FX News Trading For The Week Of 3/25

The Various Debates Are Likely To Go On For Awhile:

Does the Fed statement cleary point to a trend? The bond market has re-assessed its thinking (giving back the initial gains) and is reducing its bet on a Fed rate cut, while the equity markets still seem to like what they've heard, finishing with 2 up days on Thursday and Friday (the increase in oil didn't hurt either). The bottom line here is that in its statement this week, the Fed signaled it's open to either lowering or raising borrowing costs, depending..."on the evolution of the outlook for both inflation and economic growth, as implied by incoming information". Although it apparently dropped its tilt toward higher borrowing costs (which is intially what drove bonds and equities higher), the Fed strengthened its language on inflation, calling it the ``predominant concern.'' Is there a clear trend here? No. Overall, it looks like future policy is for the Fed to remain on hold, with a better chance of raising then lowering at its next move (which likely won't come until the 3rd quarter anyway).

After the statement, the $ weakened against Sterling and the Euro then improved against both Thursday and Friday, finishing the week 11 pips weaker against Sterling and 25 pips stronger against the Euro then where it began the day on Wednesday. There's a better chance of seeing the $ improve against both this week although no real trend will be set; most likely some range trading will be seen at least until King, Trichet and Bernanke speak.

The bond markets look to be one step ahead of equities on this and it's likely that equities will correct its exuberance. Bond market participants tend to be conservative (averse to risk) while equity markets players tend to be more aggressive (more tolerant of risk). Bernanke is likely to repeat his overall mantra of moderate growth and moderating inflation (with risks to the upside) at his Wednesday Congressional testimony, while mentioning that housing indicators continue to be mixed. It does look as though they can't see housing as being too bad if they still see growth trending moderately up. King is speaking before the UK Treasury Tuesday and Trichet speaks Wednesday. King is likely to repeat the BoE's overall inflation assessment (going down), while Trichet may continue to stress the importance of money supply and the threat it poses to inflation.

As for the overall US economy-it's likely to plod on as it has been for awhile longer. Housing will likely neither boom nor bust. The sub prime problem will still be there but likely not spread, although it'll probably get a bit worse before it gets better. The strong labor market will probably prevent an all-out recession, but the GDP doesn't look likely to show any big gains. If the Fed is looking for the present growth rate to slow inflation into their preferred zone (1% to 2%)-it's probably a long shot at best although the chances are that inflation will slowly edge down towards 2% as long as oil doesn't go crazy.

Any Predictions on the GBPYEN?

Why haven't you been appointed to the FFAN?

Your posts should be fixed to the right side of the FF website!!

Thanks for the props. As far as the GBP/JPY goes-I don't have a trade there now-although my inclination is for equities to correct their enthusiasm for last week's Fed statement and for it to go down. Still, I just plan to watch how it moves when markets open later....

USD strengthened after Housing data showed improvements.

We will be having another Housing Data on monday and if that is good, then it should further support USD and perhaps confirm that housing has bottomed out already.

The only dark cloud hanging over the US and it's economy is our Government!

No doubt a good number there will give a boost to the $, but I still want to see if Asian and European equities un-do some of the gains or not. As I said, I tend to think that because bonds have somewhat re-assessed the Fed's intentions, we could see the $ pick up a little strength in the beginning of the week, although with King, Trichet and Bernanke all scheduled to speak this week markets may wait.

This is what I'm referring to when I say that no clear consensus-and trend-exists after the latest statement:

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

It's a tough enviorment to trade, at least for me. At this time I need to stand back and wait for the smoke to clear. Let's see what the head banker's have to say later in the week...

What makes it difficult is that a good argument can be made either way for how markets could go. On the one hand, as bonds re-assess the statement and pull back on rate cut expectations we could see the appetite for risk diminish-on the other hand, equities may find comfort because the statement does seem to indicate that the Fed will intervene to support growth should it turn down. Turbulent waters for only the strongest of swimmers...

Im a newbie in the financial market. Can anyone enlighten me in the world of "Bonds", "Yield Curve", "inverted yield curve"... These terms rattle my brain and I could not understand people using these "big words".

Maybe after knowing what these mean, I can better understand all those talk of USD weakenss because of the "inverted yield curve" or whatever they are talking of..

I highly agree with you NewstraderFX, these waters are really for the strongest swimmers. It's hard to determine the direction of the US economy with housing data coming out giving different signals. I mantain that the underlying trend for the dollar is downwards still, despite the barrage of conflicting data. However, If you look at the markets now, it's clear that the prevailing bias of market participants is upwards. The way I do my analysis is simple, there are always 2 thoughts. The underlying trend and the prevailing bias. The underlying trend in my opinion is the fundamentals that point to a certain economic future. The prevailing bias is even easier to understand, it's the party that won the bull-bear fight.

