Knowledge is Power

With The Dow UP and Oil down USD/JPY is over 106.00 now.

We need to watch what happens over the next hours and review things. Friday's sometimes are good reverse days as profits are taken.

All in all the fundamentals were not good. A fools paradise or some short covereing with Oil retracing giving the Boost.

Maybe a little INTERVENTION !!!

Stay Tuned !!!

I am off for awhile

I am sitting on 15 open positions of 100K now !


Bruce

http://quotes.ino.com/chart/?s=NYBOT_DX&v=s&w=5&t=l&a=2

There is Intervention at the moment. Dow UP 186 The 2 Year US Bond Yield is now 2.56% so US Bonds are Sold and the Ten Year US Bonds are at 4.04% so they are being sold. The Carry Trade with regard to EUR/JPY is back on again as you can see. Sell Yen and Buy Euro !!!

Later !!!


Bruce

My Cash Demo Account Balance Is Now $125,031.90 US Dollars. Since I started trading again two days ago I build it up to that amount. I now have 20 open positions of 100K and the Write Down of $9.7 Billion by Merrill Lynch just announced will not help the Dow tomorrow.

See you folks later...


Bruce

Learning all the time.
Tx Bruce.

http://www.financialsense.com/fsu/ed...2008/0717.html

Snippet:

USD at risk this time
The last time the entire world economy had this kind of economic paralysis was in the 1930s during the Great Depression. At that time, the USD was not on the verge of a collapse. This time the USD is on the verge of a collapse, or at least a major devaluation. That means that the US has far less latitude to do fiscal stimulus and bailouts to combat the present economic emergency spreading over the world. The US can only go so far this time with economic stimulus.
Rising inflation is putting pressure on the US trade partner economies which forces them to raise interest rates, and that causes competition to the USD, while the US has to keep rates low to fend off a total financial and economic meltdown. This is boxing in not only the US economy, but our trade partner’s economies and central banks as well. It is very clear that the gigantic financial losses in the US since Summer 07 have spread all over the world as they have become sort of tied at the hip with the US economy, the USD being the world’s main trade currency for the last 50 years.
There are a lot of aspects to presently emerging world stagflation. But, compared to previous Western recessions, there is now a combined Western Bank crisis and, this time, the prospect of a very shaky USD.
In the last great world depression in the 1930s, the big difference from today was that the USD was strong, and even gold backed…and destined to become the world trade currency of the 20th century (20th century was the 1900s). The 21st century is the century of – what, the first global government?
That is not the case today. The USD is not strong. That is going to be a real problem for the world going into 2009. Thus, we have a second major difficulty the world has to overcome, what to do about the USD, to avoid a total financial disaster into 09. The world’s economic weakness right now is only a foretaste of what is to come from a weak USD. A weak and possible collapsing USD means a weak/collapsing world economy.
What this USD situation means today is that the US, with all of Bernanke’s willingness to use inflationary methods to combat debt deflation, is constrained by the problems that heavy inflationary methods will create for the USD going into 2009. Because the US economy is so central to the rest of the world, what limits the US limits the rest of the central banks and their economies. If the USD were not the world reserve currency, most of these problems would be confined to the US economy.
The USD is probably at a limit of stress at this moment, with interest rates at 2% and the ever present need for our trade partners to send about $700 billion a year to us to buy US bonds of all sorts. Bernanke will cut the ground from the USD if he tries any further rate cuts. Our trade partners who are basically subsidizing the USD for their own reasons will balk. Not only that, but inflation in the US in some areas in already more than 10%, such as in food and energy. Any further rate cuts to combat the present financial disaster in the US will only allow an inflation explosion.(Yes, the USD is indeed the world reserve currency, but now that seems funny. It wasn’t funny during and in the 50 years after WW2.)
If the US persists in trying to ‘bail out’ ‘everything’ the USD will collapse. Our treasury officials and the Fed are well aware of this fact. The USD is at an extremity, right now. We are at the limits of unlimited USD expansion since WW2. The US is at a crossroads with the USD system. If the US Treasury and Fed try to bail everything out, the 50 year world prosperity Jig since WW2 is up. I already heard talk by Bernanke that the Fannie Freddie mess might be nationalized.
The bailouts are not just the US. Now, every major economy is talking about massive bailouts. Their currencies will all suffer, and this post WW2 world prosperity boom is just about done for. They are going to bail out their banks, stock markets, bond markets, and economies by debasing all their currencies because they don’t have the political guts to endure a serious world recession. China too….the final result will be horrific.
What would be the outcomes if the USD world financial / economic system fell apart?
Supposing the USD devalued by over 50 to 70% in a year’s time, after endless attempts to save a collapsing world consumer credit economy, we may see:

1. <LI class=text>First of all, the savings of the US would drop drastically in value. That means everything from savings accounts to pensions would lose much purchasing power, and prices of every necessity would skyrocket. <LI class=text>Second, our major trade partner’s economies would have to do massive readjustments. They are not in a good position to do that. We can take the present rapidly spreading economic weakness of the EU zone as an example. Asia will not escape either. They will desperately try to keep their currencies from strengthening too much at first as the USD falls. This is why the USD seems to have 9 lives. These attempts to debase along with the USD allow the USD to stay higher than it would. <LI class=text>World inflation will spiral out of control, lowering standards of living. Other major currencies such as the Euro and Yen will be heavily pressured as well. Until the world figures out how to actually delink from an imploding US economy, they will suffer along with the US’s fate. So far, the delink theory has been shown to be completely wrong. Why? Because the world economy is tied at the hip to the USD (The delink theory is that other strong economies of Asia or the EU will be able to carry the world economy even if the US economy falls apart. So far, that has been completely discredited in this latest world economic slowdown). <LI class=text>Big geopolitical turmoil as regimes combat out of control food and fuel prices. <LI class=text>A war in the Middle East over oil. The Iran / Israel situation might also be called a proxy war/struggle over Mid East influence for China, the US, Russia, the EU, and Asia because energy is so expensive. <LI class=text>A very possible period of insurrection, riots, shortages, and chaos in large US cities. I also believe that the EU and China and India are at risk for this too. <LI class=text>A 10 year world economic depression, that China in particular cannot tolerate, as the world economy readjusts out of necessity into a totally new form, one that is less global and probably more warlike. <LI class=text>Debt deflation where a rapidly dropping USD effectively wipes out outstanding debts, while the population struggles merely to exist. <LI class=text>Vast bank failures in the US and major Western economies, and likely China as well. <LI class=text>Efforts of world central banks to ‘bail out’ ‘everything’ resulting in their currencies falling drastically in value while inflation skyrockets, until either they learn better, or have hyperinflation and their own currency collapses after the USD falls apart. In effect they will have to either ‘let go’ of the USD or suffer the same fate. <LI class=text>Stock markets at 10% of where they are now in 3 or 4 years if the USD actually lets go by 50% or more in 09 (nominal stock prices might actually stay higher but the devaluation of the currencies would effectively cut the purchasing power in half anyway.) <LI class=text>Prices of most essentials effectively 4 times higher, worldwide. <LI class=text>Big increases in energy and food prices causes many other sectors of world economies to fall apart, as all ‘money’ is used merely to survive. <LI class=text>Gold at $3000to $5000 plus and oil at $300 plus putting a further huge crimp on world economic growth. Obviously if the USD did a real collapse, say to 10% of its purchasing power now over several years, gold is over $10,000 and in some areas you will buy a decent house for one ounce of gold. Oil will be traded/priced in other currencies, and probably rationed in the US at a cost of $20 or more a gallon. In this case, the present world economy that depends on cheap transportation totally devolves. Globalization becomes de-Globalization, and China either figures out how to migrate to its own domestic demand or faces a huge collapse of their export economy. <LI class=text>Severe world currency restrictions and foreign exchange controls. You won’t be able to move your money out of your country. Likely restrictions of withdrawals to monthly limits from bank accounts as governments attempt to deal with currency chaos. <LI class=text>Rationing of necessities as the world economy enters paralysis and governments have no choice. <LI class=text>One bright spot for all, the return of employment to local instead of outsourcing. Production and consumption returns to local economies, as it should have been all along. That is a long 20 year process and involves a severe deep economic depression until the world economies/economy is rebuilt from scratch compared to what it is now. Debt repudiation on a massive scale as the world emerges from the ashes (hopefully not real ashes…)
2. Many new governments worldwide after revolutions during economic collapses and or wars. Democracies falter worldwide, and more authoritarian governments appear to deal with the chaos as the democracies enter paralysis.

