$ For the Week of 11/13-With Trade Ideas

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The Thinking Turns Around So Fast


Obviously, China has the potential to have a very important effect on where currencies are going, due to their vast reserves of dollars. Their statements are enough to send the markets into a frenzy-if a frenzy can be defined as 100 pip movements and breaking of resistances.

The fact is that the US needs to improve the trade imbalance with China. They're gettin too strong and we're getting too weak and that doesn't sit well for the world in general.The elections may have been a partial referandum on that-there is a perception here that people are losing jobs in part because of it (although the BLS says that job growth is strong). Paulson's mission at treasury is to improve the situation. How can the situation be improved?

Well, the democrats will be calling for tariffs. It's polictically popular and it makes them look like they're doing something that the general population wants. From a geo-political and free market perspective it's definately the worst idea. We need China as an allie and we need them as a market for our goods and services. Tariffs always make the other country angry and I don't think anyone in power really wants to see tariffs. However, the threat of tariffs is an important weapon that we need to keep in our back pocket. If I can make an analogy to the cold war, the the threat of tariffs is to an economic "cold war" as the threat of nuclear weapons were to the political cold war. The threat of their use is a deterent that gets the other side to come to the table to negotiate and we do need for them to come to the table.

Ideally, we would like to see China float it's currency in the free market, but that's not gonna happen anytime in the near future. They're still communist-which means they're "free-market" in anything that suits them and "unfree-market" in anything that doesn't. The Yuan trades in a defined range that they control, so any movement happens very gradually. Yes the Yuan can appreciate, but only at a "speed" that they control.

We can weaken the $. This can happen in two basic ways: CB intervention and free market movement. I'm not sure the CB wants to really be in the business of doing this and I tend to think that overall, most economists and market participants believe that things are better done in the free market. However, the government has tremendous control over how the market percieves reality. They put out all the numbers and we've all seen how numbers can be put out one way and revised totally opposite later on. They can definately exert control on the price of oil, which is the main factor in controlling inflation. So there's a lot the gov't can do behind (and in front of) the scenes to push the market toward $ devaluation.

My opinion? Well, the growing trade problem does need to be addressed and I think that's already in the process. It can never be completely "fixed" but perhaps it's rate of growth can be slowed somewhat and I think that overall, China does want the Yuan to appreciate (slowly and in a controlled way) because it's in their best interests as well. They need us to be happy with them too. The worst thing that can happen (from this perspective) is for the Fed is raise or even threaten to raise rates and I think the gov't is hoping with all it's might that the threat of inflation will slow and that the rate of growth will remain low so that the Fed can continue to stay on hold or perhaps reduce. I also think they can do a lot more the "hope".

How would I as a fundamental trader look to trade in the immediate term? Well, I think that any US numbers that are released in a $- way have the potential be strongly $-...more so then usual. I think that $+ numbers have the potential to reverse in a negative way after a $+ movement so watch for that too.

Watch for any indications that other CB's might be raising (I know, we do that aready but it's even more important now). Here's one more thing that I think will be incredibly important:

http://www.bloomberg.com/apps/news?p...d=a3b2DgV33TQQ

If that did happen there would be near equal appreciation in the GBP and EURO, with the GBP into the 9600's and the EURO in the 3200's.

*Watch for any indication that China is willing to widen the band in which it allows the Yuan to trade. It will signal immediate $ weakness for the near term, because any move to free up Yuan movement is a direct attempt to allow Yuan appreciation/$ depreciation*.

Technically, GBPUSD has entered into a range between 1.9100 and 1.8500 and each time, has been doing Higher High and Higher Low = A long term UP TREND! And Statistically, once a High is reached, it wont stay high for long.

I personally believe that GBPUSD is moving down trend for now. Putting money where my mouth is, I shorted GBPUSD 2lots @ 1.9085 . After ZHOU's words, I can be 85~90% wrong! But he recanted - still too early to tell.

Lookin at UK history, the recent UK rate hike SURELY cannot affect last month's CPI/PPI... it will have an effect next month (ie, Dec,Jan)... Based on housing prices, darn, its getting too inflated in UK.. BUT IF I were to believe two certain FF members (c1ro & waf_1988), a higher UK CPI/PPI numbers SHOULD move GBP to go down. And a lower UK CPI/PPI, GBP SHOULD move up!

