mtg. These can produce quite a bit of volatility as the Fed often comments on the future expectations of the economy.
Thursday will bring us the US PPI (Producer Price Index) another inflation gauge...but again it is expected to fall.
Friday will bring the last in the inflation measures this week in the US CPI or Consumer Price Index, again, no real increases are expected.
That should wrap us up for this morning.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
As we entere our short term trade in the euro, we can see that Friday gave us a bearish outside day. That occurs when a candle or bar on a chart has a close below it's open, and when the body of the candle is larger than the previous one. In this case, it marks a whole days' activity, which generally gives us a more reliable signal. Remember, the longer term the time frame, the more reliable it is for technical analysis.
Also, the euro bumped up against long term resistance on Friday and was unable to pierce it. This give us another clue that some "down time" ought to be ahead. Of course, we won't reveal our proprietary entries and exits here as this is a public forum, but those of you who have gotten your alert today will know what to do!
For our longer term sterling trade, we began a very nice move on Friday and now find ourselves well in the black by about 1%. Remember, by the time this is over, we want to be looking at something in excess of 5% for just a few weeks work. You can't beat that anywhere. But the current account balance for the UK was released earlier today and was nearly double the rate forecast. This is not good. Remember the CAB, is derived from subtracting imports from exports. As a rule, you weant you account balance to be positive, which means that you are exporting (selling) more than you are importing (buying). If not, then as a national economy, you are spending more than you are making, which is never good. However, the sterling fell sharply and then bounced nearly 100 pips after it hit the 200MA on the 4 hour chart.
We should also note that the price fell below the 200MA on the daily chart on Friday...a bearish signal.
For the rest of the day the news calendar is pretty light; we have some news coming out for Canada. But as the week wears on, we have the Consumer Price Index for the UK. AS the index rises, it is generally thought to be indicative of rising inflation. It is the presumption that a central bank will have to raise interest rates, in order to combat rising inflation. That is generally very bullish for a currency. When CPI is falling, defaltion is believed to be on the rise, and no interest rate hike will be forthcoming. That continues to depress a currency. The CPI is expected to be above the target rate of 2% ( and has been for a little while), but no major economy is in a position to raise rates, especially not the UK. However, even though the CPI is above the target rate, the rate is projected to fall on a monthly basis and a yearly one as well. On Wednesday the UK will be releasing it's unemployment figures, which are also expected to fall, and could be a bullish effect on the currency. Wednesday will also bring US Advanced Retail Sales. Traders look to these numbers to see how consumers are spending, and if they are bringing their dollars back into the market. Until they do, it is impossible to expect a real recovery. (Don't hold your breath!) We will also get the minutes of the US Fed Mtg. These can produce quite a bit of volatility as the Fed often comments on the future expectations of the economy.
Thursday will bring us the US PPI (Producer Price Index) another inflation gauge...but again it is expected to fall.
Friday will bring the last in the inflation measures this week in the US CPI or Consumer Price Index, again, no real increases are expected.
That should wrap us up for this morning.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
Friday, July 9, 2010
Forex and Mind Tricks
As any trader who's been around the FX block will tell you, the mind is capable of producing terrible distortions of reality, and simply accepting them as real, thus producing bad trades. The fact is, anyone who has had a terrifying nightmare can attest to the same fact. Even after you wake up, and you're shaking and sweating and you're heart is racing...even after you've realized it is just a dream...even after you try to describe it to someone else and it makes no sense...it still produces fear when you envision the images in your minds' eye. Why is that? Because our mind cannot tell the difference between something that is real, and something that we only vividly imagine. Our minds are perfectly capable of accepting alternate realities and making room for them in our present reality.
Such was the case with me in our last blog entry. I usually have a rule about not writing late at night. Last night I broke that, and now I remember why it is a rule. I described for you a situation of relational markets between the franc euro and dollar. And because I was using an inverted chart, my mind accepted an altered view of reality as being true. I said to you that the franc was getting pounded by the dollar, although actually the opposite is true. The dollar has fallen against the franc. Now as the dollar index is at a swing low stochastically speaking, I would look for a rebound against the franc which should dutifully help the US dollar to appreciate against the pound and euro.
But it is not true that the dollar has done that yet. It is the franc that has hit the USD. But simply looking at a variant chart I was re-interpreting the information and it fit right within my paradigm. So we have for ourselves today 2 important lessons.
