Finland will find a Greek collateral model that respects the priority creditor status of the International Monetary Fund and honors existing bondholder claims, Prime Minister Jyrki Katainen said.
“We have to find a solution that is suitable for everybody, for other European Union countries, for Finland and for other creditors,” he said at a press briefing in Helsinki yesterday.
Katainen is struggling to piece together a deal that satisfies Finnish voter demands for extra assurances their bailout contributions will be repaid as international opposition to such arrangements mounts. Europe’s failure to find a solution puts the “credibility of the euro area and each of its member states at stake,” European Union President Herman Van Rompuy said, after a meeting with Katainen in the Finnish capital yesterday.
“The task is not easy, but without solving all the challenges, we can’t achieve the final outcome,” Katainen said. “So now we’re working.”
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)
Japanese Yen: Intervention Fears Stall Strengthening—For Now!
On the heels of the Bank of Japan’s emergency meeting at the beginning of the week in which policy-makers decided to extend quantitative easing to its credit markets, Japanese officials led by Prime Minister Hatoyama are suggesting various degrees of intervention to keep the yen from strengthening.Or are they?
Taking their cues straight from the Bernanke book of monetary double-talk, Japanese ministers are offering conflicting views about what course of action needs to be taken to slow down the yen, including trying to enlist international help.What they can all agree on is that a strong yen is bad for their exports and hence bad for their economy.
Regardless of the rhetoric and what may or may not happen, yen bulls are heading for the exits.This also coincides with the resumption of the risk-taking trade, as the market has for the time-being dodged any contagion from last week’s news out of Dubai.
So while it appeared that the market was not impressed by the emergency measures, it is taking notice of the three-ring circus that is the Japanese version of jaw-boning.All this in the name of “reducing volatility”.
Let’s take a quick look at a chart of USD/JPY: (click chart to enlarge)
Earlier this week the yen reached 15-year highs at 84.80 vs. the US dollar due to the Dubai news on that huge doji candle.Combined with a stochastic crossover near the 20 level could mean a possible trend-reversal, at least in the near-term.If this pair can stay below 89, then I expect strength to continue.Should it breach 89, then the next stop could be the 90.75 level.
If the yen moves back down to the 85 level, then expect more forceful words from the ministers, and don’t necessarily rule out intervention.What sounded like a good idea back in September could have major implications for the Japanese economy, especially if things don’t improve.
Also to keep an eye on for this pair is what is going on here in the US.The forex market practically blew-off Plosser’s comments that we may need to raise rates here sooner than later to ward off inflation, regardless of recovery status.While there is still much debate about where we are in the inflation/deflation realm, one thing can be certain: maintaining a zero-interest rate policy for a prolonged period of time will not be good for the US economy.
If rates in the US, or even talks thereof, rise, then look for the yen to resume its “natural position” as the currency of choice for the carry trade.
In the meantime, Japanese officials will do all they can to threaten intervention to buy time and slow yen strengthening.
Right back at ya, Bernanke!
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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.
Happy Thanksgiving to All and be sure to check out our currency trading courses!
Yesterday’s rebound against the US dollar (USD) provides a clue about a potential resumption of the longer term uptrend. We’ll see if the euro will manage to hold gains above the fresh breached barrier into the 1.4950 region (which is currently under minor pressure) – formed by the falling trend line coming from 1.5045 over the previous lower highs. In case of an extended pullback below 1.4950, the 1.4850-1.4900 level will eventually limit losses in order to keep the bullish structure under development. I maintain my bullish stance on euro but I’m slightly cautious due to the repeated price action hesitation against the 1.5000-1.5060 top side. As I said earlier today: it won’t be easy to break higher, but it won’t be easy to drop lower (below 1.4800/50) either, while signs of hesitation continue to rule across the board – resulting in short-lived moves in a chop-chop manner.
EURUSD 4hrs chart 11-23-2009
EURUSD daily chart 11-23-2009
NZDUSD
In my previous short-term outlook, I mentioned that a pullback from .7440 would probably face solid bids around .7300, and eventually lower – around .7150.The upside remains favored for now as the pullback has faced a solid support, indeed. The rising trend line coming from .6475 also coincided with the recent bottom, so there are some valid reasons to keep the bullish view on NZD valid. Keep an eye on the .7400 handle as a breach is needed to fully confirm that the corrective cycle has ended.
Gold seem unstoppable and continues to rally to fresh highs on a regular basis – recently exceeding the upper boundary of the uptrend channel, as seen in the chart below, and the 1130 region is expected to provide support on pullbacks within the coming days. While it continues to push higher, dollar weakness across the board is likely to continue.
Let’s take a look at current Gold and S&P500 charts: both seem to provide enough bullish clues (for now) to support the ‘weaker dollar’ scenario. The important levels to watch are: 1130 support for Gold; 1095-1100 support region for the S&P500 along with the 1113 resistance.
