Trading around Christmas time generally gives you one of two scenarios.

The market can be boring and sideways, with traders taking a break over Christmas, or it can give you a really strong move heading into January.

WD Gann wrote that early January was an important time to watch for turns in the market. If you look back over any market, you will often see major moves start or finish early in January. This can be a great way to finish the year, with a nice Christmas bonus from the market!

How do you know whether you will get a good move or a boring, sideways market?

The answer lies with time analysis, which is beyond the scope of this article. However, those of you who have studied Gann would know that if your time analysis is showing you an early January date, you can be pretty confident you will see a turn.

My time analysis is telling me to watch for a turn in the first week of December on the US Dollar/Japanese Yen (FXUSJY in ProfitSource), running into another turn around the 5th or 6th of January, 2009.

Chart 1 below shows the current market action on the Dollar/Yen.

Chart 1

click to enlarge

After a very tradable move down from the August 15 high, the Dollar is trading in somewhat of a violent sideways pattern.

With moves like these, it can be difficult to know whether to expect a top or a bottom if we have a turning date approaching.

In this case, I am watching for a top around the 100.80 level. This was the 50% Retracement Level of the run down, and would give us a double top with the November 4 swing high, as shown in Chart 2 below.

Chart 2

click to enlarge

I am yet to meet anyone who can call every turn in the market, every time. Sometimes, it just doesn’t work out. David Bowden once said “when it comes to trading, the only thing you need to know about God is that you’re not him!” It’s important to remember that – if the market doesn’t give us a tradable signal on our pressure date, we simply wait for the next date.

Many people would prefer not to hold positions over Christmas, as this is traditionally a period of rest, and that’s fine – you can always come back early in the New Year and look to trade OUT of the early January date.

However if we see a Double Top come in early December, there is a very good chance we will see a 1000+ point fall in the Dollar/Yen, into a January low. With the exciting leverage of the FX market, a 1000 point fall equates to $US1000 for every $US100 US margin tied up in the trade.

Capital Flows ,Where the money goes ?

But honestly, that’s only part of it. The other reason there is always at least one currency rising is because of capital flows. As a currency trader, you’re constantly watching where capital is flowing, so you know where traders are dumping their money.

Every time markets suffer around the world, there’s always a line-up of investors ready to sell-off their positions.

Each time, those investment funds have to go somewhere. Even if that’s just back to cash – which pushes a handful of currencies higher. That’s exactly what happened in 2008. As investors ran from stocks, bonds and even CDs, certain currencies rose.

However, not all currencies (or markets) are created equal.

Currencies and the Law of Relativity

We live in a world made up entirely of fiat currencies. “Fiat” means “an arbitrary order or decree.” In other words, our money doesn’t derive its value from a particular good or basket of goods, but from the government decree that brings it into law.

So the value of these currencies isn’t fixed. Instead, it tends to fluctuate and vary, depending on everything from interest rates and policy decisions to exports and civil unrest. So if you want to know what a currency is worth at any given time, you just have to ask yourself, “What could it buy?”
 
A soda, a half-gallon of gas, a big mac etc. And we do the same thing in the Forex world when comparing currencies. A particular currency can only buy so many yen, so many Swiss francs, etc. 

So it stands to reason that if a currency’s exchange rate is falling, then another’s is rising. That’s the law of relativity when it comes to currencies. If the dollar’s exchange rate against the yen is declining, then you can buy less and less yen with your dollar. But at the same time, you’re able to buy more and more dollars with your yen.

This is where the idea of an eternal bull market comes from.

The Reserve Bank has moved to try and solve a shortage of US dollars in the Asian area by joining a swap arrangement involving the US Federal Reserve.

The shortgage of US dollars outside the US has continued despite moves by the Fed to inject more into the global economy.

The RBA has joined central banks from Norway, Sweden and Denmark in setting up a US dollar swap arrangement with the Fed totalling $US30 billion and lasting until at least the end of January 2009.

The RBA said currency swap lines have been set up between itself, the Fed and the Denmark, Norway and Sweden central banks - Danmarks Nationalbank, Norges Bank and Sveriges Riksbank.

“The swap serves to alleviate a shortage of US dollar liquidity which has affected market participants around the world including in the Asia-Pacific time zone,” the RBA said.

That’s part of a global shortage which saw short term rates in Europe for US dollar loans soar overnight to their highest levels since January.

At the same time, rates on US Government three month T-notes again fell sharply as banks and othert investors chased security while the $US700 billion bailout plan was being debated in Washington. 

The rates are not as low as they were a week ago when markets frayedf, but they are heading that way, indicating a sharp contraction in the availability of US dollars.

Hence the series of US dollar swaps the Fed has conducted in the past week with central banks around the world.

The US dollars will be made available, against collateral, to local market participants by the RBA through an auction, the first of which will happen tomorrow.

The term of the initial swap will be 28 days.

Subsequent auctions will depend on market conditions.

The RBA did a $1 billion US dollar swap last Thursday to try and pump extra American dollars into the market to accommodate demand from fund managers and others looking for greenbacks for end of quarter transactions.

“These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets,” the RBA said in a statement that was released simultaneously with a similar notice from the Fed.

“Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises.”