1. Trading while tired almost always produces disastrous results. (Same holds true for writing.)
2. Always double check. And use caution. I reminded a friend today of something my father used to say, "It's never the new guys at the reptile farm who get bitten by the snakes. They are always the most careful. But the guys who have been around awhile, they are the ones who are statistically the most at risk."
The FX market is like a big snake just waiting to strike the minute you let down your guard. So it pays to be careful.
Now even though my analysis was inverted, my "worldview" is still correct. We have seen resultant weakness in the sterling as it moved down to its sideways channel low earlier today. This has provided support for 8 days running, and we are getting a bounce off of it again right now. But a close below the 1.5080 level should give us the rest of a great short trade.
Trade Cautiously!
Bill
bill@thefxtradingmasters.com
www.thefxtradingmasters.com
Such was the case with me in our last blog entry. I usually have a rule about not writing late at night. Last night I broke that, and now I remember why it is a rule. I described for you a situation of relational markets between the franc euro and dollar. And because I was using an inverted chart, my mind accepted an altered view of reality as being true. I said to you that the franc was getting pounded by the dollar, although actually the opposite is true. The dollar has fallen against the franc. Now as the dollar index is at a swing low stochastically speaking, I would look for a rebound against the franc which should dutifully help the US dollar to appreciate against the pound and euro.
But it is not true that the dollar has done that yet. It is the franc that has hit the USD. But simply looking at a variant chart I was re-interpreting the information and it fit right within my paradigm. So we have for ourselves today 2 important lessons.
1. Trading while tired almost always produces disastrous results. (Same holds true for writing.)
2. Always double check. And use caution. I reminded a friend today of something my father used to say, "It's never the new guys at the reptile farm who get bitten by the snakes. They are always the most careful. But the guys who have been around awhile, they are the ones who are statistically the most at risk."
The FX market is like a big snake just waiting to strike the minute you let down your guard. So it pays to be careful.
Now even though my analysis was inverted, my "worldview" is still correct. We have seen resultant weakness in the sterling as it moved down to its sideways channel low earlier today. This has provided support for 8 days running, and we are getting a bounce off of it again right now. But a close below the 1.5080 level should give us the rest of a great short trade.
Trade Cautiously!
Bill
bill@thefxtradingmasters.com
www.thefxtradingmasters.com
Thursday, July 8, 2010
Forex and Present Correlations
We spent some time yesterday talking about the correlations of various fx currencies to one another. Today, let's look at a present correlation that has an effect on our current trade.
I lump the three Euro currencies together as having an inter-related effect on one another, the Swiss franc, the Euro, and the GB Pound. These generally tend to move in correlations to one another, and certainly against the US dollar.
The euro and sterling have been in a corrective trend against the dollar. They have both now bumped up against the long term down trend resistance line that dates back to the beginning of the year and a little earlier. Both are up against the upper resistance of a channel. However, the Swiss Franc has been taking a beating at the hand of the US dollar. At this point we want to remember the "triangulation" principle. If A is being crushed B, and B is being crushed by C, then A should be obliterated by C. Let's substitute currencies in our little equation to make it clear. If the Euro is being beaten by the Franc, (just look at a eur/chf to see that this is true), and if the Franc is being beaten by the US Dollar (a 12oo pip move in the last month), then the US dollar should be destroying the Euro. If the US mounts it's strength against the single currency as it has against the Franc, the sterling will fall right alongside.
This "triangulation" principal is an important and effective trading tool. it is not infallible, but it has proven itself pretty darn reliable to me.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
I lump the three Euro currencies together as having an inter-related effect on one another, the Swiss franc, the Euro, and the GB Pound. These generally tend to move in correlations to one another, and certainly against the US dollar.
The euro and sterling have been in a corrective trend against the dollar. They have both now bumped up against the long term down trend resistance line that dates back to the beginning of the year and a little earlier. Both are up against the upper resistance of a channel. However, the Swiss Franc has been taking a beating at the hand of the US dollar. At this point we want to remember the "triangulation" principle. If A is being crushed B, and B is being crushed by C, then A should be obliterated by C. Let's substitute currencies in our little equation to make it clear. If the Euro is being beaten by the Franc, (just look at a eur/chf to see that this is true), and if the Franc is being beaten by the US Dollar (a 12oo pip move in the last month), then the US dollar should be destroying the Euro. If the US mounts it's strength against the single currency as it has against the Franc, the sterling will fall right alongside.
