Aussie dollar

Once a year I like to write about the Aussie dollar although I do not get into the serious technical’s as this is the domain of our specialist currency expert, Matt Barnes. As an aside, each of the columnists selects their own area of specialty so hence you benefit with some really deep knowledge from our writers in specific areas . Imagine having the discipline as does Tim Walker to write exclusively and become a walking encyclopaedia on one stock - STO!

Anyway to the Aussie chart:

click to enlarge

I like raw line charts and what jumps out at me is the movement we have seen in the last few months. But using Elliott it has not necessarily been easy to pick moves as it has taken us down the garden path a few times.

Back in February it teased us with the prospect of a low in the range 78 – 82 cents:

click to enlarge

We then had to change our thinking as it went into an A B C pattern and then flipped up again in April:

click to enlarge

And now in June it has reversed thinking and we see a new bearish move:

click to enlarge

This can frustrate Elliott fans but I take the view such is the vagaries of the markets. I leave such a market until a decent trend develops or I trade both sides just for the sport – but holding only short term positions.

Short term positions I know suit many readers and the Aussie is likely to give many of you lots of fun and money in the coming weeks.

1. The U.S. dollar may be the world’s reserve currency, but that also means that countless tiny factors play into the buck’s value. Interest rates, major political moves, not to mention global events in all corners of the world can send money rushing for (or away from) the buck. For that reason, many traders have a hard time getting a “feel” for where the U.S. dollar is heading. So rather than playing a guessing game, they simply avoid the buck altogether. Instead, they trade crosses, like the EUR/JPY or GBP/CHF, etc.

2. Some crosses can be more volatile. That means they have the potential to jump higher or fall farther faster. Some traders like these types of quick movement because it gives you more opportunities for larger gains. This is why they have a love for pairs like GBP/JPY, which trade about 100 pips more a day than a “major” pair like EUR/USD.

3. Others like to technically trade crosses because they don’t have as much impact as dollar pairs often do. You see, U.S. news is the biggest mover of currency pairs. So if you want to trade off of technical signals from the charts and not get as many surprises from news announcements, then you can trade the crosses.

4. Spreads are narrowing for cross rates more and more all of the time. (This is important because remember forex dealers charge you the spread between each trade as their fee.) There was a day when the only reasonable spreads out there were in the majors. However, many cross rates have spreads between their buy/sell quotes that are half of what they were just a couple of years ago. As volumes increase in these crosses, the spreads narrow and draw even more traders into the pairs. So what once was a roadblock to some traders is no longer a problem.

5. Trading crosses offers more of a diverse trading portfolio than just trading EUR/USD, GBP/USD, USD/CHF, etc. If the dollar moves in a huge way, it’s going to affect all of those pairs even though they have other foreign currencies involved. However, if you have EUR/USD and GBP/JPY and you get a “dollar event” that moves EUR/USD, it doesn’t necessarily directly affect GBP/JPY. Therefore, you’ve diversified your risks.

Step 2: Fund Your Trading Your Account

There are three common ways to fund your account. The way that you fund could depend upon your starting balance.

If you’re planning to deposit $10,000 or less, then the quickest way to fund your account is through a debit or credit card. You can process this through your broker’s Web site. This will typically get the funds into your account within one to three business days.

If you are putting in amounts larger than $10,000, then you might want to consider a bank wire. Simply click on the “bank wire” option on your FX dealer’s site. The Web site will then tell you what banking information you will need to fund your account.

The other common funding method is the paper check. It’s probably the most-convenient method, but it’s also the slowest. If you fund with this method, you’ll want to expect it to take at least 5 to 10 business days for your funds to clear and be ready for trading.

Note: Here’s what experience has taught me…

The larger your trading account is, the less you will risk per trade. Risking less is always a good thing. It means that a few losing trades won’t kill your account. So having a well-capitalized account is definitely the key to success in trading.

Step 3: 2 Things You Must Do Before You Place Your First Live Trade

First, download your FX firm’s demo trading station. Secondly, ask one of their customer service reps to walk you through the trading station. (I wish someone had told me this before I started placing live trades.)

You want to do this so you know the mechanics of placing a trade, a stop order and how to exit an order long before you place a real trade. You will also be able to practice free of charge before you risk any real money in the market.

Now, lots of experts recommend trading a demo account first (that’s your “practice Forex account”). In general, I also think it’s a good idea to set up a demo account to be familiar with the software.

But that’s all a practice account lets you do – understand the software. It’s NOT a good representation of how you will trade.

Here’s why: Once you start trading with real money, you are much more emotionally invested. So trust me. You will trade differently with real money on the line (even 1 micro lot) than you will with any number of “demo lots.”

It’s a lot like losing monopoly money. At the end of the day, it’s just not that important.

After a somewhat frightening sell off in the second half of 2008, the Australian Dollar has virtually done nothing but rise in the eighteen months since its October 2008 lows.

