FX Insights: Forex Trade Team Update-05/03/2007

By FX Insights Moderator,

Are you getting tired of the euro making new all-time highs? I’m not, I’m enjoying it actually… in fact, I’m enjoying it so much I’m going to hold some of my best euro longs for a few more all-time highs…

Just about everything that could go wrong, went wrong for the dollar today which is why we went to 1.5304 during the NY session…

Gold, oil, the Dow, the banks, and the fundamentals all ganged up on the dollar to send it to new lows against the euro…

Oil was especially harsh to the dollar as it pushed to new highs after OPEC told the markets it’s not increasing oil output… coupled with today’s crude invetories data, that’s all the market needed to push oil north and push the dollar south…

As we forecasted, Eurozone data came in at or better than expected — no big surprises there, and the U.S. data was disappointing, giving the market all the more reason to hammer the dollar vs. the euro.

One of our newer community members asked me to post some things we were talking about in the chat this morning as the euro was running up to the top of the range… the market gave us some great lessons on trading and picking price targets and key levels…

Listed below is what we were talking about in the chat as things were happening in real-time. I’m also attaching a picture so you can get a visual on what we were talking about…

Banks triggering stops/finding key levels:

In the earlier NY session it seemed as if the euro was struggling to move north, but the price action was quite clear that we were only facing minor resistance and the smart trade was to stay euro long… a few were talking about shorting the euro and we very clearly said: “hold onto to your longs…”

That was the first part of things… as the market was moving, we were discussing what the topside key levels were, discussing about when to close some longs, etc. I offered a topside of 5304 to 5321…

Just before 1130 EST, we hit 5304 to the pip and then immediately bounced and eventually made our way back down to the 5250 level before bouncing off support and then falling into a range…

The question was asked, “how did you pick that 5304 in your topside target range?”

Well, I always use price action in my calculations for key topside/bottomside levels… so, I was looking at our low of the day and was looking at how far we’d come, and then based on the way the market was moving (i.e. the speed and degree in which we were moving) I calculated the bottom to top move would be somewhere around 120 to 180 pips before stopping and reversing… in addition, I’m looking at the EUR/USD 30-minute price opening data…

So, working off of those calculations, my next factor was where I thought the dumb mindless traders would be putting their stops. Next, I felt, based on real-time price action, that the banks and brokers were going to use the market momentum to trigger stoplosses and to take out stops…

OK, so I’ve got my 30-minute opening data, I’ve got my bottom to top estimations, I’ve got my estimations on where I thought stops would be placed, and I’ve got my estimations that the banks would trigger stops this morning, I calculate all of this data together and the end result is the 5304-5321 topside target…

Here’s the visual:

Make sense? Probably not… but, that’s the best way I can describe what was going on in my mind as we were in the chat watching everything play out…

Tomorrow:

Basically, forget everything that’s happened in the market this week because tomorrow we have two events that could quite possibly change the ballgame in the near-term…

1. ECB interest rate policy — I strongly believe Trichet will hold rates steady at 4.00%… obviously if there was a surprise hike or cut, the market would go nuts… you understand this, no need to go anything further on that one…

2. Trichet press conference — Mademoiselle Trichet holds the wild card tomorrow… if you ask me to predict what he’ll say, there’s no way I can do it. Last go around he was over-the-top dovish on growth and still fairly hawkish on price stability… and what did the market do? It hammered the euro against the dollar solely based on a few lines from Trichet…

Just like Bernanke, the man holds the power to move markets… if you’re a tech trader, screw your techs tomorrow and pay attention to what Trichet tells the markets… he will speak live at 0830 EST and we’ll give you the link to watch his speech…

This is pretty simple stuff… if Trichet remains over-the-top dovish on growth and gives rhetoric about inflation easing, rhetoric about downside risks, rhetoric about possible European bank writedowns, etc., I believe we’ll see some EUR/USD correction…

Now, if Trichet cools down the slow growth chatter and focuses on price stability, focuses on food and energy prices, wage inflation, etc., we’re just going to keep rising and rising to new all-time highs…

Will Trichet talk about the wildly appreciating euro? Not directly I don’t believe, but indirectly he could use this stage to do some verbal intervention if he’s so inclined…

Basically what I’m telling you is — expect the unexpected — expect the worst case and best case scenario, whatever that means to you based on the open trades you have…

EUR/USD:

With tomorrow’s ECB events, I’m sitting tight… I will hold open all of my euro longs between 4595 and 4708, they will not be getting closed at all, I’ve already made that decision no matter what…

I will likely close any open trades I have above the 5180 level in order to protect margin and any erratic moves we see the rest of the week…

I cannot recco any shorts right now unless of course you have ample margin and can withstand big drawdowns and are willing to hold them on a swing basis…

I remain biased to be euro long — end of story…

I strongly urge you to practice strict and smart risk management heading into tomorrow’s events and Friday’s NFP. It’s of the utmost importance right now.

See ya in the chat!

-FX Insights