Tuesday, April 3, 2012

Euro Recovers from Earlier Pull Back

Earlier euro pulled back on uncertainty about the Federal Reserve minutes, as well as concerns about Spanish debt. As Spanish bond yields rose, the euro dropped. However, things are turning around a little bit. After pulling back, the euro is now gaining against the US dollar.

Right now, European banks are delaying the necessity of dealing with potential problems, and so far these tactics are working. The euro is gaining as a result. And, as equities in the United States pare earlier losses, and struggle toward gains, some high beta currencies like the euro are receiving a bit of a boost.

While the euro hasn’t reached its high for the session, it is higher than it was at open, and definitely higher than the session low at 1.3299. Risk appetite has been making a comeback in the last little bit, even with the troubles in the eurozone.

However, it’s important to be careful, since things aren’t so cut and dry right now. This session has been choppy, with the euro going from gains to losses to gains again. More data should help smooth things out — for now. But volatility is likely to remain for a while.

At 14:56 GMT EUR/USD is up to 1.3339 from the open at 1.3322. EUR/GBP is higher at 0.8354, up from the open at 0.8313. EUR/JPY has also recovered, moving higher to 109.7500, up from the open at 109.3225.

If you have any questions, comments or opinions regarding the Euro, feel free to post them using the commentary form below.

US Dollar Edges Higher as Traders Wait for Fed Minutes

US dollar is mixed today as traders wait for the latest minutes from the Federal Reserve meeting. The minutes of the meeting should provide some insight into what different members of the board think should happen with the economy, and might even give some clues about what could be next.

For now, US dollar is mixed, trading mostly unchanged against the euro, and a little higher against the UK pound. Greenback is also edging up against the loonie. A little bit of the earlier risk appetite on the market has faded as traders wonder what’s next.

On the US stock market, investors have been pulling back a bit as they rethink yesterday’s gains. Risk appetite is fading, and Forex traders are looking for a little bit of safety and stability. However, the US dollar isn’t universally trading higher right now. There is a lot of uncertainty, and some positive momentum as well, as traders and investors try to figure out what’s next.

However, if the risk aversion continues, the US dollar is likely to make a few more gains today — and possibly into tomorrow.

At 14:15 GMT EUR/USD is a little lower at 1.3311, down from the open at 1.3322. GBP/USD is down to 1.5965 from the open at 1.6025. USD/CAD is up 0.9913 from the open at 0.9906.

If you have any questions, comments or opinions regarding the US Dollar, feel free to post them using the commentary form below.

Monday, April 2, 2012

Essential Elements of a Successful Trader

Courage Under Stressful Conditions When the Outcome is Uncertain

All the foreign exchange trading knowledge in the world is not going to help, unless you have the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be in it to win it”. Trust me when I say that the simple task of hitting the buy or sell key is extremely difficult to do when your own real money is put at risk.

You will feel anxiety, even fear. Here lies the moment of truth. Do you have the courage to be afraid and act anyway? When a fireman runs into a burning building I assume he is afraid but he does it anyway and achieves the desired result. Unless you can overcome or accept your fear and do it anyway, you will not be a successful trader.

However, once you learn to control your fear, it gets easier and easier and in time there is no fear. The opposite reaction can become an issue – you’re overconfident and not focused enough on the risk you're taking.

Both the inability to initiate a trade, or close a losing trade can create serious psychological issues for a trader going forward. By calling attention to these potential stumbling blocks beforehand, you can properly prepare prior to your first real trade and develop good trading habits from day one.

Start by analyzing yourself. Are you the type of person that can control their emotions and flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type of person who’s overconfident and prone to take more risk than they should? Before your first real trade you need to look inside yourself and get the answers. We can correct any deficiencies before they result in paralysis (not pulling the trigger) or a huge loss (overconfidence). A huge loss can prematurely end your trading career, or prolong your success until you can raise additional capital.

The difficulty doesn’t end with “pulling the trigger”. In fact what comes next is equally or perhaps more difficult. Once you are in the trade the next hurdle is staying in the trade. When trading foreign exchange you exit the trade as soon as possible after entry when it is not working. Most people who have been successful in non-trading ventures find this concept difficult to implement.

For example, real estate tycoons make their fortune riding out the bad times and selling during the boom periods. The problem with trying to adapt a 'hold on until it comes back' strategy in foreign exchange is that most of the time the currencies are in long-term persistent, directional trends and your equity will be wiped out before the currency comes back.