When we talk about a currency rising in value, we are comparing it to the value of other currencies. For example in ProfitSource, the chart FXADUS values the Australian Dollar (AD) against the US Dollar (US). So if the price on the FXADUS reads 0.92, it means one Australian Dollar is worth 92 US cents.

As I look across charts of the Australian Dollar against different currencies like the Euro, the Pound, the Yen and the Swiss Franc, I am seeing a strong bullish move in the Australian Dollar – but also some potential upcoming resistance.

Let’s take a look at some individual charts. In Chart 1 below, we will look at the Australian Dollar against the US Dollar (FXADUS in ProfitSource).

click to enlarge

Earlier this year I wrote an article on repeating ranges in the Australian Dollar and noted that the current highs around the 93 cent level came out on a repeat of a previous range. I also noted that the market had repeated this range very quickly and that perhaps some time needed to elapse before the next move. I was looking for the Australian Dollar to retrace to the downside or at least go sideways – despite the strong fundamentals and the rising interest rates.

You can see in Chart 1 above that despite all the interest rate rises, the Australian Dollar is as yet unable to break through this key level. In fact, Tuesday’s interest rate increase saw a large fall in the Australian Dollar.

In Chart 2 below (FXADSF in ProfitSource) we can see that the Australian Dollar has reached parity – with the Swiss Franc. This is great news for me, as I am travelling to Switzerland in July!

Chart 2

click to enlarge

While the Australian Dollar has not entered a sideways phase like it has against the US Dollar in Chart 1, you can see the market is approaching a series of old tops around the magic “1” level. Obviously parity (one for one) is an important psychological level and it will be interesting to see how the market reacts this time round.

In Chart 3 below (FXADBP in ProfitSource), we can see that the Australian Dollar is trading at record high levels against the British Pound, but has also entered a sideways phase.

Chart 3

click to enlarge

As you can see from the chart, the market reached the 200% milestone from a Double Bottom in March but hasn’t been able to go any further – yet. The current monthly swing range is also around 50% of the size of the first monthly range up from the October 2008 low.

These three charts all show the tremendous bullish move in the Australian Dollar, but they also show some potential resistance. Now I’ve been trading long enough to know that not all resistance levels hold the market every time, however they are more likely to hold at times when the market is due for a rest.

Our seemingly strong economy and consistently rising interest rates have not been enough to push the Australian Dollar higher against the US Dollar or the Pound in recent months and it will be interesting to see how the next stage of market action unfolds.

Needless to say, as a traveller overseas I am VERY grateful for the strong Australian Dollar! While it may go higher by the end of the year, I am travelling in July and have therefore locked in these exchange rates at what I believe are great prices.

When trying to judge the success of traders there is nothing more definitive than the rate of return they have been able to demonstrate. Regardless of what other explanations or justifications you might consider, a trader that has achieved a 50% return over the past year has been objectively more successful than another who generated a 5% return. Money talks and you know what walks.

But does this mean that they are a better trader? Given that trading returns are likely to fluctuate in the short term, we should avoid trying to lionize those who have experienced short term success. What any seasoned trader will tell you is that consistency is what matters above all else. Indeed, it is far more desirable to consistently generate a low but reliable return over the long term, rather than experience short and intermittent periods of high growth interspaced with periods of loss – especially when you plan to support yourself through trading. Besides, seemingly low rates of growth are far more achievable and can nevertheless compound to produce excellent results over time.

To demonstrate the point, let us assume that a trader claims he can achieve a reliable return of 10% per week by assuming only moderate levels of risk (I have actually met many traders that claim to be able to generate significantly more than this). In order to understand the validity of such a claim we need to understand the power of exponential growth and its implications. Let’s say that you invest $1000 at the start of the year and reinvest your profit along the way. After the first week you will have $1,100 (10% of $1,000 plus the initial capital). The following week you will have $1,210, then $1,331 etc. By the end of the year, the trader would have a trading account worth almost $130,000. That’s an annual return of nearly 13,000%!

So when someone claims they are able to make 10% each week, what they are saying is that they are able to make 13,000% each year. Not impossible, but extremely unlikely. Consider the case for someone who claims to be able to make 20% per week. Their initial $1,000 will grow to $10.9 million dollars in just one year! Again I’m not saying this is impossible, just highly improbable.

Of course experienced traders will be quick to point out some flaws in this reasoning. The first one is that you don’t always manage to get your targeted rate of return each week. So this just means that if you expect to make consistently high returns week in and week out you will be setting yourself up for massive disappointment. If expert traders acknowledge that a 10% weekly return can never be completely reliable, then you too should view such expectations as highly unreasonable.

