This morning I saw a classical set up for a bounce trade and I can’t resist providing it to you.
Using a 15 minute chart on the USDJPY we see two Bollinger Bands.The standard band has a 20 and 2 set up. The additional band, I am calling the Outer Bollinger band has a 13 and 2.618 set up.The set-ups represent two technical metrics. First, the simple moving average.So the standard band as a simple moving average of 20 periods and the Outer band have a simple moving average of 13 periods.The second part of the set-up represents Standard Deviation. Simply put 2 standard deviations means that the price is about 97% of the time between the two bands.The Outer band has a 2.618 Standard Deviation which means that the price is about 99% of the time between the two bands, if you use the 13 moving average.
But let’s get to the meaning of this without too much fuss over the statistics.Tactically, when we see a price point move near or outside both bands, we can conclude its doing something quite extreme. The implication is that the price can’t stay there too long.Either it’s going to keep going up, or reverse.Keep in mind that in currencies, the price probing an extreme is not in itself a reversal signal. It got extreme for a reason!The reason or sentiment has to change for a reversal to occur.But there is a clue, to the set-up as to whether we have a bounce or reversal scenario.The clue is the shape of the Bollinger Bands.If the bands are flat or sideways, it is a good geometry for bounces.Think of a ball bouncing off a floor. A flat floor generates a straight up bounce! (Click chart to enlarge)
All eyes are on the US ISM Manufacturing number due out this morning at 10AM EST.The market is hoping to see a rise in this number as that would indicate business activity is picking up.So far this morning, we are seeing mild risk-taking as the Euro has rebounded from 4 days of selling.
US stock market futures are up as are gold and oil.
Let’s examine how this is affecting world currencies:
Aussie (AUD):The Aussie is currently trading down this morning despite the risk-taking tone this morning as traders are gearing up for the RBA rate decision due out overnight.The market is expecting a 25 basis point hike to 4%, but this could trigger a bearish scenario. If they do raise rates, it is extremely likely that they will take another rate hike off of the table going forward.There is also a chance that they don’t raise rates this time, as news that China is paring back economic stimulus could affect the Australian economy.
Kiwi (NZD):The Kiwi is up slightly this morning benefitting from the risk trade.
Loonie (CAD):The Loonie is up this morning as oil prices recover and stabilize as well as a general risk-taking mood this morning.The market is waiting for confirmation from the ISM data so it trading in a tight range until that release.The Loonie should strengthen today if the number comes in better than expected.
Euro (EUR):The Euro is the biggest gainer this morning as it rebounds from 4 days of weakening.The market is gaining confidence that the plan to manage the debt crisis in Greece is acceptable and plausible which generally ties in to the risk-taking trade this morning.Over the last four days, the thought that Euro could serve as an alternative to the US dollar as a reserve currency was largely debunked as Central banks pulled cash out of the Euro at a record pace.
Pound (GBP):The pound is down this morning against all but the Japanese yen as housing prices slid in the UK and banks granted fewer mortgage applications last month.The Bank of England rate decision is on tap next week but traders are more interested to see if they continue with their quantitative easing program.
Dollar (USD):The US dollar is down this morning as part of the risk-taking trade.Stock market futures are up as are commodities and all eyes are on the ISM Manufacturing number.There are some figures out this morning that show that US personal incomes are up slightly, and personal spending is higher than the prior reading but missing expectations by just .1%.
Yen (JPY):The yen is down across the board this morning as the BOJ’s top economist said that Japan’s economy is far from “achieving self-sustaining growth” as their export led recovery failed to induce consumer spending.This also falls in line with ministers calls last week for a weaker yen.
As we can see the big news of the day is ISM Manufacturing number which will be viewed as a proxy for global economic recovery.The only currency that is trading “out of the ordinary” is the Aussie, as the market prepares for the rate decision.
In global markets, stocks in Asia closed generally higher and Europe is higher at the moment.US stock markets futures are higher pre-open and oil is up to 73.47, with gold slightly higher to 1088.
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This morning, it looks like risk appetite has returned to the forex market after yesterday’s FOMC meeting has been fully digested.The only thing “unexpected” from the meeting was that the decision was not unanimous, as KC Fed Chief Thomas Hoenig dissented and raised concerns about possible inflation. While this view will most probably be discounted for “an extended period” to use Fed parlance, it is interesting to see someone break from the pack.
Also, additional problems from the Euro zone have increased downward pressure on the common currency, as Portugal has now joined the mix and is showing up on the watch lists as their fiscal budget is drawing attention from the ratings agencies.In light of these problems, the market is still in a risk-taking mood.
The other big news came from last night’s Presidential State of the Union Address, where the President issued a renewed commitment to fixing the employment problem here in the US and pledging to help put Americans back to work which overall is positive for economic growth.Whether or not the follow through occurs is another story, but for now, the markets are satisfied.
Here’s a look at the currencies:
Aussie (AUD):Benefitting in early trade from risk appetite, the Aussie traded as high as 90.45 vs. the US dollar.In addition, commodity prices are higher as well.There is much debate over whether or not another rate hike will be in order at the next policy meeting as inflation concerns abound.Watch out for a mid-morning reversal if equity markets sell-off.
Kiwi (NZD):Yesterday, the New Zealand Central Bank left interest rates unchanged at 2.5% as inflation is likely to stay in its target range.However, the bank is expected to move on rates sometime before mid-year.Also up this morning, but off of its highs.
Loonie (CAD):With oil prices holding above $74 (for now), the Loonie is showing decent gains this morning against the risk averse currencies.The Loonie is showing some strength today vs. the US dollar, as it bounced back against technical resistance at 1.065.