Bruce

http://www.financialsense.com/fsu/ed...2008/0717.html

Snippet:

The Financial Woes of the Banks Will Continue

by Hans Wagner, TradingOnlineMarkets.com |July 17, 2008

Print
Are the financial woes of the banks over? To beat the market by investing in the stock market, you should have a good understanding of the factors that are driving the trends in the financial sector. For example, are we close to the end of the loan write-offs? If you are learning to invest, it is important to have well ground perspective on state of the financial sector before making any long-term commitments. Expect the financial woes of the banks to continue and be careful when the market make volatile moves in either direction.
Bank Failures
On Friday July 11, 2008, after the market closed, the Federal Deposit Insurance Corporation (FDIC) took over IndyMac Bancorp (IMB) in California. This was the second largest bank failure ever in the US. About a year ago, the share price was $29. It closed on Friday at $0.28. According to the FDIC, there have been 12 bank failures so far in 2008. The concern among investors is that there will be many more failures in the months to come as loan write-offs over whelm banks without sufficient capital.
Earlier on the same day, there was much consternation about the fate of the quasi-government mortgage banks Freddie Mac and Fannie Mae. An article in the Wall Street Journal and comments from a former Fed Governor indicated that these organizations were insolvent. Management at both companies claimed that this was not true and that they were fully capitalized and accepting mortgages.
Quoting "Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair-value accounting rules. The fair value of Fannie Mae [down 78%] assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, former St. Louis Federal Reserve President William Poole said." (Bloomberg). Also, Senators Schumer and McCain both said Freddie and Fannie would not be allowed to fail, in the same story.
Freddie and Fannie are essential to the U.S. mortgage market. According to various reports, they are currently buying up to 80% of the mortgages now created in the US. Without them, the mortgage market would dry up and the price of homes would fall much further as very few could afford to buy a house. If this were to happen, the US would face a housing meltdown of unprecedented form.
So where do Freddie and Fannie get additional capital? As mentioned above, the price of their stock has fallen significantly. Not many investors want to place new capital in an organization that still does not know how bad it can get. Free marketers believe they need to fail to help restructure the system and make the market work properly. Others believe the government must step in at taxpayer’s expense. Most likely, we will see the government step contributing a large amount of money receiving preferred shares in return. If this happens, expect the common stock holders to be wiped out. The hope is eventually the Treasury will be able to sell the preferred shares to recoup their investment once the market stabilizes in several years. This makes one think how bad can it get.
Testifying before Congress Ben Bernanke said that Freddie and Fannie were adequately capitalized and that the problem was one of confidence. The Securities and Exchange Commission said it will curb short selling in the primary dealers as well as Fannie Mae.
Potential Loan Losses
About a year ago, the “analysts” estimated that the total write down of bad loans would be about $400 billion. Then by December 2007, the estimate doubled to about $800 billion. Then along comes a report from Bridgewater Associates that expects the number to double again to $1.6 trillion. Bridgewater is a very large hedge fund who is also one of the top analytical firms. Up to now, the banks have been using a ‘mark-to’model’ method of valuing the structured debt. According to Bridgewater, the modes used have grossly underestimated the actual losses. They doubt the financial institutions will be able to generate enough capital to cover the losses.
According to the report, “Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12,000bn [$12 trillion] worldwide unless banks could raise fresh capital."
Not all of these losses are in the sub prime market. According to the report, more than 90% of the losses from sub prime loans have already been written off. Unfortunately, the losses form the prime and Alt-A loans could be much larger than we have already seen. The size of these loan portfolios are much larger than the sub prime portfolios. Further, Bridgewater expects about $500 billion in corporate losses that must be written off. This leads to the current estimate of more than $1 trillion in losses yet to be written off. That is a scary thought.
On Sunday evening July 13, 2008, the government stepped in to start the bail out process of Freddie and Fannie. The following is from MarketWatch:
WASHINGTON (MarketWatch) -- The White House and the Federal Reserve moved Sunday to prevent Fannie Mae and Freddie Mac from failing. In a statement, Treasury Secretary Henry Paulson said the global reach of Fannie and Freddiehttp://www.financialsense.com/fsu/ed...p_image001.gif necessitated unprecedented action. The Treasury has asked Congress to increase the existing line of credit to Fannie and Freddie. In addition, Treasury asked Congress for the power to buy the two companies stock. In a separate vote, the Fed board of governors voted to open its discount window lending facility to Fannie and Freddie. In return, Paulson asked Congress to give the Fed a formal role to work with the new GSE regulator on capital standards for Fannie and Freddie.
So the bail out has begun. So far, Freddie and Fannie have not taken advantage of the Fed’s discount window. It looks like just making it available helped to increase the confidence in the financials. Then on Wednesday, July 16, 2008 Wells Fargo increased its dividend by 10 percent, which was a surprise. This news has helped to push up the financial sector more than 10% on the day.
The Bottom Line
So what is an investor to do? The financials benefited from these moves as short covering on Wednesday helped push up the prices of the banks across the board. The transportation and consumer discretionary sectors also did well. One characteristic of bear markets is sudden moves up that can last for several weeks. However, then reality sets in and the market turns back down. We could be on the cusp of this type of move if it can sustain itself through the heart of earnings season. For investors willing to make trades that might last only two to four weeks, there is a good chance we are near an interim bottom. Before committing capital, we need to see if the rally on Wednesday can continue. Stay tuned.





