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January 31, 2012

European Policy By Sloth

Filed under: Forex Strategies — Tags: , , — admin @ 4:45 pm

Team Macro Man apologise for the lack of service recently. Last week saw their technical pullback first get Apple’d and then FED’d. And though there were glimmers of the technical turn, it looks as though it has morphed into a “technical pause”. Despite the fizzling out of yesterday’s Euro summit there has been little sell-off which leaves TMM thinking that there is a chance of the European “Policy by Sloth” may work.

TMM wrote back in December about what they believed the necessary conditions were to bring about an end to the crisis. The classic Anglo-Saxon view (TMM cannot resist the French line) is that the only way out of the crisis is fiscal union. But TMM believe it is far more nuanced than that – strictly, that measures that confirm the path to some sort of fiscal union in the medium term are in place. Specifically, as we wrote back in December, TMM reckon we need to see the following:

(i) A large enough amount of cash to cover Spain & Italy’s financing needs for the next two years,
(ii) Incentives to longer term investors to buy Eurozone government bonds,
(iii) Structural reform measures aimed at rebalancing within the Eurozone and, lastly,
(iv) Clarity on the growth outlook.

In TMM’s view, clarity on the first three of these conditions is enough of a firewall for the rest of the world to chug along, and the last of these would be enough to unwind at least some of the under-performance of European assets and loosen financial conditions significantly.

TMM also highlighted the Silver Bullet Fallacy: there rarely exist simple solutions to solve complex problems. The alphabet soup thrown by US policymakers at the the 2008/9 GFC is point in case. What is more important for markets, is to be able to see the exit. And, as many have noted over the past couple of years, the exit can only come with growth, and that is why the last of the above conditions is arguably the most important.

The Street was generally surprised at how strong the take-up at the December 3yr LTRO was, and this morning’s FT report that several banks are likely to double or triple their request for 3yr money at February’s LTRO seems to slot nicely in the framework of providing adequate liquidity both for the banking system and Spain & Italy in particular – conditions (i) above. Putting this in the context of the EFSF and ESM and the seeming probability that the March summit will confirm ESM and EFSF to run alongside and the numbers have begun to add up. It is only the end of January, yet Spain has already funded about a fifth of its 2012 funding needs. The expanded collateral pool similarly means that French banks will be able to fund a large amount of their balance sheets with the ECB, incidentally, reducing the power that the Germans have over France going forward. The private sector money that would have funded these banks but has now been crowded out will have to go somewhere.

The second point, of providing incentives to longer term investors to buy Eurozone government bonds is not there yet. The treatment of the ECB in the Greek PSI is particularly important here, to avoid markets confirming the suspicions they already have regarding de facto subordination. While the ECB’s LTRO provides time, and the promises of “No More Greeces” with respect to the approach to PSI which is supposed to be “over” evokes the post-Lehman policymaker consensus, only actions (in the form of ECB participation, or an explicit lack of PSI in the upcoming second Portuguese EU/IMF programme) will convince longer term investors.

The Fiscal Compact, while rightly criticised as being too centred on austerity, is a structural reform (iii). Additionally, the measures in Greece and Italy in particular will raise medium/long-term potential growth and aid rebalancing. More needs to be delivered here, but each incremental measure will help. By far the most important, in TMM’s view, is the enactment of structural debt brakes in national legislation, to cement the credibilty of fiscal restraint in the future. In particular, TMM would regard the French enactment of this as the most important structural measure that lays the groundwork for future fiscal union. Of course, Sarkozy has delayed this until after the April election and, with the Socialist Francois Hollande ahead in the polls stating that he would renegotiate the fiscal pact such that France would not cede sovereignty, this is a significant hurdle for markets. TMM cannot get BOLIVIAN bullish until this is passed, but it does seem like much of the plan is coming together.

