FX News Trading For The Week Of April 9-And Beyond

I Would Like To Share Something Very Important With You:

A lot of traders are looking at the Yen crosses because they can move alot. Here's how they move:

The price of G/J = U/J X G/U

The price of E/J = U/J X E/U

ETC


So the way it works is very simple-the $ has to be gaining on the GBP while losing on the JPY or vice versa to catch the really big moves in the G/J. Same with the other crosses.

Everyone should sit down themselves and play with the permutations, but here's a couple:

Let's say you want to trade the G/J from a $+ NFP Here's what happens:

U/J and G/U will move inversely (as they do most of the time anyway) as the $ strengthens. However the G/J WILL LOSE PIPS on the move if let's say the $ gains 100 pips against the G, but only 40 on J.

If G/U and U/J lose and gain the same # of pips-you'll get less pips on the G/J then you would have trading either the G/U or U/J.

If the $ gains more vs. the J then vs. the G-you'll get more pips trading the G/J then then G/U or U/J.

You must use a lot of discretion to trade the G/J or any of the crosses in this situation because mathematically speaking, the crosses can gain OR lose pips on a $+ OR $- NFP (Or any other US news report for that matter). Also, the crosses will gain less pips if the $ move is equal against the J and its counterpart as compared to trading the counterpart (or U/J) itself. The G/J will gain more pips if the move is bigger vs the J then the G. An example of this is below.

Now look at the daily charts for FEB 27-you'll see the G/U and U/J moved together (down). That's rare and that's why G/J lost a much larger # of pips then either-simple arithmatic. When the markets crashed-they sold the $ vs Yen and bought the $ vs GBP. The same thing happened with all the crosses. Or you can look at it this way: The unwinding of carry trades involved the simultaneous selling of the $ vs. the JPY and buying of the $ vs. its counterpart (GBP,EUR etc). The "winding" of carry trades involves the exact opposite.

So if you want the big pips on the G/J or any of the crosses-you need to trade when the $ is simultaneously moving the opposite way vs the Yen then it is on its counterpart. For example the BoJ looks to be raising rates at the same time that the BoE looks to be holding or cutting-like a day when Tokyo CPI is up and UK CPI is down. Here's an example:

Tokyp CPI comes put strong and U/J goes from 118.50 to 117.75
UK CPI comes out weak and G/U goes from 1.9650 to 1.9600

G/J start of day price 118.50 x 1.9650 = 232.85
G/J end of day price 117.75 x 1.9600 = 230.79

Difference = -206 pips for the G/J

There are many other things to be aware of as well. Going back to the example when the $ is set to strengthen you must be aware of what i'm going to explain in order to have a better idea of how the cross you are trading (G/J for my examples) is going to move.

G/U is a smaller number then U/J, e.g. 1.960 is a smaller number then 118.50. In percentage, the same move in pips represents a larger percentage for the G/U then the U/J.

Now in the case when the $ is set to strengthen against both GBP and JPY-if the $ strengthens 100 pips vs the GBP but only 40 on the JPY-the G/J will LOSE PIPS.

Start of day G/U 1.9650
Start of day U/J 118.50
Start of day G/J 232.85 (U/J x G/U)

End of day G/U 1.9550
End of day U/J 118.90
End of day G/J 232.44 G/J has lost 41 pips on a day of $+ sentiment.

Let's see what happens the other way ($ gaining more pips on Jpy then GBP)

Start of day G/U 1.9650
Start of day U/J 118.50
Start of day G/J 232.85 (U/J x G/U)

End of day G/U 1.9630
End of day U/J 119.50
End of day G/J 234.57- G/J gains 172 pips on a day of $+ sentiment.

So again, you must use a lot of discretion to trade a JPY cross directly off a US news report because it can gain OR lose with the same $ sentiment and it will gain less pips on an equal move vs the $'s counterpart.

From a fundamental standpoint, when could a cross lose pips with the same $+ sentiment?