The second point professionals will point out is that you should never reinvest your entire trading account each week and expose yourself to such high levels of risk. And they are of course completely right. However let’s say that you don’t reinvest your entire trading account, but rather only ever maintain the initial position size. If we again assume 10% each week, that means we make $100 each and every week from our $1000 investment – or $5,200 each year. That’s an annual return of 520%. Again, I view such an outcome as unlikely and extremely difficult to maintain. I know of no single example in the entire history of share market investing where anyone has ever managed to reliably and consistently generate 500% each and every year over the long term. In fact, the record demonstrates that even the best professionally managed hedge funds have never exhibited returns even close to this – consistently, that is.

Of course, many people and funds have achieved these kinds of returns and more for particular years but the point is that these massive rates of return do not appear to be sustainable and reliably replicable. Certainly those that have achieved super-massive returns can never guarantee that they will continue.

If you look at the Australian market since inception, that is since the late 19th century, the average annual growth is just 5% (this excludes income from dividends). That equates to less than 0.1% per week. Your common sense will tell you that anyone who claims to be able to reliably achieve significantly more than this, during good times and bad, is not being entirely reasonable. For example even a 2% return each week will allow you to double your investment capital each and every year without having to increase the position size, yet there are few examples of traders that consistently double their money each and every year.

Of course you also need to account for transaction costs – that is the costs associated with buying and selling. Depending on your trade size, this could mean that you need to generate a significantly higher return to account for these costs. For example, a trade size of $2000 will require you to experience 4% growth per week to account for brokerage (in this example $20/trade), and still maintain net growth of 2%.

The moral to this story? Be reasonable and realistic in your trading targets, and beware the false profit. It’s easy to get excited about big returns, but the point is that you are better off targeting lower returns that are more likely to be sustainable. It’s always nice to experience a big pay off from a particular trade, but we need to appreciate that this is the exception to the rule. After all, if it was that easy to make consistently big returns, people like Warren Buffet would be far more common.

Click to enlarge

We’ve already had a false break of either edge of the range and have now powered through the midpoint or ‘Point of Control’ of the structure (Slipstream Trader members will know what I’m referring to here).

The short term trend has also turned up so there’s a chance now that the AUD is on the verge of heading for another leg up. The points to be wary of on the way up would be around 95.5c which is 50% outside of the current range and is an area where it could fall over.

If it can burst through there the next stop is the 2008 high of 98.5c and then parity.

All bets are off if we see a sell off beneath the recent low of 87.3c. This would confirm the failure of the last four months distribution and we could see a more sustained selloff if this were to occur.

The Canadian labor market is widely expected to improve for the second consecutive month in September, with economists forecasting employment to rise 5.0K from the previous month, and the data is likely to encourage an improved outlook for the world’s eighth largest economy as policy makers see the nation emerging for the first recession in over a decade.

Trading the News: Canada Net Change in Employment

What’s Expected
Time of release:        10/09/2009 11:00 GMT, 07:00 EST
Primary Pair Impact :    USDCAD
Expected:         5.0K
Previous:         27.1K

Impact Canada’s change in employment had over USDCAD for the past 2 months

August 2009 Canada Unemployment Rate Labor demands in Canada improved for the rise time in four months, with the economy unexpectedly adding 27.1K jobs in August, while the unemployment rate rose to 8.7% from 8.6% in July to reach its highest level since January 1998 as discouraged workers returned to the labor force. The breakdown of the report showed part-time employment jumped 30.6K to lead the rise, with the participation rate increasing to 67.3% from 67.2% in July, while full-time jobs slipped 3.5K to mark the fourth consecutive decline, and conditions may continue to improve over the coming months as the government takes unprecedented steps to stimulate the ailing economy. Nevertheless, Bank of Canada Governor Mark Carney continued to hold a cautious outlook for the economy and sees a risk for a slower recovery as a result of the sharp appreciation in the exchange rate, and the BoC is likely to hold a dovish policy stance throughout the year.

July 2009 Canada Unemployment Rate The Canadian labor market weakened more than expected in July, with employment tumbling 44.5K from the previous amid expectations for a 15.0K drop, while the annual rate of unemployment held steady at an 11-year high of 8.6% for the second-month as discouraged workers left the labor force. A deeper look at the report showed full-time positions slipped 29.1K during the month, with part-time jobs falling 15.4K from June, while the participation rate pulled back to 67.2% from 67.5%, and the labor market is likely to remain weak going into the following year as policy makers anticipate unemployment to rise even as the economy emerges from the recession. As a result, Bank of Canada Governor Mark Carney pledge to keep borrowing costs at the record-low throughout the first-half of 2010 in order to foster a sustainable recovery, and is likely to hold a dovish outlook for future policy as job losses intensify.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