Finally, the growth outlook (iv). Markets are discounting machines, and they have already discounted fiscal austerity in Europe. The PMIs have begun to move higher which shows the exit… Greenshoots 2.0, the fabled second derivative. Late last year, the Squid published an excellent piece of research comparing Asia in 1998 with the current situation. TMM found particularly interesting the conclusions they came to, which were that market underestimated significantly the degree of demand weakness in those countries at the epicentre (ASEAN). However, the market also significantly overestimated the impact of the crisis upon the rest of the world, resulting in a grab for risk assets in late 1998 and especially in 1999. This is all of a sudden seeming all too familiar… the economic performance in the Euro-periphery has continued to disappoint, while that in Germany & France, the US and increasingly the rest of the World has exceeded expectations.

To sum up, while TMM expect the new month to bring a new bear attack on Portugal, they fear that they have been too cautious on the risk front. The strength in US equities, despite a relatively tepid earnings season, speaks volumes. And if the liquidity emitted from the upcoming 3yr LTRO is indeed large enough to restart animal spirits, then it is not hard to imagine equities finishing the year a lot higher.

TMM will finish by noting that GDP fell in most countries in 2009, yet equity markets and risk assets in general put in an incredible performance. It is not about what is happening *now*, it is about where markets can see we are going. And it increasingly looks like they can see the exit. TMM think that while just about anything US cycle linked looks cheap (Spoos, Korea, SGD, TWD, you name it) there are some things that have run on just about nothing – spec longs in AUD being case in point. TMM wouldn’t advocate going BOLIVIAN but we think the equity perma-bears are in for a rough couple of months.

Recognizing Trend Transitions

Filed under: Currency Charts — Tags: , , — admin @ 3:41 am

I recorded this video series in small chunks (back on January 25) so each topic could be covered in about five minutes although on the last one I lost track of time so it runs just under ten minutes.

(And this is a great follow-up to my last update here at Baby Pips, “The EUR/USD Enters a Zone of Major Resistance”)

This four-part video series (links are below) is about breaking down the market trend transition we see in any market and focus on what’s happening right now in the EUR/USD. The daily is losing it’s downtrend and the transition will and has changed the Directional Bias of the pair.

The psychology of a downtrend lends itself to swing shorts on bounces or corrections but once the 34EMA loses its “four to six o’clock” angle the strategy is no longer applicable. This is a tough transition psychologically because the last swing is a losing trade. And the next trade is one that must take into account the new and often unsettled market trend.

Shifting gear is hard to do especially when the old gear got you as far as it did.

I see the EUR/USD in a state of transition and not to be left out…I see the U.S. Dollar Index in the same transition. While the EUR/USD is moving sideways at the BOTTOM of its range, the greenback is doing it at the TOP of its uptrend.

The 38.2% Fibonacci Retracement is currently resistance and this lines up with past levels of selling pressure as well as it being jsut six pips from the 1.3250 major psychological level. I also think the lack of buying support at 1.3200 is especially telling of where the bulls are willing to step in and support the pair – which actually ended up being close to the 1.3180 minor psychological level.

1-30-2012 7-38-39 PM.jpg
Here’s what the daily EUR/USD looks like right now. Pay particular attention to the green GRaB candles and also the fact that the 34EMA Wave is NOT heading higher at “twelve to two o’clock”…

So here are the links to the videos. I think watching them in a bigger video size would be best since I get into a lot of price detail as the series progresses but there is a lot of video goodness at my You Tube channel.

PART ONE of Trend Transitions
PART TWO of Trend Transitions
PART THREE of Trend Transitions
PART FOUR of Trend Transitions

Ok, so if you like this…you’re gonna LOVE my webinar tomorrow. It’s a free one that I’ll be doing at 8:00PM EST and you can register here.

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Dollar Stages Upward Correction Following Poor Euro-Zone News

Filed under: Forex News — Tags: , , , , , , , — admin @ 3:11 am

Source: ForexYard

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The USD came off a six-week high against the euro in trading today, after news that Greece had once again failed to come to reach a debt swap deal with its creditors. Earlier in the day, the EUR/USD reached as high as 1.3231 before investors began selling off the pair. The AUD/USD also saw a substantial drop, falling well over 100 pips during the European trading session. The greenback failed to move up against the yen, as investors chose to keep their funds with the safe-haven Japanese currency.