The other side of the coin is staying in a trade that is working. The most common pitfall is closing out a winning position without a valid reason. Once again, fear is the culprit. Your subconscious demons will be scaring you non-stop with questions like “what if news comes out and you wind up with a loss”. The reality is if news comes out in a currency that is going up, the news has a higher probability of being positive than negative (more on why that is so in a later article).

So your fear is just a baseless annoyance. Don’t try and fight the fear. Accept it. Have a laugh about it and then move on to the task at hand, which is determining an exit strategy based on actual price movement. As Garth says in Waynesworld “Live in the now man”. Worrying about what could be is irrational. Studying your chart and determining an objective exit point is reality based and rational.

Another common pitfall is closing a winning position because you are bored with it; its not moving. In Football, after a star running back breaks free for a 50-yard gain, he comes out of the game temporarily for a breather. When he reenters the game he is a serious threat to gain more yards – this is indisputable. So when your position takes a breather after a winning move, the next likely event is further gains – so why close it?

If you can be courageous under fire and strategically patient, foreign exchange trading may be for you. If you’re a natural gunslinger and reckless you will need to tone your act down a notch or two and we can help you make the necessary adjustments. If putting your money at risk makes you a nervous wreck its because you lack the knowledge base to be confident in your decision making.

Patience to Gain Knowledge through Study and Focus

Many new traders believe all you need to profitably trade foreign currencies are charts, technical indicators and a small bankroll. Most of them blow up (lose all their money) within a few weeks or months; some are initially successful and it takes as long as a year before they blow up. A tiny minority with good money management skills, patience, and a market niche go on to be successful traders. Armed with charts, technical indicators, and a small bankroll, the chance of succeeding is probably 500 to 1.

To increase your chances of success to near certainty requires knowledge; acquiring knowledge takes hard work, study, dedication and focus. Compile your knowledge base without taking any shortcuts, thereby assuring a solid foundation to build upon.

Gold Rises as “Alternative Currency”

Everything in forex is relative, right? Actually, it turns out this adage is wrong, as there is now a way you can short the entire forex market! I’m not talking about some innovative new financial product that you’ve never heard of, but rather something that everyone already knows about: Gold.

Before you accuse me of sounding like an infomercial, consider that while gold has been an investable commodity for quite some time, its trading pattern has changed recently, especially in the context of forex. Before, the link between gold and forex was inverse and clear: “When the greenback strengthens…this tends to pressure gold since it reduces the need to buy as a hedge against a soft dollar. Also, a strengthening dollar makes commodities generally more expensive in other currencies.” In other words, a rising Dollar is usually accompanied by falling gold prices, and vice versa.

Over the course of 2010, this relationship has steadily grown weaker and weaker, and in the last month, it has almost completely broken down. To understand the rationale for such a change, one needs not to look any further than the sovereign debt crisis currently facing Greece and indirectly, the Eurozone. This crisis has affected the way that investors think about gold; while previously it was primarily viewed as an inflation hedge, now it is seen as a hedge against fiscal/financial crisis. In this regard, it has assumed the characteristics of a “safe haven” currency, much like the US Dollar.

“Gold is going to move higher regardless of what happens in the currency market, as long as there are fears of problems in Europe. People are starting to have more skepticism to a lot of these sovereign entities,” explained one analyst. At the moment, that means that the inverse correlation between the Dollar and Gold (Dollar Up = Gold Down) appears to have reversed itself, such that a rising Dollar is also accompanied by rising gold. In this case, there may be correlation (since investors are buying both gold AND the Dollar as safe haven vehicles) but there is no causation between the two as there was before.

At the moment, the correct interpretation is that anything is preferable to the Euro (whose sovereign debt problems are the most pressing). Thus, gold prices are rising at basically the same rate as the Euro as falling, and gold prices in local currency (EUR, CHF, GBP) terms are already at record levels.

As for the future, however, many are betting that gold will distance itself from the Dollar as well, if/when the fiscal “problems” of the US escalate to the level of a Greek-style crisis. At this point, Gold will start to trade as an alternative to the entire forex market! In fact, gold contracts denominated in US Dollars have also been rising, which means that investors already perceive it as more than just an alternative to the Euro. (If this was the case, one would expect gold to appreciate in terms of Euros, but to remain constant or even fall when priced in Dollars. This clearly hasn’t happened).