This "triangulation" principal is an important and effective trading tool. it is not infallible, but it has proven itself pretty darn reliable to me.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
Wednesday, July 7, 2010
Forex and Intermarket Correlations Part 2
It's been several days since I had a chance to post due to the July 4th Holiday (which was a great one here) so I'm glad to be back to the blog.
Today we want to consider a bit further market correlations and the forex, following up on trader Brian's question from a couple weeks back. Today, let's consider the inter markets between forex markets themselves and how they relate to one another.
Among the majors currency pairs, GBP/USD, EUR/USD, CAN/USD, AUS/USD NZD/USD and CHF/USD, there are basically three correlated groupings.
GBP, EUR, and CHF are all considered one family, we'll just label them the European Currencies. CAN, AUS, and NZD are all considered one family, we'll label them the Commodity dollars, or comdolls for short. Lastly, we have the USD which essentially stands alone as the counter part to all these. We don't really need a nickname for it.
As a rule, these will often trade in some relation. When commodities are on a run, especially oil, we see the commdolls making bullish moves. Such a trade fits in fundamentally with their production, and also, as oil is priced in US dollars, when it's price is rising, it usually means that the dollar is weakening. As the US dollar weakens, all these commodity currency dollars tend to strengthen as the counter part to the trade.
On the European side, we see similar action. These three tend to be considered more related to one another. First, we should note that when the dollar index is moving, it is moving primarily against the euro which makes up the lions' share of the index. Thus, US dollar weakens, euro strengthens. US dollar strengthens, euro weakens. It is an inverse relationship, or something like a see-saw. But as we often hear that a rising tide lifts all boats, when the euro is on the move up, frequently the swissy and the sterling move right along beside. This gives added volatility to these three apart from the strict interpretation of their fundamentals.
These two schools also often move together, in sympathy moves against the dollar. So if commodities are strong, it can move the whole lot. If equities are strong, they can move the whole lot. If both are strong together as a result of some news that promotes an idea of economic recovery, they all will move up. In the current, environment one of the wild cards however is this: good news out of the US. Not so long ago, good news from the USA would prompt a US dollar selloff, and a currency run up everywhere else. The rationale being that if the US is going to recover, everyone is going to recover. (And if there was going to be a recovery, everybody wanted to be holding the higher yielding currencies against the dollar.) The reason being is that the US was the primary engine of growth worldwide. They purchased what everyone else produced. But things are somewhat different now in the US. Citizens no longer boast massive amounts of equity in their homes against which they can borrow for every toy and trinket under the sun. The US savings rate is rising. This is the death knell to sales, especially as incomes have been falling due to rising unemployment and underemployment. Even if the US recovers, spending will not return to its previously dizzying heights. Many who were just about to enter into retirement have seen massive amounts of their retirement accounts wiped out, never to be recovered...and with very few years left to work.
Without spending, the rest of the world cannot return to its previous peaks of manufacturing and selling success. So now US good news is debated hotly for it's inferences. Will it be the US who recovers and leads interest rates higher? Will the US be the first to emerge from depression? Will the US's gowth benefit the rest of the world? What should we be buying...the USD or the Euro?
The truth is, no one really knows. We have never been at this juncture in world
history before. No one really knows how to fix the current problems under the current theories of economics. And the truth is, no one can. The current theories do not allow for a place in time where debt is so incredibly massive, that it cannot be repaid. Sure, it was ok for certain 2nd and 3rd world countries to default. Because then all the wealth of the developed countries could be funneled to them by way of "loans" and "aid". Which has actually already happened. But who will spare the mighty US? Or the Eurozone? Or Great Britain? There isn't enough money in all the world to bail them out. This is what I mean when I say we have never been at this juncture before. Basic, non-Keynesian, economics says that after a run up like we've had, the only way out is to write off debt or pay off debt and get it out of the system. But that isn't happening on the governmental scale or Central Bank scale. It is happening in private businesses (the ones which don't get bailed out), and in private families (where foreclosures end the game), these are getting rid of debt. But the governments of the world have just continued to add to it; bailouts and purchases and guaranteed loans of all kinds. Until the governments of the world stop spending to try to create sustainable recovery, no recovery is bound to happen. You can't spend your way to wealth.
As such, the markets move in tandem with greed and fear, what they want, and what they are afraid of. When all is said and done, they are the great correlators, and they are the great market movers.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
Today we want to consider a bit further market correlations and the forex, following up on trader Brian's question from a couple weeks back. Today, let's consider the inter markets between forex markets themselves and how they relate to one another.