Turning to tomorrow, dollar pairs are likely to be influenced by any announcements out of the euro-zone which may lead to further risk aversion. Traders will want to pay particular attention to any news out of Greece. While a Greek debt swap deal is likely to be finalized by the end of the week, safe-haven currencies may continue to go up until a final agreement is announced.

With regards to the rest of the week, traders will want to keep in mind that a batch of US data is forecasted to have a significant impact on the markets. Wednesday’s ADP Non-Farm Employment Change figure, as well as the ISM Manufacturing PMI are both considered valid indicators of the current state of the US economy. Furthermore, a speech from the Fed Chairman on Thursday, followed by the Non-Farm Employment Change figure on Friday, are both likely to generate substantial market activity.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

EURUSD rebounded from 1.3077

Filed under: Forex News — Tags: , , , — admin @ 3:09 am

After testing the support of the upward trend line on 4-hour chart, EURUSD rebounded from 1.3077. The bounce would possibly be resumption of uptrend from 1.2624, further rise is expected later today, and next target would be at 1.3300 area. On the other side, a breakdown below 1.3077 will suggest that a cycle top has been formed at 1.3233 on 4-hour chart, then pullback towards 1.2800-1.2900 area could be seen.

eurusd

Forex Signals

Euro Pulls Back Before EU Leaders Meet in Brussels

Filed under: Technical Analysis — Tags: , , , , , , — admin @ 3:05 am

The trouble with normal is it always gets worse. ~ Bruce Cockburn Good morning. Euro trades lower today, before European leaders meet in Brussels to discuss the region’s debt crisis and sign off a permanent rescue fund for the eurozone. Here’s a couple of charts to start the week with: USD Index Former support around 79.50 Read More


© 2012 FX Trading Blog

ECB and IMF lift spirits. One Question: Who backstops the backstop?

Filed under: Currency — Tags: , , , , — admin @ 2:25 am

Quotable

“The measure of a master is his success in bringing all men around to his opinion twenty years later. “

 Ralph Waldo Emerson

Commentary & Analysis

 I recently succinctly summarized my view of stocks with the Wily Coyote analogy.  I got one very good succinct comment, and I am paraphrasing; I agree with you Jack but you have missed a lot of profit along the way. I can’t argue with that.  Neither technically nor fundamentally did I expect stocks to break above intermediate-term highs, measured by the S&P 500 cash index at 1292 back on October 27, 2011.  But we sure have. 

In retrospect, there is always reasons one is wrong.  But if one is right, there is an assumption of being right for the right reasons–many a career are made based on that.  However, any trader will take being right no mater the so-called reasons–ephemeral as they are.  My retrospective rationale (a dangerous thing the art of rationalization) for being wrong (so far) was undrestimating the buy in by the market on the not so stealth European Central Bank (ECB) quantitative easing and on the idea of yet another backstop for the Eurozone as the IMF gets into the act. 

But, when you evaluate the degree of leverage already in the system, the question I think we need to ask is: Who backstopst the backstop?

The two institutions tyring to keep hope alive are massively overextended–it would seem.  (Granted, they can print till the cows come home and Lehman couldn’t, but there has to be some logical limit here?)  The leverage ration for the ECB is around 430 now, as measured by Assets divided by Paid-In Capital.  Remember, Lehman Brothers went belly up when its ratio was only around 50.  The US Fed’s ratio is a whopping 109; that looks almost tame compared to the ECB largess.

If the global economy doesn’t respond, and I don’t believe it will because I do agree with Lacey Hunt at Hoisingtonwho expects a US recession during 2012, there will be blood.  I am fairly confident of that.  But as always, that nagging little question of “when” is a problem.  And the lost profits in between do hurt.  

