How to use Fundamentals to make Money

Hi

Micardo

Can you explain

negative data = risk aversion = dollar strength
positive data = risk appetite = dollar weakness

Risk appetite and Risk Aversion

It would also be great if you can advise of
scenarios of where currency's will be more bullish and where currency will be bearish perhaps using the currency you trade.

Things like politics, interest rates, gdp - basically what main factors drive the fundamentals.


Perhaps stacking the news against a currency

ie

USD

Interst cuts
unemployment high
trade balance

equals - bearish for USD expected downfall

Euro

Unemployment low
houses buying increasing - shows economy boost
Interest put up by 0.5%

equals - bullish for Euro expected uprise

With EU you expect a rally upwards as the economics of the EURO are more bullish than the USD

USD/CHF as the USD is bearish and CHF is within the eurozone you would expect a Bearish move

The above just example - would you say this is a good way of interpreting

GAME

Keep up the good work, and thanks for your wealth of infomration

Thanks guys for the support. I will certainly be happy to stay around in this thread and provide my insight.

Fugly - I am actually an junior economics major in college so I learned most of what I know about macro-econ factors from classes. However, i would definitely recommend you reading some macro-economics textbooks as they will provide you with a solid macro-economic background that you can use to apply to pretty much everything else you read both online and offline. As to which one, I'm not sure. It's been a while since my intro to macro class so I don't remember which one i used, but i do remember the name "Besanko".

Malstrom - I'm not sure where or when you read that the ECB is considering taking a break in its rate cuts. If it's anytime in the last 48 hours, I must have missed it. But from what I know, the ECB is currently considered to be "behind the curve" compared to the rest of the world in its rate cuts. Look at how Spain and Greece and potentially Portugal were getting their credit ratings cut by S&P. You know stuff is getting F-ed up if countries have lower credit ratings than many large corporations. The only way I can really see the ECB handling the current economic situation is to lower rates - or risk the collapse of the whole european union.

The reason why the ECB is "behind the curve" is because the ECB is a lot less efficient than the US Fed. When you have a central bank that has to consider the well-being of a whole host of nations, decisions are going to be made at a much slower pace than if it only has to consider the well-being of one nation.

And one last point that I have to make about the future health of the EU. An overwhelmingly large percentage of emerging market loans (asian countries, etc.) are held by european banks. These emerging markets took out these loans expecting their incredible rates of growth to continue on for longer than they expected. Thus, when their economies get pulled down with the collapse of the US economy, we might see a global defaults much like the subprime defaults of the United States (though potentially on a more damaging scale to european banking system that is already stressed by the current crisis). But of course, this is just a theory and i think that we should all hope that this does not happen.

I can help to explain this.

When the economy is bad, people no longer want to risk in high yielding investments. For example, in good times people want to borrow low yielding dollars (at <0.25%) for really cheap in order buy high yielding currencies like say...the australian dollar (4.25%) in order to make that 4% spread. This is why in good times, currency pairs typically trend towards the higher yielding currency. A perfect historical example of this was the Carry trade (JPY pairs) that was so hot in the last decade before it collapsed. Thus, high risk appetite.

However, when the economy is bad like nowadays, people no longer want to deal with that risk involved with something like that and they start selling their investments and returning to the home currency. Furthermore, investors tend to flee to what they imagine to be relatively more stable currencies, which right now are the dollar and the yen. Thus, increased risk aversion pushes these currencies in directions that might not make perfect fundamental sense. This is the exact same reason why gold tends to shoot up in value in recessions. And this is also why EURUSD tend to experience brief periods of corrections on the long side when the dow rallies and continues to fall when the dow continues its decline.

I don't follow gold closely at all, but i can tell you that gold is one of the safest stores of values out there and investors will flee to it when they are uncertain. So i believe that as long as the global economy is in the gutter and is expected to get worse, gold will maintain its trend up.

Mmmhh... i see... so if things like index going bad, that means good thing for gold? Is that correct?

If we take a step back first and think about what a piece of news entails. If you think of a particular piece of news as an option, all options have a price which is determined by a number of factors. With regular options, you have parameters like expiration, risk-free rate, strike price etc.
So like with options, each piece of news has diff parameters that determines the 'impact' on the market. Unlike with options though, there is no black scholes to tell you what the price/effect of it is, but you can almost def determine whether it will have a positive or negative effect on the value of a currency.

Ignoring economic data, there many potentially market moving news that come out every day. I'll try to run through a few examples showing diff effects of each

20090119 11:13:18 - S&P CUTS KINGDOM OF SPAIN LONG-TERM RTGS TO 'AA+'; OTLK STABLE

Quite obviously this is -ve for the euro area and as such one would expect eur$ to sell off as you can see in the attachement.

Now options have theta or time decay, meaning its price and subsequent pay-off is also determined by how much time is left till it expires. As time passes, and it becomes more obvious what the outcome will be, then obv the price will change depending on whether it's in the money or out of the money. So with news, its effect on the ccy value will have a time value as well. Now this is something that is obv easier to see in hind sight but once you experience it in real time and get a feel for it, it will become easier to determine a very rough approx time factor i.e. whether the effect will be in seconds, minutes, hours etc.

So in the above example, you can see that this news has had a temporary effect on eur$ lasting a few minutes. Had it been france or germany that had been downgraded then you could be sure that the effect on the ccy would have been far stronger and lasted longer

Another example of a relatively short term move:
20080422 14:45:01 - ALERT: SOURCES: ECB THINKING SHIFTING IN DIRECTION OF TIGHTENING

The effect can be seen in attachment.

