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Fed Leaves Rate Unchanged; Focus Shifts to Inflation

Gail — Wed, 17 Mar 2010 00:45:12 +0000

Tue, Mar 16 2010, 23:36 GMT
by James Hyerczyk

ForexHound.com | View company’s profile

On Tuesday, the Federal Reserve left its benchmark interest rate unchanged and reiterated that interest rates would remain low for “an extended period”. In its statement, it also mentioned that inflation remains subdued, and that the weak employment situation seems to have stabilized. While this may sound rosy, the Fed did express concerns about housing and employer reluctance to increase payrolls.

The tone of the statement suggests that while the Fed seems to have a plan as to how to begin reducing stimulus and returning interest rates to normal, it still is having trouble deciding when to initiate the first rate hike. One obstacle it faces is the possibility it will kill the recovery if it hikes too soon. The other more important obstacle is inflation. Although by its standards, inflation is low, there is a possibility that all of the liquidity that has been pumped into the financial system may trigger a spike in prices.

The overall dovish tone of the statement gave the go ahead for traders to continue to use the Dollar as a funding currency thereby driving up demand for higher risk assets.

The U.S. Dollar finished lower as the rise in equity indices and the prospect of lower interest rates for an extended period drove up demand for higher risk assets.

The EUR USD extended its gains after the Fed statement. Earlier in the session, the Euro was up on the news that Standard and Poor’s reaffirmed its rating on Greek debt. Some traders were concerned of a possible downgrade but these worries were for naught. The decision by the S&P Corp. now shifts the pressure on the Euro Region nations to create a bailout program. Technically, the main trend is up on the daily chart with 1.4000 a near-term target. This market is expected to move higher in an attempt to drive the numerous shorts out of the market.

The inability to break to new lows helped to trigger a short-covering rally in the GBP USD. Tuesday’s move erased all of Monday’s losses and put this market in a position to regain a major 50% level at 1.5217. Additional resistance comes in at 1.5297 to 1.5419. Despite the strong rally, the fundamentals remain weak because of political uncertainty in the U.K., a weak economy, debt concerns and a dovish monetary policy.

The USD JPY traded slightly lower despite strong gains in the U.S. equity markets. A .618 retracement level at 90.61 provided the most resistance. The charts indicate that a breakout over a downtrending Gann angle at 90.83 is likely to trigger an acceleration to the upside. The Bank of Japan is expected to announce on Wednesday that interest rates will remain low and that additional stimulus will be provided to help drive the recovery.

The strength in the Euro helped push the USD CHF lower. A break through an uptrending Gann angle at 1.0590 helped to trigger an acceleration to the downside. The chart formation suggests this market is headed to a 50% level at 1.0513.

Demand for higher yielding assets helped the USD CAD extend its losses. Downside momentum is building which has this market in a position to drop to parity. The language in the Fed’s statement suggests that demand for higher risk assets should continue to increase pressure on the USD CAD. Today’s rally in equities, crude oil and gold all contributed to the rise in the Canadian Dollar.

Strong demand for higher yielding assets helped to support the AUD USD in light trading. Technically, the trend is still up. Today’s rally through Friday’s reversal top at .9194 reaffirmed the uptrend. The Fed’s decision to leave interest rates low gave trader’s the green light to drive the Aussie higher.

Strong upside momentum in the NZD USD sent this market into a key 50% price level at .7124. The inability of the Fed to offer any clues as to when it is likely to hike interest rates makes some traders believe that the Reserve Bank of New Zealand will raise interest rates before the Fed does. This is increasing demand for the higher yielding Kiwi.

Published on Tue, Mar 16 2010, 23:37 GMT

Fed Opens Door for Higher Stocks, Commodities

Gail — Wed, 17 Mar 2010 00:45:11 +0000

Tue, Mar 16 2010, 23:37 GMT
by James Hyerczyk

ForexHound.com | View company’s profile

Earlier this afternoon, the Federal Reserve left its benchmark interest rate unchanged and reiterated that interest rates would remain low for “an extended period”. In its statement, it also mentioned that inflation remains subdued, and that the weak employment situation seems to have stabilized. While this may sound rosy, the Fed did express concerns about housing and employer reluctance to increase payrolls.