How To Trade This Event Risk

The Canadian labor market is widely expected to improve for the second consecutive month in September, with economists forecasting employment to rise 5.0K from the previous month, and the data is likely to encourage an improved outlook for the world’s eighth largest economy as policy makers see the nation emerging for the first recession in over a decade. Business spending in Canada expanded for the fourth consecutive month in September, with the Ivey PMI rising to 61.70, which is the highest reading in a year, while  leading economic indicator jumped 1.1% in August to mark the biggest rise since 2002, and conditions are likely to improve throughout the second-half of the year as the International Monetary Fund raises its economic forecast for the nation and expects the region to grow at an annual rate of 2.1% in 2010 amid an initial forecast for a 1.6% expansion in GDP. However, a report by Statistics Canada showed the economy failed to growth in July after expanding 0.1% in the previous month, while the capacity utilization rate slipped to a record-low during the second quarter, and businesses may continue to scale back on production and employment over the coming months in an effort to weather the downturn in global trade. Nevertheless, Bank of Canada Governor Mark Carney held an enhanced outlook for the region and said “growth has resumed in Canada,” but reiterated that “persistent strength” in the domestic currency poses a threat to the recovery and stated that the board maintains “considerable flexibility” in its conduct of monetary policy even as the central bank pledges to keep borrowing costs at the record-low throughout the first half of 2010. Moreover, Mr. Carney argued that the excessive movements in the exchange rates “is a downside risk to inflation,” and expects the economy to face further headwinds as he sees an “uneven” recovery in the US, Canada’s biggest trading partner, and policy makers are likely to hold cautious outlook for the economy as the labor is expected to weaken further over the coming months. At the same time, Prime Minister Stephen Harper said that the nation is emerging from the economic downturn “only in a technical sense,” and noted that the recovery remains “extremely fragile” as households face a weakening labor market paired with tightening credit conditions, and an unexpected drop in employment is likely to weigh on the outlook for future growth as policy makers continue to see a risk for a protracted recovery.

Trading the given event risk favors a bullish outlook for the Canadian dollar as economists anticipate labor demands to improve for the second-month, and price action following the release could set the stage for a short USD/CAD trade. Therefore, if employment rises 5.0K or greater, we will look for a red, five-minute candle subsequent to the release to confirm a sell-entry on two-lots of the dollar-loonie. Once these conditions are met, we will set our initial stop at the nearby swing high, or a reasonable distance, and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

On the other hand, the slump in global trade paired with fears of a slower recovery may lead businesses to take addition steps to lower their cost structure, and an unexpected drop in employment is likely to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if payrolls fall 10.0K or greater from the previous month, we will favor a bearish outlook for the loonie, and will follow the same setup for a long USD/CAD trade as the long position mentioned above, just in reverse.

Why Stocks May Not Move
Higher Following Earnings Season

Everywhere we look there seems to be a property connection, even the US GDP numbers are said to have been negatively influenced by slowing investment in US residential property.

This morning we’ve been feverishly finishing off the August edition of Australian Small Cap Investigator. In fact, if you’re a subscriber, there’s a chance you’ll get it even before this newsletter gets to you.

In some ways, the current market conditions make it harder to pick stocks than when the market was hitting lows in November last year and then in March.

Even though we didn’t know for a fact that it was a low point, picking stocks was a lot easier. Especially small caps.

When you’re investing in a market as high risk and volatile as the exchange’s little tiddlers, the extra volatility suffered by the rest of the market was nothing new. It’s what we’re used to at this end of the market.

That means, when you’ve got small cap stocks getting beaten down to bargain basement prices, you know they can’t go much further - or you hope they can’t anyway.

Then it’s just a case of picking out the good ones. Of course, it’s not quite as simple as that, you’ve still got to know what to look for.

As you know, the market is always looking ahead. Back then it was looking ahead and seeing the worst. When that’s priced into a stock it makes the stock even cheaper than it should be.

Now, the market is looking ahead and it’s seeing nothing but happiness.

It’s why the main index is up over 30% from the low. So now, when you’re picking stocks you’ve got to work out rather the move is justified and whether there is still room to move higher.

That’s the case with all stocks, not just the small caps. You can see by looking at the chart below that after the big run from July, the market appears to be settling into another consolidation phase:

It would be easy to think the move from early March to today has been smooth. But another look at the chart tells a different story. In fact between the beginning of April and the beginning of July the market just about broke even. Then it took off again.

But that’s all part of the game. There’s nothing particularly scientific about it. It purely means that between April and July investors as a whole considered the rally to have run its course, and perhaps there was some caution as earnings season approached.

As can happen, when company earnings started coming out better than expected it gave the market a reason to buy stocks again. That’s pushed the market higher.

Now earnings season is mostly over, the market will need to look for other reasons to move higher. If none are found that’s when you’ll see a sideways consolidation.

Still, the market has put on about 200 points since it dipped last week. And this morning it’s edging higher again.

But whatever happens, trying to make specific long term predictions about a level for the major indices is doomed to end in embarrassment for those that try. So we won’t be tempted.

