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.

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.

FOREX-Euro fails to hold gains after Greek aid package, forex market ,forex market  news

FOREX-Euro fails to hold gains after Greek aid package

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.

Harmony on the Euro

In his Ultimate Gann Course, David Bowden compares this to Elliott Wave breaking the market down into three sections. While Elliott would describe the pattern as “5 Waves”, being three impulse waves and two corrective waves, Gann would call it three equal sections, with the impulse waves and the sections being labelled the same.

There are a few things to note about this chart. Firstly, the second and third sections are very similar in terms of price, with both being larger than the first section. Also, with the second and third sections being almost equal in price, there is also a relationship in terms of time, with the third section taking four times longer to complete than the third section.

As a sidenote, those students who attended Safety in the Market’s Master Forecasting Summit in September 2009 might like to review the homework I set them on the Euro based on the work we did on the last day of the summit. The homework led you to forecast a major top on the Euro on November 27th. The actual high of the year came one trading day earlier, on November 25. Now to wait for the Dollar/Yen forecast!

But for now, back to the Euro! From the November top, we have seen the Euro decline. I am looking for the Euro to start its next bull campaign towards the end of the first quarter of 2009 and then move on to a strong 2010. But first it needs to make a strong low. Chart 2 below shows the important percentage levels of the 2009 bull market range. The most important level, the 50% milestone, is highlighted in red.

The 50% level is worth watching for two reasons (other than the fact that WD Gann said you could make a fortune trading this one rule alone!).

Firstly, it gives us a potential price support target to watch for, and secondly because it allows us to rate whether the move on the Euro is strong or weak. If the Euro can find support and make a bottom – possibly in mid-March – above the 50% level, it will show it is a stronger market. If it can’t hold the 50% milestone, it will show that it is in a weaker position.

One of the easiest ways to bet on a dollar rally is by following the biggest trader’s lead and buying the dollar bull fund, UUP.

You can buy shares through a standard brokerage account and benefit from the dollar’s rise. How much money can you make with a conservative play like this? Well, that depends on how high the dollar soars.

The last time this happened – in 2008 – UUP jumped from $22.79 to $26.50… a gain of 16%. Not bad for an unleveraged investment that you can buy with a click of your mouse on any standard online brokerage account.

But there’s an even better way to capitalize on a rising dollar, and I think you should know about it…

See, while UUP surged 16%, another type of currency play gave traders the chance to line up triple digit gains the last time the dollar rallied, like I predict it will this year.

How is this possible?

Through the $4 trillion Forex market – specifically, by buying the dollar and shorting key emerging market currencies. Take the South African rand, for example…during the dollar rally of 2008, this currency depreciated by 33%. Forex traders who shorted the South African rand in the Forex market were able to pocket gains of 833% (using a reasonable 25:1 leverage).

Similarly, the Mexican peso and the Hungarian forint fell 28% and 34.5% against the dollar that year. That would amount to gains of 700% and 862% in 25:1 leveraged trades.

Of course, this strategy is riskier than buying an unleveraged exchange traded fund like UUP. But with a good risk management strategy, you can easily limit your downside, while benefiting from much higher potential returns.

Minimize Your Risk with Minis

Currency traders have the advantage over commodity or stock traders because they can strictly limit their risk and control their leverage using what’s known as “lots” in the currency market.

As a trader, you have the choice to trade different amounts of currency using standard lots, mini lots or micro lots. Choosing the right type of lot helps you control your leverage – micro-lots use a little leverage, mini-lots use a medium amount of leverage, and standard lots is a LOT of leverage.

Personally, I believe using the medium choice: mini-lots are the best and easiest way to reduce your risk especially when trading exotic currencies.

When you trade mini-lots, you’re actually investing in 10,000 units of a specific currency pair, as opposed to 100,000 units with standard lots. More leverage = more risk, so mini-lots are a safer option for your account.

A Hypothetical

At the risk of getting a little bit technical, let’s look at a hypothetical situation…

Imagine that you have a $25,000 account and that you want to buy the dollar and short the Mexican peso (or buy the USD/MXN pair). You’re looking to earn a 4% gain, with an equal maximum loss.