The overall dovish tone of the statement gave the go ahead for traders to continue to use the Dollar as a funding currency thereby driving up demand for higher risk assets.

June Crude Oil rebounded after a two-day sell-off. Increased demand for risk is making commodities more attractive. Technically, a failure to take out the main top at 83.80 on this current rally will indicate the start of a down turn, but this is unlikely since the Fed green lit higher prices by deciding to keep interest rates low.

The U.S. Dollar weakened after the Fed’s dovish statement. This weakness helped to boost April Gold prices into the close. The recent break in gold stopped short of the late February bottom at $1088.50 to maintain the uptrend. The current rally has reached the 50% level of the recent range of $1145.80 to $1097.30. Further weakness in the Dollar should continue to drive precious metals higher.

Gold bugs came in on Monday to support prices after the hard sell-off in the British Pound triggered concerns that the currency would collapse over concerns about its ability to service its debt and a possible cut in its credit rating. As long as this is an issue, look for buyers to support gold as they debate whether hard assets are a better investment than paper currencies.

Stock indices close higher but slightly off their highs. The markets were up from the start, boosted by demand for higher yielding assets. Later in the session, the Fed helped the indices reach new intraday highs by promising to keep interest rates low for a prolonged period of time. Although the trend is up, traders have been reluctant to chase the markets higher. This means they are still susceptible to profit-taking breaks.

June Treasury Bonds surged to the upside after the Fed left interest rates unchanged. Nothing in the Fed statement hinted at as to when the Fed would begin hiking interest rates. This helped investors gain confidence in trading the long side of the market.

Published on Tue, Mar 16 2010, 23:45 GMT

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Forex: EUR/USD gains ground and trades at 1.3764

Gail — Wed, 17 Mar 2010 00:45:11 +0000

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GBP/USD above key 1.5230 area

Gail — Wed, 17 Mar 2010 00:45:10 +0000

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Chart EUR/USD Update : Corrective upmove still in focus

Gail — Wed, 17 Mar 2010 00:45:09 +0000

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Price Action Points to a Bullish Breakout but Market Fundamentals May Force a Collapse

Gail — Sat, 13 Mar 2010 16:02:52 +0000

o Price Action Points to a Bullish Breakout but Market Fundamentals May Force a Collapse
o Greece, China and Global Sovereign Credit Ratings are but a Few of the Threats to Stability
o The US Dollar Slips without Confirmation of Risk Appetite from Commodities or Equities

There is a growing divergence in the state of the financial market’s fundamentals and its general level of activity. In the past week, there have been developments that have degraded the fidelity of the Euro Zone, leveraged the threat of a financial crisis in China and added risk to the very assets that are used to establish risk-free returns. However, the benchmarks for speculative positioning have either held their ground or maintained a gradual advance in favor of growth and yield. How can this dichotomy exist and when will it rectify itself? Assessing the situation objectively, it is possible to quantify the complacency of the market. Looking at traditional volatility measures, the S&P 500′s VIX Index is hovering just off of its lowest level since May 2008 while the currency equivalent currently stands at an 18-month low. Another approach to appraising activity is through calculating the average daily range of different markets. This measure of price action shows the Dollar Index just nearing an August 2008 low, crude easing to levels of lethargy last seen in September of 2007 and the Dow Jones Industrial Average just off of an average daily range not witnessed since the beginning of 2007. For changes in value itself, both equities and crude have advanced at a steady clip while the benchmark currency has essentially made no progress in over a month. Which is the better reflection of sentiment? The currency market. The notable appreciation in stocks and commodities is undeniable; but this has taken place within the confines of a broad range. Both the Dow and crude have prominent swing highs that were set back in January; and neither has yet to contest their respective milestones in this climb. When conviction in trend is revived (be it bullish or bearish), the correlation between these markets will return and there will be little doubt as to the market’s intentions.

