FX News Trading For The Week Of 3/25

Lol....I'm working on an exit strategy come the Big One...a good dose of hedonism sounds choice...hehe.

I'm trying to get my head round this notion of risk divestment and the currencies that are most exposed were that to happen, either as a structural thing or timely correction.

What we've seen repeatedly is that risk divestment means converting investment currencies-GBP,AUD,NZD etc back into the Yen. Risk investment means borrowing Yen and selling-coverting-it into other currencies for investment-GBP,AUD,NZD etc.

Hope you will bear with me as I am thinking out aloud but in a nutshell, the risk is in the strategy obviously...gearing off low interest lending for the interest differential...aka carry trade.

The differential is so massive though (look at the Yen/NZ differential) that I'm wondering what NZ rate reductions (piggybacking on a US slowdown) would wound the yen/kiwi carry trade significantly. I can't see it in my perhaps incomplete view of the bigger picture. And I don't see any sustainable yen zone turn around were America to go into recession so clearly yen rates wont be upwardly mobile in that instance as well.

The Bank of England’s Monetary Policy Committee gave a favorable outlook on inflation and wage growth during testimony to the UK Treasury today. Fellow MPC members Gieve, Sentence and Lomax also were comfortable with medium term inflation pressures, despite the last CPI reading.

This was completely in line with their previous statements on inflation, going back at least to King's January speech, when he said that inflation should go down "possibly quite sharply" in the 2nd 1/2 of the year.

The $ picked up against the GBP after the comments. We'll see what tone the CC sets for the day...

The CC was a bit weak, but nothing dramatic. The report also showed more Americans said jobs were plentiful than at any time in more than five years. Increasing pay may shield consumers from the brunt of the housing slump, helping to maintain spending and preserve the economic expansion. Gasoline prices and mounting mortgage defaults pose potential threats to the economy should unemployment turn higher.

Basically what it's saying is that with jobs and incomes good, confidence hasn't eroded despite the housing slump and if jobs and incomes get worse...

So there really isn't a clear trend in the market as traders are likely waiting for Bernanke tomorrow. All you need to do to see the state of the market-undecided-is to read the varying opinions on what the Fed meant, what they're likely to do etc. Even the CC report was interpeted somewhat differently-BB didn't think it was so bad, but other places like the FT's thought it was.

We'll have to check Dr. B's language but again, any thing that sounds like a negative for the growth outlook is likely to get markets thinking about a cut-good for stocks and pairs like the GBP/JPY, AUD/JPY and NZD/JPY and bad for the $. For today while things are this choppy-it's best to stand aside...

And just a last thought on housing before I head out to enjoy a beautiful day here in NYC: Spring is the major selling season and while I won't predict how it will turn out, what I will say is that if it does turn out bad and barring a major drop in mortgage rates brought about by a Fed cut-it's very likely that housing won't rebound for the rest of the year. If it does go bad thru the spring season-then IMO we're much closer to that cut as the continued drag on the GDP could force the Fed's hand...

Now I gotta go hit some golf balls...the Masters is next week...lol

Notes On Bernanke's Testimony:

``The incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation,''.

With this statement, I can't see where a rate cut is indicated. What it says to me is that the Fed if anything is more likely then not to be on hold.

More from BB:

``The economy appears likely to continue to expand at a moderate pace over coming quarters,'' he said in prepared remarks to the Joint Economic Committee of Congress in Washington today. ``However, the uncertainties around the outlook have increased somewhat in recent weeks.''
Bernanke, who said the housing downturn could worsen, also stressed that inflation ``remains uncomfortably high.'' His comments contained no reference a possible interest-rate cut, which some economists predict as soon as next quarter.

We also had this from the chairman: ``I do want to emphasize that we have not shifted away from an inflation bias.''

``There is no justification to lower rates,'' said Diane Swonk, chief economist at Mesirow Financial Inc. ``The housing slowdown has not changed the basic outlook. They are still uncomfortable with inflation.''

In his February testimony, Bernanke said a ``waning of temporary factors,'' meaning energy and commodity prices, would help suppress inflation. An index of 18 industrial materials tracked by the JOC-ECRI Index is up 2.5 percent year-to-date, and 12 percent over the past year. Oil prices are climbing.

That means that the "waning" they had been hoping for may not materialize.

I found this article from Reuter's interesting:


NEW YORK, March 28 (Reuters) - Oil prices rose sharply, stocks fell and the yen rallied on Wednesday as escalating tensions with Iran sparked a fresh wave of risk-aversion. Investor unease grew after Federal Reserve Chairman Ben Bernanke told Congress U.S. economic uncertainties had increased but inflation remained a concern.

Unease across markets about Iran and the health of the U.S. economy prompted investors to ditch risky carry trades. The strategy, a favorite of hedge funds, involves borrowing cheap yen and using it to finance purchases of assets with higher yield -- and often higher risk.

I can't find anyone talking about rate cuts at this time. Could they happen? I suppose so, but housing and growth would have to really turn down for that to happen. It's also opposite how the Fed see's the economy going. Could the Fed be wrong? Anything's possible, but if you read the minutes from last June and understand how they saw the economy going-you'd have to say that so far, they've gotten it right.