The underlying trend and prevailing bias are always in conflict, that's why we get rallies. In this case now of the US economy, the underlying trend like i mentioned above is downwards, with the huge trade deficit, growing power of china, as well as the really gradual recovery of the Japanese economy, unless the dollar devalues its currency, we will find it hard to mantain the trade balance. Consumer credit is way high with the average american in debt up till their neck. I could go on and on about this.

People who read this will say, then why has the economy of America been growing and the dollar been mantaining its exchange rate? Like I said, the prevailing bias and the underlying trend will seldom be the same. However, when the underlying trend reaches a point till the prevailing bias is unable to sustain it, the tide will turn. It's a simple boom and bust sequence.


I'm sorry if the above is too messy, I'm just spitting out my thoughts and it's not really arranged neatly. Will edit and put in more thoughts after I'm home from work. Sorry if this is nonsense, it's my first attempt =\

There is no such thing as bias and trend. There is only news and market reactions.

FX Market is a SPOT MARKET. That's why there is no trend or bias. Sorry to say.

Of course certain players are biased and thus form a certain trend since they tend to react on events in a particular way.



just my 2 Cents

/Juao

Some points on bonds:

The first thing to know about bonds is why price and yeild have an inverse relationship. If I buy a bond today when the rate is 4.0%, I have to sell it at a discount if rates go to 4.2 tomorrow. Likewise-if I already own a bond with a 4.2% rate, I can sell it at a premium if rates go down to 4.0%.

When bond market movement is quoted in the financial press, they're talking about the price. If they say bonds rose, that means the price rose and yeilds fell.

The yeild curve and spread refers to comparisons between shorter and longer dated bonds. In times of expansion, shorter dated bonds have a lower rate of interest then longer. Traders look at many different spreads-some of the standard are the 3mo-10yr and 2yr-10yr. The yeild curve is said to be inverted when shorter bonds have a higher rate then longer bonds. This happens in times of economic contraction and they also have preceded many recessions. We've had inverted yeild curves since last summer.

So this "Inverted yield curve" is summarize, if i remember it as posted in this forum some months ago, "my 4.25% beats your 4.0% anytime".

From an outsider's observation, I see that high USD value is detrimental to the growth of US exports. BUT its not putting any brakes on the "service" sectors. Domestic economy is strong from what I see it.

Are Bearish US Economists bitching for a rate cut?

So New Home Sales was USD Negative. This means that less and less are building new homes. And the Existing Home Sales could meant that, well, foreclosed houses are being sold at dirt cheap prices (sarcasm)...

Kidding aside, if Durable Goods and next week's ISM, NFP does not paint a good picture, USD will be battered bad! Hello 1.98 GBPUSD?

As I wrote in the first post this week-housing seems to be bouncing around. Existing sales good-new sales bad-prices are down 18% compared to last year-sub prime probably getting worse before it gets better...and on it goes.

The DOW wrestled around with it, as shares of home builders went down while oil stocks went up. The GBP/JPY lost about 80 pips from the announce ment to around noon...

Also-as previously mentioned-I think the best chances to trade this week will be after the head bankers speak, so let's listen and we'll try to figure out what it all means...

How do you define a trend? Let's say it's a true fact that the US is going to raise interest rates to 10% (hypothethical), what would you as a market participant do? What would all the other investors in the world do? Buy the dollar! Simple as that. And when that happens? What's the trend? Of course it's going to be upwards for the dollar. I'm using a simple model to explain why there are trends in forex. Sure, the markets react on news and market reactions, but those build the trend too. I'm sorry to say that, news and market reactions are just a small part of forex. Do you think that huge traders just trade on news releases or they scalp the markets? No. They place trades according to what they perceive will be future market directions. I do not mean to put down traders who do scalp or trade on news releases, they work. But the fact that they work don't make them the only way to trade or define how the markets work.

I deem it inappropriate to narrow down the forex spot market to just news reports and market reactions. Do not forget, the actual purpose of the forex markets is to satisfy the needs of import/export merchants on hedging off their needs.