The S&P/ASX200 fell 0.08% yesterday, while on Wall Street the Dow Jones Industrial Average added 37 points. In Europe the FTSE100 slipped 0.43% and the CAC40 dropped 0.54%.

The price of gold in Australian dollars is trading at $1,133.24, while in US Dollars it is trading at $950.79.

The Aussie dollar strengthened slightly versus the US dollar and Japanese Yen, trading at USD$0.8394, and JPY78.57.

Crude oil traded this morning at USD$72.74

US Dollar Preparing to Fight Back

What’s new on the FX markets? What is the current US Dollar direction? The US Dollar index is a good synthesis and gives a pretty good snapshot of the current trends.

Let’s take the daily chart. The index has just reached a key level. This level is a support line around 78.5 and is the last Fibonacci retracement ratio (the 61.8%) of the rise occurred between points A and B on the chart. Point A is the inflection point where the Greenback started bouncing firmly last year at mid-July. From this low of 72.11, the index rebounded to a high of 89.71, posted in last March (point B). This 24% uptrend was backed by an ascending support line (green line) that was eventually cleared in late April this year.

Click to enlarge

This triggered a bearish signal that drove the price lower very quickly. As a result, the index fell to a low of 78.37 in early June (point C), the 61.8% Fibonacci retracement level. The index found some support there and bounced to 81.8 two weeks later, before it eventually fell back to the Fibonacci support (point D).

Points C and D may create then a “double bottom” chartist pattern. As this pattern appears on a support line, it is likely to strengthen its accuracy. That’s why a new rebound from the current level is probable. However there is an immediate resistance line that could prevent the price to move higher on the near-term: it’s the descending line that comes from point B and goes through lower highs (points E and F).

The MACD has indicated a bullish divergence. It did not confirm the new low posted by the price action on point D. The current price is 79.31 and the resistance is just above, around 79.50. A cross above this resistance line would turn the technical indicators bullish. The next target would probably become the level of 83, which is the 38.2% retracement ratio.

Of course, on the downside, a break below the support of 78.30 would be a clear new bearish signal, with probably no important new support before 74.75 (a previous high posted in June 2008).

Tomorrow at 1400EDT/1800GMT, the Fed will release its Beige Book summary of US economic developments ahead of the August 12 FOMC meeting. We think the overall tone of the report is likely to further undermine short-term sentiment, given the rather meager improvements in recent data and the overhang of weak longer-term components, such as unemployment and consumer spending (see Research Analysis below). We think the Beige Book will lead to further selling of so-called risky assets (e.g. stocks, commodities, and the JPY-crosses, such as EUR/JPY, AUD/JPY, etc.). However, weaker than expected US July consumer confidence released on Tuesday has already seen a significant unwinding of long risk trades, especially in the JPY-crosses. The drop in the JPY-crosses comes against the backdrop of overweight ‘long-risk’ positioning (i.e. long JPY-crosses), so we think the downside shake-out has more room to run. On the technical front, EUR/JPY and GBP/JPY have fallen back inside their Ichimoku clouds, suggesting a failure from above the cloud and a rejection lower. They have also broken below trendline support for the move up since July 13.

Trading Strategy: Rather than chase the JPY-crosses lower after Tuesday’s sell-off, we will look to use remaining strength to establish short positions prior to the Beige Book, focusing on EUR/JPY and GBP/JPY.

EUR/JPY: We look to sell between 134.30/80; stop loss above 135.20; take profit between 132.00/50.

GBP/JPY: We look to sell between 155.80/156.50; stop loss above 157.00; take profit between 153.50/154.00

Research Analysis: The current Beige Book will cover economic activity from early June through late July and here is how we expect some of the more important components to have evolved.

US consumer spending remains depressed. The June retail sales report showed a -0.1% monthly decline in “control” retail sales. This number strips out the volatile gasoline, building materials and auto dealer components and offers a clearer picture of the underlying trend. The three-month annual rate plunged to a dismal -2.7% from -0.3% and was the worst since February. More recent data suggest no change in the downward trend. Chain-store sales were running at a dreadful -5.6% annual rate as of July 25 and this is down from a -4.4% pace at the end of June. Furthermore, the recent decline in consumer confidence - to 46.6 from 49.3 last month - points to continued weakness in the months ahead.

The employment situation is showing little signs of improvement. While initial jobless claims have corrected sharply lower in the first few weeks of July, the reports were riddled with statistical adjustment problems. The earlier than usual auto layoffs in June meant that July witnessed much smaller seasonal declines in that space. This threw a wrench in the government’s adjustment process and thus the better numbers are merely a mirage. The potential for a rebound back above the 600K level is extremely likely in the weeks ahead. More evidence of continued deterioration came from the Conference Board’s consumer survey. The labor differential–which measures jobs plentiful minus jobs hard to get– slipped to -44.5 in July from -40.3 the prior month and is the lowest now in 17 years. Indeed, the evidence continues to point to an unemployment rate above 10% sooner rather than later.