Let's say there's been some recent JPY+ news (like personal consumption, which is the number everyone is looking at). We know that due to the Japanese deflationary situation and from what the BoJ has said they definately want to be able to raise rates and will do so if the data allows it. On a day with a strong NFP, the $ would likely gain on the JPY but the gain could possibly be muted.

Now let's say at the same time, knowing that the BoE doesn't want to raise rates further (because they've said they expect inflation to go down this year) some recent GBP- news has come out (like a lower CPI or retail sales number). In this case, the $'s gain against the GBP might be amplified.

In this situation a cross might very well lose pips because the $'s gain against the GBP will be greater then its gain agaisnt the JPY.

Much more on this to come.

Well the way I trade the yen crosses are just like this.

First I get my bias of the yen. Is it strengthening or weakening?

If the yen is strengthening, I'll find the weakest currency. For example if the dollar is the weakest now compared to the euro and pound, i'll short the dollar and buythe yen.

If the yen is weakening, find the strongest currency for example the euro is strong now, i'll buy the euro and short the yen.

I have been doing just that and it's been earning me quite a bit =)

You are absolutely right Jody-buying when one looks stong vs one that looks weak is a great way to trade. If you're good at getting the bias right-you should do very well.

Since you've done well, any time you want to share your opinions on the bias' as you see them, please do so.

Thanks newstrader!

Well I think one thing that people is doing wrong is that they are constantly changing their bias with every news reports that comes out. Once you've got a bias, be strong and stick to it. Do not change your mind once things look different. Those are just market noises and there are plentiful of that!

If you've got the faith and conviction to stand with your bias, you're almost there!

Jody I couldn't agree with you more however-it still comes down to a question of timing.

For example-I have been of the opinion for a long time that the Fed would be on hold and the ECB would be tightening. I don't see that as any big revelation but here's the point:

If I had traded this back in Nov (Long E/U)-i'd be sitting with a very nice profit indeed. If this thinking had occured in Dec and had I went long then-right now I would be about even and would have had to have sat thru a 500 pip drawdown.

So trading is alot like being a stand-up comic. Not only do you need to have a pretty good idea of what your audience thinks is funny (the bias) you need to have the timing down as well.

Again, thanks for the post and keep them coming!

As far as trading the GBP/JPY (or any of the crosses goes) yes the bias on rates is obviously important, but if you want the big moves that we've seen you need to put it all together with where the $ is going vs the Yen and it's counterparts (G/U in the case of GBP/JPY trading)

Let's talk about the bias and please offer your own opinion if you see it differently.

BoE-Wants to hold if the data allows them to. Not likely to go past the mid 199's even with a raise because their assesment is that inflation will be decreasing after that occurs and another rate increase will not be needed. Plenty of room to go down if they look to be holding.

Fed-On hold, bias towards inflation.

ECB-Definately on a course to raise at least once more, due more to M3 then inflation numbers. Trichet's use of "strong vigilance" in the post announcement press conference should take it past the highs agaisnt the $. Euro will lose support without it.

BoJ-Wants to raise if the data allows them to. Watch the personal consumption numbers because they could raise rates with strong numbers there even if inflation remains flat. Check the language in Tuesday's press conference for indications that the pace of increases might be slowed or increased as the bias will be adjusted from there.

RBA-Will have to raise next time-nearly priced into the market already. Everyone was expecting a raise last week and the Aus $ hit 82 cents.

NZD-see RBA

From the past 3 weeks, AUD is the strongest currency and JPY is the weakest. AUD/JPY manage to reach another 10 years high on Good Friday. For the past 15 years(700+weeks), it only trade at this level for around 10+ weeks. By Jody theory we need to long AUD/JPY and stick to it even when things look different. It seems to be very risky to long AUD/JPY now. AUD/JPY may just trade at this level for a few weeks and never reach here again for another 10 years. All JPY cross break new high recently, rise over 50% from year 2000 low, reaching 1997/98 Asean financial crisis level. AUD/JPY have risen more than 70% from year 2000 low. Obviouly Japan is not in financial crisis now, and compare the interest rate level between year 2000 and now, there is no much difference too. I am curious why AUD/JPY can trade as low as 55+ in year 2000. This week Japanese saw their Australia imported goods price increased 10% compare to early March for no reason, the market seems a bit irrational now.