As you can prob start to gather, I tend to trade news that has a relatively short term effect as it is usually easier to guage and more likely to yield a better profit-loss ratio.

However, there are longer term trades that can be easier to hold onto e.g. the ecb conference held after the rates announcement. In the last meeting, trichet said that the march meeting was the next important meeting, meaning that they would most likely stay on hold in feb. This had a long term +ve effect that kept euro bid for a few days.

Another major factor that comes into how strong and how fast the market reacts is actually which new wire it comes out on. You may think of this as trivial but when it comes to fx, most of the fx desks at the banks only look at reuters so because of this, the reaction is most strong when news hits reuters. This can be used to your advantage as this means you often get a good heads up as if the news comes out on say bloomberg, you can put a small trade on if you're unsure, and if the mkt doesnt move much, you can have your finger on the trigger for when it hits reuters. A great example of this would be yesterday's comments from swiss finance mininster regardless intervention on the franc. Headline came out on market news first (great for ecb sources stories but mainly used by futures traders) and didnt really move. About 10 mins later it came out on rtrs and .... wel you can see the reaction for yourself in the attachment

13:58:28 MNI - SWISS FINMIN: GOVT WOULD SUPPORT SNB IN SELLING SWISS FRANCS
14:06:56 RTRS - SWITZERLAND'S MERZ-GOVERNMENT WOULD SUPPORT SNB IF WANTED TO SELL SWISS FRANCS - MNSI

Now, the main thing with news .... is that, of course, it has to be new. If Blanchflower says that rates could go to 0, it's not going to move the mkt for two reasons .... he's the uber dove on mpc, and king has already spoken of this previously.

Now I'm not saying that I don't respect technical traders, at the beginning of every day, I make sure I am aware of all the major levels in the pairs that I trade because regardless of news, in these thing markets is stops go off or big levels are breached, you're going to want to ignore fundamentals for a while. And the same can be said for the other way, if there is massive support on eur$ at say 1.2850, and it's currently trading 2860 and trichet says rates could go to 1 and ecb will look at quant easing, I dont give a shit if 2850 is the biggest support level ever, it's going through that like a hot knife through butter

Great post sccz. Though I don't personally like to trade short term based on news, I completely agree with your insight on the relationship between technicals and fundamentals. It's one of the best explanations I've heard on this forum on why a good trader should always consider both sides.

On an other note, I just read that European nations are beginning to carry out protectionist policies to improve their trade balance. This would mean that government policies will favor domestic producers, essentially reducing imports. In the long run, this SHOULD strengthen the Euro, but of course, risk aversion is still a major player in the markets. On the other side, talk has been stirring in the US govt. about similar protectionist measures. Now if something like that goes through, we might see further strength in the dollar.

In the end, I guess it all depends on how many governments actually start implementing protectionist policies. As for currency effects, we might see rather small effects on currency pairs with both countries taking protectionist measures while currencies of countries with no need for protectionist measures (net exports) tanking.

gerald celente,peter schiff,mark faber,jim rogers,etc.,were right about the meltdown and are right about the coming crash.

stock up on gold and silver bullion coins,guns and ammo,storage food,etc.

what happened in argentina was nothing compared to what happens in america.

thnk la riots and new orleans meets dawn of the dead.

i'm ready.

got gold?

Hey Guys,

Sorry I have been on holiday for the last 2 weeks hence no updates but I will continue today :-)

The dollar rallied against the single currency as the markets received more negative data and triggered further buying of the Usd due to its safe haven status. As we’ve mentioned before, the current trading theme sees the greenback strengthen when traders become risk averse, and the higher yielding currencies when risk appetite returns. Yesterday the Euro fell from a high of 1.2945 down to 1.2720 on the back of weak economic data. However, the dollar rally was halted as U.S equities staged a dramatic come back from the day’s lows reducing the safe haven appeal.

Firstly the Eurozone Industrial Production output slumped in December by the largest amount since records began. The output contracted by -2.6% in December instead of the forecast -2.3%. The contraction in industrial output was not a surprise. However, the rate in which the deterioration has taken place is worrying. The industrial output for the Eurozone declined and a much faster pace than even the U.S economy during the 4th quarter of 2008. This had the risk takers running for the hills and initiated the slide in the Euro against the dollar.

Data from the U.S was no better as further deterioration in the U.S economy was seen as the Weekly Unemployment Claims which measures the number of individuals who filed for unemployment insurance in the past week release a figure of 623k instead of the forecast 610k. The rot is still strong in the U.S and contributed to the disappearing of risk appetite amongst traders. The one bright spark and surprise to the upside was that retail sales in the U.S showed sales were up 1% instead of the -0.8% forecasted halting a 6 month decline. After a brief rally in the currencies, the markets soon realised that the figure was more than likely due to post holiday sales encouraging consumers to spend that little bit extra. Many experts believe this level of buying to be somewhat artificial and unsustainable. With a collapsing job market in the U.S spending it likely to deteriorate further.

The ECB announced yesterday that growth risk remain clearly to the downside. An ECB minister, Papademos, mentioned that "further easing of the Eurozone monetary policy may be appropriate as risks to growth and inflation are to the downside." Then another ECB minister, Liikanen, said that "at the next meeting it is possible we could move." These factors all points towards a more aggressive approach towards monetary policy by the ECB at their next meeting. It must be noted that lower interest rates won't necessarily devalue the euro, as we can see with the dollar! During the financial crisis currencies have been rewarded when Central Banks have cut interest rates as investors see this as a sign of proactive measures being taken to stimulate the economy. Therefore the meeting on the 5th of March will make interesting viewing as a currency trader.