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FX News Trading For The Week Of 3/19

  • #21
  • Mar 21, 2007 8:44am Mar 21, 2007 8:44am
Quoting NewstraderFX
Today was a chance to see how one fundamental drives 2 different currency pairs:

Bank of England policy makers voted 8-1 to keep its benchmark rate at a five-year high of 5.25 percent this month. David Blanchflower unexpectedly made the first call for a rate cut since May.

The dovish minutes casused the GBP/USD to go down and caused the GBP/JPY (and the FTSE) to go up. Why might this be the case?

The GBP/USD pair is an interest rate driven pair, while the GBP/JPY is a flow of funds driven pair.

Let me expalin what I mean by flow of funds. As it becomes apparent that interest rates are not to be raised in the future, the investment climate is improved as a more accomodative monetary policy stimulates the appetite for risk and investment. Funds will flow into an enviorment like this. In this case, becasue the Yen is a funding currency for all types of investments, money will flow from Japan to the UK.

The reaction to the minutes was somewhat tempered today by the last UK CPI numbers; the minutes may actually be a bit outdated, but they certainly indicate the BoE would much prefer to not have to rasie rates further. I base this also on what the bank has said recently: they see inflation going down in no uncertain terms. If the CPI numbers had printed better, I believe we would have seen much more movement in these pairs and in the FTSE as well.
Really well thought out post.
  • #22
  • Mar 21, 2007 9:17am Mar 21, 2007 9:17am
The Point On Which Markets Will Turn:

There's been a lot of chatter today regarding what the Fed will say, specifiacally how their growth estimates could be revised (down). Now the question becomes this: If this turns out to be the case, how do markets react to it?

One the one hand, the markets may see a downward growth estimate as a negative and we could see equities take a tumble. On the other hand, a downward growth estimate may be a signal to the market that a rate cut is closer, which would be a stimulus to risk appetite and investment. Equities would do well in that case.

This is the turning point. Stay tuned.
  • #23
  • Mar 21, 2007 10:31am Mar 21, 2007 10:31am
What I saw earlier was GBPUSD dropped due to that dissenting vote.
GBPJPY also dropped. But market sentiment was strong GBPJPY carry trade and they saw the drop as a "cheap" entry price to get in and so they did...
  • #24
  • Mar 21, 2007 10:51am Mar 21, 2007 10:51am
Is it foolish of me to believe that the GBP/JPY is going 600 pips higher?
  • #25
  • Mar 21, 2007 10:55am Mar 21, 2007 10:55am
Quoting BurgerKing
What I saw earlier was GBPUSD dropped due to that dissenting vote.
GBPJPY also dropped. But market sentiment was strong GBPJPY carry trade and they saw the drop as a "cheap" entry price to get in and so they did...
Why did they see the price as "cheap" at that point? Probably because equities favor an accomodative enviorment.
  • #26
  • Edited 11:31am Mar 21, 2007 10:57am | Edited 11:31am
Here's an opinion from a BB article regarding how the market might turn on the Fed statement:

If the Fed maintains that stance, ``it would be detrimental to both the equity and credit-related securities because we are expecting some kind of an ease in the second half,'' said Andrew Harding, who oversees about $17 billion as chief investment officer for fixed income at Cleveland-based Allegiant Asset Management. ``If that gets taken off the table, it will not be good for markets.''

Interest-rate futures contracts show a 26 percent chance the Fed will lower borrowing costs a quarter-percentage point to 5 percent on June 28, up from 12 percent odds a month ago. Traders see a 65 percent chance the central bank will cut its interest rate by August.
  • #27
  • Mar 21, 2007 11:33am Mar 21, 2007 11:33am
Quoting dunningduke
Is it foolish of me to believe that the GBP/JPY is going 600 pips higher?
We can't know which way anything is going until the Fed statement is released. IF the Fed were to indicate that a cut is more likely-IMO we certainly could see GBP/JPY go the upper 233's quickly and perhaps to the pre-crash levels in the 237's if gobal equities were to rally.
  • #28
  • Mar 21, 2007 12:21pm Mar 21, 2007 12:21pm
If a cut is indicated, what will happen to GBPUSD? UP or Down?