The Fed said in its statement that the swap lines it will have with the RBA, Denmark Norway and Sweden central banks are a $US30 billion addition to the $US247 billion previously authorised temporary swap arrangements with other central banks announce earlier this month.

“In sum, these new facilities represent a $30 billion addition to the $247 billion previously authorized temporary reciprocal currency arrangements with other central banks: European Central Bank ($110 billion), Bank of Japan ($60 billion), Bank of England ($40 billion), Swiss National Bank ($27 billion), and Bank of Canada ($10 billion),” the Fed said in its announcement.

In a separate announcement the RBA said that it will establish a domestic term deposit facility to further enhance the flexibility of domestic liquidity management operations.

“To further enhance the flexibility of its domestic liquidity management operations, the Reserve Bank will offer a short-term deposit facility (to be known as RBA Term Deposits),” it said.

The facility will be available to institutions holding an exchange settlement account and to authorised deposit-taking institutions.

The RBA will conduct auctions at which eligible institutions will be able to bid for deposits.

The first of auction, for a deposit of 14 days, will be held next Monday, September 29.

It will be run in addition to the current system of injecting funds each morning via repurchase deals involving government bonds and other securities as well as asset backed commercial paper and residential backed mortgages.

The offer to take short-term deposits from banks and financial institutions is going to be aimed at mopping up liquidity from banks, as part of its domestic operations.

Analysts said the bank is trying to attract some of the excess overnight funds that banks are holding as they refrain from lending to each other at the moment because of the credit crunch.

That has led to a spike in term-money rates, especially in three month bill rates. They are above the rates for 180 day paper: 7.43% versus 7.34%. This has been happening since the start of the month

The RBA yesterday $815 million in repurchase agreements, compared to an estimated cash deficit of $612 million. It drained a small amount on Tuesday, but resumed pumping in extra cash on yesterday as interbank lending rates remained high.

In that context we were discussing the misfortunes of the Australian dollar during the last two months. But the same can be said for the stock market as well. During the current earnings season there has been a bit of a mixed bag with some showing excellent revenue and profits (BHP and Rio) while others have been woeful (Babcock & Brown).

At the moment, the outlook for a broad rise in the stockmarket doesn’t look good. Ever since the market topped out last October the S&P/ASX200 has continued to drift downwards, punctuated by false rallies on the back of over optimism.

But there is light at the end of the tunnel. The problem is that we can’t quite work out how long the tunnel is. There are positives that should ensure that Australia emerges from any economic downturn without too much agony.

As a resources led economy there is often talk that any downturn in the US economy will reduce demand for goods there, which will reduce demand for imports to the US from China which will reduce demand from China for Australia’s resources. Of course, this will have an impact but probably not to the degree that is feared.

Thanks to the massive demand for raw materials companies such as BHP Billiton, Rio Tinto and Fortescue Metals have been able to charge big premiums for their commodities. Any downturn in the US and Europe is bound to have some impact, however there is still ample room for Asian economies to grow without the need to rely on the US and Europe. Demand for Asian domestic consumption will be the next growth area as incomes rise and the standard of living rises with it.

Another insulator for Australia is the concentration of business in a small number of large companies. Many Australian sectors are in effect presided over by duopolies where the lack of major competition has allowed them to maintain healthy profit margins. The relevant smallness of the Australian economy makes it that much harder for new entrants on a large scale.

This allows them to maintain some of their margins without the fear of being undercut by competitors. And when competitors do come into the market they have to work fast in order to build up market share. A tough ask when consumers are comfortable the same brand they have used for years.

So what does that mean as investors? It really means that with the market having fallen so far since last year, the opportunities for value in this market are starting to present themselves so now is the time that investors should be starting to get back into the markets. Unfortunately, history tells us that for most retail investors they tend to exit the market just at the time when they should be getting back in.

In my opinion, there is one thing that separates the novices from the professionals in the Forex market: Novices gamble and professionals trade.

This is a key distinction because it’s the reason countless new currency investors have trouble trading in the Forex market.

So what separates gambling from trading? In a word: Risk.

Successful traders take calculated risks. They gauge the risks to each trade and allocate their funds accordingly. In other words, they think about what they could lose on a trade - rather than just the possible gains.

To be successful, you need to think about how much you’re betting on each trade. Take this into account when you’re placing each order. Make sure no one trade can wipe out your account.

This is how the professionals trade. And even though you aren’t trading billions, you can still profit from the same strategy.

This is pretty typical of professional traders. All the pros leave the FX market alone on holidays. In fact, my opinion is that the Forex market should post a sign that says “Enter at your own risk” during major U.S. holidays.

I say this because the Forex market is like a renegade switch on most holidays. The market is either “turned on” and your trades are moving like crazy (which means it’s hard to predict what will happen next). Or the market is completely “turned off,” and it’s about as interesting as watching paint dry.

More often than not, you’ll see BOTH scenarios happen on a single holiday. First the market will be switched on, and then it will suddenly switch off - or vice versa. Unfortunately, there’s never any telling which comes first…the “calm” or the “storm.”

So on any given holiday, I generally wait until the afternoon to check on the currency markets. Then I just wait for the “show” to start. Frankly, for a seasoned trader like myself, it’s fun to watch the markets move that fast.

But it’s definitely NOT time to start trading. Please keep that in mind for every holiday going forward.