Credit markets are still on the mend and the improvement will be duly noted. Interbank lending is well back to normal and the TED spread (3-month Treasury/3-month Libor spread) has collapsed down to just 31 basis points. This is well below the two-decade average of 49 basis points and miles away from the 464 crisis highs. Corporate lending is still troubled and the spread between Baa corporate paper and Treasuries remains high at 351 basis points, well above a normal 220 - thus it is still expensive for businesses to borrow. In an environment where revenues are underperforming this is not a welcome development. Consumer lending likely remained subdued both from tight lending standards and an overall lack of borrowing demand as households repair balance sheets.

Often in trading we will analyse a market using our Gann analysis, make some calculations and determine a price level that looks like it will provide support or resistance in the market.

Sometimes the market pulls up exactly on these levels, sometimes it will pass through by a few points, and sometimes it will ignore our levels altogether!

In previous Trading Tutors Newsletter articles I have quoted WD Gann from page 36 of How to Make Profits in Commodities regarding the all important “50% rule” but I will write it again here: “you can make a fortune by following this one rule alone.”

Let’s take a look at two recent 50% levels on the US Dollar / Japanese Yen Currency Pair (FXUSJY in ProfitSource). In Chart 1 below, we have the 50% level of the range from the January Double Bottoms up to the April top coming in at 94.29.

About the DFX Trend Index

The DFX Trend Index ranges from -100 to +100 and is updated everyday at 5 pm eastern US time.  The numbers correspond to specific trend conditions.

50 to 100: uptrend / potential for a top increases the closer the index is to 100 (high readings during trends)
25 to 50: in a range / bullish potential
-25 to 25: price has reversed to the mean
-50 to -25: in a range / bearish potential
-100 to -50: downtrend / potential for a bottom increases the closer the index is to -100 (high readings during trends)

Japanese Yen Driven by Risk Trends, But Threat of Political Instability Looms in August
•    Euro, British Pound Gain Against Safe Havens, Data Prevents Increase Against Other Majors
•    New Zealand Dollar Rally May Be Hindered (or Helped) By Upcoming Inflation Data

US Dollar Down as Optimism Fuels Demand for Carry Trades - Threat of Risk Aversion Lingers
The US dollar and Japanese yen were the weakest of the majors as investor confidence surged, driving up FX carry trades and sending the DJIA and S&P 500 up roughly 3 percent. For evidence that the dollar’s decline was driven by risk trends rather than fundamentals, one must only look to the US data on hand. First, the US consumer price index (CPI) rose more than anticipated at a rate of 0.7 percent in June, driven by energy prices, though the annual rate did fall to -1.4 percent, the lowest since January 1950, from -1.3 percent. Meanwhile, the Federal Reserve Bank of New York’s “Empire” manufacturing index jumped up to a 15-month high of -0.55 in July from -9.41, with a breakdown of the report showing a surge in prices paid, new orders, and shipments.

However, the release of the minutes from the Federal Reserve’s June meeting left the markets on edge, cutting rallies in FX carry trades short amidst changes to growth and inflation forecasts. Furthermore, central bankers generally expressed doubts that expanding their quantitative easing program would have much of an impact, indicating that traders should not expect increased Treasury purchases anytime soon. Taking a closer look at the Fed’s projections, inflation forecasts were revised slightly higher, suggesting that the central bank doesn’t anticipate deflation becoming an issue, while 2009 GDP projections were revised up to -1.5 percent to -1.0 percent from -2.0 percent to -1.3 percent, and the 2009 unemployment rate forecasts were changed to 9.8 percent to 10.1 percent from 9.2 percent to 9.6 percent.

In other news, trading of CIT Group, a large and troubled commercial lender, was halted this afternoon, suggesting that some sort of news will be released soon. This leaves the question open of whether they will they be deemed as being “too big to fail”, but the market’s response to the news may be negative either way. Indeed, a bailout would set a precedent that the US government will save anyone, which feeds moral hazard, while a bankruptcy filing by CIT would highlight the fact that financial market conditions remain unstable. There are other potentially ominous pieces of news that will be released through the end of the week: JPMorgan Chase will publish Q2 earnings on Thursday morning while Bank of America, Citigroup, and BB&T will publish theirs on Friday. Of the four banks, only Citigroup is expected to announce another quarter of losses, but following the astonishingly strong results we saw from Goldman Sachs on Tuesday, there’s a risk that the bar has been set too high and any disappointing result could resonate deeply with investors and spark flight-to-quality toward the US dollar and Japanese yen, while weighing on carry trades and stocks.

