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

I think what Merlin is referring to with "good" and "bad" is that if inflation is high and the Fed looks to be raising rates-that's "good" for the $ in terms of trading it because it will get stronger.

Of course in overall terms, inflation does mean that purchasing power is eroding which of course is bad for the $ and the people who use it domestically. However, when the $ increases in value it causes foreign goods to become relatively cheaper.

So inflation is both good and bad for different reasons and in different contexts...got it??...lololol

How The IMF See's the US Economy:

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

This is an easy one-no long drawn out explanations.

They see it pretty much as the Fed see's it-growth slow now and picking up as we go forward. No hard landing and they think the Fed has it just about right in terms of monetary policy.

Do you know that the Fed has been predicting slowing growth since last summer? Do you know that they actually see it as a good thing because slower growth can slow inflation without the need for rate increases and that they don't really want a 5% GDP right now anyway?

Do you realize that if slower growth cannot move the core PCE into target range, the Fed will be forced to increase rates?

Take advantage of what the Fed is giving you. You have one of the best (if not THE best) economic teams in the world working for you for free, providing you with transparent predictions that so far have been totally on the money. The IMF has basically copied everything the FOMC has been talking about for months.

Have Another Look At The Minutes:


A comparison on the Fed's outlooks for growth and inflation between the January and March meetings is crucial to understanding how the Fed sees the economy evolving over time.

Growth Outlook In the January Meeting:

"Over the next several quarters, economic activity would likely advance at a pace at or modestly below the economy's trend rate of growth. Thereafter, growth was likely to return to around its trend rate, which several participants viewed as likely to be higher than the staff's estimate:.

Growth Outlook In The March Meeting:

"Thus economic growth likely would increase in coming quarters to a pace close to or modestly below the economy’s trend growth rate. However, additional evidence of sluggish business investment and recent developments in the subprime mortgage market suggested that the downside risks relative to the expectation of moderate growth had increased in the weeks since the January FOMC meeting".

Conclusion:

It's clear the Fed is more concerned about the downside risks to growth then before and that they are now projecting a slightly lower rate of economic growth. The language regarding..."evidence of somewhat firmer economic growth and tentative signs of stabilization in the housing market" that was present in the January meeting has been eliminated from the March meeting. Also eliminated was the statement referring to the the FOMC participants who saw future growth as possibly being above staff estimates.

This is what prompted the Fed to make the language change in the statement that investors took as a sign that the FOMC was closer to a rate cut then previously thought.

Inflation Outlook in the January Meeting:

"To be sure, incoming data had suggested some improvement in core inflation, and a further gradual decline was seen as the most likely outcome, fostered in part by the continued stability of inflation expectations. However, participants did not yet see a downtrend in core inflation as definitively established".

Inflation Outlook in the March Meeting:

Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected; that risk remained the Committee’s predominant concern.

Conclusion:

It's clear the FOMC sees more risks now then before to it's inflation expectations. As before, inflation remains there predominant concern.

What we are left with at this point is a Fed who's projections for the prospects of growth and inflation are still favorable but at the same time sees the risks to both of those assessments as having increased. We have to consider the possibility of a lower growth rate occurring simultaneously with a higher inflation rate. Does the FOMC see this happening? At this time, no. Their overall assessment is still positive. However, since they do see the risks to their assessments as increased, the possibility of a stagflationary period does exist.

I Really See a Weak Period For the $:

What does the $ face now? Let's take it right from the horses mouth, the Fed meeting minutes:

"Outside of...a weather-related surge in spending on energy services and by a jump in sales of light motor vehicles...real consumer spending moderated".

Translation: Because people can't (or won't) borrow against their houses anymore-they had to use their disposable income to keep their butts warm.

While information..."indicated that the economy appeared to be expanding at a modest pace in the first quarter...declines in residential construction activity continued to weigh on overall activity, and business investment had softened considerably over the preceding several months".

