Another same week

I hope you did buy the major currencies on the dips this week. Currencies like Eur, Gbp, Aud and Nzd have continued to be on a tear against the greenback.

GBPUSD had been the stellar performer, hitting 1.61 t0 come close to 50% retracement between last year's high and this year's low.

One reason why these currencies moved big time were also due to long term yields moving higher this week. The market feared that investors will not soak up the increased supply of debt issued by the US govt to fund its stimulus packages and sold off treasuries.

Higher LT yields also endanger the recovery of the Us economy because borrowing costs, which usually come at a premium to risk free yields, will be pushed up. The housing market will stagnate and so will corporate borrowings.

If US govt debt auctions do not turn out as well as expected, then we can expect more selling of the dollar as well, as investors start to think about re-allocation into other currencies as the US economy falls further into danger of non-recovery.

That though, needs to be balanced against the allure of higher yields (returns) on dollar based assets. Japanese investors this week have shown an appetite to take risks again, buying up dollar based assets, hence pushing up the USDJPY to 97 from 94 in the middle of this week.

But going forward, the market will still pay attention to US govt debt auctions for directions. Even stocks too, is behaving accordingly. Better debt sales will help stocks as yields are brought down.

This coming week, I prefer to not be so greedy to continue to buy into the majors (higher yielding currencies) at every chance. Alot of central bank meetings are taking place, not to mention major econ data like the NFP on Friday.

The ECB will announce more details into their covered bond buying scheme. We'll see if they are open to more buying going forward, if so, that might hurt the Eur.

What a week it has been

What a week it has been in the FX markets. The greenback's massive selling off had been exacerbated by the possibility of further quantitative easing steps and asset purchases by the Fed, as revealed in their Apr meeting minutes.

Just this week, the dollar lost 4.97%, 3.72% and 4.49% against the Sterling Pound, Euro and Aussie.

And myself, I lost some money on the GBPUSD recommendation I posted last week as well (a loss of 120 pips). But, the murder had been a quick one as the price of the GBPUSD blitzed past my stop order so quick I couldn't react.

Yes the meeting minutes played a role in the dumping of the safe haven dollar, but I believe this is a part of a sea change towards valuation of currencies. This week's moves are a confirmation that the worst of the global recession is over as prices are trying to find their way back to normalcy.

Of course, we will not see EURUSD, GBPUSD and AUDUSD trading back at the heights of 1.62, 2.00 and 0.95 like in the heady days of '08 any time soon, but the markets are making adjustments already. Even ahead of the stock markets.

This week, the Dow traded almost unchanged, but currencies moved like crazy. Going into the next couple of weeks, I trust there would be potential for a correction back down but I am not making any confident calls right now as I have not found objective support/resistance targets after the strong bursts higher.

For the above major currency pairs, I suggest trading using the day's main theme and riding on the day's trend will help prevent excessive losses as compared to leaving positions open multi-day.

But if the corrections are strong, I'd favour buying these majors against the dollar for a longer term trade.

My GBPUSD forecast

I feel that there will be a correction downwards in the coming 1-2 weeks as the trend upwards tires out and investors take profit/re-assess the Bank of England's willingness to rely on Quant Easing measures.

Quant Easing is the printing of money to purchase govt bonds or other securities from investors, as a direct form of injecting liquidity into the economy.

The release of the UK's inflation numbers on Tue 19 May may reiterate this. The BOE is very keen on keeping the inflation numbers' fall in check to avert stagflation.

This is the primary reason for them to expand QE measures by GBP 50 Bn to GBP 125 bn in the last BOE meeting. Following that announcement, the GBP fell but remained support by bouyant stocks.

And on Tue, if a faster than expected decline happens for the Apr CPI numbers (mkt expects 2.3% yoy vs 2.9% previous), then the BOE will see a need to quicken the pace of QE or even increase it, though I doubt this will happen given the laid out schedule for QE needs some doing to complete.

On price action, the long legged doji on the recently concluded week for the cable indicates indecision after a 2 week surge (see weekly chart below).

The 23.6% retracement level shown in the chart also provides reasonable resistance.