Related Article: FOMC Minutes Cause Carry Trade Rallies to Pause as Fed Indicates No QE Expansion, Weaker Labor Markets

Japanese Yen Driven by Risk Trends, But Threat of Political Instability Looms in August
The US dollar and Japanese yen were the weakest of the majors as investor confidence surged, driving up FX carry trades and sending the DJIA and S&P 500 up roughly 3 percent. In the near-term, there is potential for carry trades to reverse in favor of Japanese yen bulls as we will soon find out the status of troubled commercial lender CIT Group, JPMorgan Chase will publish Q2 earnings on Thursday morning, and Bank of America, Citigroup, and BB&T will publish theirs on Friday.

There are risks to keep in mind in about a month as well, as Japan’s Prime Minister Taro Aso recently called for an election on August 30. Both the ruling Liberal Democratic Party (LDP), to which Aso belongs, and the opposition Democratic Party of Japan (DPJ) have been calling for an early election since last September. The threat here is that the LDP could be booted from power after more than 50 years of governing Japan, creating political instability. Furthermore, the shadow finance minister of the DPJ, Masaharu Nakagawa, said this week that Japan should diversify its currency reserves in the “medium to long term” in order to “avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” and “start considering” investment in International Monetary Fund bonds. Any instability derived from a shift in power to the DPJ could cause trouble for the Japanese yen, but it may also create problems for the US dollar as talk of sweeping changes to central bank reserves is enough to hurt the greenback.

Euro, British Pound Gain Against Safe Havens, Data Prevents Increase Against Other Majors
The euro and British pound jumped against the US dollar and Japanese yen, but this was only because the latter two were so weak amidst broad-based risk appetite. However, data didn’t necessarily work in favor of euro or British pound strength. First, the UK jobless claims change rose for the 16th straight month in June by 23,800, and while the claimant count rate held at 4.8 percent, the ILO rate jumped to a more than 12-year high of 7.6 percent from 7.2 percent. Second, the Euro-zone consumer price index rose 0.2 percent in June, as expected, but that did not prevent the annual rate of growth from falling to -0.1 percent, indicating a contraction in prices for the first time since records began in 1996.

There are traditional range opportunities in some of the majors (like EURUSD and GBP for example); but the lack of profit potential and the terminal patterns these pairs are developing suggest breakouts are a real risk. Instead, I am looking for the relatively quiet conditions for the broader market to temper AUDCAD’s aggressive momentum.

Trading Tip – There are traditional range opportunities in some of the majors (like EURUSD and GBP for example); but the lack of profit potential and the terminal patterns these pairs are developing suggest breakouts are a real risk. Instead, I am looking for the relatively quiet conditions for the broader market to temper AUDCAD’s aggressive momentum. This pair is still mired in a steep, bearish pitch; but the drive behind this move is circumspect and obvious technical levels are offering reason for a stall and reversal. This is certainly a much more speculative proposal than usual; so I will need to approach with caution. Our strategy has entry that is now above spot; which in effect requires something of a reversal to trigger entry. Furthermore, the stop is set wide enough to cover the zone of support along with the general rising trend with a buffer for false breakouts. The initial objective is set within an average daily range; but the second target looks to recoup risk and capture profit on a large rebound. Since this position is already setting up, we will cancel any open orders in 24 hours.

Event Risk for Australia and Canada

Australian – The Australian dollar is first and foremost tied to its sentiment. Relatively strong growth, a high benchmark lending rate and heavy exposure to commodities makes this a speculative favorite. For general risk appetite, no gauge is better to reflect investor optimism than equities. Though the market is more congestive than trending; the general bias has clearly taken a disappointing shift. For specific event risk, the Aussie docket doesn’t really threaten price volatility until next week. The NAB business confidence figures are noteworthy; but they have shown little in the way of market movement in the past. Along similar lines the Westpac Leading Index is too lagging and inaccurate to benchmark a 2Q GDP number that is a long ways off. After the weekend, 2Q inflation and RBA minutes however will give us direct insight into interest rate forecasts.
   
Canada – Canada is the fundamental black sheep of the majors. The economy has avoided the worst of the economic recession with relatively strong domestic demand and healthy exports. What’s more, the local impact of the global financial crisis has been surprisingly limited. However, unlike its Australian counterpart, the Canadian economy has fallen into recession. With clear ties to the health of the US, there is a clear anchor on the performance of the world’s eighth largest economy. This is the reason for the dour forecasts from policy officials; but the favorable comparisons to the nation’s largest trade partner keeps speculation on an even keel. However, these are long-term considerations. Through the short-term, shifts in market sentiment will likely be responsible for most swells in volatility outside of general market tides. From scheduled event risk, there is notable data ahead; but its cumulative market moving impact is doubtful. This week sees manufacturing shipments for May and CPI for June. The former lags the physical trade report and the later is a practice in policy-based economics. The top release is next week’s BoC; but even that is not expected to develop any surprises.