If you use a standard lot, you will be risking more than 15% of your capital on that one trade.

Sure you have the opportunity for more gains with that added leverage, but you’re also risking a huge chunk of your account. If the trade goes against you, you won’t be able to bounce quickly from the loss.

On the other hand, if you trade two mini lots, you will risk just 3% of your total capital on that trade. But you still can double your money, using 25:1 leverage.
For currency traders, it’s the best of both worlds.

Regardless if you win or lose on the trade, you can ensure you have plenty of cash left in your account to trade with. And at the same time you can target far higher returns than you could ever achieve through a pro-dollar fund like UUP.

There is no doubt in my mind that mini-lots, combined with exotic currencies offer the most predictable, risk-controlled way to play this dollar rally.

By employing this strategy, you can enjoy all the benefits that the professional traders enjoy, with less capital at risk. You will also be able to trade without the anxiety and distractions that come with large swings in the currency market.

Whatever the result of the upcoming consumer price index (CPI), homeowners should be prepared for an official interest rate rise on Melbourne Cup day.

The latest readings of CPI and underlying inflation at 1130 AEDT will determine the likely pace and size of interest rate increases by the Reserve Bank of Australia (RBA) over coming months, economists say.

The RBA holds its next monthly board meeting on November 3.

“Even if (CPI) comes in on the low side they are still going to do 25 basis points next week,” Nomura Australian chief economist Stephen Roberts told AAP.

The RBA has made it clear that it feels that it would be “imprudent” to keep the official cash rate at “emergency” low levels when the economy is in recovery.

It raised the cash rate to 3.25 per cent from 3.0 per cent early this month, and a further 25 basis point increase would add another $45 to monthly repayments on an average $300,000 mortgage.

Economists’ forecasts centre on an annual CPI rate of just 1.2 per cent as of the September quarter, remaining below the RBA’s two to three per cent inflation target.

However, annual underlying inflation is expected to remain stubbornly high at 3.45 per cent.

Rate swaps slip

Australian rate swaps fell and bond futures rose on Tuesday, as markets pared back expectations for a 50 basis point interest rate increase next month and as caution prevailed ahead of price index data.

Australian three-year futures rose 0.06 points to 94.61 while the 10-year contract was 0.025 points up at 94.275.

Interest rate swaps also fell on comments from influential columnist and central bank watcher Terry McCrann which were taken by the market to mean the Reserve Bank of Australia was unlikely to make an aggressive rate increase.

“The writer now sees a 50 basis points (bps) hike as less likely, really not a surprise given the lower PPI reading and the wobbles that are appearing in equity markets,” said Sean Keane, director of Triple T Consulting and former money market trader at Credit Suisse.

The 5-year interest rate swaps fell by two bps to 6.05 per cent.

Implied cash rates, based on money market and swap rates , are fully pricing in a 25 basis point hike and factoring in around a 25 per cent chance the central bank will raise rates by 50 basis points on November 3.

That compares with a 30 per cent chance of a half percentage point increase factored in last week.

“People are squaring up ahead of tomorrow’s consumer price index data and equity markets were not impressive today and that probably helped bonds and fixed income products,” said JPMorgan rate strategist Sally Auld.

Slow superannuation recovery

While households consider the implications of rising interest rates on their major asset, their second biggest investment - superannuation - is showing a slow recovery after the shock of the global financial crisis.

A report by the Organisation for Economic Co-operation and Development (OECD) shows that Australian super funds recovered 1.0 per cent in the first six months of 2009 after a drop of over 20 per cent in 2008.

This compares with an average 3.5 per cent recovery among pension funds across OECD countries and returns of 10 per cent in Norway and Turkey.

“The impact of the crisis on investment returns has been greatest among pension funds in the countries where equities represent over a third of total assets invested,” it said.

“In 2008, Australian pension funds were the most exposed to equities at 59 per cent of total assets.”

The Paris-based institution said funds in other countries benefited from having a large proportion of their assets invested in bonds, whose rates of return tend to be lower but more stable than those in equities.

Still, an analysis by Commonwealth Securities chief economist Craig James shows that the value of the Australian share market has now risen by over $500 billion to $1.4 trillion since March.