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Daily Forex Fundamentals – January 30, 2012

Filed under: Currency Charts — Tags: , , , , — admin @ 1:28 am

What’s on the Economic Horizon

U.S. Q4 2011 GDP Disappoints Forecasts
BOJ To Intervene Soon?
Greek Debt Deal Expected To Be Announced During The EU Summit

U.S. Dollar (USD)

And just when investors were starting to get over the Fed’s dovish FOMC statement, negative data from the U.S. were released and reminded markets that QE3 is indeed a real possibility. Consequently, the Greenback was unable to bring sexy back in Friday’s trading. Boo! Read more…

Euro (EUR)

We got mixed results from the euro last Friday. While it came out on top and earned 115 pips in its battle against the dollar, it marked its second straight loss against the yen and lost 12 pips. What can we expect from it today? Read more…

British Pound (GBP)

Clean sweep baby! For the second straight week, cable shut out the dollar, posting another 44 pip victory on Friday to finish at 1.5731. For those of you who can’t do simple math, that’s TEN straight days that GBP/USD has closed higher! Boomshakalaka! Read more…

Japanese Yen (JPY)

The yen sumo-wrestled and knocked out its counterparts once again in Friday’s trading. USD/JPY dropped to its one-week low of 76.65 before ending the day at 76.68, 77 pips below its opening price. Against the euro, the yen managed to snatch a 12-pip win as EUR/JPY closed the week at 101.36. Read more…

Canadian Dollar (CAD)

Parity holds AGAIN! Though the Loonie gained 9 pips against its American counterpart, it was unable to push USD/CAD below parity as the pair greeted the weekend at 1.0008. Will Loonie bulls attack 1.0000 again today? Read more…

Australian Dollar (AUD)

Just like Willow Smith’s hair, AUD/USD got whipped back and forth between the 1.0650 and 1.0600 handles in Friday’s trading. Luckily for the Aussie, negative data came out of the U.S. and helped it end the day with a 38-pip win. Read more…

New Zealand Dollar (NZD)

That’s what you call ending the week with a bang! The Kiwi soared higher on Friday, as risk appetite was still rampant in the markets. This helped NZD/USD close at .8189, up a solid 48 pips on the day! Read more…

Swiss Franc (CHF)

Just like its European counterparts, the Swiss franc exerted its dominance over the greenback in last Friday’s action. USD/CHF closed 81 pips lower to finish the week at .9125. This marked the third consecutive week that USD/CHF has finished lower. Read more…

Bonnie and Clyde, peanut butter and jelly, Justin Bieber and his hair. Some things just go well together.

In forex trading, you get better odds at securing pips when your fundamental analysis is complemented by technical analysis.

Head on to Big Pippin’s Daily Chart Art for some pip-locking technical setups!

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USD/JPY looking familiar

Filed under: Business — Tags: , , — admin @ 12:27 am

After reaching 78.27 last week on concerns over Japan’s first monthly deficit in nearly 30 years and a decline in growth outlook, USD/JPY started this week in familiar territory again 76.60 – 76.80.  Other than Japan’s Jobless rate tomorrow, there isn’t much news to trade with.  Perhaps of more interest is the EUR/JPY movement where Japanese officials have recently hinted concerns over its rapid decline against the JPY.  We think the market may test ‘BOJ water’ this week with sub 76.00 and we dare say 75.00 to see if there is any ‘intervention bites’ around.  For the rest of Monday market may range 76.54 – 77.12.

January 30, 2012

AUD/USD Outlook – Jan 29, 2012

Filed under: Forex News — Tags: , , — admin @ 3:11 am

AUD/USD moved up, as mentioned during the last weekend and quoted above, and went as high as 1.0688 i.e. little below the mentioned 1.0720. The currency pair found some resistance there and took a correction towards 1.0592 but jumped up again to close for the week at 1.0667.

audusd daily chart

AUDUSD is approaching a resistance zone and there may be some sideways moves initially but we would expect a support over 1.0470 and overall we exect further upwards gains towards 1.0720/1.0765. The resistance in this zone will be a critical factor to expect further upward gains. If the currency pair manages a firm break over 1.0765 then we will expect further upward move towards first 1.1000 resistance and with a break over that towards 1.1079 high.