What will happend to USDJPY? Up or down?
  • #29
  • Mar 21, 2007 12:25pm Mar 21, 2007 12:25pm
Quoting BurgerKing
If a cut is indicated, what will happen to GBPUSD? UP or Down?

What will happend to USDJPY? Up or down?
Quoting NewstraderFX
We can't know which way anything is going until the Fed statement is released. IF the Fed were to indicate that a cut is more likely-IMO we certainly could see GBP/JPY go the upper 233's quickly and perhaps to the pre-crash levels in the 237's if gobal equities were to rally.
NewsTrader,
you are making a lot of sense. if the Fed were to indicate that a cut is imminent in the near future, equity markets' levels should keep ameliorating, the USD should loose value accross the board, versus CHF, GBP, AUD, etc and the GBP/JPY should respond accordingly (Shooting up just like you say).

Generally speaking, do you foresee any major movements in other pairs and crosses, such as EUR/CAD, AUD/JPY, CAD/JPY, etc, as a result of such fed attitudes?
  • #30
  • Mar 21, 2007 4:05pm Mar 21, 2007 4:05pm
I really stick with the G/J-it tends to move a lot and I feel that's enough to keep track of, because in order to trade it you need to be aware of US, UK and JPY fundamentals. I have noticed that the A/J goes with the G/J, but doesn't move nearly as much.
  • #31
  • Mar 21, 2007 4:34pm Mar 21, 2007 4:34pm
I was a little disappointed in the upmove on the GJ in relation to the move in equities but a new day may bring the correlation into pair.




Quoting NewstraderFX
I really stick with the G/J-it tends to move a lot and I feel that's enough to keep track of, because in order to trade it you need to be aware of US, UK and JPY fundamentals. I have noticed that the A/J goes with the G/J, but doesn't move nearly as much.
T
  • #32
  • Mar 21, 2007 4:51pm Mar 21, 2007 4:51pm
Quoting BurgerKing
If a cut is indicated, what will happen to GBPUSD? UP or Down?

What will happend to USDJPY? Up or down?
If a US rate cut seems to be in order I would think both pairs would move against the $.

And just to throw in my own 2 cents on this (since I started it...lol) is that by changing the phrase "additional firming" to "future policy adjustments", they've indicated to the markets that policy will be adjusted for both slower growth as well as higher inflation. In other words, they are saying "don't worry, we're on top of things".

That is going to give comfort to the markets. They are going to see the Fed as being in their corner. You hear people talk about the Fed being "behind the curve" and with this statement, I really think that they are showing the markets that this Fed will NOT be "behind the curve".

Of course they are still worried about inflation just as they should be. It's just that now, they've alerted markets that they will adjust policy as needed to either firm up growth or control inflation.

You still have to keep in mind their overall mantra: growth will be about at trend levels and inflation will moderate so the chances are still there that the Fed will remain on hold.

We've also had some time to gauge market reaction and what we saw was the DOW rally the best it has in the past 8 months and I believe there is a good chance that the Asian and European equity markets will follow suit.

And there are some other things to be aware of:

The GBP/USD has returned to the pre Feb 27 correction levels as has the Chinese stock market (which started the whole thing in the first place). So if the Asian and European markets follow the DOW's lead-we could see GBP/JPY go to the 234's, getting past the 100 and 50 day ma's to the .786 retracement of the Feb 27 plunge. A sustained break of the .786 would be a very good sign that the pre Feb 27 levels-the 237's-could be in site.
  • #33
  • Mar 22, 2007 9:32am Mar 22, 2007 9:32am
Possible Scenarios From The New Fed Statement:

The Sub Prime Problem-Now that the door to a cut has at least been open, what can happen is a lessening of defaults. Lenders may be better able to obtain new lines of credit and extend introductory terms, avoiding default and foreclosure. Sub primes became an issue as housing prices stopped increasing and borrowers couldn't refinance at better rates. If the introductory terms are extended, this problem may be avoided because the job market is still strong and it's likely that many sub prime borrowers will be able to continue making payments at present levels.

