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The EUR/USD Rally-Still Dead?

  • Post #1
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  • First Post: Dec 16, 2006 3:55pm Dec 16, 2006 3:55pm
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Are The EUR/USD Fundamentals Still Holding?

The dollar gained .9% against the Euro since I called the Euro rally dead.

Right now I'm neutral on the EUR/USD. Why? Possible change in the fundies-let's have a look...

http://www.bloomberg.com/apps/news?...nvxc&refer=home

This article is a bit contradictory-we did have no rise in coreCPI in Nov, BUT for the year to year period (first 11 months of the year), coreCPI is HIGHER this year then last by .4. Yes coreCPI seems to be trending down, but it's still .4 higher then for the same period last year. Things are looking good for inflation, but no obvious reason to cut rates yet.

The bond market rejoiced in this, but the $ basically strengthened Friday. My personal opinion is that the report indicates the Fed to be on hold thru March. The economy seems to be doing what the Fed thought it would do-inflation to moderate and growth at a sustainable trend. Remember that an ideal economy from a Fed point of view is inflation between 1-2% and GDP at sustainable levels-i.e no more then 2.5%.

Another good article:

http://bloomberg.com/apps/news?pid=..._WxM&refer=home

As far as betting on rates-2 weeks ago there was almost a 100% certainty in the Fed Funds Futures market of a March cut. That has now dropped down to 11%. The inflow of foreign investment into equities, bonds etc was 80B in Oct. With the way the market has been going...we could see bigger and bigger numbers there too...certainly doesn't indicate $ weakness.

On the Euro side we have this:

http://bloomberg.com/apps/news?pid=...yE&refer=europe

OK, some are thinking the ECB will raise the rate again in Feb and a couple of their bankers mention rate increases aren't off the table, but that's not news. Remember that the ECB LOWERED it's inflation forcast and that inflation is still under it's target. Are their options for an increase still on the table? Sure, but that doesn't mean it's a sure thing. What is a sure thing is that they, along with the Fed, will do whichever is necessary as the data indicates. Remember also that the Nov inflation reading came after a big VAT increase in Germany.

So there appears to be a lot of contradictory info and thinking. I'm neutral on the EUR/USD right now. I want to gauge some market reaction before I do anything again.

My overall bias is still $+...but there's plenty of time to take a wait and see approach. As for trading, I'm looking for a break below 3170 to short. If it does break and i'm lucky enough to make some pips i'll do SL=BE and watch it from there. If it goes back above, i'm out, then if it's below again i'm short. If i'm lucky enough to make 20 pips i'll cut my lots by 1/2 and make another SL=BE, then ride it as long as I can, adding to it if the fundamentals warrant.

If traders take it up, I think 3150 is an important R level. I'm not sure I would go long before then, but a break could be significant.

With no real news out Monday-who knows maybe it will just trade in a band between those numbers. Maybe a little swing trading is in order.
from the looks of the article, it seems like the USD and EUR are in good shape heading into 2007. One thing I don't get is that:

"Dec. 16 (Bloomberg) -- European two-year government notes posted a second weekly drop after European Central Bank policy makers signaled they'll continue increasing interest rates into next year."

why are the notes dropping if ECB intends to raise rates?
Quoting Trader1580
from the looks of the article, it seems like the USD and EUR are in good shape heading into 2007. One thing I don't get is that:

"Dec. 16 (Bloomberg) -- European two-year government notes posted a second weekly drop after European Central Bank policy makers signaled they'll continue increasing interest rates into next year."

why are the notes dropping if ECB intends to raise rates?
Bond prices and rates move inversely. When they report notes have dropped-they're saying the price has dropped and the rate has gone up...
Quoting NewstraderFX
Bond prices and rates move inversely. When they report notes have dropped-they're saying the price has dropped and the rate has gone up...
part me on my confusion, but an increased interest rate is very good for a fixed security no? Please elaborate for me.
Quoting NewstraderFX
we did have no rise in coreCPI in Nov, BUT for the year to year period (first 11 months of the year), coreCPI is HIGHER this year then last by .4. Yes coreCPI seems to be trending down, but it's still .4 higher then for the same period last year. Things are looking good for inflation, but no obvious reason to cut rates yet.
Core inflation has raisen at a 1.6% annual rate in the past three months,but FED needs more data on inflation and economic growth.Now it is nearly impossible to predict next FED's move.
Quoting Trader1580
part me on my confusion, but an increased interest rate is very good for a fixed security no? Please elaborate for me.
An increased rate is very good for a fixed income security if you are going to issue it after the rates already increased....The norm is that if rates are increased to 3 % today, then if you want to issue a fixed income note or bond today you will have to assign coupons as 3% of the face value...If the bonds' face value is $1,000, then every coupon shall be $30...