Euro (EUR):The Euro is down this morning after having broken support at 1.40 vs. the US dollar.While EC economic sentiment was up this morning vs. an expected decline, the news that the first of the PIIGS countries, Portugal, may be following Greece’s lead down the road to fiscal uncertainty.S&P is saying that Portugal’s current budget leaves the country economically “frail”.Remember that when trading often times support becomes resistance so keep that 1.40 level in mind.
Pound (GBP):The Pound is strong again this morning, extending yesterday’s gains.The prevailing thought is that interest rate hikes may be on the table for the foreseeable future.
US Dollar (USD):The dollar is down today against the commodity currencies as risk appetite has returned.US durable goods orders came in lower than expected, and initial jobless claims came in slightly more than expected.This lends credence to the FOMC stance that rates should remain low for “an extended period”, much to KC Fed Chief Hoenig’s chagrin.
Yen (JPY):The yen is down against all but the Euro currencies, as the bottom rung on the risk-taking ladder.The uptick in risk appetite as a result of the State of the Union Address last night has helped propel Asian stock markets higher last night and the yen lower.
In world markets, the Asian stock markets closed higher than 1.5% from the previous day but stocks in Europe are mostly lower with news out of the Euro Zone.US stock markets are down, and gold and oil are higher, to 1093 and 74.12 respectively.
What’s important to take away from all of this news is that no single instrument trades in a “bubble” and that news from around the globe can affect any market.By having and maintaining an understanding of global events, investors and traders can better position themselves.
To learn more about how these markets are ALL inter-related, be sure to check out our extremely affordable currency trading courses!
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As we come to the end of 2009, now is the time to look back and reflect upon this past year and to think about making changes going forward.2009 was a “roller coaster” of a year for investors and many were left wondering what to do when the markets were collapsing and then missed the rally back.
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As I gear up for the holiday invasion and the ensuing gluttony that’s about to transpire, I can’t help but look forward to my next vacation.I’m thinking somewhere tropical, perhaps the Caribbean, enjoying drinks with little umbrellas in them.I lull myself into daydream, counting waves and sunsets as island music fills the air.Yet all is not perfect. And then it hits me like a ton of bricks—the calypso music I’m hearing is being played by none other than our esteemed Fed Chairman Bernanke! He’s wearing a Panama Hat and a blousy Hawaiian shirt, playing a version of the Limbo: how low can you go!Only the participants aren’t drunken tourists, but dancing US dollar bills, each trying to squeeze under a rapidly sinking bar to Bernanke’s amusement! The pleasant daydream has now become a nightmare, as I realize that I can’t afford another Painkiller with the mountain of cash I place on the bar.I awake in a cold sweat.Thankfully it is just a dream.Or is it?
We are all aware of the trying economic times we are experiencing and the fact that we haven’t gone off the cliff (yet) is something that I am thankful for.Now that we seemingly have avoided Depression (again yet), we find ourselves mired in a serious recession and there is great debate about how to get out of it.
One of the prevailing themes and the one espoused by those charged with figuring this out is that the path to prosperity is through dollar destruction.Since the dollar has been tanking thanks to Bernanke’s zero interest rate policy (ZIRP), both the stock market and the commodities markets (particularly gold) have seen tremendous gains (relative to where they were before last fall) as well as other currencies.
This has led to the “tale of two trades”, which I have outlined in previous articles.The irony of this is that in order for the dollar to advance, we need to see inflation so the Fed will raise rates.The fact that we are not seeing inflation but rather serious deflation means that the dollar will continue to fall until it reaches its “breaking point” whether we are out of recession or not.
However, there is another way that the dollar can rise without raising interest rates.It’s called the risk aversion trade and will come back into fashion as investors become more skeptical /less confident in the world and particularly the United States recovery.I wrote recently about how the Fed massages the numbers and jaw-bones the dollar so at this point it shouldn’t come as a shock to anyone.
So if you want a stronger dollar, you have to be prepared to accept worsening conditions.Things like GDP revisions and less-bad-but-not-quite-good-employment figures all keep the dollar from crashing.
So where is the breaking point for the dollar?How low can it go?
Well rather than try to throw out some technical mumbo-jumbo, or attempt to rationalize the irrational, I’m going to leave you with this thought:the Dollar will continue to decline until things look so bad that the US dollar carry trade starts to unwind as the “flight to safety” takes effect; or if conditions actually do improve enough for the Fed to raise rates.
The first scenario is likely to happen more rapidly than the second.The dollar funded carry trade is getting crowded so all its going to take is one timely placed comment or economic number to send everyone running for the door.This will provide a temporary lift and is intended to buy the Fed time for the second scenario to happen.
The second scenario is a bit more involved and likely to cause the economy to “get worse before it gets better”.Sacrifices will need to be made and I hope that we have the political fortitude to do so.
But until that happens, I’ll keep hearing those steel drums in my dreams and seeing those dancing dollars making new lows.
So for this Thanksgiving I’ll be thankful that as of right now, they will still take dollars for my favorite Caribbean drink!Anything else at this point is just gravy.
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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)
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.
It is appears as though the currency markets are believing the economic numbers that are coming out of the US, that inflation is tame at .4% so that there is no chance that Bernanke and the Fed will even consider raising rates anytime soon.
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!
Good gains today for the Japanese Yen, which of course means losses for the others. Top performing pairs are USD/JPY -1.46%, EUR/JPY -1.34%, AUD/JPY -1.31% and GBP/JPY -1.20%. Look for continued strength in the Yen in the upcoming days/weeks.
Take a look a USD/JPY (click chart to enlarge)
And also the double top that has formed on GBP/JPY. (click to enlarge)
Both of these charts show that the trend is positive for the Yen, so I would be long the Yen here. Until any significant news or price pattern tells me otherwise, I want to be a buyer of Yen.
Remember, when looking at charts of the Yen, down means up in relation to other currencies!
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