Among the majors currency pairs, GBP/USD, EUR/USD, CAN/USD, AUS/USD NZD/USD and CHF/USD, there are basically three correlated groupings.
GBP, EUR, and CHF are all considered one family, we'll just label them the European Currencies. CAN, AUS, and NZD are all considered one family, we'll label them the Commodity dollars, or comdolls for short. Lastly, we have the USD which essentially stands alone as the counter part to all these. We don't really need a nickname for it.
As a rule, these will often trade in some relation. When commodities are on a run, especially oil, we see the commdolls making bullish moves. Such a trade fits in fundamentally with their production, and also, as oil is priced in US dollars, when it's price is rising, it usually means that the dollar is weakening. As the US dollar weakens, all these commodity currency dollars tend to strengthen as the counter part to the trade.
On the European side, we see similar action. These three tend to be considered more related to one another. First, we should note that when the dollar index is moving, it is moving primarily against the euro which makes up the lions' share of the index. Thus, US dollar weakens, euro strengthens. US dollar strengthens, euro weakens. It is an inverse relationship, or something like a see-saw. But as we often hear that a rising tide lifts all boats, when the euro is on the move up, frequently the swissy and the sterling move right along beside. This gives added volatility to these three apart from the strict interpretation of their fundamentals.
These two schools also often move together, in sympathy moves against the dollar. So if commodities are strong, it can move the whole lot. If equities are strong, they can move the whole lot. If both are strong together as a result of some news that promotes an idea of economic recovery, they all will move up. In the current, environment one of the wild cards however is this: good news out of the US. Not so long ago, good news from the USA would prompt a US dollar selloff, and a currency run up everywhere else. The rationale being that if the US is going to recover, everyone is going to recover. (And if there was going to be a recovery, everybody wanted to be holding the higher yielding currencies against the dollar.) The reason being is that the US was the primary engine of growth worldwide. They purchased what everyone else produced. But things are somewhat different now in the US. Citizens no longer boast massive amounts of equity in their homes against which they can borrow for every toy and trinket under the sun. The US savings rate is rising. This is the death knell to sales, especially as incomes have been falling due to rising unemployment and underemployment. Even if the US recovers, spending will not return to its previously dizzying heights. Many who were just about to enter into retirement have seen massive amounts of their retirement accounts wiped out, never to be recovered...and with very few years left to work.
Without spending, the rest of the world cannot return to its previous peaks of manufacturing and selling success. So now US good news is debated hotly for it's inferences. Will it be the US who recovers and leads interest rates higher? Will the US be the first to emerge from depression? Will the US's gowth benefit the rest of the world? What should we be buying...the USD or the Euro?
The truth is, no one really knows. We have never been at this juncture in world
history before. No one really knows how to fix the current problems under the current theories of economics. And the truth is, no one can. The current theories do not allow for a place in time where debt is so incredibly massive, that it cannot be repaid. Sure, it was ok for certain 2nd and 3rd world countries to default. Because then all the wealth of the developed countries could be funneled to them by way of "loans" and "aid". Which has actually already happened. But who will spare the mighty US? Or the Eurozone? Or Great Britain? There isn't enough money in all the world to bail them out. This is what I mean when I say we have never been at this juncture before. Basic, non-Keynesian, economics says that after a run up like we've had, the only way out is to write off debt or pay off debt and get it out of the system. But that isn't happening on the governmental scale or Central Bank scale. It is happening in private businesses (the ones which don't get bailed out), and in private families (where foreclosures end the game), these are getting rid of debt. But the governments of the world have just continued to add to it; bailouts and purchases and guaranteed loans of all kinds. Until the governments of the world stop spending to try to create sustainable recovery, no recovery is bound to happen. You can't spend your way to wealth.
As such, the markets move in tandem with greed and fear, what they want, and what they are afraid of. When all is said and done, they are the great correlators, and they are the great market movers.
Happy Trading!
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
Thursday, July 1, 2010
Forex and Stock Correlations
In the age of instantaneous communication, market correlation is more significant now than it ever has been before. In days gone by, often markets stood "alone", or at least the correlations between them were lagging so much that it did not appear that they were very related or interconnected. But no more.
As news zips around the globe, data from China affects the Pacific, European and American markets almost at once. So the question arises, what are the correlations between various markets, and, can we trade them?