US TIC data last month did not do squat to help USD inspite of a HUGE almost x2 actual vs estimate... Philly Fed ruled the day!...

I will watch Philly Fed data and trade accordingly. Last 2 months Philly Fed have been very USD Negative!

Fundamentally, USD is getting weak this week.
Technically, USD is in a rebound.

I personally believe that GBPUSD is moving down trend for now. Putting money where my mouth is, I shorted GBPUSD 2lots @ 1.9085 . After ZHOU's words, I can be 85~90% wrong! But he recanted - still too early to tell.

Wow BK I think ur pretty smart man, but i'll tell u that is a very, very stressful way to trade. You traded against an important fundie-what he said moved the market more then an NFP! Granted, the effect may not last too long, but even if you see $ strength from 9085-why take a ride the other way if you don't have to?

its dangerous time if ur trading the short side i would def lockin profits and minimize the risk as much as possible if ur trading retracement we need to see the dolalr really turn here to get further weakness this can happen, if all the longs start selling in mass the problem is more buyers could absorb selling if this is the case you wont see a sharp drop youll see consolidation flag type patterns forming with price remaining bid, this is a sure sign of a trend continuation... be careful right now i plan on seriously protecting my profits on any retracement trades the market is spooked right now, anything is possible it can turn go up the key is how well can we adapt to it? you can wait for pullbacks or trade retracements or breakouts or combine them all its up to u...

im not gonna be f^ing around next week im using some tight ass money management and protecting positions and profits gonna trade much more aggressive, i assumed we would have trending conditions and managed my positions accordingly ihave learned greatly from this mistake... now the guns come out... lol

my main defensive strat will be to use BE once +20 points is achieved, then to let it run and see where it goes maybe move my stop to lock in profits as it progresses but if it falls back thru my entry point im out... this news stuff caused some serious difficulty in normal TA models...

As a newstrader (or at least a trader who watches the fundies very closely) I'm starting question the "accuracy" of the info as it comes out. Numbers are put put one way and revised later on. The market trades from the info as it's released then trades again from revisions. For whatever reason, the China trade imbalance problem has been put into the forefront. My opinion is that at this time, our gov't wants the $ to devalue and I expect to see the PPI and CPI $- this week, more so then consensus. No, i'm not placing bets on it and i'm not telling you to do so either, but if the numbers do come out that way I expect more movement then what we would normally see, so when I'm in a position i'll likely stay in longer then I would otherwise.

Take a look at the GDP. Right now we have many coporations reporting excellent numbers. The BLS says that job growth is strong and the strength is in the service sector, where the better paying jobs usually are.
The GDP is the sum of all goods and services produced and it includes the trade balance, which showed a nice improvement. How could the GDP be decreasing so much? Maybe it's decreasing because the gov't needs the $ to devalue and it certainly won't if it reports the GDP is rising.

CB's do work together sometimes to acheive their objectives. Right now we have the ECB and the Japanese jumping up and down about the need for their rates to increase. Maybe they're cooperating with us at this time. They have in the past when it suited them to so so.

Asute observers might ask why would the Japanese want their currency to appreciate-wouldn't that hurt their exports? Well maybe it would and maybe it wouldn't. There is strong demand for their cars, gaming consoles, etc. Maybe they feel the demand is so strong there's room to raise the price (by appreciating their currency) without hurting their exports (thereby earning them more money). I know for a fact my kid wants the new playstaion and I don't really think he cares if the price of it goes up a bit. My wife has been driving Toyota's for years and she wants a new one now. I can get a similar American model that's cheaper-but she doesn't care, she still wants the Toyota. I know that I don't see Toyotas and Nissans go on "sale" as often as Fords and GM's do.

What does the EU export that has room for price appreciation? Luxury foodstuffs (including liquor), clothes and cars (like MB, BMW etc) that well-off people want and will (because they can) pay a bit more to get. Maybe there's room for their currency to appreciate as well. Maybe having the EURO appreciate is good business for them at this time.

As always, you need to watch the developments as best you can. Look for the answers behind the questions and maybe you'll find some.

http://bloomberg.com/apps/news?pid=2...Mbs&refer=home

An article just for you to hash over NewsTrader:

http://www.frontlinethoughts.com/pdf/mwo111006.pdf

All I know is that I put in a long position Friday near EOD on GBP. Not only has a supply line been broken on the weekly, but the daily is real close as well.