Is there an easier market to trade right now than the currency market?There are basically 2 trades going on: risk taking and risk aversion.While this will come as no surprise to anyone who’s in this market, investors in both the stock and commodities markets should also pay attention.
Let’s face it, if it were up to the market, stocks would be back to pre-Lehman collapse levels, gold bugs seem to be happy with the price of gold, oil would be extremely cheap,bank interest rates would be higher, yet mortgage rates would be where they are right now, and we’d have a strong dollar.Sounds just peachy, doesn’t it?
Of course it does, it’s a complete fantasy.Yet those in government believe they can create situations where they can attempt to achieve these ideal conditions.How do they do this?Through their words.
The nice thing about the currency market is that it tends to “trend” more so than other markets.This is good for investors.But bad for policy-makers.Especially if they are firmly rooted in a downtrend.The direction of the trend is established by their decisions, so it follows that they way to change the trend is by changing their decisions.
The conflict occurs when they try to achieve the ideal conditions as they are seeking to make the impossible possible.And in no currency is this truer than the US dollar.After all, in having the world’s reserve currency, US policy makers have a little more juice than their counterparts.This means that almost all markets are affected by US policy.
Again, nothing new here but what it does illustrate is how the markets have essentially become a “tale of two trades”.The risk taking trade (sell USD &JPY, buy stocks and commodities) and the risk aversion trade (buy USD & JPY, sell stocks and commodities) is not only a bit counter-intuitive, but also a case of “throwing the baby out with the bath water.”
A perfect example of this was President Obama’s double-dip recession comments from earlier this week.While the timing of these comments has been debated in the blogosphere, one thing can be certain.Obama was clearly trying to send a message to the Chinese that it is very easy to change the short-term direction of the US dollar without having to change policy.He can do it through his words.
I mean, is the US really in any more jeopardy of falling into the double-dip on Wednesday then it was a week ago?A month ago?A month from now?What this does is slow the pace of the dollar decline, to appease our largest debt-holder.And what we’ve gotten is two days of the risk-aversion trade.
Surprise!
Those comments notwithstanding, what happens if we really do fall back into double-dip recession?
Based on the “tale of two trades” scenario, one would likely assume that investors would dump stocks and commodities and buy US dollars and Japanese yen.However this time I think it might be different.
While stocks will surely take a beating, and oil will sell off due to decreased demand, I think I’d still want to hold gold over US dollars, even if it is losing value.There is a reason why guys like David Einhorn and John Paulson are investing heavily in gold, as the flight to safety trade should be to the precious metal and NOT the US scrip.
I also wrote recently that regardless of what the risk trade tells me, I want to be long the Australian dollar (AUD).Not only for the interest rate differential via the carry trade, but also because of the Australian economy’s link to gold.
So while US policy makers like to get cute with the rhetoric, I’m closing my ears and keeping my eyes open!
To learn more about how to trade currencies, be sure to check out our currency trading courses!
The British pound (GBP) is weak across the board today as BOE Governor King re-iterated that a weaker currency should lead to a recovery in the economy.This comes on the heels of a better than expected unemployment report, though not enough to buoy the sentiment for a rapid economic recovery.
As a result of subdued growth prospects, the BOE increased its quantitative easing program to $200 billion pounds last week to pump liquidity to the financial system.Some have argued that their conservative, controlled approach to asset purchasing was a major reason why GDP shrank an unexpected .4% back in October, as other nations were exiting recession.
Also to note was that the BOE said that inflation will stay below it 2% target for the next three years, thereby all but confirming that deflationary pressure is the concern for today.As a result, don’t expect any interest rate hikes anytime soon.In fact, a Bloomberg survey of economists showed that the median thinks they will maintain rates at .5% until the Q3 of 2010.This also leaves open the door for increased asset purchases going forward.
As I wrote in an article back in September, I couldn’t envision the pound falling against the US dollar in the near-term as, “Bernanke’s path to dollar destruction has been well-documented”.But I did caution against the pound in the long-term as the problems that are inherent in the British economy are coming into play today.Since that time, GBP/USD did decline further before going on a tear from mid-October until now.
Here’s a good article from BBH’s Marc Chandler from yesterday presciently calling for GBP weakness.
One of the other things I talked about in my previous article was the pound’s positive correlation to the S&P 500. Here’s a chart of the British Pound ETF (FXB) and the S&P 500 (SPY). (click chart to enlarge)
Well since that time, it looks like this correlation has stalled and we could be in for a possible decoupling of this correlation. (click chart to enlarge)
Or could this move down in the pound be foreshadowing a move down for the US equities markets?Now that earnings season is over, there doesn’t appear to be a catalyst that will move the stock market higher other than Bernanke’s commitment to dollar weakness.
If we do see a pullback in the US equities market, then expect the US dollar to strengthen as the risk aversion trade is sure to hold up.
Either way, I expect a bit of fireworks in the New Year!
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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!
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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!
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