FX News Trading For The Week Of April 16-And Beyond

First of all I want to say thanks to all who read my thread and give an especially big thank you to the many people who welcomed me back to FF a few weeks ago and who have been so generous with their compliments ever since.

What I try to do here is to break down the "what" of some of the major news events in order to get a deeper understanding of the "why". The idea then is to take the "what/why" and apply it to some trading because I firmly believe that a deeper understanding of the "what/why" will allow all of us (me included) to spot some of the major trends and make some major pips.

Let me give you 2 examples of what I mean and please, I am not doing this to "toot my own horn" or to make myself seem better or more knowledgable than any of the many fine analysists here on FF.

I always welcome any questions or differences of opinion. Don't be shy about having either and writing a reply. Active discussion can only help everyone.

Let me give you 2 examples of what I referred to as the "what/why". These are abbreviated because they have been extensively discussed in previous posts.

What: Fed retains its' inflation bias. Confirmed by Bernanke's testimony from 2 weeks ago.

Why: It's not just the core PCE number; lowering interest rates while the economy is in a stagflationary phase can lead to a very dangerous runaway inflationary period that would likely have a much longer lasting and profound affect on the economy then any recession that could result from an increase of rates during a stagflationary phase.

Apply the What/Why: The US economy is in a weak phase while other world economies are waxing. That is why the $ has weakened against every major currency despite the fact that it's apparent to the market that the Fed will not be cutting rates any time soon (confirmed by Fed Funds Futures trading). Expect a $1.37-38 EUR and $2.0-2.1 GBP in the next couple of months.

I know-the $'s stronger against the Yen-that is a function of the carry trade which is explained in the next example:

What: BoJ is on a course to slowly normalize their rate

Why: To better manage an expanding economy in order to prevent the same "bubble" that placed them in the 15 year recession/deflation situation they've been in (and are not yet completely out of).

Apply the What/Why: The carry trade is in order because the bank can only raise rates very slowly-if at all. Long up-trends in the JPY crosses lasting days and weeks (and maybe months) were (are) to be expected (a lot of it has already occured and more is likely to) as the GBP/JPY approaches 240 and USD/JPY approaches 120.

Please note that these trends are not 20 pip swing trades done off 5 minute charts. They are long term trends that can provide 100's of pips over the course of days and weeks. I've come to the conclusion that the reason why 90% of retail traders fail is that they are trading the very short term bleeps and blips that occur within the major trends. I'm also convinced that the best way to trade is to identify the major trends at the beginning and later to buy on the dips within these major trends. IMO, when the GBP/JPY is in a 1500 pip upturn, trying to scalp 40 pips off a temporary downturn is a losing proposition.

So I hope you'll keep returning to my thread for a long time to come. I have every intention of being here for a long time-God willing.

NFX

First trading tips of the week-and beyond.

Start your trading day off with some mental and physical exercise-maybe a crossword or sudoku puzzle and something aerobic. Keep upping the resistance as your mental and physical strength improves.

Filling your head with a lot of facts and figures before your brain and body are ready will tend to bog you down. You won't be at your best.

Sleep late on Saturday and Sunday if you can and have some fun later on. Your brain and body need the rest and diversion.

Don't get too happy or too sad if you're up or down pips. Staying on an even emotional keel is much healthier and less stressful. Yes, happiness puts stress on you (how stressed out is your family as your sisters' wedding approaches).

Have you ever wondered why-absent some major event-it usually takes several attempts for price to break resistance in an up trend? Here's an example that explains why this usually happens.

Let's say you're working out and you're benching 175 pounds. You're in decent shape and now you try 200. What happens? Maybe you can do a couple of reps but that's it. What should you do?

Don't try to just increase the reps at 200 and risk injury. The thing to do is to go back to 175 and increase your reps. Let your body grow into this new strength. Now when you go back to 200, you'll likely be able to do more reps.