A little bit on Technical Analysis for the GBPUSD - Rate of Change and Williams %R on the daily chart, both measures of momentum have shown declines, with the latter, falling into negative territory.

These give support to a weakening trend and certainly shows potential for the pair to head down (see daily chart below).

My call for GBPUSD for the next two weeks (until 29 May 09):

Sell GBPUSD from 1.5255

Stop loss: 1.5375 (above 12 May high)

Take profit: 1.5014 - potential 241 pips profit (above 1.50 psychological support)

Profit taken on USDCHF

Having seen the USDCHF trade in a range in the past few days, but showing some potential to move higher (as noted in my 13 May My Forecast post), I bought into the pair at 1.1062 on Wed.

Last night, the pair did hit my profit level at 1.1188, giving me a profit of 126 pips under 3 days.

But I hadn't been greedy enough. The pair was last done at 1.1220 and I think there is still more upside to it.

Still a profit is a profit is a profit and I should be thankful for that.

Have a good weekend!

Trading Psychology

A good article on one's perceptions of demand and supply in the markets.

http://www.tradingacademy.com/lessons/20090512/featured_article.htm

Enjoy..

Getting things up

Nice to know.. Pfizer is giving out free drugs, including viagra to people affected by the recession.

Talking about giving people a 'leg' up.

http://www.cnbc.com/id/30742297

My USDCHF call

This is a play based on technicals which I feel provides reasonably good risk-reward opportunity for the USDCHF.

From the daily chart above, we see two hanging man candlesticks formed on the 11 and 12 May. The bodies of the two bars are almost identical in height, and are completed by 'legs' at the bottom.

The legs indicate that there had been buying interest in the USDCHF since the 11 May even while bears are trying to push the pair lower. However, the bears could not force the issue and close the price near the lows, allowing space for the bulls to take over slowly.

Hence, I'm going with the flow and am staying on the side of the bulls.

My call for USDCHF until next Fri 22 May is:

Buy from 1.1062 (bottom of 13 May 09 candle)

Stop loss 1.0973 (lower than last low touched on the 13 May)

Take profit at 1.1188 (near lows touched in late Mar)

Profit taken on USDJPY trade

I recommended selling USDJPY in a post on the 25 Apr 09.

My order to sell was hit at 99.25 a few days later on the 1 May and I just took profit today at 95.85 - a 340 pips profit.

I had to wait for more than two weeks for this trade move over 99 and come back down. But I guess the wait was worth it.

Volatility hadn't been enough to cause me a heart attack and fundamentals (as explained in that post) gave me the confidence to hold this position for the two whole weeks.

The only scare came as USDJPY hit a high of 99.74 on the 7 May, just 10 points shy of my stop loss order before it crumbled back down and never looked back. I guess it is rather important to not place the stop in a 'hot zone', where the price tend to congest as chances are that your stop loss will be hit out of volatility.

In this case, the stop was placed above the previous price surge and my trade was safe. Or else, it'd be shameful to say I had the right view but could not profit on it.

Hope you have been profitable too.

No weekend forecast

Technical indicators for some majors appear overbought, but a sense of good ol optimissim keeps risk afloat these days, so I am kind of aimless on what to make of the next 2 weeks for now.

I said in my previous post I'd try to post a forecast or two but I regret to say I'd have to eat my words.

Perhaps in the next few days of watching price action and market developments, I'd then write something.

Have a good week ahead peeps!

My EURUSD Call

I guess I under-estimated the market's willingness to take on risk.

In my previous forecasts on the EURUSD and USDJPY on the Sunday before last, I called for the two currency pairs to fall on persistent uncertainties within the banking sector and EZ economy.

Yes my orders to sell were hit at 1.3425 and 99.40 for the EURUSD and USDJPY respectively, the two obviously did not move down to my target zones at 1.31 plus and 97. USDJPY did trade near the 97 handle though, but not near enough to my desired level.

I did take some profits off the table in the EURUSD on Wed when it got stuck at low 1.33 because price action tells me there is some strong buying that keeps coming back into the market.

I just closed out the remaining position at a small loss near the opening price because this trade seems to be a lost cause. Sometimes we have to live with a poor call. Not allowing a trade to run deep into the red should be priority. Ego is second.