Housing inventory-There could be a gradual decline in the inventory overhang, as mortgage rates go down in a strong job enviorment. While housing prices likely won't rise until a correction there is seen, there could be an increased demand as lower rates take hold.

M&A-An increase may be seen here as investment is stimulated by the prospect of lower borrowing costs. Since the Fed has stated that policy will be "adjusted" for lower growth, that could provide a safety net in the minds of investors as they become convinced that the Fed will make every effort to stave off an actual recession by lowering rates.
  • #34
  • Mar 22, 2007 10:14am Mar 22, 2007 10:14am
GBP/JPY Daily Chart:

The Fib study is of the plunge that occured on Feb 27 when stock markets corrected. The overall move was over 1650 pips!

Where were some good points of entry on the swing up this week?

The first came on Sunday as price broke thru the 200 day ma (Blue line). At that time the MACD was crossed and Stochs pointed up. Not a bad place to enter because you don't need to hold if price goes too far below the 200. You can always watch for another break and enter again.

The next entries are as price goes thru the Fibs, especially as it crosses the 50 because that's very often confirmation of a trend. This one looks good to me because you can see that once price closes above a fib level it barely ever gets below the previous candle's close.

After that was the the Fed statement and after the intial movement settled, I was able to get in at 230.8. From the technicals, it wasn't a great place to enter; it was a fundamentally based entry for me.

So far today, you can see that price has flirted with the 100 day ma (green line), where it failed to find further buyers.

So the price goals are based on where the fibs are. A sustained equity rally, which is within the realm of possibility now, could see price get to the 786 and perhaps all the way back to Feb 27 levels. What's really interesting to me about this fib, is how the 1236 fib level matches up almost perfectly with the high around 241.6.
Attached Image
  • #35
  • Mar 22, 2007 1:34pm Mar 22, 2007 1:34pm
I decided to close my GBP/JPY trade from 230.8 @ 232.10. If it's really going to potential-there'll be other oppurtunities to enter.
  • #36
  • Mar 23, 2007 2:10pm Mar 23, 2007 2:10pm
Weekly Summary:

Markets can close the week with a positive overall feeling. The housing indicators were good on both new and existing homes. The Fed basically assured the market that it still see's a moderate outlook on growth while implicitly placing the "safety net" of lower borrowing costs out in the open for all to see. Or let's just say that the "luggage" in which the safety net was being stored was dragged out and shown off, as if to say "don't worry, it's right here and we'll use it if we have to".

Now that does not mean at all that it WILL be used-as a matter of fact, don't be surprised if traders actually REDUCE their bets on a rate cut. The Fed will use it though, IF it becomes neccessary and that, coupled with other continued signs of growth and corporate profits, should go a long way to creating confidence and stimulating investment. What are the chances of the Fed moving either way going into the summer and the 3rd quarter? I don't see them doing anything at all besides some verbal massage.

There are some major differences in Fed policy before the 2001 recession compared to now. Back then, the Fed continued raising rates as growth slowed, because inflation was above their target. It was only when we got into the recession in March of 01 that they started cutting rates. Inflation didn't really start going down until about 1 1/2 years after that.

This Fed stopped raising rates after last June (even as inflation remained outside it's target) and announced it's intentions to hold rates steady starting in August-betting on the slowing growth rate it saw going forward and the effects of previous rate hikes to gradually bring inflation into the range it's looking for. That difference in policy may be the crucial difference that helps us avoid a recession this time.

