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)
This morning, the US Q4 GDP figures came in at a better than expected 5.7%, the fastest growth since 2003.While this is seemingly good news for the US economy as it marks the 2nd straight quarter of growth providing further evidence that we moved forward from recession.
However, we’re not out of the woods just yet.There are still global concerns weighing heavily upon the markets, such as the Greek debt problem in the Euro Zone, as well as China’s restrictions on lending.
This morning’s currency action is rather neutral, as it can’t be described as either risk-taking or risk-aversion.
Here’s how world currencies are trading this morning:
Aussie (AUD):Gains in the Aussie have slowed down as the global slowdown, particularly in China, is expected to slow growth in Australia.This morning is a mixed bag for the Aussie, as it’s higher vs. the Japanese yen and British pound, but down vs. the US dollar and Euro.
Kiwi (NZD): The Kiwi is trading higher across the board and is showing the highest percent gain vs. the yen this morning, up 1%.They just reported a budget deficit for the first time in 9 years, as tax receipts have slowed and government spending picked up last year.
Loonie (CAD):Canadian GDP came in this morning at .4%, a smidge higher than expectations.Canada is showing slow but steady growth, which is a positive for the economy.The Loonie has been weakening against the US dollar as global risk appetite has abated and oil prices are down almost $6 this year.
Euro (EUR):The Euro is trading higher against the yen and the pound, but down against the rest this morning.Consumer prices rose 1% showing that inflation is starting to pick up in the region.Also to note is that fears over the Greek debt crisis are weakening as region considers all of its options.
Pound (GBP):The pound is down this morning against all but the yen, experiencing a technical pull back from its recent strength.Housing prices were up the most in 5 months and consumer confidence is improving.BOE policy-maker Andrew Sentance cautioned that the recovery can continue, “especially if interest rates remain low.”
Dollar (USD):The dollar is showing strength today after the GDP figures that were reported this morning.The fastest growth since 2003 is stoking thoughts that inflation may be closer than the Fed thinks.
Yen (JPY):The Japanese yen is down across the board today as the CPI index showed that deflation is still very prevalent in the Japanese economy.Finance Minister Kan called for the Bank of Japan to take a powerful approach to combat falling prices and a strengthen yen.
The stock markets closed down in Asia, but are currently higher in Europe and the US.Gold is down slightly and oil is up this morning.
So today is a bit of a mixed bag.Keep an eye on the correlations to watch for break-downs or irregularities to see if there are reversals or reversion to mean.Today seems like it will be a range-bound day going into the weekend.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here!Don’t miss out on the world’s fastest growing market!
This morning, the broader currency markets are trading in a slight range, with the Japanese yen (JPY) and the British pound (GBP) showing gains against the US dollar.There is a mild risk-aversion theme this morning as all eyes are on the US FOMC policy meeting today at 2:15 EST.
As far as news-worthy currency events go, this may be the one which has the largest impact on the market.It is almost 100% certain that the Fed will not be raising rates from .25%, however the market will be looking for clues for any change in language that may suggest a shift in policy.
The markets here in the US have been on edge recently, as political pressure and rhetoric have picked up because of what many see as a rejection of the current administration’s policies.This has caused some in Congress to pull their support for Fed Chairman Bernanke, whose term is up at the end of January.
Let’s take a look at how specific currencies are faring so far:
Aussie (AUD):Earlier today the Australian Consumer Price Index (CPI) number came in at .5% for Q4 and at 2.1% YoY, which was slightly higher than expectations.This sent the Aussie initially higher and above .90 against the US dollar, though it’s now trading below on the move to risk aversion and fears that the moratorium in Chinese lending may affect the Australian economy.
Kiwi (NZD):The Kiwi is trading down on the risk aversion theme, most notably against the Japanese yen around .5% on the morning.The Reserve Bank of New Zealand is coming out with its rate decision later today and is expected to maintain rates at 2.5%, which is a record low.This could weigh heavily on the Kiwi as the market has priced in a 50 basis point rise by mid-year.
Loonie (CAD): The Loonie is trading near a 5-week low as world markets and commodities have sold off recently and the flight to safety trade has been in effect.One of the major factors affecting the Loonie is the price of oil, which is off some $10 from recent highs.
Euro (EUR): The Euro is off slightly this morning, as it attempts to shake off the problems it’s been having related to the debt crisis in Greece.European stock indices are down today, as comments from ECB council member Weber said that the bank may take additional steps to withdraw liquidity from its banking system.With today’s FOMC decision on tap, the Euro could test 1.40 which has been an area of psychological support for some time.
