FX News Trading For The Week Of May 29-And Beyond

First, I want to say thanks to everyone who reads my thread. As you may have noticed, i'm now an FFAN Analyst so i'll be doing alot more here at FF.

I really believe we have a fantastic community of traders here at FF, so I want to make as many contributions as possible. There are many improvements being planned for the Factory.

Part of my responsibilities includes writing pre-event analysis for some of the various weekly economic releases. The analysis covers the economic implications and more importantly for us-likely market reaction and currency price movement. These articles are posted in the News and Analysis Forum (http://forexfactory.com/forumdisplay.php?f=8) which is easily reached by clicking "News" at the top of the page.

If you don't use th N&A forum, I think it's a great idea if you start doing so. A lot of important info is there from all over the financial world. I really believe it's important to at least be aware of what's happening, because it all comes down to making what I feel are the best trades: The trades that occur while the market is thinking and acting collectively.

This isn't something that happens everyday, but the better we can understand when and why it's happening, the better our chances are of tapping into this and making some PIPS, which is why we're here in the first place.

How's this for collective thinking: Equity markets crash on February 27. This causes carry trades to rapidly unwind with pairs like the GBP/JPY and EUR/JPY losing 1600 and 900 pips. Even better, is that once the smoke clears and market partipants realize that global economics are still favorable, they start buying back in. GBP/JPY, among others, turn right back around and pick up everything they lost over the next few weeks.

Follow my thread and you'll know exactly what to look for and how to trade when the inevitable corrections occur again. Do I have an exact date? NO! What I can provide is the guidance for what to look for and the exact "weapons" you need to bag some major pips when it does happen.

What I want to do is connect the pre-event analysis with my weekly thread here, so this is what I propose to do:

At the start of the week, i'll write an article in this thread which covers things like recent news, trends, economics, central bank policy or whatever is "hot" at that time, so it's a good place to start.

During the week, read my pre-event analysis in the N&A section. There are two ways to find it, but either going to the N&A forum and scrolling, or an even easier way: clicking on the icon at the far right of the listed event and finding the link there.

What you will also find is excellent analysis posted by other FFAN Analyists like Investica, FX Thoughts and FX Logic. I read all their posts and you should too.

Later in the day, i'll post some post-event analysis here. By watching markets react, we'll hopefully be better able to trade future events.

An example of this is in this thread:

http://forexfactory.com/showthread.p...01#post1451001

There's an old adage in the market: "Sell in May and go away". It doesn't look like it's gonna happen this year though-and if you sold early, you missed out.

Yes i'm talking about equity markets here and you may be asking "why talk about equities when we're here to trade currency"? The answer is about liquidity-the availability of cheap money.

Because world interest rates are low in real terms, there's a lot of money available for things like M&A and leveraged, margined positions in everything from futures and options to interest rate swaps and derivitives. The question is where all this cheap money is coming from.

A large part is coming from carry trades-borrowing the Yen (and CHF) at low rates in order to invest in higher yeilding assets which could basically be almost anything else. How much carry trades contibute to global liquidity can't be measured, but analysis of currency movements during the February market crash and subsequent rally indicate the role they play is very large.

Simply stated, equity markets love cheap, available money and they are currently reacting positively to bad economic numbers (which indicate that rates will not be going up) and reacting negatively to positive economic numbers (for the opposite reason).

As equity markets go-so to do carry trades, for the most part.

Friday is an excellent example of what i'm talking about so let's take a look at EUR/USD and USD/JPY-and of course EUR/JPY.

We had some pretty negative housing numbers on Friday-and as you saw, equity markets rallied off the bad news. The dollar normally weakens on bad news and it did-against the Euro.

Against the Yen however, the dollar strengthened. Why?

The answer, in part, is because in an enviorment when interest rates look to be going down-like off the weak housing numbers-carry trades and risk appetite is heightened.

This is the "reaction trend" we have in the market right now.

Good News = Bad News. Works both ways. Good news is bad because it threatens low interest rates. Bad news is good because it enables low interest rates.

We see this reflected in bond markets also. Bond prices on the short end of the curve tend to move inversely with dollar moves against investment currencies, so on Friday as the dollar weakened vs the Euro, bond prices went up and yeild came down.

What also enables this is the markets belief that the global economy will continue to expand around 4-5 percent this year. The reason they believe this is because major organizations like the IMF, G7 and OECD along with US, UK,EU and Japanese central bankers all agree that it will.

The best way to see carry trades going into the market (winding) is when the dollar depreciates vs an investment currency-like the Euro-and appreciates vs a funding currency like the Yen. This is exactly what happened on Friday.

The price of EUR/JPY = EUR/USD x USD/JPY. I was amazed when I first learned of this and you should be too, because it explains why pairs like EUR/JPY and GBP/JPY have larger moves. If the dollar depreciates 30 pips vs the Euro and appreciates 30 pips vs the Yen, EUR/JPY is gonna appreciate 75 pips.