I wouldn't recommend shorting GBP right now unless you're playing the short term (<1 day).

Excellent article, thanks summit.

As with every story-there's multiple sides to consider. Let's take the housing boom fueled by lowered interest rates and increased demand for housing.

Yeah, if you took the equity out of your house to fund vacations, cars and trips to casino's-u might be hurting now. Likely those people are somewhat fiscally irresponsible anyway.

If you used your home equity for home improvements (investment that increases the value of your real estate), a successful business venture or perhaps your kids education you're probably doing much better. You still have a tax deduction on the interst and that interest is still low.

News- You're welcome

You should publish your own newsletter. Your dissertations are always thought provoking and insightful.

Thanks for taking the time to publish them here.

I shorted the euro at 2890 on nothing but pure gut feeling, but maybe all the dollar bearish articles and opinions I've seen this week has something to do with it; that and the fact that cable got above 9150 closed the week below that.

Thanks for the props-maybe I can get a job doin this!

Here's some more China info with a specific mention of the "band" that china allows the yuan to fluctuate:

http://bloomberg.com/apps/news?pid=2...d=ad6Wgf9XLHiE

.3%/day is not very much movement-in the last 3 months USD/CNY has gone from about 7.9600 to 7.8645, which means the $ has depreciated by about 1.12% against it (or the Yuan has appreciated by that amount). Not nearly as much as we want, or how we think the yuan would be valued in the open market. Remember back in May when the US (Snow was Tres Sec then) was threatening to label China as a "currency manipulator"? We were saying that a 30-40% yuan appreciation was what was needed (or how much the Yuan was undervalued) and congress was calling for a 10% "down payment" on that. The Schumer trade bill calls for a 27% tariff on chinese goods, which essentially immediately depreciates the $ 27% against the yuan.

The statements by the PBOC this week do show that there is some concern on the part of China to the problem. A growing surplus does fuel chinese inflation, which is something they obviously don't want. According to the IMF, the US Current Account Deficit poses a serious risk to global growth if a sudden problem arises in our ability to fund it (i.e. sell out bonds, equities etc). A further examination of the trade imbalance shows that although it did narrow last time (mostly due to lowered energy prices), the gap actually widened with china.

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

As previously mentioned, what we as traders have to look for is any widening of the band, as that will signal immediate $ weakness. Also, watch the next TIC data report as a decrease of inflows also signals $ weakness.

Truthfully, I didn't fully appreciate why a large trade imbalance like we have is such a dangerous thing, but I'm starting to get the idea now. Basically, we have to continuously sell our assets in order to fund it and it eats away at out GDP. Hows this for a number: as of last month, the trade balance was at -64B. If we have 11T of GDP, the trade gap eats away almost 7% of our GDP. Or put it this way: GDP has to grow at a 9% annual rate just to have a net GDP growth of 2%!

Do you want to be running a growing deficit in your own finances that forces you to sell more and more of what you own? Maybe it wouldn't hurt as much if your personal GDP was growing, but what do you think would happen if your personal GDP slowed (or even dropped) as the need to fund a deficit rose? Not a pretty picture.

Although I think that a tariff is bad, we must be able to use the threat of imposing one as a way a forcing china to allow further (and faster) yuan appreciation. Now that they see the democrats are in power-i'm sure they see that as something that really could happen. And as bad as a tariff is-it really will become necessary to impose one if a proper adjustment in yuan valuation cannot otherwise be accomplished.

Taking all of this into consideration it is apparent that there is an immediate need for $ depreciation in the world economy. I'm not saying that this is going to start immediately on Monday morning, but I'm also not taking any long term positions expecting the $ to rise in value either. The world cannot afford to see the USA get into serious financial difficulty. What do you think would happen to world security if we couldn't fully fund our military?

One more question: If the Schumer tariff was passed tomorrow, is that $- or $+?

I really enjoyed reading this post; thought provoking stuff. My guess is that the yuan situation will only become a real "market issue" when it becomes convenient to do so.

To answer your question. Do you think the market could look at the Schumer tariff as dollar positive, because it would appear like the United States is taking a step towards fixing the trade imbalance and hence protecting the value of the country as a whole and the dollar with it?

Equally a tariff could be percieved as a step toward de-regulation of the yuan and along with it a huge rally in yuan/usd rate, which conversely equals a dollar sell-off.

The market may focus on a bullish theme on a particular day and then on something completely different and bearish, (which was there all the time) on another.