What else can be gleaned from knowing (EGAN)/J = U/J x (EGAN)/U where EGAN=Eur,GBP,Aud,Nzd

We know when carry trades are winding and unwinding and when I say carry trade-I mean at any time when investors are either borrowing and selling the Yen to fund other investments (winding) or buying and paying back the Yen to close positions (unwinding). How do we know this is true and why should we be interested in knowing when carry trades are being put on or taken off?

When the markets had that mini crash back on Feb 27 it caused traders to unwind their carry positions. The unwinding of carry trades involved the simultaneous $ selling/Yen buying with $ buying/EGAN selling. To paint a visual picture U/J, EGAN/U and EGAN/J all had bear candles and were in a bear trend.

So the opposite must also be true and visually speaking, all will have bull candles and/or you will see U/J, EGAN/U and EGAN/J trending in the same direction (up). Let's do some arithmatic using U/J, G/U and G/J:

If the $ weakens say 50 pips against the GBP and strengthens 50 pips against the Yen (the situation to look for to know that carry trades are being wound) G/J is gonna go to 235.59-160 pips from where it is now. How about 80 pips of winding? Looks like 236.9 for the G/J-257 pips away.

Ready to try a little carry trade action now?

By looking at JPY cross we know the relative strength of JPY vs other currency. If USD/JPY -2%, GBP/USD -1%, we will have GBP/JPY -3%. It is tat simple. From 2000, all EUR/GBP/AUD is stronger than USD, but JPY is weaker than USD. So we see wild upswing on all JPY cross. Any economist can explain why JPY is so weak now compare to year 2000? Carry trade seems very rampant in 1996-1997 but suddenly JPY quickly appreciate against all major from 1998-oct to 2000-sep, then the JPY weaken against all major from 2000 onwards.

Currency Trading and the Theory of Currency Relativity:

I'm gonna write something here that may lead you to think i've kind of lost it-but until you fully appreciate the implications of (X)/J = U/J X (X)/U, where (X) can equal the GBP, EUR, AUD, NZD, SEK, NOK etc I don't think you'll have an appreciation for how money flows around the world and what trading currency really means in today's society.

I also know that you will not have any kind of ability to trade the very profitable Yen crosses without getting sliced up in the non-trending (and what you will come to know as "wrong-trending") markets. You won't know when or why to trade it and you won't know when it will and won't make the big pips. Yeah, you might get lucky and catch one of the trends via one of the many MA cross-over "systems", but you won't have any idea why the trend was there.

I think that (X)/J = U/J X (X)/U is as important to understanding currency flow as E=MC squared is to understanding the relation of matter and energy. It's also just as easily explained. See, I told you you'd say I lost it..lol. Stick with me for a while longer.

We're going to call this equation the Theory of Currency Relativity. We should because it explains how every currency with a JPY cross-rate is related via the Yen and USD.

When the markets crashed on Feb 27 what happened in currency was the simultaneous selling of the $ vs. the Yen and buying of the $ vs. the Eur, GBP, AUD etc. Why? Why is it necessary to convert $'s into Yen and everything else into $'s simultaneously when stock markets are crashing? What does that tell us about the way money flows ands works?

Well, it tells us something many of us are aware of but don't really understand-carry trades and the depth of Yen borrowing to fund many types of investments all over the world. The Feb 27th correction was all about getting out of open positions, which entailed the rapid conversion of everything into $'s and $'s into Yen; This is the definition of a market crash expressed in terms of the flow of money.

Economies can only expand when money is cheap to borrow, available and convertable (Nations cannot trade if money cannot be converted and they cannot expand without trade). What the equation tells us is that the expansion of the world economy is a function of the cheap, available and convertable money specifically from Japan. It's also a function of the interbank system and the way currencies are tied together mathematically to allow for the ready conversion of one currency into another. There's no market for borrowing the Yen and there's no world economic expansion without the availability, liquidity and convertability.