Same thing when price is trying to break resistance. It needs the "strength" (buyers) to do it. Price will tend to drop a bit and gather more strength (buyers) at a lower price. Now it will be stronger the next time it reaches that resistance level.

Outcome of the G7 Meeting:

I posted an extensive report on this before, but encountered a database error when I tried to save it. I'll give you the skinny now and post a more complete report later.

First outcome: The Yen will continue to weaken vs. the USD, EUR, GBP, AUD and NZD as the carry trade system of investment funding is continued.

Second outcome: The $ will continue to weaken against the EUR and GBP and very likely the AUD and NZD as well, but will continue it's strength against the Yen.

Much more to come a bit later.

G7 Does Not Focus on the Yen:

By reiterating their February statement, which said that the Yen's value should reflect economic fundamentals, the G7 has cleared the way for further Yen depreciation and the continuence of the carry system of funding-including the use of the Yen by investors all over the world as a funding currency for investment.

The G7 has also identified trade barriers and Current Account imbalances as the main impedements to continued world economic exapansion. Since currency manipulation by China (who does not let their currency float in the open market) has been cited as a trade barier-it makes no sense for the European G7 countries to particpate in any manipulation of the Yen. Besides, the continued Japanese recovery is seen as crucial to the continuence of global growth and a weak Yen is crucial for their continued recovery.

Other Asian emerging markets were also cited by Paulson as creators of CA imbalance-he is urging the IMF to step up it's programs to identify currency manipulators. Emerging markets are accumulating currency reserves that are far beyond their necessity. Any strengthening of the Yen at this time can only run counter to their desire for the re-balancing they seek.

The G7 is completely unified in its belief that continued global expansion is a function of free, open and unmanipulated markets. Anything that smacks of protectionism is counter to everything they stand for.

Since all G7 nations are currently running CA imbalances with China (and other emerging market economies)-their focus has been on the Yuan as it should be. Paulson is the point man for their campaign to have the IMF monitor currency maipulation by emerging markets. Further growth in these unbalances is an impedement to continued, balanced global expansion.

So from the continued needs of reducing the US Current Account imbalance and fueling of the Japanese recovery and expansion, the Yen and the $ will remain weak for the time being against the other G7 currencies. As the carry system of funding continues, the $ by necessity will continue to strengthen against the Yen.

The trends appear to be set and the within the comin weeks and months expect the $ to weaken towards 1.37-38 vs the EUR and to 2.1-2.2 against GBP, while the USD appreciates towards 120-121 vs the Yen.

In this scenario, GBP/JPY is headed towards 250 and EUR/JPY to 165.

That doesn't mean they will go there in a straight line without re-traces. It does mean that if say the GBP/JPY drops 150-200 pips in like an hour-buy on the dips.

My post on March 30th regarded shorting th $ against the majors based on what happened after the last set of tariffs were imposed back in '02. Here's how that trade has gone since then:

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

Because of the G7 results, I have changed the short U/J into a long. I'll keep you updated on Friday.

I found this to be one of the more interesting exchanges. While the Japanese do agree with Trichet that the Yen should reflect market fundamentals:

Omi told reporters yesterday that ``the economy is undergoing a solid recovery and we believe that currency rates should reflect economic fundamentals.''

The message was reinforced later, when a Japanese finance ministry official said that the solid state of Japan's economy doesn't warrant a weakening in its currency.

On the other hand they had this to say about where the Yen is likely to go-

The Japanese official, who spoke to reporters late yesterday on the condition of anonymity, added that because exchange rates are set relatively between countries, they can strengthen or weaken regardless of domestic factors.

Omi said the yen's slump may be a consequence of the euro's climb. The currency shared by 13 European Union members also gained yesterday to a two-year high against the dollar, approaching a record.
``It is more accurate to say that the euro is strong'' given it has been rising against both the yen and the dollar, Omi said.

Just a little bit of G7 fun...boys will always be boys...