What do you think?

Imposing a tariff is essentially the same thing as devaluing your currency relative to the currency who's exports have been tariffed. I would tend to think the market would see that as a +, because it addresses a problem that the market has percieved as a -. (It would help to narrow a trade imbalance which is + for a currency)

I'm not certain that a tariff (or just a currency adjustment) between the US and China would have that big of an effect anyway, because their goods are so much cheaper. Using the 99 cent batteries as an example-if they suddenly cost $1.25, they would still be a bargain compared to other batteries which sell for almost $5...

Getting back to trading this week and the first potentially big trade:


The PPI is a mixed bag with the core MoM expected to be rising at a much slower rate and the core YoY expected to be rising at a somewhat faster rate.

I think there's a good potential for $- info accross the board-remember that import prices were down last time. If the data is $- I think we could see more movement the we might otherwise see as it would add to the already $- sentiment that exists in the market at this time.

Mondays pricing will be important-we'll see if some profits get taken (Eur and GBP sells off) and if rumors of $- info get bought into (Eur and GBP re-bought). Let's see how it goes...

I know this is "hindsight" telling you that my short @9085 is doing well right now but it was a scare seeing how it kept poking up and up. I actually was "throwing towel" on that short so I hedged it with my favorite USDJPY, GBPJPY.. everything ended up well right now its unfortunate my USDJPY had a very small limit so I wasnt able to bag much..

But what I wanted to know is "what caused the crap GBPUSD to drop down?" I just came back fetching the kid from school so I was unawre what happened.

All I know is that there is huge rumor that Japan will have a bad GDP tommorrow so the JPY selling..

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So it was Softer than Expected UK PPI! WOW thanks!

I dont believe that the last bad UK data have caused such a massive USD rally..

Both EUR and GBP were shorted!

Seems like Dollar Love is back in town.

[quote=NewstraderFX]Thanks for the props-maybe I can get a job doin this!

QUOTE]


I would think that would be a peice of cake for you based on your posts. Your writings have 5 times the substance as most of the stuff I read from banks, brokers and news sites.

Thanks again for the props...i'm amazed, really...

I think the sell-off we've seen in the GBP since the open yesterday is due to several things; one of might have been obvious to many traders and one that may be more subtle.

Obviously the market thought the pound was overbought at 9150. The remarks by the PBOC on Thursday and Friday are what drove the $ down in the first palce. Long GBP positions were taken off the remarks, some nice profits were on the table so traders took them.

The GBP hit a peak of around 9150 around 1.30 GMT this morning-it sold off about 45 pips until the GBP neg info came out and has continued to sell off from there. (I would say the GBP PPI was kind of a mixed bag anyway; the input prices didn't go down anywhere near consensus but the output price beat the consensus).

So 9150 was an overbought level and that leads me to a second, more subtle point: Fundamentals tend to be very short lived especially when there is little further fundamental info scheduled to be released during the next trading day. Nothing's really changed vis a vis the PBOC comments, yet the effect they had has worn off (or at the least allowed profits to be taken as there was no immediate fear of further $ weakness). The UK PPI numbers were some further icing on the cake.

I can tell you that I didn't take any short posions up there (if you did, nice trade) because I didn't know if profits would get taken or if the PBOC would still be driving the market. Since I had no clear idea, I put in some demo trade positions. When the GBP was at 9150 I placed buy orders @ 9090 and 9070. Those obviously went bad. However, feeling the "pain" of a loss gives me a good feeling for where I think things will go from here, unless an unscheduled fundamental comes out that leads me to think otherwise.

The market still expects the US PPI, retail sales and CPI numbers will be $- this week. The PBOC is likely in the back of the market's mind as well and that's certainly $-. I think there's a good chance the GBP will drop further-to around 9860-80 or so thru NY and tomorrow's London session. I'm still not taking a short position, but I may go long in the pound if it does go to that level and London seems to be buying back in. If it doesn't, I'll wait the PPI and retail sales numbers and trade off of that.

Even if the GBP flattens out, there should be an excellent trade off the PPI and retail numbers if they do come out $-. We've recently seen the GBP in the mid to upper 9100's so there's plenty of headroom available if those numbers do come that way.

Congrats to anyone who shorted the GBP up there. Maybe the next time there's a similar situation, i'll do the same.

The old saying, buy the rumor sell the news, comes to mind.