On the downside, as mentioned above, the support of 1.0470 is important. This support is current 22-day EMA. If there is a firm break of this support then we would expect the next support near Kijun-sen level of daily Ichimoku cloud i.e. 1.0415/1.0410 and a break of that should bring further downward correction towards 55-dayy EAM i.e. 1.0320. Only a break of this support zone will change our focus towards convincing reversal of the current upward move.

Overall we stay bullish for AUDUSD but need to keep an eye for the approaching resistance levels and a break over those to have the retest of the previous high as mentioned above or even a further upward move.

You may also check daily technical aud/usd analysis and the weekend audusd forecast at ForexAbode.com.

Japan’s Endgame Nears

Filed under: Forex News — Tags: , , — admin @ 3:09 am

By The Sizemore Letter

I read a fact this week that I never expected to read in my lifetime: “The Japanese government is expected to announce Wednesday that the country recorded its first annual trade deficit since 1980″ (see ” End of Era for Japan’s Exports “).

Trade deficit? Japan?

Japan’s economy has been a slow-motion train wreck for the past 20 years. The bursting of the country’s 1980s credit, stock market and real estate bubble would have wreaked more than enough havoc on any economy. But on top of the normal debt deflation that would follow the bursting of a financial bubble, Japan adds the worst demographics of any developed country. Japan is aging rapidly, and its population is shrinking.

Most of the research on the effects of Japan’s demographics have focused on skilled labor shortages and pension funding. These are legitimate concerns, to be sure. But you don’t have to be an Ivy League economist to see that there is a much larger problem.

If you own a business—anything from a world-class automaker like Toyota (NYSE: $TM) to a neighborhood corner café—you have a smaller pool of potential customers every year, and within that smaller pool a larger percentage are elderly consumers who buy less. Some companies grow at the expense of others, but it becomes a zero-sum game. Growth in the aggregate becomes impossible. The math simply doesn’t add up.

Unless, of course, you export. And this is what Japan has been quite adept at doing for the past 20 years. Until now.

In his 2011 book Endgame , New York Times best-selling author John Mauldin calls Japan a “bug in search of a windshield,” and it’s a great metaphor. Like a bug buzzing along a highway, Japan’s economy has bumbled along for the past two decades, not really growing but not imploding either. In the not-too-distant future, Japan may be in for a good “splat.”

Two things have kept Japan’s economy afloat all these years: its healthy trade surpluses and its government’s ability to borrow large sums of money at ridiculously low interest rates to fund enormous budget deficits. The high price of the yen and prolonged weakness in the United States and Europe are doing a fine job of denting exports. And soon, the low interest rates may be under attack.

Anyone reading this article is well aware of Europe’s debt woes. But Japan’s debts make Europe’s look like pocket change. Italy, the most indebted of the major Eurozone countries, started to see its market bond yields reach punitive levels when its debt-to-GDP ratio reached 120 . As a comparison, Japan’s debt-to-GDP ratio is an almost unbelievable 220 percent (IMF).

The only reason that Japan hasn’t had a run on its bonds is that they are all by and large purchased by domestic buyers. As Mauldin explains it in Endgame, “94 percent of all JGBs have been bought by the Japanese.” But demographically, Japan is fast shifting from a nation of middle-aged workers saving for retirement to a nation of elderly retirees liquidating their savings to pay their bills. The savings rate has been in stark decline.

The domestic demand for Japanese bonds cannot last forever, and when it dries up, Japan will find itself at the mercy of international banks and investors. Ask Greece and Italy how that worked out for them.

Japan can look forward to a currency and debt crisis that makes Europe’s look mild by comparison. Yet betting on Japan’s collapse is a little like fraternity hazing for macro hedge fund managers. It’s just a rite of passage that they have to go through. They short Japan’s bonds, lose a fortune, and learn a few painful lessons.

Knowing this, I’m not going to recommend you short the yen or Japanese stocks or bonds — yet. Wait until you see Japanese yields starting to creep up. And when they do, position your portfolio for the potential short of a lifetime.

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