“It has been a great rebound, but it was a humongous drop from the highs of late 2007 and we still have some work to do to prepare the damage to superannuation and to wealth levels,” Mr James told AAP.

“But certainly from all the developed share markets and economies, you would have thought Australia was in the best position to claw its way back to those highs (of late 2007),” he said.

The S&P/ASX 200 share index closed at 4,753.5 on Tuesday compared with around 6,800 in late 2007.

Australia is the biggest the beneficiary of China’s industrialisation and has a strong banking and corporate sector.

Mr James defended super funds’ investment weighted towards shares.

“Over a long period of time domestic shares have outperformed other asset prices by a very significant magnitude,” he said.

“You could take short-term strategy and opt for safe haven bonds or cash, but really that’s not the strategy we advise for individual investors and it shouldn’t be what super funds take on either for the broader masses.”

The strong Australian dollar is a disaster for Australian manufacturing, and persistent credit restrictions are likely to depress engineering and construction for years.

These are the two big, possibly permanent, losers from the aftermath of the ‘Great Recession’, but watching the action in Canberra there’s a sense of Nero Claudius fiddling on his lyre during the Great Fire of Rome.

Not that Australia is burning – far from it – but profound structural shifts are taking place in this country while our political leaders squabble endlessly and pointlessly about asylum seekers and emissions trading.

This country has indeed come through the ‘Great Recession’ in good shape and our resource industries are looking forward to decades of boom on the back of China and India, but that picture masks some difficult and lasting problems. Every silver lining, it seems, has a cloud; complacency is unwarranted.

In particular the 50 per cent appreciation in the currency from its long-term trading range could drive a manufacturing catastrophe.

Unions and industry groups are calling for government assistance after last week’s closure of local tyre manufacturing by Bridgestone Australia, but the task is too great for that. A thousand flowers will die if the currency continues to rise, or even stays where it is.

In addition to that, we are now seeing a classic post-bubble deleveraging cycle manifest in the structural tightening of credit around the world. Global bank lending is continuing to contract although there are signs in Australia that business lending is beginning to resume.

But it will not return to the way it was. Much of the securitised lending market has vanished, never to return, and bank capital has permanently increased.

Last week, Leighton CEO and president of the Australian Constructors Association, Wal King, said that despite the government’s education building plans, firms in Australia would remain under pressure for at least two years because of “tight funding for development and the fall-out from the contraction in global industrial production”.

He and the AIG’s Heather Ridout were releasing a joint construction outlook survey on the same day that Treasury Secretary Ken Henry spoke about the structural changes that will be forced on the Australian economy by a sustained terms-of-trade boom.

The survey predicted a drop of $9 billion in engineering and construction work this financial year. The chief economist of the Master Builders Association, Peter Jones, predicted a 7 per cent fall in employment over the next couple of years.

Last week two senior bureaucrats gave important speeches about the consequences of high terms-of-trade – Ken Henry, and the RBA’s Assistant Governor (Economic), Philip Lowe. The terms-of-trade, by the way, is the ratio of export prices to import prices – that is, export prices divided by import prices.

Lowe pointed out that despite big falls in commodity prices from their peaks last year, Australia’s terms-of-trade are around 50 per cent higher than the levels prevailing in the 1980s and 1990s.

The only other time they have been as high as they are now was when the wool price spiked in the 1950s.

The result of this is that Australia has become, and will probably remain, a very high investment economy: the big contradiction to the story about Australia’s lack of investment in infrastructure that was highlighted yesterday by the Rod Sims of Port Jackson Partners, is mining, which is now 5 per cent of GDP – a record by a big margin. Also, huge LNG projects are now planned for export to China, on top of iron ore and coal expansion to take advantage of China’s steadily growing steel consumption.

Philip Lowe says the mining booms of the 1960s and 1980s look “relatively small” compared to this one.

Ken Henry said: “Standard economic theory tells us that if the terms-of-trade remain at high levels, not only will the resources sector command more capital and labour, manufacturing and other industries whose relative output prices are declining will command less, even as our total stock of capital expands.