This works even better for GBP/JPY because the same 30 pip move in GBP/USD and USD/JPY is gonna be worth about 100 pips!

How long the market continues to react this way can't be known, but until things change-it seems to be the way to go.

An additional point on the previous post:

I wouldn't trade the carry pairs from an NFP report. Recent NFP's have caused the dollar to trade uniformly against all other currencies.

Since for example, GBP/JPY = GBP/USD x USD/JPY let's see what can happen when the NFP and revision are strong ($+) and the dollar moves uniformly.

If the dollar gains a lot vs the GBP and not very much vs JPY-GBP/JPY will go down. If the dollar happens to gain more vs JPY then it does vs GBP-then GBP/JPY will go up.

The Good News = Bad News situation may take hold after Friday's NFP, but it hasn't yet and until it does-i'd stick with EUR/USD or GBP/USD for now.

We were looking at JPY household spending and retail sales-

Spending was up sharply but the retail number was mixed-up MoM but down YoY-larger retailers had softer sales too...

No trade off these numbers

There has been a lot of news for the Euro-check the N&A section for several posts. They will be discussed here later today.

I also posted an analysis for consumer spending and we'll cover the market's reaction to that as well.

NTFX, thanks for your hard work and analysis that goes into the forum!

Thanks for the props-

Equity markets traded in a tight range after the CC. This was likely due to the data printing later in the week-Fed Minutes, GDP, PCE and NFP. This data is much more important from a Fed point of view and is likley to help set some market trends.

We did see a "Good News = Bad News" reaction as carry trades weakened and bond yeilds rose. This is a pattern that's been holding for quite some time and will probably continue.

(FR) FRENCH PRESIDENT AND ITALIAN PM DISCUSS DIFFICULTIES WITH EURO STRENGTH AHEAD OF G8 SUMMIT

(FR) FRENCH PRESIDENT REITERATES VIEW THAT EURO IS OVERVALUED


There is another news wherein French President wants to peg the EUR to the USD.

Seems that he really hated the EUR at this level. And good thing he is. I as short at 1.3500 (from a lmit sell I have since last week)

The trend ahead of the FOMC is definately strength. We'll be covering the FOMC with a full analysis after they're released.

Analisis of the FOMC minutes is here: http://forexfactory.com/showthread.php?t=31836

As far as trading is concerned-the recent pattern of equity and carry trade markets reacting negatively to positive economic data will probably continue even more strongly. The same goes for the reverse as well.

I believe that the most intersting part of the FOMC minutes concerned the outlook for growth and there's a major potential for positive market movement if we get good corePCE AND wage data in the NFP.

Recent developments were seen as supporting the Committee's view that maintaining the current target rate was likely to foster moderate economic growth and a gradual ebbing in core inflation. Members continued to view the risks to economic activity as weighted to the downside, although with turmoil in the subprime market appearing to have remained relatively well contained and business spending indicators suggesting a more encouraging outlook, these downside risks were judged to have diminished slightly.

In its forecast prepared for this meeting, the staff (of federal reserve economists) expected the pace of economic activity to pick up from weak first-quarter growth to a rate a little below that of the economy's long-run potential for the remainder of this year and to increase at a pace broadly in line with potential output in 2008.

Meeting participants (the FOMC members) anticipated that real GDP would advance at a pace a little below the economy's trend rate of growth through the remainder of this year and then pick up to a rate broadly in line with the economy's trend rate in 2008.

These are very impotant statements that the major market participants will look at. The Fed is saying that despite the on-going housing correction, the risks to their growth assesments have diminshed and that growth will return to a level near the economy's trend rate of growth (2.5-3.0%) thru the remainder of this year and be even better in 2008.

This assessment is in line with other central banks and organizations such as the IMF and OECD.

The next crucial piece of data is sure to be Friday's corePCE and the wage info contained in the NFP and I believe it will be those two sets of data that have the potential to set a long term trend.

If those numbers appear tame, market participants will see an ideal economic situation: growth in an uptrend and inflation in a downtrend. A perfect bull-market storm.

Today's core PCE and NFP numbers present a perfect bull market scenario, as growth appears to be trending up while inflation is trending down. All evidence points to the consumer supporting the economy without stoking inflation.

Carry trades should do very well in this scenario as the market takes on more and more risk.

I'll be posting a more detailed analysis later-but right now things are looking very good and pointing to an interesting summer.

NFP and NFP Revision were slightly USD negative in my opinion - same way as NFP last December release was. But the other numbers for the day including ISM were all USD Positive. But the market did not buy the USD though.

Carry carry carry.. This is very strong it kept pouring money on the table! NZDJPY and AUDJPY just broke away from some resistances.