A Momentus Shift in World Economics:

The global economy will grow by 4.9 percent this year, following a 5.4 percent expansion in 2006, the International Monetary Fund predicted last week. The IMF said the U.S. would grow 2.2 percent this year, down from 3.3 percent in 2006.

This truly represnts a dramatic change in how the world economy functions as the US is forecast to slow while UK, EU, Japan and Emerging markets are forecast to expand. What this says is that rather then having the situation of the last 100 years-US slowdown causing a world slowdown-the balance created in the world economy via the elimination of trades barriers, protectionism and currency manipulation is having the desired effect.

This in no way infers that the US is in trouble; just the opposite. The expansion of other economies is likely to have a cushioning effect for the US, with the soft landing everyone was hoping for looking more and more certain.

This is the new order of the world. Globalisation is working. Perhaps not to the betterment of all simultaneously, but certainly to the betterment of the world in general. Think how much worse things would be, with all the political instabilities that now exist, if the US slowdown was dragging the rest of the world with it.

March retail sales figures today, including the ultracore number, were positive and the February numbers were revised up. Not a big surprise given the better weather and job situation. Perhaps more telling was the TIC number that showed a strong decrease of foreign investment in US debt and assets. The lack of $ buyers after the retail numbers speaks volumes about where investors see growth likely to happen. The TIC confirmed the thinking, yet the overall appetite for risk continued in equities. This is as it should be with the US soft landing seen more and more likely.

This renewed appetite for risk was seen in the continued expansion of the carry system of investment funding. The $ continued its' slide against cable while gaining on the Yen. No more sure sign exists for indicating that the carry system is winding ever tighter. GBP/JPY and the other JPY crosses had strong gains as a result of the continuation of the intense Yen borrowing and selling into the various investment currencies.

There still are barriers that must be eliminated. Perhaps most important are a reduction of rapidly accumulating emerging market current accounts and the movement of their currencies into the open market system and away from manipulation. Obviusly, China is the focus here and Treasury Sec Paulson has perhaps become the point man to the IMF on this. While China is not likely to let the Yuan float freely in the near term, upping their imports and a widening of the band the Yuan trades in will certainly help.

It's all about spreading the risk. Just as in the sub-prime mortgage industry, a spreading of the risk allows for further investment and opportunity.

Retail Sales and Housing Numbers:

Equities reacted strongly to the core and ultracore retail sales numbers which printed pretty good. Much of the credit was given to some better weather in the 1st half of March. Another positive print for the April numbers will lead the markets to contiue their faith in the American consumer, who's responsible for nearly 70% of the economy.

We also saw a terrible housing index. The National Association of Home Builders/Wells Fargo index of U.S. homebuilders' confidence fell to the lowest level of the year in April as the index dropped to 33 from 36 in March. A reading below 50 indicates that most respondents view conditions as poor. The National Association of Realtors said last week the median price of a home will fall 0.7 percent this year.

In addition to this, the number of U.S. homes entering foreclosure in the first quarter doubled from a year earlier. Lenders sent 46,760 default notices to California homeowners in the first three months of 2007, an increase of 148 percent from the same period last year, DataQuick said.

So while some evidence points positive, other evidence points negative. What we can say is that the housing figures did nothing to discourage Wall St. today. The DOW and S&P 500 reached their pre-crash levels, as did GBP/JPY.

You Need Twins to Buy a Pound:

Nothing too complicated here. The bank has to write that letter and 5.50 is assurred. It's all a question of 5.75 and beyond.

The backdrop to this is the psychological effect of the $2 pound. Like anything else that's new-it's likely to take a bit of getting used to. Once that happens...things will just proceed. It could very well be that $2 will look cheap in a few weeks.

I think we've just seen the dam wall burst.

Could be-

It's really interesting how things have worked out for UK inflation and the BoE. I went on their hompage in Jan and Feb and read the speeches by King and Blanchflower.