To prove my point that there is an underlying trend, let me just name one. Of course, it might not be correct, but it is MY perception of the market's underlying trend, not everybody's perception. This is what causes conflicting biases. In my opinion, the underlying trend for the yen is for the yen to depreciate. Why is that so? The yen is the currency with the world's lowest interest rates, look at the differential, against the US it's 4.75%. Unless the BOJ or government do something drastic, this situation will remain. And will the BOJ or government do something? That's another point of discussion. A strong yen would lower exports and encourage imports, reducing the trade surplus. Japan evens off this trade surplus by buying US denominated bonds or debt instruments, in other words, capital outflow. If the yen appreciates, what would happen? There would be a reduction in capital outflow. In another perspective, that would mean that there would be a reduction in the capital inflow of the US, which is supporting the US trade deficit. That would cause the trade deficit to actually cause major problems for the US, something the FED nor the government would want. So my view is that the yen will depreciate.

Of course, you could have another view that's perfectly well thought and correct in your opinion, that's fine. Opinions are what makes the market. So these opinions cause different bias in the markets and the prevailing bias is the bias with the most people supporting it. If 70% thinks the yen will appreciate and 30% thinks otherwise? What's the prevailing bias? Do the maths! I do not mean for this post to be provocative, but stating that the forex market has no trend or bias really just irks me, how can a market have no trend? Even if you bid with 10 other people in the market for a super fresh fish, there's also a trend. Upwards!

I'm sorry if I have any wrongs in my analysis, just sprouting nonsense again. I'm still inexperienced and please point out any wrongs that you spot. These comments would certainly aid in my quest for knowledge. And NewstraderFX, sorry for bringing this into your thread, I'm a great fan of yours and keep up the posts! They're the best. I do my analysis over the weekends and I'll be posting mine soon after I get cleaned up. Hope you don't mind. I just reached home from work, dead tired!

It's not a question of bearish US economists-I don't think any economists are calling for a cut, it's the bond traders and Wall street guys that would love to see one.

A rate cut at this time would be bad for several reasons-it would undermine the Fed's credibility as an inflation watchdog and it likely would accerarate the inflation rate-given that inflation is already above where the Fed wants to see it and with the unemployment rate so low.

We still need to remember that the economy is showing pretty much what the Fed predicted way back when...and that prediction was based on the expected lagging effects of the previous rate increases...

You have to think of the economy as one of those huge tankers...the momentum is enormous-it's still gonna go forward for miles even after you reverse the engines...

We have a pretty good indication that risk appetite may start to diminish after the data this A.M. and that means a potential sell-off in the GBP/JPY. It wasn't just sales-which are down 18% from last year-it was the home prices, which are down .3% from last year and the inventory, which expanded to more then an 8 month supply. Further deterioration in price and increase in inventory will definately worsen the sub prime problem. And although existing sales, which make up the bulk of the market were good, many of those sales reflect contracts that were signed in December and January so it can lag. Also, it doesn't include cancelations in the figure. If US consumer confidence prints tomorrow as a low number, it could create some further equity and GBP/JPY weakness with it.

I have a query here.

Limiting the risk/safety dichotomy to forex alone, in times of the slowdown of the US as world's consumer locomotive, which currency crosses/majors do you reckon count as safe harbours. Presumably the carry crosses would be amongst the risky mixes.

I would rate the reserves as well as swissie as safe havens. Not sure about the order of preference though.

Thanks for the props-I don't trade currencies based on "safe harbours" so I wouldn't know how to answer that except to say that gold has traditionally been one of the safe harbour type investments.

It depends also on the investment objectives. For example, if this was your 401K time has proven that if you just make the same steady investment you'll come out ahead in the long run.

If it becomes clear that the world is about to go into a major depression, i'd probably take whatever extra money I had and spend it on wine, women and song...lol!

Just an update on this-because there's another side of this coin to think about:

Equities bounced back during the day (DOW down but off the lows and the Nasdaq and S&P 500 finishing up) and there could be a good explaination. Since the door to a rate cut has at least been open, traders may look at any weak numbers as increasing the likelyhood of the cut they're looking for.

Like wise, if Bernanke somehow intimates that growth or housing may be turning out weaker then expected, traders will be thinking of a rate cut and that could very well spur equities and risk appetite. If he should happen to just reaffirm what they've been saying all along-traders could see the chance of a rate cut diminished and the appetite for risk may be contained.

I would have to make an assessment of the trading enviorment as having both possibilities...so if you want to trade it's essential to not only have a clear understanding of what's been said-you're gonna need to gauge market reaction as well and ride along with that.

What we can safely say-is that the more markets see the possibility of a rate cut-the greater is the appetite for risk and the more investments will be made. We saw that last week off the initial reaction to the Fed statement.