Now let's assume that after 1 year rates went up to 5% and our initially 3% coupon bond didn't mature yet...Now a new bond issued when rates are 5% with the same face value which is $1,000 will have a 5 % coupon which is $50....Of course this is not fair....That's why the coupon of the old bond should now yield $50 and not $30...For this to happen, the market price of the bond itself must be decreased so that the $30 it pays yields 5 %...If you calculate the new bond value you will arrive at $600 as a market value for the old bond that pays 3% off a $1,000 face value....

That's why when rates go up, bond prices go down....

Of course this is the simplest form just to clarify things up....But to exactly calculate the current market value of the bond you wil need to consider maturity into consideration as well....Instead of saying that both bonds yields must equal the same percentage yield, we should consider the future expected cash flows of both bonds till maturity & discount the value of those cash flows back to the present time so that both bonds yield the same discounted dollar amounts from their expected cash flows...

This method will yield a very precise result but is time consuming a little bit...


Thanks,

Nader
narafa, thanks, that was a very informative post...
Narafa-your post is educational and informative and I appreciate the time and effort you put in...but allow me to make a little comment here.

The best traders do way less thinking and tend to break things down to a much simpler level. Bond prices go down when interest rates go up because who wants to buy your crappy 3% bond when they can buy a 4% bond. Now if I have a 4% bond and rates go down-of course the price of it goes up-it's more valuable...

It's just my theory that the simpler yo can keep things-the easier it is to trade. You definately need to know the bond price/rate relationship just like you need to know that rising interest rates tend to make a currency go up, but you gotta be careful of "paralysis by analysis".

For trading currency in Forex, since you're dealing with a currency pair-in order to have the best long term chance of making good trades-you must be able to figure out which currency is likely to have a rising rate and which is likely to have a rate that's going down, if possible. That was the main reason for the recent $ weakness.
[quote=NewstraderFX
My overall bias is still $+...but there's plenty of time to take a wait and see approach. As for trading, I'm looking for a break below 3170 to short. If it does break and i'm lucky enough to make some pips i'll do SL=BE and watch it from there. If it goes back above, i'm out, then if it's below again i'm short. If i'm lucky enough to make 20 pips i'll cut my lots by 1/2 and make another SL=BE, then ride it as long as I can, adding to it if the fundamentals warrant.

If traders take it up, I think 3150 is an important R level. I'm not sure I would go long before then, but a break could be significant. [/QUOTE]

I think "3170 to short" is typo because current price is 3075 and later, post says that 3150 is an important R level. isn't it?

Thanks for any clarification.
These too shall pass away.
Quoting NewstraderFX

For trading currency in Forex, since you're dealing with a currency pair-in order to have the best long term chance of making good trades-you must be able to figure out which currency is likely to have a rising rate and which is likely to have a rate that's going down, if possible. That was the main reason for the recent $ weakness.

WOW

Fantastic.

What I have seen in my trading career is that there is an always fundamental reasons why currency is going up or down and also there are technical reasons for the same thing.

Technical people including wave trader will come out with absolutely different perspective for the same thing.

And yes they are both right. What I learned that I have to master in fundamental and to watch what techys are saying just to gauge thing.
These too shall pass away.
Quoting NewstraderFX
Narafa-your post is educational and informative and I appreciate the time and effort you put in...but allow me to make a little comment here.

The best traders do way less thinking and tend to break things down to a much simpler level. Bond prices go down when interest rates go up because who wants to buy your crappy 3% bond when they can buy a 4% bond. Now if I have a 4% bond and rates go down-of course the price of it goes up-it's more valuable...

It's just my theory that the simpler yo can keep things-the easier it is to trade. You definately need to know the bond price/rate relationship just like you need to know that rising interest rates tend to make a currency go up, but you gotta be careful of "paralysis by analysis".

For trading currency in Forex, since you're dealing with a currency pair-in order to have the best long term chance of making good trades-you must be able to figure out which currency is likely to have a rising rate and which is likely to have a rate that's going down, if possible. That was the main reason for the recent $ weakness.
ahhh I see, makes sense. I do not know anything about bonds and that explanation, as you said, is very simple and clear. I also very much appreciate narafa's detailed explanation as well. Thank you guys.

I also want to gauge the bonds market now in relation to the forex market. Mainly for EUR/USD and USD/JPY. Are there any good sites that display charts, etc... of the bond market movement? What types of bonds should I be looking at for short term analysis i.e. day trading? 2-year notes?
  • Post #12
  • Quote
  • Edited at 8:03pm Dec 17, 2006 5:17pm | Edited at 8:03pm
Quoting fspirani
I think "3170 to short" is typo because current price is 3075 and later, post says that 3150 is an important R level. isn't it?