Bruce

Bruce, didn't get chance to read all the post but my understanding is currently you are short on usd/jpy right ??

I have my closed trades done with cash balance to $125,158.30 !

I need to see it move below 106.00 to to get out of three positions of 100K of today ! They were at 105.49, 105.41 and 105.36 !

Market Could Go Down on Friday based on Futures now ! We Will See !!!

http://www.financialsense.com/fsu/ed...2008/0717.html

Snippet:

Nationalization, Fiasco, USDollar, Gold

by Jim Willie, CB. Editor, Hat Trick Letter | July 17, 2008

Print
A grotesque grandiose nationalization initiative is gradually being forced upon the USEconomy, US financial system, US political system, and the hapless US citizenry. Its crucible for construction comes from the desperate situation unfolding for the banks, the mortgage holders, and homeowners. Rising costs, falling incomes, failing banks, declining home values, eroding mortgage bonds, interfered financial markets, corruption in Congress, endless war, destructive economic counsel, an unconstitutional USDollar without gold backing, these factors all contribute toward a crisis without remedy. The only possible response will be an implosion with greater state assumption of losses, responsibility for operations, and extended power. Systemic failure, credit seizures, profound job loss, severe supply disruptions, and violence in public places will force a more urgent solution. The irony is that the agents and mechanisms that produced systemic failure will next be granted almost total power as reward for their ineptitude, corruption, and connection to the power centers. Reaction to systemic failure, orders for nationalization, and other desperate measures ensure the USDollar will fall significantly, leading to gold rising toward 1500 and silver rising toward 40.
WE ARE BEGINNING THE ACUTE PHASE OF BANK AND BOND BREAKDOWN NOW, WHOSE EPICENTER HAS EXTENDED FROM WALL STREET BANKS TO FANNIE MAE. THESE GROUPS ARE THE PRIMARY CENTERS FOR CRIMINAL FRAUD, ALL TO BE BAILED OUT. A broad bank asset liquidation in several weeks will exacerbate the crisis and invite immediate action, some of which might be well orchestrated in a power grab. The solutions will all appeal to the current devices, which tend to mean greater state controls. The authorities seem totally lacking any list of alternative methods. With bailouts come controls. If truth be told, the failure is of economic policies, the scummy relationships between the USGovt, the US Federal Reserve, the Dept of Treasury, the regulatory agencies, the Wall Street bankers, several giant banks, debt rating agencies, certain private equity firms, and the media news networks. Some wonder why media networks would be so subservient, not report stories of substance. Check their advertisers, which pay the bills, and also check where they obtain much of their international information. The USGovt supplies data, interviews, video clips, and stories for reasons of efficiency, safety to correspondents, which tends to permit a gradual slant that has turned absurd over the years. Many stories just are not covered at all, like recent foreign summit conferences among banking groups, in Asia and South America.