Pound (GBP): Reports are out this morning that the quantitative easing measures that the Bank of England has taken may be working.Although UK GDP came in lighter than expected, it did come in positive which is a step in the right direction.BOE policy-maker Sentance warned that the bank may need to act quickly if the recovery strengthens and inflation picks up.The pound is up to 1.62 vs. the US dollar.
US Dollar (USD):The dollar is weak against the pound and the yen this morning, but otherwise is up slightly against the commodity currencies and the Euro.The market is waiting on the FOMC decision and more importantly if there is a change is language which may give hints about a change in policy.Keep an ear out for a continuation of the “extended period” language.The dollar has been gaining recently, as risk-aversion has heightened around the globe.
Yen (JPY):The Japanese yen is at a 5-week high vs. the dollar, as the Japanese yen benefits the most from the risk-aversion trade.With interest rates at .1% and not moving any time soon, the carry trade is back on with the yen as the funding currency of choice.Also to note is that Japanese exports have risen for the first time since mid-2008, a sign that economic recovery may be taking place.
In world markets, stocks are down in Asia and Europe and the MSCI world stock index is experiencing its largest losing streak in almost a year as concerns that developed economies may be preparing to scale back which affects emerging markets.In the US, the stock markets are down slightly as are gold and oil, which are trading below 1100 and 75 respectively.
Look for a reversal today if the Fed does as expected and maintains uniformity of language with its previous rate decisions.The world markets are looking for some vote of confidence that will allow risk-taking to resume again.Despite all of the political wrangling coming out of Washington, if Bernanke can project confidence that the recovery in the US in taking place, then it may signal game on again!
To learn more about how these events affect the currency markets, be sure to check out our currency trading courses!
To follow these events in a free, real-time practice account, click here!
Tags: account, AUD, Aussie, Australia, bank, Bernanke, British, cad, carry trade, commodities, commodity, course, currenc, currencies, currency, currency market, currency trading, data, decision, dollar, dow, economic, economy, EUR, Euro, Europe, fed, free, fx, fxedu, gbp, gold, Il, index, interest, interest rate, interest rates, Japan, jpy, Kiwi, market, Mike Conlon, new zealand, news, nzd, oil, pair, pound, practice, practice account, rate decision, ssi, stock, stocks, Swiss, time, trade, USD, Yen
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.
Happy Thanksgiving to All and be sure to check out our currency trading courses!
Let’s face it; the currency market is akin to the ultimate final table in the World Series of Poker.At that table, you have eight people sitting around, all trying to bluff one another.Some have large stacks of chips, while others are short-stacked.Some like to talk a little more than others, while others prefer to let their cards do their talking.Ultimately, there will be one winner.
And that is where the similarities end.For in the currency market, there are many winners and many losers.But depending upon the actions of one player, a lot of money hangs in the balance.Imagine if every time Phil Helmuth blew up, you just lost some of your purchasing power.Also imagine that you had no choice in which player you were backing and that the player you have to back was based solely on where you live or work.And you’re watching in disbelief as the player you are forced to back is making dumb move after dumb move and slowly running out of chips.Sounds frustrating and scary, doesn’t it?
Welcome to the world as we know it.
And be thankful that the currency market exists!Why?Because even though you may be forced to cheer for the worst player in the room, you can still vote as to who you think is doing the best.You do that by buying the currencies of the strong players, and selling currencies of the weak ones.This is essentially known as a carry trade.
And in executing a carry trade, you also get rewarded by receiving the difference between the higher yielding currency (the one you buy) and the lower yielding currency (the one you sell) in the form of interest.
And just who are these players whose prowess or lack thereof affects the lives of so many?Why it’s the finance ministers, Central bank governors, and monetary policy makers of the most commonly-traded world currencies out there!
(Cue Michael Buffer voice) Representing the Euro-zone is Jean-Claude Trichet.From Japan, Hirohisa Fuji.From New Zealand, Allan Bollard.All the way from the outback of Australia, Glenn Stevens.Hailing from Canada, Mark Carney.Representing the UK, “Swervin’” Mervyn King.And last, but certainly not least, from the United States, Helicopter Ben Bernanke!
So how do you know who is winning (besides looking at the cards or the amount of chips)?Well that’s easy.Look for the guy who keeps raising the pot, and stay away from the guy who keeps telling you he has the best hand, yet keeps folding and has to borrow money to stay in the game.Also, be conscious of who is speaking the loudest but doing the least.
What you also may notice, is that there appears to be one empty seat at the table, as if there should be someone else playing in the game.This person holds a lot of chips, and can be seen giving them to one specific player time after time.
So when the WSOM (World Series of Money) rankings come out, can you guess who’s atop the leader-board and who is at the bottom?
1st Place: Glenn Stevens, Australia.Shows his willingness to raise the pot and actually does it.
2nd Place: Alan Bollard, New Zealand.Shows his ability to stay in hands by talking up the pot and may be very close to raising.