If we examine the traditional correlations between stock and currency markets, we should note that the drivers which move them are not the same. Let's start with stocks. They are broadly driven by two factors: interest rates and earnings. Once upon a time, interest rates below 8% were said to propel stocks higher. And once rates fell to that level or lower, traders should begin buying in. With interest so low, every company would be making a profit (of course that dynamic has grossly changed). But nevertheless, low rates generally make for rising stocks. On the other hand, rising rates make for falling stocks. This is the dilemma where US and other policy makers now find themselves. They know rates cannot stay at these absurdly low levels forever. But how can you raise them when they are not stimulating the economy. Such an action would crush anything that's left of the economy.
But when rates do begin to increase, and stocks are falling, as a rule, bonds are going up. As they draw more interest from investors for their higher return, we see they usually move in tandem, or an opposite correlation from stocks or equities.
Currencies act a little more like bonds than they do stocks. If interest rates are falling, the interest by traders in that currency will fall also. Why? Because of a lesser return. As the US is presently setting its rates at .25%, why would I as a currency investor want to buy the USD over the Aussie $ which is paying 4.5%? As a rule, I wouldn't. But we are in the midst of an inverse market relationship. Now the lower paying currency is strengthening because of fear in the market. Fear drives investors to what they perceive as safety and liquidity. Right now, that is the USD.
So the important thing to remember now is that correlations also change. At times, strength in the USD is mirrored in strength in the equities. But during this fearful time, falling US equities have meant a strengthening dollar. On days when counter parties to the dollar were having good equity days, that was good for their currency.
Thus there are correlations, but they appear to be rather short lived for our style of trading. Even as I write this the bottom is dropping out of the S&P which would normally be good for the dollar against the euro and sterling. But the pound is up 250 pips and the euro 150. That is a huge disconnect for what has been happening lately.
So be careful when you hear (especially talking heads on Bloomberg and CNBC or Fox) talking about these correlations or negative correlations. They are not as reliable or as simple as some would lead you to believe. They are interconnected, but apart from long secular trends, they are more like minefields than good trading strategies.
Happy Trading,
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
As news zips around the globe, data from China affects the Pacific, European and American markets almost at once. So the question arises, what are the correlations between various markets, and, can we trade them?
If we examine the traditional correlations between stock and currency markets, we should note that the drivers which move them are not the same. Let's start with stocks. They are broadly driven by two factors: interest rates and earnings. Once upon a time, interest rates below 8% were said to propel stocks higher. And once rates fell to that level or lower, traders should begin buying in. With interest so low, every company would be making a profit (of course that dynamic has grossly changed). But nevertheless, low rates generally make for rising stocks. On the other hand, rising rates make for falling stocks. This is the dilemma where US and other policy makers now find themselves. They know rates cannot stay at these absurdly low levels forever. But how can you raise them when they are not stimulating the economy. Such an action would crush anything that's left of the economy.
But when rates do begin to increase, and stocks are falling, as a rule, bonds are going up. As they draw more interest from investors for their higher return, we see they usually move in tandem, or an opposite correlation from stocks or equities.
Currencies act a little more like bonds than they do stocks. If interest rates are falling, the interest by traders in that currency will fall also. Why? Because of a lesser return. As the US is presently setting its rates at .25%, why would I as a currency investor want to buy the USD over the Aussie $ which is paying 4.5%? As a rule, I wouldn't. But we are in the midst of an inverse market relationship. Now the lower paying currency is strengthening because of fear in the market. Fear drives investors to what they perceive as safety and liquidity. Right now, that is the USD.
So the important thing to remember now is that correlations also change. At times, strength in the USD is mirrored in strength in the equities. But during this fearful time, falling US equities have meant a strengthening dollar. On days when counter parties to the dollar were having good equity days, that was good for their currency.
Thus there are correlations, but they appear to be rather short lived for our style of trading. Even as I write this the bottom is dropping out of the S&P which would normally be good for the dollar against the euro and sterling. But the pound is up 250 pips and the euro 150. That is a huge disconnect for what has been happening lately.
So be careful when you hear (especially talking heads on Bloomberg and CNBC or Fox) talking about these correlations or negative correlations. They are not as reliable or as simple as some would lead you to believe. They are interconnected, but apart from long secular trends, they are more like minefields than good trading strategies.
Happy Trading,
Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com
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