Bruce

Bruce-how many trades did you mak today, and what was the win/loss ratio of the trades that were closed? I wasn't by a computer today so just got caught up on the days action.

Bruce, what is your setup like...do you use multiple computers with multiple monitors, along with TV to watch news?
Thanks
Tim

This was a wild day ! I did 43 FX trades and they were all wins !!!

I am now at 19 open positions of 100K using 18% of my capital. I need it to go below 106.00 to get out of a bunch of positions. I have 7 now within 30 PIPS of being wins.

Off to bed soon...


Bruce

You can save money but you cannot save time. Time never stand still. Clock ticking always. Time is what life is made of. Never waste time for that is to waste life.


"

Quote

Disliked

With Forex, knowledge is power!

Quote

Disliked

Applied knowledge is power. Knowledge does nothing. One must apply knowledge through action to have power.


Soory my english not good.

I have 3 Samsung 19 Inch Monitors being able with video cards to use them separately. I drag the cursor across all three. I have HP 2840 All in One Fax, Copier, Scanner and Color Printer. I have TV on Always to left of first Monitor watching CNBC.

I have Sound Cards, extra Memory and all that I need.

On my left is my FX trading platform with both Live and Demo there. The middle is emails, news, and a chart when I need a extra one. It is from Oanda Game Platform.

On my right is where I keep the charts and things like that.

Good Evening


Bruce

Thank You Very much For Your Contribution ! I enjoyed reading it and I fully agree.

Please post more often. Thank you...


Bruce

What will Friday Bring ?

Such is the FUN of Forex ?

See everyone tomorrow. Have Sweet Dreams or if in Asia a Good Breakfast !!!

Bruce

I just posted this on the USD/JPY thread and I am reproducing it here in order to share it with all of you.

http://www.forexfactory.com/images/s...n/post_new.gif Today 6:07am
Warren Forex http://www.forexfactory.com/images/s...ser_online.gif
Warrenforex
Member Since Sep 2006
Posts: 1,260


http://www.forexfactory.com/images/icons/icon14.gif Anything Is Possible !
Quote:
Originally Posted by Camel Trader http://www.forexfactory.com/images/buttons/viewpost.gif
That Merrill news was interesting but I can't really give it all the credit for the pull back. What are the odds the news hits about the same time U/J comes up against the resistance of a down trend line above at 107.11?

It pulled back to the 61.8 fibo level and has been moving sideways since. I wonder if it randomly decides to retest that news in an hour and a half or so or if it re-experiences the shock of the news and heads even lower?

Hint: we're approaching the up trend line that it's been riding since it turned at 103.77 and I doubt it will keep going sideways when it gets there.

Not saying I don't believe in fundamentals, I'm just saying every twist and turn isn't due to "new news". Just my opinion.

My point was made since the price reacted at the time of the news release on Merrill and the Dow Futures headed down. Part of my trading strategy is finding out after the fact what caused the move. The reason I do that is to determine if the information I find out about that moved the market changes the fundamentals. The Merrill results only confirmed the fundamentals have not changed. In order to understand why the price moves you need to understand Human Nature !

It is humans that move the market. Supply and Demand of that particular currency. By understanding how people are thinking and why you can determine if they are correct or not. The charts CANNOT tell you anything but the mood at the moment. Just because the pattern was what it was does not guarantee it will repeat. I have seen this happen so often. 4Cast or whatever service you might follow at times changes their call on direction of a particular currency sometimes 3 times in one day.