• Euro, British Pound Remain in Consolidation Mode vs. US Dollar
• Commodity Dollars Surge as Canadian, New Zealand Data Surprises to the Upside, FX Carry Trades Gain
• Swiss Franc Remain Range Bound vs. Euro as Data Highlights Swiss Deflation Risks

US Dollar, Japanese Yen To See High Volatility on Tuesday Amidst Goldman Sachs (GS) Earnings, US Retail Sales

The US dollar and Japanese yen both took a hit on Monday and ended the day as the weakest of the majors thanks to a surge in risk appetite that took the DJIA and S&P 500 up more than 2 percent.  Economic data certainly did not drive these moves, as the release of the US budget statement was disappointing with the deficit hitting $94.3 billion in June, bringing the deficit for the fiscal year to $1.1 trillion. Instead, FX carry trades and equities were driven higher as speculation mounts that Goldman Sachs earnings for the second quarter will indicate that the firm made huge profits, painting a brighter outlook for the financial sector as a whole. While a large increase in profits is sure to ignite significant risk appetite, these optimistic expectations are bordering on the extreme, creating potential for disappointment and high volatility. This makes it important for traders to be careful with the amount of capital they put on the table.

Forex traders may also notice choppy price action upon the release of US advance retail sales, which are projected to rise 0.4 percent for the month of June, which would mark the second straight improvement, and excluding autos, retail sales are anticipated to increase by 0.5 percent. However, there is potential for a worse-than-expected result, as the International Council of Shopping Centers (ICSC) said that same-store sales tumbled 5.1 percent in June from a year earlier, which was the sharpest decline since March. All told, a negative reading has the potential to stoke risk aversion in the markets, and thus, US dollar strength. On the other hand, surprisingly strong results could offer a boost to FX carry trades and equities.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro, British Pound Remain in Consolidation Mode vs. US Dollar

The euro and British pound were mixed on Monday, but from a longer-term perspective, pairs like EURUSD and GBPUSD remain range bound and we have yet to see any sort of directional break. On Tuesday, the UK consumer price index may reflect lessening price pressures for the month of June. Indeed, the annual rate of CPI growth is forecasted to fall to a nearly two-year low of 1.8 percent from 2.2 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further in August. On the other hand, if CPI holds strong, the currency could rally in response. Ultimately, though, a breakout in EURUSD and GBPUSD may have more to do with a directional move in the US dollar, as the currency has just treaded water since the beginning of June.

Related Articles: Euro Weekly Trading Forecast, British Pound Weekly Trading Forecast

Commodity Dollars Surge as Canadian, New Zealand Data Surprises to the Upside, FX Carry Trades Gain

The Canadian dollar and New Zealand dollar were the strongest currencies of the day while the Australian dollar trailed close behind as carry trades benefited from increased risk appetite. Meanwhile, Canadian and New Zealand economic data was surprisingly strong. First, New Zealand sales rose 0.8 percent in May, and excluding autos, spending rocketed 1.6 percent, which was sharpest increase since February 2007. The results suggest that the New Zealand economy is holding up rather well and that there is no need for the Reserve Bank of New Zealand to cut rates any further. In Canada, surveys published by the Bank of Canada reflected positive sentiment on the business outlook, and slight improvements in lending conditions. Indeed, the business sales outlook index surged to a nearly 10-year high of 38.0 in Q2 from -22.0 in Q1 as a greater number of firms anticipate increasing sales volume over the next 12 months. Adding to the mix, the Senior Loan Officer Survey showed that lending conditions remain tight, but to a lesser degree than what loan officers saw in Q4 2008 and Q1 2009.

Swiss Franc Remain Range Bound vs. Euro as Data Highlights Swiss Deflation Risks

The Swiss franc was mixed across the majors, and ended the day little changed against the euro after the Swiss producer and import price index rose a slight 0.1 percent during the month of June, while the year-over-year rate plunged to a nearly 23-year low of -5.6 percent from -5.0 percent, adding to evidence that the Swiss economy faces severe deflation risks. Indeed, these downward price pressures are the reason why the Swiss National Bank has turned to physical intervention to try to prevent the Swiss franc from appreciating. All told, EUR/CHF remains within an intraday falling channel formation, with support now at 1.5087/90 and resistance at 1.5170. SNB directorate member Thomas Jordan said two weeks ago that they “continue to consider interventions to prevent an excessive rise in the Swiss franc,” and as a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.

The Japanese currency lost ground across the board in early Asian trading on Monday.

The yen drifted lower to 129.57 against the euro, 92.69 versus the US dollar, 150.23 against the pound and 85.57 against the Swiss franc by 8:00 pm ET and this may be compared to Friday’s closing values of 128.99, 92.48, 149.97 and 85.28, respectively.

The Japanese unit also slipped to 58.34 against the New Zealand dollar, 79.94 versus the Canadian dollar and 72.46 versus the Australian dollar by 8:05 pm. The yen closed last week’s deals at 58.03 against the kiwi, 79.49 versus the loonie and 72.03 against the aussie.