Translation: Except for the fact that business isn't investing at this time, things are just fine.

"Industrial production...was boosted by a rebound in motor vehicle assemblies and by a temporary surge in output at utilities that reflected a swing from unseasonably warm temperatures in January to colder weather in February".

Translation: Thank goodness the weather worsened and you people had to spend more to warm yourselves.

"Output of materials and defense and space equipment expanded"...while..."production of consumer goods and business equipment changed little, while output of construction supplies declined".

Translation: If we weren't at war, who knows where we'd be?

"In addition, recent declines in equity prices and slowing house price appreciation pointed to a modest reduction in households’ wealth-to-income ratio in the first quarter".

Translation: Both inflation and asset depreciation are eating away at disposable income. However, we still think growth will be OK because people will just start to rob banks to pay for their vacations. The upswing in gun and ammunition sales will be duly noted in our next assessment of consumer spending.

Wait, there's more:

"Housing starts declined in January...adjusted permit issuance in the single-family sector continued to step down...house price appreciation had slowed further, with some measures showing outright declines in home values...business fixed investment had been sluggish...spending on equipment and software fell in the fourth quarter...orders for and shipments of nondefense capital goods excluding aircraft posted widespread declines in January, with transportation equipment showing a very large drop".

And...

"...the ratio of inventories to sales for manufacturing and trade excluding motor vehicles remained elevated. In addition, purchasing managers at manufacturing firms, on net, continued to view their customers’ inventory levels as too high".

Translation: Don't bother making anything more, because no-one's buyin what you have and if you don't drastically lower your prices right now-you might as well throw the stuff out and save on the storage costs.

Despite the fact that we're doin so bad, perhaps you can take comfort in knowing that..."economic activity in the advanced foreign economies accelerated in the fourth quarter". I sure do. I'm long in the Euro, GBP, AUD ETC...

Don't worry though-something is going up...

"...the PCE price index excluding food and energy rose at a faster pace than in the previous two months...in recent months, prices have risen across a broad range of core goods...core CPI inflation in February was considerably above its pace a year earlier...

Thee's just so much more in the minutes indicating all kinds of problems, but the bottom line remains that there are increased risks to their growth assessments and increased risks to their inflation assesssments. Lower growth and higher inflation...it just isn't good...it isn't.

The US economy can be summed up very simply at this time. Growth is slowing and the risk of slower growth is increasing. Inflation is increasing and the risk of faster inflation is increasing. That's what our central bank is telling us; the risks are for slower growth and higher inflation.

When an economy is in a slow growth/fast inflation phase that's called stagflation. There may be an "official" length of time that an economy has to be performing like this to be officially labeled as "stagflated", but certainly we can say that right now that the US economy is in a "stagflationary-like period".

Actually, i'm surprised the Democratic candidates haven't jumped on this yet. Perhaps I can hire myself out as an economic advisor to Hillary or Obama.

And BTW, don't point to the employment reports as evidence that the economy is OK. The monthly figures are well below last years' average monthly figures, which is further evidence of another component of the economy that really isn't doing all that well, or at least as well as it was doing last year.

Stagflation can very often precede a recession, due to the CB's predeliction for raising rates in stagflationary times. This focus is well founded because while neither situation is pleasent, it is easier for a CB to solve a recession problem then for it to solve a running-away inflation problem, which is what stagflation can lead to. Besides, the "medicine" for recession (lower interest rates) tastes much better then the medicine for run away inflation (higher rates).

The last time the US economy was stagflationary was prior to the 2001 recession. Greenspan by neccessity raised rates even as growth was slowing and the recession was begun. It was short-lived however as he rapidly eased policy. Greenspan was well-versed in the dangers of runaway inflation and knew recession was the preferable thing, having been Gerald Ford's economic advisor when inflation was running away in the 1970's. It took years (and an 18% interest rate) to solve that problem.