Admittedly, gold is outside of my expertise, so I’ll refrain from personally making any predictions. According to Deutsche Bank, “If the correlation re-establishes itself before July, either the dollar must continue to decline or investment into bullion-backed funds must pick up in order to avoid erosion in gold prices.”

Regardless of what happens, my intention here is simply to point out the emergence of this trend, for its own sake. While it doesn’t have any serious implications about the internal dynamics of forex markets, it most certainly is important insofar as it reflects what investors (forex and otherwise) are generally thinking about. In this case, it signals that concern over the ongoing sovereign debt crisis isn’t going to abate anytime soon.

Greek Debt Woes Far From Solved

1. Convince European officials to provide another bailout to the tune of 130 billion euros? Check.

2. Persuade your creditors to “voluntarily” accept 100 billion euros less in repayment? Check.

3. Close the Eurozone debt file as “solved”? Not a chance.

Despite the unprecedented amount of financial support Greece has received over the past two years or so, does anyone seriously believe Europe’s debt problems are over? At best, Greece has avoided a near-term default, but this in no way nudges Greece any closer to sustainability. For proof, one need only look to last week’s bond yield for proof.

True, the bond auction was held prior to the official announcement confirming the second bailout package, but the market knew the deal was ready for final approval. It is also true that even with the guarantee of more bailout money and the bond swap deal in place, yields on Greek debt remains considerably higher than other Eurozone member nations.

In last week’s offering, the yield for new 11-year Greek bonds averaged around 19 percent, while 30-year bonds were in the 14 percent range. By way of comparison, the benchmark German 10-year yield is currently only about 3.6 percent.

To be blunt, these yields are simply not sustainable and there is no way Greece can afford to borrow money at the current rates. With its ability to borrow curtailed, Greece will have to rely on further spending cuts and massive tax hikes to meet its budgetary needs. Few believe this will happen.

Just look at the ferocity of the protests against the initial austerity efforts which are little more than a drop in the bucket when you consider the enormity of the present deficit gap. In order to avoid insolvency, Greece will continue to rely on assistance from the rest of the Eurozone for the foreseeable future.

It would be bad enough for the euro were it just Greece facing this predicament, but there are several other countries sharing the same fate. It’s just that Greece is the furthest along this inevitable path so it receives most of the news coverage.

Hungary Warned About its Debt

On Tuesday, Eurozone officials emerged from a hastily-arranged meeting to announce that Hungary must reduce its debt level to 3 percent of GDP by the end of this year. Failure to do so will result in the suspension of EU funds earmarked for development projects for the country.

Interestingly, Spain, facing its own fiscal challenges, received permission to run a deficit equal of 5.3 percent of GDP rather than the original target of 4.4 percent. Naturally, this is not going over well with Hungary’s government and even the Austrian finance minister is questioning why one Eurozone member is being held to a more challenging standard than other members.

Still, it is Portugal that remains the odds-on favorite to be the next sovereign nation to be forced to appeal to its neighbors for help. Following two rounds of Long-Term Refinancing Operations (LRTOs) to recapitalize the European banking system, bond yields did decline for many Eurozone nations. But even with its two-year rate declining to 12.48 percent, Portugal’s current yields are more than double this time one year ago with no relief in sight.

U.S. GDP Growth Holds at 3 Percent in 4th Quarter; USD Pares Gain

THE TAKEAWAY: The U.S. Gross Domestic Product Holds at 3% in Fourth Quarter > the Third Round of Quantitative Easing Remained on the Table> U.S. Dollar Pares Gain

The third estimate of the growth of the U.S. economy for the fourth quarter of 2011 was unrevised from the prior estimate, Bureau of Economic Analysis reported today. Real gross domestic product (GDP) holds at an annual rate of 3.0 percent in the fourth quarter, the fastest pace in more than a year and half. The print was in line with expectations as most economists polled by Bloomberg News had predicted no revision from the 3.0 percent growth initially reported. In the third quarter of last year, the world’s largest economy expanded at 1.8 percent.

The largest contributors to the acceleration in real GDP growth were a pickup inventory investment and surges in personal consumption expenditures and in residential fixed investment. U.S. personal consumption expenditures increased 2.1 percent in the fourth quarter compared with an increase of 1.7 percent in the third. In addition, consumer spending for durable goods speeded on more spending on motor vehicles and parts. Partly offsetting these contributions to growth were a downturn in federal government spending, a pickup in imports and a larger decrease in state and local government spending.