OK, enough of this boring theory-you want to trade and make some money. Don't worry you will, once you learn how to apply these concepts. I'll tell you how to do it, but not right now.

First, try to put it together for yourself. All the info you need is right here in the thread. Once you think you have it, explain it here.

bravo!!!

TOKYO (XFN-ASIA) - The Bank of Japan kept its overnight call rate target unchanged at 0.5 pct for the second straight meeting, as widely expected by the market.

The BoJ said the vote by the nine-member policy board was unanimous.

At the conclusion of a two-day board meeting, the board also decided to leave the Lombard rate, at which it lends directly to commercial banks, at 0.75 pct.

And to curb any spikes in long-term interest rates, the central bank said it will continue its monthly purchases of 1.2 trln yen worth of long-term government bonds.

The BoJ's policy board will hold its next meeting on April 27.

The fact that the BoJ will activily work to hold down long term rates by buying debt in open market operations, signals that the carry trade is good to go despite the fact that the Bank is clearly on the the road towards the normalization of rates. However, that's a long, twisty, bumpy road and let's just say they're not exactly driving one of those "Tokyo Drift" cars...lol!

That however in no way suggest the the BoJ will not have another rate increase this year. The most likely time would be after the elections in July, with the 3rd quarter looking pretty good too.

From BB:

The central bank said the economy is ``expanding moderately,'' led by exports and business investment, leaving its monthly economic assessment unchanged today. Consumer prices will rise in the long term, the bank said, while acknowledging inflation will stay around zero ``in the short run.''

Spending among Japanese households rose in the first two months of 2007 after declining every month last year. Economic and Fiscal Policy Minister Hiroko Ota told reporters today that consumption is showing ``brighter signs,'' though wages need to increase more.

So it's not really the inflation numbers it's the consumer demand, business investment and exports.

Althought the last Tanken headline # was down-the report indicated that business planned to invest more to expand factories. Exports is a bit of a worry though as the US economy will definately be slower this year then last. No surprise there as the Fed has been saying this for months. 2007 US growth was also downgraded by the World Bank last week. Yet, ``The worst of the downturn is over for the U.S. economy and we can anticipate foreign demand for Japanese exports to gather steam later this year,'' said Hiromichi Shirakawa, a former BOJ official and now chief economist at Credit Suisse in Tokyo. The Bank of Japan may raise rates as early as May or June, he said.

So despite all the words-the actions by the Bank to hold down long term debt signals it will keep borrowing costs low. It looks like the Bank will feed the fire of the Japanese economy without letting it run away and get out of control. In the meantime, the carry traders are still good to go, the Yen will remain the world's funding currency and plenty of marshmallows will get toasted in the controlled heat.

hey newsie and co- interesting angle for the week. i guess what you were getting at before is that if both the dollar and yen are moving together you see big changes in the yen crosses? or was it the link to equity markets? or both? hopefully youll fill me in the rest of the way.
i like how fukui said he sees(i paraphrase) 'no immediate resumption in carry trades' - its probably what sent eur/jpy up to 160 earlier lol. or was it what held it there lol.

novie-ur gonna have to be a bit more specific...and what's with ur avatar? what is that?

extreme mathematical modeling you have here!

now this is something to stir the mind! (something to keep me busy inbetween programming)

Does anyone have any idea regarding relationship of USD Index vs Dow Jones & NAsdaq?

Dow has been up up and up trend, but USD is down down and down (vs GBP, EUR)...
I thought Dow positve would cause positive USD ?(as foreigners will buy usd to invest in the dows)

damn, i knew you were gonna ask for something more specific... hmm well there are many implications. maybe we could go so far as to say that if BoJ raises rates somebody else has to lower them to keep the global economy moving as it is now.

my avatar is just some eyesore i made without thinking about it, i hope it lights up all the ill lit, trading rooms and sleep deprived eyes around the world of FF. i think it somehow started off as a representation of the pill on the back of kanedas jacket from old school anime 'akira' before my mind wandered. but hey whats with your lack of avatar? im providing one for you here just in case you need, feel free alright-

A Weak $ May be Just What the Powers That Be Have in Mind:

Remember the G7 meeting in Feb and how the European finance ministers complained about the weak Yen and strong Euro? Things apparently are a lot different this time:

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

What's important from this is to remember how much Paulson and Trichet commented last time and to recognize the silence this time as being just as meaningful.