What moves the charts is either new fundamentals or new perceptions. Since the first release of new facts are most of the time misunderstood since they do not analyse the reason that number is what it is once they understand what the number really said then the perception changes. That gives an edge to traders that understand that and find out when the first reaction was false. It is very rare for someone to constantly be profitable by trading the charts. Regardless that is not the point of my post. The point is how to make money. I share my thoughts in order to explain things not to debate things. The charts are good but it has limitations and tell you nothing other than the current price action. Especially in this currency pair. Two things move this pair in a substantial way. The Dow going UP or Down and the Risk Aversion Factor which causes the other element and that is the Euro Yen Carry Trade.

Have you noticed that when the Dow goes UP like in the last two days the EUR/JPY pair goes UP ! That brings the USD/JPY pair UP.

Why ? The Yen is sold in large amounts and the Euro is bought. When the Euro goes UP it brings the USD/JPY down in most cases as there is selling of US Dollar and in large amounts it affects the Yen.

You cannot learn this from charts other than to witness the price changing. Not one person here needs to accept what I say. However trust me when I say that is the truth of the matter. If you want to win most of the time trading Forex you need to understand it. The charts have not a thing to do with understanding much of what I just explained here. Again no debate is needed on this as it is what it is. Discussion is great in order to understand as we have done in both our posts. FTP moves markets.

Fundamentals + Technicals + Perception !!!

Good Trading To All !!!


Bruce
Last edited by Warren Forex, Today 6:12am Reason: To Correct Spelling !!!

http://www.forexfactory.com/images/misc/progress.gif

US before and after Bush

http://eatliver.com/i.php?n=2775

I just posted this answer on the USD/JPY Thread.

Here it is for all of us to read and understand. Can someone post a 30 Year Chart here of USD/JPY ?

It is really revealing to see it. Thanks ...

My Post On USD/JPY Thread:

http://www.forexfactory.com/images/s...n/post_new.gif Today 7:18am
Warren Forex http://www.forexfactory.com/images/s...ser_online.gif
Warrenforex
Member Since Sep 2006
Posts: 1,263


http://www.forexfactory.com/images/icons/icon14.gif An Intelligent Post and Question !!!
Quote:
Originally Posted by branco http://www.forexfactory.com/images/buttons/viewpost.gif
Why do you relate the JPY crosses to the equity markets? Have you tried relating it to the bond market? I think the reason most people relate it to the equity market is that in recent years bonds and equities have been both moving in the same direction but that is not true these days.


If you relate it to the bond market you will get a better explanation of why we are in an uptrend since March on the JPY crosses. I am on the long side of GBP/JPY since 198 and have accumulated for two occasions when it came near the trendline beeing the last one this week when it came down to 209 and everyone was saying that "now the downtread will resume".


Using fundamentals is good and I use it in conjunction with technical analysis (always that fundamentals set direction and TA gives me the timing to enter the market) but how can we both be doing the same thing and be on the opposite side of the trade?

I am only on the side of USD/JPY heading down. I do use the following in my trading plan on these currency pair. I look at the price of Oil and Gold.

I closely follow the 2 Year Bond Yield and the 10 Year Bond Yield.

I follow the spread between the two. When the USD/JPY was lower the spread in was about 166 basis points. As the spread moves up the Yen goes down. Can you explain why since you follow US Bonds as you have stated in your post.

There is NO QUESTION about the Correlation between the Dow and The Carry Trade !

For those unaware here is how it works.

A Homemaker in Japan with good credit wants to make money ! She borrows One Million Yen and pays a very low interest rate. She then buys US Dollars.

When the Spread last August 2007 was 5.25% VS .50% she would have made a profit of 4.75% just on the spread. Then with her US Dollars she bought the Dow or other US Exchanges.

When the Dow kept going UP and things were calm and stable she was a double winner. However when we got to the beginning of the end in this financial mess caused by the FED with their misguided monetary policies and as the spread went to 2.0% VS .50% the benefits are reduced. Now add the uncertainty to the elements and things now reverse.