On the other hand, it is not difficult to mark the return of volatility. It is, however, difficult to establish the direction the risk appetite and positioning ultimately take with this resurgence. Over the past month, the evidence of a move towards speculative position building has been made abundantly clear through the appreciation of the commodity and financial instruments (stocks and bond yields). Yet, in contrast, the economic and speculative arguments to be made for assuming greater risk have deteriorated over the same period. The greatest concerns can be split into two categories: issues that are currently influencing the market’s normal functioning and those threats that have yet to mature. The headline for the former column is the uncertainty surrounding the Euro Zone. The clearing in market volatility itself seems to have prevented a crisis with Greece as risk premium demanded for the nation’s debt have deflated. However, this is a fragile calm that could easily be broken by a shift in the currents of investor sentiment. And, considering the wide skepticism over the possibility of a European Monetary Fund, the national strikes in Greece and the reality that it will take significant suffering for EU nations to return to respectable levels of growth and indebtedness; balanced investor sentiment is all the region has going for it. The list of potential threats is long and growing. In China, recognizing the trouble that property speculation and lending have raised for the economy, the government vowed regulation and nullified all loan guarantees made by local government. This second effort is particularly worrying because it opens the doors to a wave of defaults as activity does cool. Other pending issues include the rating agencies’ warnings to the UK about its banks’ credit ratings, government stimulus withdrawal and global sovereign debt ratings.

Is Carry Trade and risk appetite rising or falling? Discuss how to trade yields and market sentiment in the DailyFX Forum

Risk Indicators:	Definitions:
	What is the DailyFX Volatility Index: The DailyFX Volatility Index measures the general level of volatility in the currency market. The index is a composite of the implied volatility in options underlying a basket of currencies. Our basket is equally weighed and composed of some of the most liquid currency pairs in the Foreign exchange market. In reading this graph, whenever the DailyFX Volatility Index rises, it suggests traders expect the currency market to be more active in the coming days and weeks. Since carry trades underperform when volatility is high (due to the threat of capital losses that may overwhelm carry income), a rise in volatility is unfavorable for the strategy.
	What are Risk Reversals: Risk reversals are the difference in volatility between similar (in expiration and relative strike levels) FX calls and put options. The measurement is calculated by finding the difference between the implied volatility of a call with a 25 Delta and a put with a 25 Delta. When Risk Reversals are skewed to the downside, it suggests volatility and therefore demand is greater for puts than for calls and traders are expecting the pair to fall; and visa versa. We use risk reversals on USDJPY as global interest are bottoming after having fallen substantially over the past year or more. Both the US and Japanese benchmark lending rates are near zero and expected to remain there until at least the middle of 2010. This attributes level of stability to this pairs options that better allows it to follow investment trends. When Risk Reversals move to a negative extreme, it typically reflects a demand for safety of funds – an unfavorable condition for carry.
	How are Rate Expectations calculated: Forecasting rate decisions is notoriously speculative, yet the market is typically very efficient at predicting rate movements (and many economists and analysts even believe market prices influence policy decisions). To take advantage of the collective wisdom of the market in forecasting rate decisions, we will use a combination of long and short-term, risk-free interest rate assets to determine the cumulative movement the Reserve Bank of Australia (RBA) will make over the coming 12 months. We have chosen the RBA as the Australian dollar is one of few currencies, still considered a high yielders. To read this chart, any positive number represents an expected firming in the Australian benchmark lending rate over the coming year with each point representing one basis point change. When rate expectations rise, the carry differential is expected to increase and carry trades return improves.