Back then, the MPC was predicting that the CPI would spike up and then recede and that inflation would be turning down by the middle of the year-King actually said that inflation would turn down "possibly quite sharply".

The really interesting thing is that the inflation projections in Jan and Feb were based on the rate going to 5.5%!

In reality-no one should be even a bit surprised that the MPC will be going to 5.5, as 5.5 was indeed "preordained". So while the run-up today may be warranted-what I don't see is why it took so long.

As far as the minutes go-at this point I can't understand what the frenzy is-the MPC is going to 5.5 and a second raise is still what's in question in trader's minds.

Be aware that the BoE has no expectation of a need for that 2nd increase. The expected down-turn in inflation is projected to occur without it.

You really have to give King as much credit for sticking to his guns as you do for Bernanke. In his letter today King reiterated the MPC's February inflation projections, so the spike in CPI is definately seen as temporary. There's no crisis-the bank will simply raise rates at the next meeting.

If I were to guess about future rates-I would say absent some unforseen geo-political event-a 2nd rate increase to 5.75% is likey to not happen. The projections of the BoE and the Fed have been very accurate as of late, so i'm placing my bets on them.

Here's another example of the what/why I was taking about a few posts ago:

What: BoE February inflation projections indicate inflation will spike and then go down
Why: Becasue the projection is based on rates going to 5.5%
What/Why: Nothing much happened to the GBP after the release of the speeches, so it looks like that rate increase isn't fully priced in. Good time to go long...before everyone else does.

I'll leave that last comment there, but let me add something to it:

Trading currency against what the market is thinking and trying to "outsmart" them is not a strategy for the short term day trader, which most of us are. Trying to "outsmart" the market by trading the way you think price should "really" go is a good way to get killed quickly.

If you were to have dinner with the govenor of the BoE and he told you they wouldn't be raising rates again this year and that all these traders who were betting up the price of the GBP were wrong-does that mean you run right out and short it? Yes and no. Yes if you have deep pockets (or you're playing a relatively small position), can shrug-off potential large drawdowns and are in it for the long term.

No, if you're a day (or even a week) trader. Being a day trader means having your finger on the pulse of the market and having a pretty good idea of how they're thinking "today". Do that consistently and watch your account grow.

I Heard No News Today Oh Boy...

Well, maybe a little. There were 47% more foreclosure proceedings last month compared with the same month from a year ago. The main reason this is happening is because falling housing prices make it difficult (or impossible for anyone in the sub-prime category) to refinance mortgages at better rates.

The number of owners making late payments on mortgages is at a four-year high and the National Association of Realtors is forecasting that the median price of a home will fall 0.7 percent this year.

From BB:

Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, said last week that the home median price will slide to $210,000 in 2008, the lowest level since March 2004. That will make it tougher for homeowners to refinance their home loans. The number of adjustable-rate mortgages due to reset at higher monthly payments will peak in September, October and November, Zandi said.

The National Association of Home Builders/Wells Fargo Index of builder sentiment fell this month to the lowest level this year, the group said earlier this week. The gauge declined to 33 from 36 in March as buyer traffic fell and builders said cancellations remained high.

This basically continues the trend that started last summer, as home prices stopped increasing and began to fall. It doesn't mean that spill over will occur and it doesn't mean the US is headed for recession.

What is does mean is that the US is in a trend of slower growth then other economies (EU, UK and Japan) and that US GDP is likely to stay around 2, with a top-side of 2.5 for the year. It's also projected by the G7 and IMF that these faster expanding economies will cushion the blow for the US, as globalization has had the net effect of preading the risk. The $ will likely stay weak as the effort to re-balance the US Current Account Deficit continues.

Not a hard landing pre se-but you still need to be wearing your seatbelt.