You'll see the article refers to the cheaper $ aiding US exports, but there's another important side to this: A weak $ makes things that aren't exported cheaper too. Things like real estate, stocks, etc. and that helps to prop up the economy too. Those expensive Manhattan apartments look cheap to a young London trader with a big bonus. A lot of other things probably look pretty cheap too, like Citibank or Morgan Stanley. Hey, when I have money and something appears cheap to me-I tend to buy...

Eurther Comment On The BoJ:

TOKYO (XFN-ASIA) - Bank of Japan governor Toshihiko Fukui says he sees no sign of the resumption of the yen-carry trade, despite the recent weakening of the yen.
'The foreign exchange market can fluctuate day by day for various reasons, but this market has been calm recently,' Fukui told a press conference after the conclusion of a two-day meeting of the Bank of Japan's policy board.
'And overall, we do not think the yen-carry trade will be resumed immediately,' he added.

This is a non-sequitor. It's doubtful the BoJ looks seriously the carry system or could care less about it. Everyone knows full well the Yen is the world's funding currency and looks to stay that way for quite some time. If anyting the comment means that future BoJ policy will be completly independent of what the carry system may or may not be doing, just as Trichet has intimated the same regarding ECB policy towards the Euro. Or "immediately" may simply refer to the first thing on Wednesday morning but no bets on what happens Thursday and thereafter. So when the carry system resumes on Thursday, the bank will have been correct in it's assesssment because it didn't resume "immediately", it resumed the day after "immediately".

Fukui said the central bank had no plans to make its policy-making more transparent and prevent lurches in the movements of financial markets by indicating in advance how interest rates will change in the future.
'In the foreseeable future, the possibility of us plotting a desirable path for interest rate adjustments and taking action according to a pre-set schedule is low,' Fukui said.

Now this is something a bit more interesting. The Bank is saying that they are on a path to raise rates (nothing new there), but that it's impossible to say when policy will be adjusted and it won't be signaling the adjustment either. In other words-they want to be able to surprise markets in order for them to have a higher degree of control over the Yens' movements then would otherwise be possible with more transparency.

All in all-it suggests the BoJ is very comfortable with a weak Yen and would like to see it as weak as possible while they remain on a course of rate normalization. Everyone else-except maybe some GM and Mercedes Benz executives-want to see the Yen weak too so it looks like weak it will stay for the time being.

yes this is true, but what is even more powerful is the reaction to inflation. inflation is bad for Dow, good for Dollar. just take the last FOMC meeting, the statement was dovish, dollar got pumbled, Dow rocketed.

Bernanke Speech and FOMC Minutes:

There could be some sort of absurd, knee-jerk reactions to either of these events, but both the speech and minutes are extremely unlikley to reflect anything different then what the Fed has been saying for months and what Bernanke spoke about 2 weeks ago before Congress.

I would agree that it's likely the minutes will reflect a bit more concern over housing and growth compared to the previous minutes, but this should not in any way change the substance of what the Fed's opinion is. The bias is towards inflation and they see growth picking up to trend in the 2nd half of the year.

If the market somehow reads "cut" into this-take it a very short term chance to buy the $, as it will come back to where it started. Whatever you do-don't try to further short the $ if it happens to spike to the downside.

The odds are nothing will happen anyway so don't even worry about it.

Inflation good for dollar? Doesn't inflation mean the supply of dollars is high? If demand lags supply, then it is bad for the dollar...it is getting weaker.

I would think that the only way it can be good is because it (eventually) causes the Fed to raise interest rates which in turn increases demand and causes the dollar to rise.

Am I missing something?