Additional Information

What is a Carry Trade
All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Each currency has a different interest rate attached to it determined partly by policy authorities and partly by market demand. When taking a foreign exchange position a trader holds long position one currency and short position in another. Each day, the trader will collect the interest on the long side of their trade and pay the interest on the short side. If the interest rate on the purchased currency is higher than that of the sold currency, the result is a net inflow of interest. If the sold currency’s interest rate is greater than the purchased currency’s rate, the trader must pay the net interest.

Carry Trade As A Strategy
For many years, money managers and banks have utilized the inflow and outflow of yield to collect consistent income in times of low volatility and high risk appetite. Holding only one or two currency pairs would invite considerable idiosyncratic risk (or risk related to those few pairs held); so traders create portfolios of various carry trade pairs to diversify risk from any single pair and isolate exposure to demand for yield. However, even with risk diversified away from any one pair, a carry basket is still exposed to those conditions that render this yield seeking strategy undesirable, such as: high volatility, small interest rate differentials or a general aversion to risk. Therefore, the carry trade will consistently collect an interest income, but there are still situation when the carry trade can face large drawdowns in certain market conditions. As such, a trader needs to decide when it is time to underweight or overweight their carry trade exposure.

Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Has Crude Taken the First Step Towards a Breakout and Reversal?

Gail — Sat, 13 Mar 2010 16:02:52 +0000

Volatility perked up modestly for the active NYMEX crude contract Friday such that the market would test a new eight-week high of $83.16 before reversing course and potentially forging a bearish breakout. With the week’s close pulling the market below a trendline that has guided the commodity upward for over a month now, a speculative barrier has been removed. What is needed now is momentum; and such

North American Commodity Update

Ultimately, when the next solid trend does form, it will likely follow wherever investor sentiment leads. However, risk appetite itself has significant fundamental pressure from economic data on the backend. Specifically, should fear and uncertainty take over, there is more than enough reason to unwind speculative positioning. Today, the headline macro data was somewhat mixed. Retail spending in the world’s largest economy rose 0.3 percent against speculation of a contraction. On the other hand, the University of Michigan consumer confidence report unexpectedly eased back from a two-year high. These changes were relatively modest and do not definitively alter their respective trends of improvement. Taking a broader look at demand, the International Energy Agency revised its forecast for global oil demand for the year by 70,000 barrels to 86.6 million barrels per day. Further noteworthy in this release was the 1.7 million barrel increase to emerging market consumption to 41.2 million barrels per day. Economic expansion across the globe has developed more clearly outside the developed bloc; and top amongst this group is China, which is also the second largest consumer of fuel in the world. This is a link that will certainly not be overlooked going forward as the Chinese government attempts to cool its markets and economy to avoid a potential asset bubble. And, through this economic link, we loop once again back to the influence risk appetite has on the market as sentiment has so far held up despite building pressure for policy makers in the economy to act upon.

It was an unusual end to the week for gold bugs. Through the close, the risk appetite was little changed while the US dollar was tumbling ; and yet, the precious metal was also on the decline. This is an unusual mix considering gold’s two most elemental roles in the financial market through recent history were as a speculative instrument and dollar-hedge. This divergence is most likely the mix of two key developments. The first consideration that market activity itself has become so stagnant that the correlation that has bound these markets together is loosening. A second issue is the deterioration of fundamentals in the background (despite the relatively stable condition of other growth-sensitive markets). Concerns about the stability of the Euro Zone, financial stability of China and sovereign credit ratings of the world’s largest players have all increased with time. So, while this metal has a value through its function as a safe haven by acting as an alternative to fiat currency; it could be considered too expensive and volatile to reliably play the role of a clear hedge. Looking at speculative interest, the COT report revealed speculators increased their long exposure on the COMEX by 822 contracts on to a net 208,194 contacts. At the same time, the delayed volume data on the active futures contract shows the highest level of activity, at a turnover of 236,000 contracts, since the February 5th plunge and reversal. We will see what leading fundamental driver takes precedence in the near future as the market finds its course for risk appetite.