3rd Place: Jean-Claude Trichet, Eurozone. Keeps winning hands because others keep folding to him.
4th Place: Mark Carney, Canada.Also winning hands because others keep folding, but his talking down of his cards haven’t fooled anyone yet of his strength.
5th Place: Mervyn King, UK.Not winning many hands, but his erratic play is keeping everyone on their toes.
6th Place: Hirohisa Fuji, Japan.Just folds every hand and loses his blinds.
7th Place (Last): Ben Bernanke, USA.Continued bluffing has fooled no one, and is losing hand after hand and has to keep borrowing chips to stay in the game from the player who is not at the table.
Mystery Player:Zhou Xiachuan, China.Doesn’t sit at the table and therefore isn’t bound by its rules.Keeps lending chips to Bernanke and engages in backseat poker playing.Outcome is uncertain as he has never actually ever played a hand.
So, if you are forced to wager and bet on who the winner might be, you just may want to consult these rankings!
To learn more about the currency markets, be sure to check out our currency trading courses!
I just wanted to give readers a heads up on this trade that I called out last week. To give you a little background, I don’t typically like to say that I am doing this or that, but rather like to point out “possible trades” with “theoretical results.” Whether I am actually in the trade or not is immaterial for discussion purposes on this blog, as I don’t want to be seen as recommending specific trades, but rather as just trying to point out some tidbits that may be unconventional to some.
The reason I say this (and have disclaimers LOL) is because right after I posted this initial trade idea, I got a call from a good friend of mine who asked me in no uncertain terms, “Are you Nuts?” When I asked what he meant he gave me the usual response of don’t fight the trend, the fundamentals don’t add up, the Aussie is benefiting from the carry trade, BOE trying to keep GBP low through further threats of more QE, etc. And while I was aware of all of these factors before I picked this trade, something told me I should investigate this a little further.
Perhaps it was yesterdays sell-off of this pair that had me second guessing myself, but I realized that when dealing with trend-reversals rarely do they happen and then go strait up. So I decided to do some multi-time frame analysis.
Now you may be asking yourself, why don’t you use technical indicators? Well, I do, but do after the fact as confirmation to see if it matches up with what I’m seeing from the price action on the chart. What I’d rather do is begin looking at shorter time-frames to see if any discernible patterns are emerging.
Voila! I dropped down 1 time-frame (which for me is the 4-hour chart) and noticed what I thought to be a possible cup & handle formation. This is a very bullish pattern if it completes properly. Let’s look at the chart (click to enlarge):
Now you’ll have to forgive my awful chart-drawing skills, but as you can see, there is a very rudimentary c&h formation in progress. Should this pair breakout above the “brim” of the cup at around 1.785, then we could see some momentum to the upside.
To come up with a target price, I added the height of the cup to the breakout price of the handle and came up with roughly 500 pips. But because I am already in this trade (half position- I took some profits), I don’t need to take any action at this point. But if this should breakout above the handle, then one could play the break-out by buying just above that price level.
So while at this point the fundamentals still don’t add up for this trade, stranger things have happened. Its amazing to watch how the technicals sometimes predict fundamental action. Whether or not it will in this case is anyone’s guess. But that is what trading is about, not trying to guess where the market is going, but rather trying to increase your odds that a particular action may take place and having sufficient risk management in place if it doesn’t occur.
So keep an eye on this pair to see if this formation “activates”, and if so, listen to the news to see if anything material has taken place. Or you can just check back here… as I will be sure to update.
Good trading to all!
To learn about these possible set-ups, be sure to check out our forex trading courses!
Or get a live demo account to follow in real-time!
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.
A lot is made about the safe-haven status of the US dollar and the inverse correlation it has with stocks and commodities.When the economy is seemingly doing well, risk-takers look to sell dollars and buy higher-yielding, riskier currencies to earn interest.This is more commonly known as a “carry trade” and I described it in an article last week.
The carry trade is a very easy way to make money and it was formerly only available to sophisticated investors.Now, you can participate from the privacy of your own home!The basic premise behind the carry trade is that you want to borrow a low-yielding currency and invest in a higher-yielding currency.You make the difference in interest.Sounds better than putting your cash in a bank savings account, doesn’t it?
*Do you know what one of the lowest yielding currencies is right now?That’s right, it’s the US dollar!
And this is likely to continue for some time.If the dollar is going to continue to decline, it doesn’t sound very safe at all, does it?Here are a few reasons why the dollar decline will continue and why you should be concerned.
1.The United Nations at their most recent meeting asserts the role of the US dollar should be reduced as the world’s reserve currency.While this is “nothing new”, this time it may be different.If the dollar continues to fall then alternate solutions may be sought.
