FX News Trading For The Week Of June 10-And Beyond

I posted this thread in the N&A section on Wednesday afternoon-hope you caught it: http://www.forexfactory.com/showthread.php?p=1460820

There are certain fundamental indicators you want to look for when making this kind of assesment and they really are not that hard to spot. Timing can be a little tricky, but if you can be patient prices will often move as the indicators suggest they should

Economic indicators fall under two broad categories: Growth and Inflation. When those numbers are higher then consensus, it's generally good for the dollar and vice versa. There's a pecking order here too; Central bankers take precedence over economic indicators, but when they both agree-then things can really move.

Tuesday:

Bernanke's statements regarding positive growth going forward were a major influence on market participants, because they decreased the possibility of a rate cut. The non-manufacturing ISM was higher as were the prices paid. The dollar weakens slightly on the day vs the GBP and EUR after data prints that indicates it should do the opposite. The reason for that is because there is an ECB rate decision and press conference on Wednesday and market participants will be looking for clues regarding the ECB's next moves.

Wednesday:

The ECB hikes rates as expected and Trichet omits the term "strong vigilance" from his statement. This means that the next hike cannot occur before September, although the markets is still expecting two more hikes this year from the ECB. In other words two rate increases are already priced in. US data prints inflation positive.

The dollar gains a bit on both the EUR and GBP on the day, but there's still the BoE rate decision on Thursday morning.

Thursday:

The BoE holds rates and issues no statement; markets are disappointed, although they still expect one more hike from the BoE this year. US unemployment claims print strong.

If you've been short the GBP and EUR vs the dollar you're about to get rewarded. All the US data has basically printed growth and inflation positive. The addition of Bernanke's comments is causing equities to tank and the 10y yeild to shoot up to levels not seen in a year as the yeild curve reverts to normal.

Going Forward:

The dollar still looks strong and has a lot of potential IF the data prints dollar positive and negative for the GBP and EUR. Given the right set of circumstances, the dollar can reach the circled areas on both charts.

If a rise in the dollar from those seeking yeild coincides with a carry trade sell-off, some real movement could be seen. Why? Because if you review the Feb 27 charts of the market crash-you will see the dollar appreciate vs the GBP, EUR, AUD and NZD while depreciating vs the JPY as carry trades rapidly and collectively unwind.

It's kind of interesting with what's been happening with Japanese retail investors. They are buying foreign assets like bonds and putting their money into foreign banks, sending the Yen flowing out of japan in ever increasing numbers. This out flow of capitol has got the BoJ very concerned, because a sudden, sharp rise in the Yen will devestate retail investors.

The bank is desparate to make a move in order to head this off. By raising rates at the next meeting, they hope to bring about a more orderly appreciation of the Yen, all the while warning retail investors about the dangers of one-way bets.

Maybe Yen is the currency Warren Buffet is betting on and its seems very undervalued.

The 2007 Asian Currency Crisis-What To Look For
The first thing you need to understand is what the crisis is about. To put it as directly as possible-it's about Asian currencies that are too weak, aka the Emerging Market (EM) + Japan current account surplus disaster.

Why the focus on current accounts? Because import governments have to borrow in order to fund them. That means they're forced to do things they don't want to do and to become dependent on things they don't want to be dependent on. Exporting countries (Read Japan) are forced into a cycle of deflation, artificially low interest rates and powerless central banks.

It's obvious that all this creates different problems depending on which side your're sitting on-but the key thing is that it's creating problems for everyone that are bound to come to a head sooner or later. And if the problem can't be solved by governments-there's someone else who'll be happy to do the work for them (at tremendous profit to them and tremendous harm to millions of others).

Because the G7 Central Bankers have shown no desire to take the bull by the horns, things are ripening for a Hedge Fund-lead, George Soros-like currency squeeze.

This time Hong Kong looks to be the target since they have the unique position of having open trade markets coupled with a currency that is pegged to the dollar (a de-facto manipulation that artificially keeps its value low), but the reverbarations will be felt all across Asia.

Let's review some recent history.

It became public knowledge that Hong Kong discussed decoupling its dollar several years ago and that the man in power at the time (who now works for Blackstone) thinks the Hong Kong dollar should now be pegged to the Yuan.

The BoJ has repeatedly warned the many small retail Japanese investors that continuing to send trillions of Yen to AUD, NZD etc is a dangerous proposition. Their words have been totally ignored. An Asian currency crisis that causes rapid Yen appreciation will wipe out these investors-to say nothing of the damage it will have on Japanese exporters.

The G7 has repeatedly warned against one-way bets, carry trades etc. Their central bankers see the biggest risks to global growth as coming from protectionism and "global imbalances" (global imbalances being the code word for current account imbalances). They've talked the talk but so far, have not walked the walk. Their inaction is helping to create protectionist pressures in the US to build up-which everyone agrees are a major threat to global expansion.

China's trade surplus widened 73% in May, blowing more air into the Chinese "bubble".

The RBNZ intervened today. That action by itself is mostly symbolic and not likely to have a long term affect, but what it does do is say to the G7: "Your inaction is helping to enable a dangerous situation and now is the time to do something so that an orderly appreciation of Asian currencies can occur" (Otherwise a dis-orderly appreciation is going to occur).

It's obvious that there's a problem. The only question is how it will be fixed.

Good one

The short story is that if an Asian crisis does come to a head-and evidence is mounting that if Central Banks can't (or won't) do the job some major league currency speculator(s) a la George Soros will-price will move fast. What to look for:

Rapid unwinding of carry trades that could make the Feb crash look tame. A 10% appreciation of the Yen could occur, taking USD/JPY to the 110's for starters.