As far as the sub prime problem goes-the worst might well be behind us. Aside from the improving housing numbers this week, you need to look at the overall numbers to get an appreciation of how isolated a problem it is at this moment. It's estimated that between 5 and 20% of the mortgages written in the past few years fall into this category. Let's call it 15%. Only about 10% of sub primes have gone bad. That means that out of every 100 mortgages written, 15 are sub prime and out of those-1.5 are gonna go bad. Let's call it 2. That means 2 out of every 100 mortgages written recently will go bad due to the sub prime effect and that's only if prices continue to go down. Also, don't forget that lenders who continue to be provided with credit can extend the teaser terms and not adjust interest rates up which will avoid default and foreclosure in some cases. That already happened this week. So there's a good chance the whole problem will be contained after all.

So if you look at what the Fed stated and the fact that bond and equity markets liked it, look at the improved housing numbers this week and the strong labor market, you have to think there's a good chance that the worst is behind us and the stage could be set for a pretty good economic enviorment going forward. Fed wise, we look to be in pretty good hands.
  • #37
  • Mar 23, 2007 3:39pm Mar 23, 2007 3:39pm
Quoting NewstraderFX
Weekly Summary:

Markets can close the week with a positive overall feeling. The housing indicators were good on both new and existing homes. The Fed basically assured the market that it still see's a moderate outlook on growth while implicitly placing the "safety net" of lower borrowing costs out in the open for all to see. Or let's just say that the "luggage" in which the safety net was being stored was dragged out and shown off, as if to say "don't worry, it's right here and we'll use it if we have to".

Now that does not mean at all that it WILL be used-as a matter of fact, don't be surprised if traders actually REDUCE their bets on a rate cut. The Fed will use it though, IF it becomes neccessary and that, coupled with other continued signs of growth and corporate profits, should go a long way to creating confidence and stimulating investment. What are the chances of the Fed moving either way going into the summer and the 3rd quarter? I don't see them doing anything at all besides some verbal massage.

There are some major differences in Fed policy before the 2001 recession compared to now. Back then, the Fed continued raising rates as growth slowed, because inflation was above their target. It was only when we got into the recession in March of 01 that they started cutting rates. Inflation didn't really start going down until about 1 1/2 years after that.

This Fed stopped raising rates after last June (even as inflation remained outside it's target) and announced it's intentions to hold rates steady starting in August-betting on the slowing growth rate it saw going forward and the effects of previous rate hikes to gradually bring inflation into the range it's looking for. That difference in policy may be the crucial difference that helps us avoid a recession this time.

As far as the sub prime problem goes-the worst might well be behind us. Aside from the improving housing numbers this week, you need to look at the overall numbers to get an appreciation of how isolated a problem it is at this moment. It's estimated that between 5 and 20% of the mortgages written in the past few years fall into this category. Let's call it 15%. Only about 10% of sub primes have gone bad. That means that out of every 100 mortgages written, 15 are sub prime and out of those-1.5 are gonna go bad. Let's call it 2. That means 2 out of every 100 mortgages written recently will go bad due to the sub prime effect and that's only if prices continue to go down. Also, don't forget that lenders who continue to be provided with credit can extend the teaser terms and not adjust interest rates up which will avoid default and foreclosure in some cases. That already happened this week. So there's a good chance the whole problem will be contained after all.

So if you look at what the Fed stated and the fact that bond and equity markets liked it, look at the improved housing numbers this week and the strong labor market, you have to think there's a good chance that the worst is behind us and the stage could be set for a pretty good economic enviorment going forward. Fed wise, we look to be in pretty good hands.
Great post Newstrader - and thanks for you insights this week. Hope you are back to stay
  • #38
  • Mar 23, 2007 3:50pm Mar 23, 2007 3:50pm
Great thread FXNewstrader!

Thanks for posting your insight.
  • #39
  • Mar 23, 2007 4:41pm Mar 23, 2007 4:41pm
Ditto

Quoting dunningduke
Great thread FXNewstrader!

Thanks for posting your insight.
T
  • #40
  • Last Post: Mar 24, 2007 8:45am Mar 24, 2007 8:45am
Thanks for all the props and thanks for reading my thread!!
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