The main thing to appreciate from the minutes is that an economic slowdown was not only predicted, it's what the Fed was depending on to slow inflation into their target range. Last week, Fed Gov Mishkin expressed doubts that was possible and suggested it might not happen without further tightening.

Here are the Fed's projections:

Fed officials forecast last month an expansion of 2.5 percent to 3 percent this year and 2.75 percent to 3 percent in 2008. Inflation, according to their outlook, will run at 2 percent to 2.25 percent this year, and 1.75 percent to 2 percent next year, minus food and energy. The unemployment rate will remain between 4.5 percent and 4.75 percent in both years.

Since a rate cut doesn't seem to be forthcoming and the appetite for risk is likely to be diminished-I shorted GBP/JPY several times at different prices...229, 229.25 and 229.5

When you get into a trade like this-based on how you see some strong fundamentals-you need to be able to sit with a loss and perhaps increase your position if price goes against you.

My first short was at 229 and obviously I was hopin to see price just go down from there-it flucuated for a while then went up, so I shorted again. It isn't often that I do this, but when you feel something's right-you gotta go with it.

There are a couple of ways to look at this-but the essential element is that a cut will not come unless the economy gets much worse. The unemployment rate has to go up while growth has to continue to go down. That could happen but it isn't likely.

For that to happen, the Fed has to completely wrong about things. Since housing plays a big part in this-let's take a look at how the numbers have come out. January's numbers for existing homes was good-when weather was good. Feb new homes sales were bad when the weather was very bad. With jobs still plentiful, wages up a bit and with mortgage rates and homes prices down a bit-there's a good chance that the spring season may turn out OK. Not gangbusters, but not bad either. And if housing holds up-the economy will too and a rate cut won't happen. What actually could happen in that case is inflation wouldn't slow into their target zone and we'd be hearing more talk about an increase.

If you have an opinion, please don't be shy about expressing it here. Thanks.

IMHO

Bernanake's shit scared of oil...it's the unknown quantity...so for what it's worth, I reckon at e least he'll be on hold for the next quarter at least until we cruise into US summer driving season.

I don't think he wants to compound the sub-prime fiasco but on the other hand, I suspect he wants to keep a hand on the appetite for personal consumption in case oil does another jump...these guy's havent a clue where the next barrels coming from.

Oil is a factor, but it's not as big a factor as it was back in the 70's. Of course, if it goes crazy...

I think they feel confident that there won't be any recession-they've stated that. One reason could be that if you look at rate movement before the 2001 recession-you'll see Greenspan kept raising rates as growth was slowing because inflation was above their target. That isn't happening now-they stopped raising rates as they saw the potential for slowing growth even when inflation was above their target. That action could be the difference...

A Very Interesting Finish For The Week:

First and foremost, Chairman B made it plan the Fed is more worried about inflation then growth and he reiterated what they've been saying all along, albeit with an indication they're watching growth riskd too...as if that wasn't already the case.

Q4 2006 GDP was revised a bit higher and today's reports on spending and construction indicate that the strong job market is supporting, depite the sub primes that have gone bad. (Bernanke sees no spill-over anyway).

The MoM PCE was higher then expected which caused some temporary $ buying, but there was a report from the Dallas Fed which placed the figure lower and acually going very close to the target zone and that was the reason behind the $ weakening that occured later. The stock market definately took some encouragement from the report as well.

Basically what we're left with is an economy performing pretty much along the lines the Fed outlined last summer and chances are it's gonna continue that way, so look for growth to grow towards trend in the 2nd half of the year, although Q1 and Q2 2007 may show a dip. I wouldn't let that scare you though and if the market turns down afterwards-buy on the dips.

All of this sets up the strongest likelyhood of the Fed on hold for a longer period of time. It should set up a fairly good enviorment for equities and risk taking.

Market is not happy with the trade war between US and CHina.. US penalize China and the market reacted negatively vs USD / Stocks

UK has sailors jailed in iran. US is said to have sent plains to Iran. And Bahrain is said to have told US citizens to leave bahrain...

Trade War, World War... buy oil, buy gold.

You might very well be right BK-

No doubt the $ got hit hard after the trade sanctions on China were imposed...we'll have to see how it shakes out, but the week certainly had a wild finish!

Hello

Can someone me out because i am also interested in buying or investing on penny stock. can you advise on how to go about it? broker or what it entail?

10x

LOL... yes. take $1000, buy a roll of toilet paper, write the name of a penny stock on every sheet, and then burn the rest of your money. its the same result except this way you'll end up with a roll of usable toilet paper.

penny stocks are by and large scams that suck investors money as long as they can and then disappear, diluting their stock all the way, and even the ones that aren't are too volatile and risky unless you are a very savvy and experienced investor.

if you are even asking that question then i urge you to stay far, far away. if you really want to, learn to trade big board stocks profitably first and then consider it (i don't know why you would). you will probably decide that the forex market is a better environment for day traders.

by the way people usually don't revive months-old posts to ask a completely off-topic question...

Yea i really appreciates your contribution but i am into forex and i am trying to compound my profits but with all efforts, i see that i am losing. Can any one helo me without any indicator.

thnkx

I dont know anything about buy penny stocks, but i can tell you that you are posting your question where not many people will see. Try posting it in the beginner Q&A section.