Meanwhile in the US, there are mounting pressures building in Congress for currency reform. Hearings were held last month on the subject of Chinese and Japanese currency manipulation at which testimony from US manufacturers was taken. The Financial Times reported that US Senate leaders are now “close to finalising legislation that they hope will lead to a reversal of long-standing US policy of opposing intervention in currency markets.”

This bill (to be introduced this month) will “mandate the US Treasury to intervene in global markets if currencies become fundamentally "misaligned." More specifically, the coalition reportedly believes that the administration’s opposition to currency market intervention has not only failed to sway Chinese government thinking but has also “inhibited co-ordinated policy action through the Group of Seven industrialised nations over other weak currencies such as the JPY.”

It's fairly obvious that the mention of the JPY is potentially significant as it suggests that Congressional leaders were swayed by the arguments of US manufacturers during the recent hearings over Chinese and Japanese currency policy, since they are writing a bill to address the issue.

The Treasury is releasing its semi-annual report on overseas currency practices on Wednesday-that will surely be very closely observed.

Overall, this paints a picture that shows things are brewing. When exactly the pot will come to a boil is another story.

All of this puts the Federal Reserve in a bit of a quandry. Current account imbalances are all about the dollar (along with other industrialized currencies) being too strong vs the Asian currencies. Raising interest rates (should that become necessary) would no doubt force the dollar even higher, which is the exact opposite of what the proposed legislation would be trying to achieve.

I read your news analyses with admiration, you have a detailed knowledge of Japanese yen!
To be frank and honest with you, we Japanese may be mistrustful of Bank of Japan.
Exactly one year ago, in Japan, Mr.Yoshiaki Murakami who had led an investment fund(Murakami Fund/M&A Consulting,Inc.) arrested on insider trading charges on June 5,2006. Then,(on June 13,2006) it brought to light a vital truth that Bank of Japan Governor Mr.Fukui got a handsome return on investment in Murakami Fund while he occupies a position of BOJ Governor. He acceded to BOJ Governor in March,2003.
He invested 10 million yen in Murakami Fund in 1999. In 2006, his investment money became 28 million yen. In addition, he had invested in listed Japanese stocks and US funds. Afterward he broke off these investments though, we had already distrusted of BOJ. Now it seems to be buried in oblivion in Japan. But I remember clearly, not only Japanese retail investors including us but also BOJ Governor invested in foreign currency! We still have plans including gold in the future to continue our expansion.

Thank you so much for your kind words-I enjoy your posts as well!

From what you've described, there obviously should be some mistrust of the BoJ however, the fundamental idea is that many Japanese retail investors probably are overexposed with these kinds of investments. The mis-trust you spoke of may onlt serve to further damage them, should a rapid Yen appreciation occur.

It's my pleasure. My best wishes for your continued success as FFAN analyst.
By the way, I give a familiar example. Exactly two years ago, "My consecutive victory method that I continue earning of 200,000 yen per month by foreign currency" written by Miss Akiko Yamane(Japanese young woman) appeared in print. At that time, this book was printed off 50,000 copies. Therefore it has triggered a rush to foreign exchange trading on margin money in Japan.
I also read this book, and then I get started in forex.
Now I am waiting for a chance to buy on the dips...

Thanks again-that's really interesting. I'd love to read it, if a translation is available.

Strong Retail Sales and Higher Inflation = Weak Dollar-Why?
A very interesting day to watch market reaction-because things worked out very differently from how they had before.

Until today-data that showed stronger growth and/or higher inflation had caused bond yeilds to rise, equities to fall and the dollar to GAIN. Today's data showed strong retail sales (including the ulta-core number which was at the highest level since last July) and higher import prices (three times as much as expected), yet the dollar LOST against the GBP and EUR. Why?

Before the report came out, the 10y had hit 5.3%. At that point, many investors saw a good investment-a garunteed 5.3% rate of return-and they started buying. All that buying drove price up and yeilds down. The 10y went from a high of 5.31% down to 5.21%-10 bp's!

That told equtiy markets that borrowing costs might not be rising as they had feared. There's nothing equity markets love more then decreasing interest rates.

Now the retail numbers come out and they indicate that the consumer is very resilient. In the longer-term that bodes well for stocks-especially when coreCPI and PCE have been trending down, which they have.

So by sheer serendipity-interest rates (the 10y) were going down right at the time that an important report showed that growth was going up. Higher growth coupled with lower interest rates-a very rosy picture to say the least.

Equity futures lost a little right after the report, then shot up strongly. Rates had already dropped and they stayed flat. That certainly pointed to a good day on Wall Street and a weaker day for the dollar.

Higher import prices? They were ignored-for now.

So it was an atypical reaction-but an excellent chance to watch the markets at work. Interest rates, futures and market perception. It all ties together.

Equities loved what they saw. I'm not sure that the Fed did though.

Great, detailed explanation. Very helpful and much appreciated!

Rex

Do you have any idea what to do with usd/mxn? I got it as a technical trade this morning and foolishly went long with it. Help!

This is another her book, every time she had a chance, she also explained clearly entry-level forex trading for office lady(this Japanese-English word means female office workers), homemakers, general public and old men.
According to a Japanese broker's report, in Japan, investment trusts in foreign currency are about 32.3 trillion yen in April 2007 and foreign exchange trading on margin money seems to be on the scale of 1 trillion yen. It doesn't look like it's going to let up anytime soon.