Thanks for any clarification.
Yep-it's a typo...should be 3070 thanks for pickin up on that

BTW-if it does go there-after about 20 pips (if u get that lucky), u can either sell 1/2 the position and set SL=BE or just set SL=BE. I don't want to hold it above 3070. Yeah it could go back and forth a couple of times....

When might I thnk about a long position? I'd like to see the 3150 area break and the fundamentals to match. Try to match up a technical system like the Vanessa 4 hr with market interpetation of the fundamentals, along with some correlation of the 4 majors.
This came from Fxcm

Eur/Usd market losing interest after another weak close Friday
Sydney,
December 18: Analysts in Asia feel that the second consecutive weak weekly close
in the EUR/USD has resulted in EUR/USD bulls losing enthusiasm. Real money funds
were reluctant to buy the EUR/USD when it started to trend higher and only
started buying en masse when the weak US ISM two weeks ago fanned concerns that
the US economy might head into recession. There was talk on Friday that the real
money funds decided to liquidate those longs and were the main sellers in the
move down from 1.3185 to 1.3085.
Even though the EUR/USD uptrend has lost momentum most analysts feel that the
downside is limited due to ongoing central bank diversification that should
underpin the EUR/USD on extended dips from here. Barring any data or event
surprises the popular scenario being discussed this morning is a quiet end to
the year with the EUR/USD consolidating between 1.30/1.32 for much of the
holiday period. The EUR/USD trades 1.3081/86. [email protected]
If Ever There Was a Reason to Buy $'s:

http://www.bloomberg.com/apps/news?p...RhU&refer=home

That's right, I said buy. These crackpots who think they're gonna out think the best financial minds in the world by sellin a few of their $'s are gonna get buried. You want to sell $'s because psycho's like Venuzula and Iran say they're going to? Good luck.

Let 'em sell some $'s-they'll get caught in a bad trade like a newb forex trader...they'll have to sell more oil to make up the loss and the price will go down. Anyone who runs scared after what these tin-plate dictators say has no balls and deserves to lose money too...Russia is gonna double-cross 'em anyway...all these dogs are gonna lie down together and do nothing but get each other's fleas...
Quoting NewstraderFX
If Ever There Was a Reason to Buy $'s:
.all these dogs are gonna lie down together and do nothing but get each other's fleas...
AMEN !! Hallejuia !! You tell 'em !! I agree with you wholeheartedly !!
If they actually were going to sell dollars they wouldn't announce it in advance because of the risk they would get a worse price. Looks like they already sold too many and now they're trying to untangle themselves from a bad trade.
Hey I don't mean jump right in and buy $'s... it's just something to think about...western governments are fight against this if they see a real threat...
Quote
That's right, I said buy. These crackpots who think they're gonna out think the best financial minds in the world by sellin a few of their $'s are gonna get buried. You want to sell $'s because psycho's like Venuzula and Iran say they're going to? Good luck.

My initial thought was to sell the USD after learning of these two countries' plans. But these are no China or Italy where the economy really contributes much to the world. I stood aside.

Quote
Let 'em sell some $'s-they'll get caught in a bad trade like a newb forex trader...they'll have to sell more oil to make up the loss and the price will go down. Anyone who runs scared after what these tin-plate dictators say has no balls and deserves to lose money too[/b]

Buttom Line: Dictators dont move the currency market.


Quote
...Russia is gonna double-cross 'em anyway...all these dogs are gonna lie down together and do nothing but get each other's fleas...

Russia dont dance with OPEC anyways. Russia thinks differently; while OPEC lowers production, Russia pumps more oil and laugh at OPEC for allowing Russia to eat the bigger share of the pie. It is sad that Russia's economy is still largely based on Energy - but one day, Russia will catch up. Who knows? perhaps it would join EU! Now thats the reason to buy EURO.
  • Post #19
  • Quote
  • Edited at 4:00pm Dec 19, 2006 1:49pm | Edited at 4:00pm
"My overall bias is still $+...but there's plenty of time to take a wait and see approach. As for trading, I'm looking for a break below 3070 to short. If it does break and i'm lucky enough to make some pips i'll do SL=BE and watch it from there. If it goes back above, i'm out, then if it's below again i'm short. If i'm lucky enough to make 20 pips i'll cut my lots by 1/2 and make another SL=BE, then ride it as long as I can, adding to it if the fundamentals warrant.

If traders take it up, I think 3150 is an important R level. I'm not sure I would go long before then, but a break could be significant".

This was my first post this week...just goes to show how important it is to have an idea of some important S and R levels and the psychological numbers too...and that you can have an opinion, but the most important thing is to trade with the market. Don't fight what you see happening just go with it...

As far as the Euro rally goes...as of now it's about 20 pips higher then when I called it dead...but let's see if 3170 becomes support then...
http://www.bloomberg.com/apps/news?p...&refer=economy

yep, hawkish.
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