At one point there might have been over Three Trillion Dollars in Carry Trade.

Now it still might be as high as One Trillion Five Hundred Million US Dollars.

As the Dow is sold down and the USD/JPY was at around 122.00 last August here is what happens. Bonds have no role in this operation. The money from the sale of the Dow in US Dollars is used to pay back the borrowed Yen and therefore the Yen gets stronger. That is why it now trades at 106.58 Bid at the moment rather than 122.00

Look at a 30 Year Chart of USD/JPY ! Perhaps someone can post it here ?

Can you answer my question concerning the US Bond spread ?

Thank You for your observations and question.


Bruce

http://www.forexfactory.com/images/misc/progress.gif

WWW.SAXOBANK.COM

THEMES TO WATCH – UPCOMING SESSION


Key Risk Events (All times in GMT)

1. Norway Q2 Existing Homes Sales (0800)
2. Bank of England's Gieve to Speak (0805)
3. EuroZone May Trade Balance (0900)
4. Canada Jun. Leading Indicators (1230)

Market Comments
US financial stocks continued to squeeze higher yesterday and the JPY crosses followed suit, but then a further enormous writedown from Merrill Lynch and bad news from major tech bellwethers pushed the sentiment back down and USDJPY corrected 100 pips from its blow-off rally late yesterday. This was clearly a short squeeze - but how long it will last is the key question for the moment. Let's see if the 200-day moving average in USDJPY continues to survive, it has been the key resistance area since the pair topped out a month ago and now comes in around 107.20.
A story emerged late last night in the FT about Gordon Brown and the UK Treasury seeking to change/eliminate rules that prevent the UK Treasury from borrowing more than 40% of GDP, but sources within the Treasury are apparently denying that this is the case this morning. This was the likely cause of the dip in GBP late yesterday. On a long-term basis, this is a sensitive area for the pound as the powers that be did little or nothing to rectify excessive budget deficits even when the times were good in recent years in the UK, so the pound will likely be vulnerable on this issue going forward when tax revenues are falling in a weaker economy while stimulus spending is likely to increase. The 1.9950 area gave way briefly overnight in GBPUSD on the story, and this is a key support area as it is also near the 200-day moving average (Update: this level was taken out as we were writing, so it now serves as resistance zone...)
The US housing starts/building permits numbers yesterday looked impressive on the face of things, but this development was apparently due to some new building code regulations in the NYC area that provoked a one-off boost for July. The worst ever NAHB survey (probably the most forward looking new housing indicator in the US) from the previous day should remind us that not all is well in the US housing market, nor will it be for some time to come. The only hope at this point is a deceleration in the rate at which it is deteriorating.
We have a virtually empty calendar again today, with the Citigroup earnings probably one of the key events considering all of the recent noise about US banks. Also, the equity market in general may be a key driver of moves in FX with the disappointing tech earnings bellwethers. It is a bit surprising that the equity market hasn't seen even more strength considering the enormous drop in oil prices this week.
Technical Impressions
EURUSD continues its rangebound ways. After a brief drop to a new low, likely on the oil price drop, the pair rebounded back into the key 1.5820 (10-day EMA) to 1.5892 (yesterday's highs) zone. These may be the range markers/break points of the day. In USDJPY, the 0.382 of yesterday's frantic rally comes in at 105.83 and the downside reversal level is all the way down at 105.00. Again, the key upside resistance level comes in at 107.20, the 200-day moving average. USDCAD saw a reversal yesterday after another try through parity that failed to hold, but found resistance right at the 10-day EMA (around 1.0082 at present) which has been serving as resistance for over a week now.
Chart: USDCAD
USDCAD is perking up and has twice avoided a dip through parity (and the 200-day moving average just below) in recent days. Yesterday the pair snapped higher on the oil drop and a BoC report that showed Carney and company reasonably optimistic that inflation will ease (though they were also a bit bullish on growth we must add in contrast to Bernanke's recent and rather dour countenance). the 10-day EMA looks like a key threshold if the pair wants to have a try higher.