FX Insights: Forex Trade Team Update-04/03/2007

By FX Insights Moderator,

In today’s market action we had a bit of a tug of war going on — on one end we had the EUR/USD and on the other we had several of the market correlated variables and some central bankers… one of those factors was gold…

Gold and the EUR/USD were highly correlated today… we saw the euro rise with gold, only to fall from the 5250 level as gold took a sharp drop in the late morning NY session… in addition, oil faced some profit-taking and sell-offs ahead of tomorrow’s OPEC meeting in Vienna.

The Dow had a rather neurotic day, going down, then up, then stabilizing towards the end of the day…

Add today’s rhetoric from the Fed and ECB, and you have the situation we saw today — a very tight range where the euro doesn’t want to stay below 5200 but doesn’t want to rise above 5250…

After yesterday’s verbal intervention from Trichet and other ECB officials, I imagine some market players were on the sidelines waiting to see if there was any follow through to yesterday’s comments…

We did get a bunch of jaw-boning from the ECB and Fed today, but most of it was EUR+… here’s a few key things that came over the news wires today:

ECB’s Quaden: Euro strength has both advantages and disadvantages. Excessive FX volatility must be avoided. US authorities must reaffirm a strong dollar policy. Inflation is a big concern.

Dutch Finance Min: Euro Zone economic fundamentals are sound, should not complain about a strong Euro.

ECB’s Almunia: Euro Zone fundamentals “remain solid.”

Fed’s Bernanke: Delinquincies, and foreclosures to rise for a while longer.

Fed’s Mishkin: Inflation expectations appear contained, expects unemployment to rise further this year – Says rate cuts, fiscal stimulus should improve odds of avoiding more adverse outcomes. Expects consumer to weaken, sentiment “plummeted” in Feb. Sees housing as a drag on the economy for “some time to come,” risk of feedback loop from markets to economy. Says long-run inflation expectations are consisent with annual PCE price index rise of 2%.

Fed’s Kohn: State banks face deteriorating credit conditions.Weak housing markets adversely affecting commercial real esate, and bankruptcy rate could be sign of increasing delinquency rates on consumer loans.

Fed’s Kohn: Correction in markets is painful, necessary, not going away quickly, not much “we can do” about near term slodown, economy entering period of “slow growth.”

Fed’s Fisher: Fed cannot assume slower growth will curb inflation, overall PCE price gains have been “alarming.” Notes that since Jan 30 fed rate cut, USD has hit record low.

You get the idea… so overall, central bankers and finance ministers in Europe remain “ok” with the high euro and remain concerned about price stability… the Fed, on the other hand, are still just a bunch of lying, blithering idiots who will do all they can to run the dollar into the ground, inflate the money supply, which will cause further price instability, and ignore the real issue commony know as “stagflation.”

Tomorrow’s fundamentals:

We got to take a breather today, but tomorrow we have a ton of data coming out of the Eurozone and U.S.

Eurozone — early tomorrow morning we get inflation and retail data… I believe we continue to see heightened inflation pressure in the Eurozone’s production sector and retail sales should see a modest gain from the prior month…

U.S. — we start with ADP… who really cares, ADP sucks and they rarely get it right… next we have NFP productivity — this is a piece of data I don’t really research, but basically diminished productivity is actually good for the USD as it relates to our market (inflationary).

The big data tomorrow is ISM and Factory Orders and Biege Book… ISM services may show some signs of life… the service sector has remained somewhat resilient. Now, should we see a downside surprise, this would be a terrible kick to the U.S. economy based on the fact the U.S. has slowly turned into a service economy and pulled away from a manufacturing and production economy.

I see no relief with Factory Orders tomorrow, not based on the kind of data I’m seeing out of the manufacturing and production sectors…

Then we get Biege Book later in the day… the past few months the market has been reacting to the Biege Book more so than in the past… if this Biege Book focuses strictly on downsides to growth, housing, and jobs, and avoids the inflation issue, you can expect more dollar sell-offs…

EUR/USD:

Don’t let today’s drop in commodities trick you into thinking we’ve seen the highest highs for gold and oil…

As long as the dollar keeps getting beat up by the euro, gold and oil will keep pushing north and will keep pushing to new all-time highs…

Again, I still have to remain biased to stay euro long — there are almost zero indicators that the market is ready to make a bigger correction — yet…

There’s one man who holds the power to take us down a few hundred pips and his name is Trichet… I can almost feel the market going into a holding pattern right now, waiting on Trichet’s press conference…

Yesterday, Trichet’s very brief comments caused the euro to drop 120 pips… I really believe Trichet could set the tone on Thursday for how the market will trade the euro in the near-term… last time he caused a big euro sell-off and big profit-taking and he can certainly do that again…

So for me, this means trading with more caution heading into Thursday’s ECB activities… I may even close some of my euro longs between 4651 and 4708 as a way to bank good profits and ROI in the event Trichet is dovish and the market makes a big, knee-jerk emotional reaction like last time…

If you’re one of our newer members trying to ween off the tech indicators, now would be a great time to take some invaluable learning lessons for how this market really works and for why the market responds the way it does… I hope yesterday’s verbal intervention was a learning lesson… I think Thursday can and will provide another valuable lesson… screw the techs and lets take or signals from those who have the power to move the market and from those who then respond to this power by actually moving the market…

One last thing I want to mention in regards to trading and specifically shorting the euro — there’s nothing wrong at all with shorting the euro right now as long as you can meet a few conditions:

1. You actually have the usable margin to safely take a euro short
2. You take a small margin short
3. You are willing to take the euro short on a swing basis, being comfortable with drawdowns
4. Your account can survive to a possible 1.5400+ topside

If you’ve got the margin and you can survive more topside should the market want to keep taking us farther north, then I say more power to you with a euro short above the 1.5200 level…

We’re going to come down as soon as some of these factors we’ve talked about the past week start to go in motion, it’s just a matter of being patient, trading the shortside smart, and not getting emotional about it… and of course, not overleveraging your account!

That’s all for now… see ya in the chat!

-FX Insights