“Furthermore, as the factors of production are reallocated, the pattern of growth will be characteristic of what is often referred to as a ‘two speed economy’; and real wages growth and labour productivity growth will be weak – possibly even negative.”

Many countries are taking action, usually pointlessly, to prevent this reallocation by halting the rise of their currencies against the US. Brazil, for example, slapped a tax on capital inflows; Korea, Thailand, Russia, Indonesia and Taiwan have been buying dollars.

A good start in Australia would be some recognition of what’s going on.

The Australian dollar is likely to face increased volatility on Wednesday as economists forecast the annual rate of inflation to fall to 1.2% in the third-quarter from 1.5% during the three-months through June, which would be the lowest reading since 1999, and the slump in price growth may drag on the exchange rate as investors weigh the outlook for future policy.

At the same time, the central argued that the marked appreciation in the Australian dollar “may help contain inflation,” but went onto say that economic activity “had for some time been noticeable stronger” than projected. At the same time, a report by the Melbourne Institute for Economic and Social Research showed consumer inflation expectations held steady at 3.5% for the third consecutive month in October, while TD Securities inflation estimate grew at an annual pace of 1.3% in September after rising 1.7% in the previous month, and easing price pressures may lead the central bank to hold the benchmark interest rate at 3.25% over the remainder of the year as the outlook for global growth remains uncertain. Nevertheless, Credit Suisse overnight index swaps shows investors are pricing a 131% chance for the RBA to hike borrowing costs by another 25bp to 3.50%, with market participants speculate the central bank to tighten policy by more than 200bp over the next 12 months, and long-term expectations for higher interest rates may continue to drive the Australian dollar higher as the policy makers see a risk for inflation to overshoot the 2% target maintained by the board.

Trading the given event risk favors a bearish outlook for the Australian dollar as market participants anticipate price pressures to weaken further in the second-half of the year but nevertheless, price action following an enhanced CPI report could push the exchange rate higher as the RBA turns increasingly hawkish.

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.

USD/SGD Lower; MAS Fears May Limit Fall

USD/SGD lower, at 1.4222 vs 1.4250 late Monday in Asia on firmer risk appetite overnight. Positive start from Nikkei, Kospi may weigh on pair, but downside likely limited given concerns about possible MAS intervention to slow pace of SGD gains. Traders have said pair not yet able to break out of familiar ranges with investors still assessing outlook for global economy; key U.S. data this week like August retail sales (due later in global day) to be closely watched. Support at 1.4200, then 1.4150; resistance at 1.4300.

Making Decisions in the Market

A doctor would be excused for declaring the Euro futures contract (EC-Spotv in ProfitSource) legally dead over the past two weeks.  Chart 1 below shows that the Euro has traded in a “sideways but gently rising” pattern since late May, with Tuesday night’s breakout still to be proven as a true break by the market.

Chart 1

click to enlarge

The last two weeks were particularly flat, with seemingly no energy whatsoever in this market, and no desire from either the bulls or the bears to commit to a longer term direction.

Trading sideways markets is not a part of my trading plan, so after a couple of attempts at this market, I’m happy to sit back and let it declare itself before taking any further part. A quick look at a longer term history of the Euro will show that this is not the first sideways pattern that has occurred on this market, nor will it be the last.

Chart 2 below shows other sideways patterns in recent times, often lasting several months or more.

Chart 2

click to enlarge

You will notice that many of those sideways patterns were similar in shape and duration. WD Gann said that to know what to expect from a market in the future, we can use the past as a guide, and I have certainly found this technique useful.

Let’s take a closer look at the current pattern in Chart 3 below, because it is clearly recognisable.

Chart 3

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Now let’s compare this with Chart 4 below, which is a very similar setup from the Australian Dollar Futures Contract (AD-Spotv in ProfitSource) a couple of years ago.

Chart 4

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If the Euro can’t consolidate above its current levels, then my outlook remains the same as it has been for several months. I am long term bullish on the Euro – the further we go out in time, the more bullish I become!

However, I won’t be a buyer at these current levels until the market has had either a decent correction, or several more months of sideways consolidation.