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Forex Weekly Trading Forecast – 03.15.10

Gail — Sat, 13 Mar 2010 16:02:50 +0000

US Dollar at Risk for Further Declines versus Euro on FX Positioning
Euro Will Struggle to Develop a Trend with Greece Back in the Headlines
Japanese Yen: Speculation for Intervention to Intensify Ahead of BoJ
British Pound May Rise as Bank of England Releases Meeting Minutes
Swiss Franc Vulnerable As SNB Threat Grows
Canadian Dollar on Pace for Parity Against the US Dollar
Australian Dollar May be Losing its Cache as the Only Carry Currency
New Zealand Dollar Drivers Lacking, Ranges Set to Persist

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Stocks flat-line but make history

Gail — Sat, 13 Mar 2010 16:02:47 +0000

Fri, Mar 12 2010, 22:25 GMT
by Carley Garner

DeCarley Trading | View company’s profile

The day’s economic data was mixed, the volume was light and the market was directionless. According to our sources on the CME floor, most of the locals had left for the day by mid-session and this made for extremely quiet market conditions.

The S&P has never settled higher 11 days in a row (cash or futures) but came close to doing so today. The cash S&P 500 index settled down a quarter, just under positive territory. The June futures contract traded sideways into the close but eventually settled in the green. It wasn’t glamorous (flossy, flossy) but it was 11 consecutive positive closes for the first time.

There was some early morning excitement over a stronger than expected retail sales report, but the rally quickly faded. A disappointing Michigan consumer sentiment reading prevented the market from recovering.

Where will the market go from here? We wish we knew. All we can say is that the odds are in favor of a pullback and what goes up usually goes down faster. Unfortunately, it is nearly impossible to pinpoint the price at which the short-covering will have run its course.

There continues to be a large amount of put (and put spread) buying in the indices as well as call (and call spread) buying in the VIX. This suggests that investors are looking to insure their portfolios and more likely speculators are looking for a pullback. However, this has been the case for over a week now and the market has relentlessly rallied anyway.

If you are a bear in this market, you had better be sure to get good entry prices and this means selling on rallies rather than selling weakness. Going into Monday we see resistance in the S&P near 1153 and then again near 1163, similar resistance in the NASDAQ will be 1940 and near 683 in the Russell.

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does. Charts provided by Track ‘n Trade, Gecko software.

**Seasonality is already be factored into current prices, any references to such does not indicate future market action.

Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations can be applied to either the full-sized S&P or the mini. Unless otherwise noted, profit and loss will be based on the mini version.

S&P 500 Futures and Options Trading Recommendations
**There is unlimited risk in naked option selling and futures trading

Position Trade -

February 19 – Our clients were advised to sell the April 1165 calls for about $7.50, fills were coming in near $7.25 and a handful at $7.50.

March 5 – Clients with ample margin and guts, were recommended to add to this position by selling the 1165 calls for $9.50.

Russell Futures and Options Trading Recommendations
**There is unlimited risk in naked option selling and futures trading

Position Trade -

March 9 – Sell 1 June mini Russell @ 682 OB

Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.

NASDAQ Futures and Options Trading Recommendations
**There is unlimited risk in naked option selling and futures trading

Position Trade -

March 3 – Sell 1 e-mini NASDAQ at 1878 or better

Published on Fri, Mar 12 2010, 22:34 GMT

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Indices: Wall Street gains secure

Gail — Sat, 13 Mar 2010 16:02:47 +0000

Sorry, readability was unable to parse this page for content.

Leading Forex Trading Consultant in Australia | OperateForex.com » Articles

Fed Leaves Rate Unchanged; Focus Shifts to Inflation

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Fed Opens Door for Higher Stocks, Commodities

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Forex: EUR/USD gains ground and trades at 1.3764

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Price Action Points to a Bullish Breakout but Market Fundamentals May Force a Collapse

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Forex Weekly Trading Forecast – 03.15.10

Stocks flat-line but make history

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Indices: Wall Street gains secure