Latest Data Indicates a Sluggish US Economy:

From BB:

"The leading index was down 0.8 percent in the last 12 months and dropped at an annual rate of 0.3 percent in the last six months following a gain in February. It would take a 3.5 percent six-month annualized decline to signal contraction in the economy, according to the Conference Board. The last time the index met that criterion was in December 2000, three months before the start of the last recession. A separate report today signaled firings may be picking up again this month. Jobless claims fell less than forecast to 339,000 last week, the Labor Department said. Economists had projected claims would drop to 320,000 after a holiday-related jump the prior week".

So while the US is nowhere near recesssion-certainly there's nothing pointing to a nice pick-up either. More then likely, things are going to continue shuffling weakly along as they have been. The consumer continues to prop up the economy, but there's no great exapansion there. Housing remains mired in a slump that it doesn't look to bust out of in the meduim term. The economy is unlikely to get a boost from the Fed via a rate cut; that will not happen until inflation is trending down on a YoY basis in a way the Fed feels confortable with. They're definately not close to that yet.

The US is like a 2 engine plane that is flying on 1 motor. While it's not in a tailspin, it can't gain any altitude either. It can still land "softly" but a crash is also possible. It's also possible that the engine that isn't working might get going again and altitude will be re-gained. Most likely scenario? The pilot will land the plane without more then a couple of minor injuries happening to the passengers. There'll by some nails bitten off, but most will survive just fine. The other engine will get fixed and it'll get goin again. At least, I hope so.

How The Week Finished:

As I was talking about 2 posts ago-the reaction to the Chinese news was overblown and emotional. The Nikkei shrugged it off in the Friday session as well they should have because later on it came out that the Chinese need a repidly expanding economy to suit their own economic and political agendas. The whole interest rate thing was them blowing smoke.

We tend to think of China in terms of an advanced western economy because thier overall GDP is so high. The fact is that China is about the equivilent of the US around 1860. More then 80% of their population still work on farms and are very poor. Their per-capita GDP is still far below any modern industrial nation. It has been estimated that China needs to create over 10M jobs/mth! Their needs are very different from the needs of G7 nations who at this point require a balanced, sustainable pace of growth. Think of it this way: We (the G7 economies) are like an adult. If we "eat" to much-we'll get fat and that's unhealthy. China is like an adolescent that can eat and eat and not gain an ounce of fat because they're still growing.

A 10% or greater expansion of their economy is exactly what they need and want. Will an economy like that go thru booms and busts? Of course it will, but look at it this way: we did, and we seem to have done pretty well. Obviously, the Chinese have learned that lesson. You can't have the big booms without the occasional busts.

This doesn't mean that China does not have the potential to become the dominant world economic power-in fact, the next 50 years or so are likely to see a big shift in world economic balance exactly because they have such a huge GDP with 80% of their population yet to contribute to it in any kind of meaningful way. Why do you think the G7 powers want to see China without trade barriers and with a free-floating currency?

The G7 controls 2/3's of the worlds' money and they want to keep it that way.The G7 economy is a consumer-driven economy and China needs to "import" those consumers in order to grow rapidly. China can't sell all those products to the 80% of their population who live on $3/day, so they need what the G7 has: Consumer Purchasing Power. Contolling the Yuan's exchange rate is the best tool the Chinese have right now to keep the flow of consumers (and $'s, Euros, Pounds etc) going in their direction. That plus an endless supply of cheap labor.

In the mean time-you and I want to make some profits by trading. What better way is there to profit then by identifying irrational market moves and capitilizing off the inenevitable corrections? Go back to a chart of anything after March 5th and see how everything corrected since then. The rout happened because of emotional irrationality and there's a lesson for smart traders there. It sure beats trying to squeeze 9 pips out of EUR/USD trades every day...

An update on my short $ positions based on the announcement of Chinese tarfiffs since the close on 3/30:

GBP/USD +357
EUR/USD +243
USD/CHF + 86
USD/JPY First I was short and lost 183 pips then I changed it to a long based on the G7 meetings and potential for carry trades-that position is -43 so there's a total of -229 on USD/JPY

Total=+459