For the whole year, real GDP increased 1.7 percent in 2011 compared with an expansion of 3.0 percent in 2010. With the unemployment rate stubbornly high at 8.3 percent, the recovery in the world’s largest economy so far seems to hardly worth celebrating. In his speech in London on Tuesday, Federal Reserve Bank of Boston President Eric Rosengren forecasted that the U.S. economy will grow 2.5 percent this year. He also said that “If real GDP does not grow more rapidly and unemployment remains at its current unacceptably high level, monetary policy may need to be more [simulative]”. Apparently, the Fed still leaves the door open for another round of quantitative easing to boost the economy and support the labor market.

China Data is Solid, But is it Enough to Inspire Fresh Risk On Trade?

Initial market reaction into early Monday trade was risk positive with participants welcoming the shocking weekend China March PMI data, which came in well above expectations, helping to ease concerns over a hard landing in the massive emerging economy. However, we should not be getting too excited with the revelations, given the favorable historical performance for the data series in March, and recommend taking the PMIs with a grain of salt. The subsequent release of HSBC Markit PMIs was actually softer than previous and certainly took some of the wind out of the sails of risk appetite. A much weaker than expected round of building approvals from Australia was also not overlooked and has further depressed some of the positive follow through seen in early Asia trade on the back of the weekend China PMIs.

Moving on, the Bank of Japan Q1 Tankan review came in generally weaker than expected, despite a softer Yen, positive signs in the US, and some stability in the Eurozone. In our opinion, this offers yet another reason to not be optimistic with the outlook for the global economy. We are looking for more underperformance in risk correlated assets going forward.

Elsewhere, we continue to hear more and more from the hawkish members of the Fed, with the latest comments from non-voting Kocherlakota suggesting that policy could in fact be reversed sooner than investors have been pricing. Clearly, this would lead to a net US Dollar bullish development, one in which yield differentials would narrow markedly back in favor of the buck.

Still, the technical fate of the US Dollar is less clear over the short-term, and we see risks for some additional US Dollar depreciation before the buck finally looks to reassert in 2012. The latest Euro consolidation above 1.3300 has now opened the door for a potential acceleration of gains back towards the 2012 highs just shy of 1.3500. We would not rule out the possibility for a push to challenge the 200-Day SMA just shy of 1.3600 before the anticipated underlying bearish resumption within the more definable downtrend off of the record highs in 2008. A break and daily close back under 1.3250 in EUR/USD would now be required to officially negate this outlook and put the buck back in a more attractive setting.

One other major themes in the markets right now is the EU bailout package, with the latest news of a fund that has been increased in size to EUR 800bln generating a good deal of attention. Once again, on the surface the news sounds rather positive, but upon further glance, there is a good deal of speculation and doubt over whether the ESM can in fact secure the necessary amount by mid-2013. Furthermore, we must also be reminded that the need for additional bailout is a sign that the economy requires more stimulus to help rescue it from the depths of a major crisis. For today, we will continue to keep a close eye on price action in EUR/USD for clearer directional insight. As a side note, one other cross rate worth watching this week is EUR/CHF, with the market dangerously close to testing the highly touted SNB 1.2000 floor. A break below this barrier could spark some fresh volatility in the cross.