What the present Fed is telling us is that it too will raise interest rates and risk recession rather then face the possibility of years of runaway inflation, should push come to shove. The reality is that the Fed is much closer to an increase then a cut. The increase likely would not be supportive of the $ in the long term in this scenario because many in the market would be thinking a recession could be that much closer. In the meantime, the US economy is vunerable and I wouldn't be long $'s. Not now I wouldn't...

The way to look at the Dow (or any market in which risk and investment are expanding) is more about the JPY crosses, in my opinion. As risk is funded, the flow of money will show up on your charts as G/J, E/J, A/J etc going long, $'s into GBP, EUR, AUD, etc and Yen into $'s.

What Happened To The $ After the Feb '02 Tariffs Were Imposed?

Very interesting to say the least. First of all, this was a few months after 9/11 and during the time the Bush administration was fighting in Afghanistan and building it's case against Iraq. Certainly, there was a lot of geo-political turmoil then and you might say there's more now. We're still fighting in Afghanistan and the Bush administration has just gotten finished building it's case for more troops in Iraq. We're also that much closer to a confrontation with Iran.

Second-the Fed was on hold from Jan 02 thru Oct @ 1.75%. It cut rates in Nov by 50 basis points to 1.25%. The Fed's been on hold since August (the last increase was in June) and looks to be on hold for the foreseeable future or at least into Q3.

Third-and this is the part you're waiting for-the $ had huge slides against the 4 majors (Eur, GBP,JPY and CHF). How huge?

From Feb 02 thru July, in pips, the $ fell over 1100 vs. the Eur, almost 1600 vs. the GBP, almost 1400 vs. the Yen and over 2200 vs. CHF.

This was my post from March 30th. How's things goin so far?

Not bad. I took 5 mini's on each pair near the close that day and the results have been interesting:

GBP/USD +183
EUR/USD +193
CHF/USD +10
USD/JPY -186 Carry trades still heavily funded.

Total +200. I'll keep this updated each week.

So, what you are showing is that, we just look for xxxJPY for possible trend in the respective StockMarket?

DOW up up up, went down last days of feb, up up up
USDJPY up up up, went down last days of feb, up up up

I still could not get the idea why JPY reacts this way.. surely NOT ALL of the stock buyers are from japan. nor the majority of the buyers used JPY.. so how can JPY react this way?

CHF and JPY reacts almost in the same direction.. positively correlated though not highly correlated.

The reason why things react this way is all about the funding (borrowing) of the Yen for investments all over the world as shown by the Theory of Currency Relativity:

The price of G/J = G/U x U/J. This works for all the JPY crosses as well e.g.
The price of E/J = E/U x U/J

Now look at the charts of the market crash on Feb 27th in which it was acknowledged that carry trades were rapidly unwound. I'm expanding the definition of carry trade beyond a currency swap; carry trade involves the borrowing of Yen to fund margined investments all over the world. What happend to price?

G/J collapsed (unwinding of carry trade) as the $ rapidly advanced against the GBP (and all the majors) except the Yen, against which it also rapidly collapsed. This is the definition of the Flow of Money in a market crash in which carry trades are unwinding.

From the equation you can see that G/J can go down in other ways. It's mathematically possible if say G/U drops and U/J stays the same, but this is not what happened.

What is apparent is that while all the market investors are not from Japan, many investors are borrowing the Yen and converting it into whichever currency they need to make the investments they want.

Investors always want to borrow as much as they can as cheaply as they can. If you're in the US and buying stock on margin from your broker, they're charging you a much higher rate of interest then a bank in Japan will charge you. This is a very simplefied example, but it explains the basic concept.

long usdchf and eurusd effectively long eurchf so eurchf tell much ;-) so yes i like how u trade study the rates and figure whats what :-)

revoke

i like to use this 1 http://finance.yahoo.com/currency this gives a quick overall picture on whats going on if checking it once daily or 1 per week etc depending on the analysis try it out fill it out on a paper

revoke

nice info..
newtrader can u updated ur thread
Great Job