At the end of the day, that’s what trading comes down to. We look at a chart, we apply some analysis to that chart, and we form an opinion. We then apply money management rules, look for high probability trades and take our chances. If we are wrong, we either miss a trade or get stopped out, and we look for our next setup.

Pretty simple when you look at it that way! A little bit of patience goes a long way in trading… I learned that from Uncle Tom!

It’s Time to ‘Go Long’ This Bullish Currency

AUD/USD, here’s what we wrote:

“There is a resistance line at 0.85. This level corresponds to a previous low (point D posted in late august last year) that become a new high (point E posted in last September). This is clearly the target before a probable correction towards 0.81 in a first time.”

What happened actually is that the currency pair posted a high at 0.8477 on August 14 then slightly corrected towards 0.8150 just a few days later. However the bulls have been driving it back on the upside, and the objective of 0.85 that we were mentioning has been reached and cleared.

This target at 0.85 was a previous low where the price action strongly rebounded in January 2008 (point A on the chart). This level was eventually cleared as the pair was plunging in September last year. It then became a new resistance level (point E) a few weeks later. This point E was the peak of a bear market short-term rally.

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Two days ago, the price action closed (the FX market operates 24/7 but here we consider the Australian trading time zone as the reference) at 0.8552. This was a signal that the resistance has now been cleared and yesterday the bulls gave another push up as they drove the currency pair significantly above 0.86. This should open the door, on a medium-term perspective, to a further bullish trend. The next target identified now is 0.90.

The indicators argue for a continuation of the momentum despite potential short-term corrections. There are many trend-following strategies among FX traders and fund managers and the current configuration remains an opportunity for those market players. The moving averages crossovers system is clear: the short-term moving average (20-day) is above the medium-term one (50-day) and the longer-term one (100-day). It indicates that the trend in place remains valid. The 30-day Commodity Channel Index (CCI) has soared. The pair is not overbought yet and no major bearish divergence is detected.

That’s why the AUD/USD is likely to move higher. The immediate support is 0.85 and the next target is 0.90.

USD/SGD Lower On Econ Outlook; 1.4375 Support

USD/SGD lower at 1.4421 vs 1.4436 in Asia late yesterday, with traders saying MAS survey of economists showing GDP expected to contract 3.6% in 2009 (vs 6.5% in previous forecast) providing support to local currency, although risks remain. “The outlook for Singapore seems brighter, but of course the health of the U.S. economy will have an impact on the pair. With some data overnight showing job losses aren’t stabilizing, it is likely the SGD won’t rise much today.” Support tipped at 1.4375, resistance 1.4460

The Aussie Dollar (AUD/USD) just reached a 10-month high as the currency pair climbed above 0.8450. It has retraced a large part of the plunge occurred last year, when it fell by 39% in just 3 months, which is absolutely huge on the FX markets.

The extreme points of this large decline are points A and B on the weekly chart…

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Several technical indications argue for a completion of the current trend just ahead, around 0.85. The current bullish move has been valid since early November last year. The Aussie bounced back from 0.60 (point B) to 0.8450 which is a 40% rise. Actually, if we look in more details, the real start of the current trend has been posted at mid-March this year (point C).

This confirms the timing of the correlation that has been in place for 2 years now between the US Dollar, the commodities markets and the stock markets. When the risk appetite rises, investors sell the US Dollar (therefore buy other currencies like the Aussie) and buy commodities and stocks. Oppositely, they buy back the Greenback and sell the commodities and stocks when uncertainty and risk aversion appear.

Technically, the weekly indicators are really high now and don’t have so much more potential upside. This suggests a peak and eventually a consolidation or a correction. The MACD is well above its level when the price was at 0.9850 last year. The RSI is currently just below the overbought area.

On the daily chart, there is something more…

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A bearish divergence clearly appears through several oscillators. You may know that a bearish divergence is created when an oscillator does not confirm a new high posted by the price action. Typically it means you’re in the very last part if the rally. The trend completion is usually close. Here the Chande Momentum Oscillator illustrates this chartist configuration.

There is a resistance line at 0.85. This level corresponds to a previous low (point D posted in late august last year) that become a new high (point E posted in last September). This is clearly the target before a probable correction towards 0.81 in a first time.