Dollar Ready to Collapse at Critical Level with FOMC Minutes Ahead

You couldn’t miss it: the US dollar was under pressure through the opening day of the week / month / quarter. Is this a sign for what is in store for the currency through the immediate future or is this still volatility without clear direction. Regardless, the benchmark is staring down serious levels of support and we are starting to see bigger waves on the fundamental plane. If we are waiting for a spark to set things off, FX traders should be ready for the event risk on the docket. Before we set the sensitivity dial to high, however, it is important to understand what the primary themes for the dollar are – in other words, what could get the market moving. The recent boost the greenback extracted from the bounce in rate expectations and Treasury yields has notably backed off. To wit, the 12-month rate forecast for the Fed measured through overnight swaps are anchored to 10-15 bps and refusing to take the next step to 9-month highs. Further dampening early reads of a return to carry glory, the Fed purchased $4.5 billion in longer-dated Treasuries (the first of four purchases this week) in the Operation Twist effort to lower rates.
For dollar traders, the restrained outlook for yield should curb expectations for a hearty and lasting rally to develop on the basis that the greenback is soon to be a carry candidate (though there is still room for short interest to unwind Fed stimulus-funded positions outside the US). Alternatively, we still have the opposite end of the risk spectrum for the dollar to react to: risk aversion. And, in that role, little slack has developed. In this role, those trading dollars or risk sensitive assets (ie most markets), a close eye should be kept on the upcoming FOMC minutes. Though there is relatively little scope for change in policy expectations from the central bank, there is a rapidly growing faction expecting the minutes to outline options for future stimulus moves. And, in case there is doubt to the legitimacy of these calls, a Fed survey shows 15 of the 21 Primary Dealers (a market maker for government securities) expect QE3. That said, we go through periods were the market starts to lean on its stimulus expectations. This looks to be one of those times. If prayers are answered, the dollar falters, missed and it may rally.
Australian Dollar Traders Head into RBA Decision with Strong Opinions
There was a remarkable drive behind the Australian dollar at the open of trade in Monday’s Asia session. The catalyst: the Chinese manufacturing activity report. Factory-sector data was released for many of the largest economies, but the 11-month high from China’s survey (53.1) clearly elicited the greatest reaction from the capital and carry markets. For the Australian dollar, the risk connections were clear; but there was the further trade ramifications that gave the currency an extra boost. As strong as that fundamental rally was, the subsequent correction was just as quick and aggressive. Boosting risk appetite itself is one way of getting the Aussie dollar moving. Another way is to alter its position in the carry trade spectrum. To that effect, we are watching the RBA decision for guidance. The baseline scenario is for no change to the benchmark rate (4.25 percent) and there is a low probability of change to the group’s view to future policy making; but swaps markets have recently priced in as much as a 50 percent chance at a 25bp cut this go around. This tells us that someone will be proven incorrect...
Euro Slides against Carry and Funding Currency Alike as Economic Issues Stand Out
There are a few key concerns with the euro for this new week. The ECB rate decision is an obvious one that many are counting down to. That said, we shouldn’t adopt convenience to replace serious fundamental drive. It may be more difficult to define, but the balance of weight behind the health of the Euro-region’s financial markets is still an active driver for the shared currency. Through the open of this new trading week, financial media outlets were rehashing the story that EU officials are hoping the recent boost to their firewall will encourage the IMF to up their own contribution. If that is the headline bulls are waiting on, they could be on ice for a while with the next G20 meeting on April 20. In the meantime, the jobless rate hit a near-15 year high, factory activity stagnated and European bank holdings at the ECB are just off records.
Japanese Yen Rallies Despite Tankan Disappointment
It’s a new fiscal year for Japan and the currency still managed a significant rally through the opening 24 hours of the new week / month / quarter / year. That in itself wouldn’t be particularly unusual if it weren’t for the fact that the data released through the period (the Takan numbers for the first quarter) didn’t disappoint and risk trends were actually pointing higher. That would suggest that the risk push is building on false pretenses or the currency is building its own strength. The yen will struggle for real progress; but if a true risk unwind kicks in, the yen will snap too quickly.
British Pound Outpaces Euro with Activity Report, BCC Cries Out for Stimulus
The sterling advanced for a third consecutive day against its euro counterpart. That said, the currency didn’t stray too far from its bigger cousin when a third party was drawn into the conversation (like EURJPY and GBPJPY). On the data front, the UK’s standing on the manufacturing release can out well – the 52.1-reading was the highest in 10 months. Despite the implications this carried for growth, however, the British Chamber of Commerce continued its calls for government stimulus to help out the “weak” recovery. How strong will this call grow?
Swiss Franc Pushing the Envelope, Backing the SNB into a Corner
We are little more than 30 pips away from the SNB’s self-determined 1.2000-floor on EURCHF. There was already significant pressure on the central bank’s shoulders as a significant crisis event for the Euro Zone could have sparked an overwhelming flood of safety-seeking capital that swamped their offsetting efforts and subsequently trigged stops on floating long orders. Now, there is less of an immediate threat to the financial functioning of the euro-region, but diminishing the buffer room will nevertheless leverage the risk for the SNB. How close will they let it get?
Gold Up as Dollar Down, Metal Traders Would Cheer Stimulus Talk
The dollar is down and gold is up – little surprise there. When we look at the precious metal’s performance against the broader currency spectrum, we see the higher yield players were making out with gains. That means investors were tapping fear of underperformance for specific currencies rather than wholesale shifting capital out of the FX realm. That may change in the upcoming session as we are back on the stimulus conversation. If the FOMC minutes lays out the steps for the next stimulus effort as Goldman suspects, currency appeal with diminish.