My USDJPY position is still open though, but I'll be closing it soon if cross yen buying persists. I sold at 99.25. The only thing that is keeping the USDJPY contained is broad dollar weakness it seems.

On Thur, the ECB announced a refi rate cut of 0.25% to a record low of 1% as well as a plan to buy up to Eur 60 bn worth of covered bonds to ease credit conditions in the EZ.

Well, Eur 60 bn is just a small percentage of the total outstanding issuance in the EZ market and is not expected to make much of a splash but the fact that the EURUSD jumped after the announcement says a lot about the market.

There is pent up demand for risk.

And look at the sterling pound - after announcing further Quant Easing (bringing the total to GBP 130 bn from GBP 80bn), the pound recovered from its post news sell-off to end the week at 1.5237, from under 1.50 on Monday.

Maybe next week we might see some profit taking, but I wouldn't bet against another surge higher.

Will try to write a post on my forecasts for the next couple of weeks before the weekend is over.

Hope your weekend has been good.

The May ECB meeting

On Thur 7 May 09, the ECB will conclude their May meeting and many expect them to announce a rate cut of 25bps as well as some form of 'unconventional measures' to ease credit conditions in the Eurozone.

Pres Trichet and co are keeping their cards real close to their chests and not divulging what kind of 'unconventional measures' would be employed.

But I suspect there won't be so much of QE or Quant Easing, employed by both the Fed and BOE. Because three quarters of the supply of the EZ's credit comes through banks, lesser on securitization of debt, hence there is more of a need to target bank lending instead of the secondary securities market.

QE through the form of direct purchase of corporate debt by the governments is hence, unlikely.
Judging from price action of the EURUSD today, it seems there has been good and consistent buying, with the pair stabilizing around the 1.33 pivot after crashing to low 1.32 after the release of the WSJ report that BoA needed a massive USD 34 bn in additional capital.

Perhaps this is why..

1. Pre-empting the ECB outcome tomorrow, the market is buying on the rumour and will sell on the news. As traders expect the ECB to not implement QE, the Euro will be supported up until the announcement and get sold off after.

I have written before in previous posts on the lack of fundamental reasons to expect the EURUSD to go much higher. It will continue to trade in the downward channel - which I also illustrated on a previous post. Mid 1.31 is a likely target.

2. Less likely to occur: If the big surprise happens and the ECB does announce QE, the Euro will see a fire-sale. Selling EURGBP, EURCHF would be good ideas in this case.

Either way, I see the EURUSD to sell off at the end of the day.

3. But of course, if later in the NY session, the US bank stress test results are better than expected i.e. lesser than the reported 10 banks need more capital and the biggies like BoA and Citi require substantially less capital, then the mood will turn positive, leading to the buying of higher yielding currencies like the Euro, GBP and AUD.

Barring ECB QE, the EURUSD will go higher.

Snippets of the day - Wed 6 May 09

This morning in asian trade, news flashed across the Reuters screen saying that BoA might need USD 34 bn more in capital.

Coming as a surprise, the market promptly sold Dow futures, the Euro and cross yen pairs in a short flight to safety.

The worry of poorly capitalized US banks is the centrefold of the stress test result, which will be officially announced on Thur. If a majority of the 19 major US banks need to raise a lot more capital, then risk aversion will return for sure.

But, for political reasons, I doubt this will be the way the US government will put it across. They'd make it less of a problem than it really is.

After all, the government said no banks will need more public money after this test, and by the experience of the whole crisis, only seriously ill banks need public funds.

Fed Chairman Bernanke also said 'most banks are well capitalized'.

But still, this Thur's announcement should pose as a potential event risk. I won't be taking a position in stocks until I can see where sentiments are heading.

However, the sell off in the morning didn't last as euphoria once again overtook the asian stock markets. Judging from past weeks' statistics, foreign money had been pouring into asian stock markets and this doesn't look like stopping.

Maybe Asia is where growth will recover first.

Most bourses rallied higher impressively.

Snippets of the day - Mon 04 May 09

The rally just wouldn't quit.

Stocks have been rallying for the past 7 weeks and has surprised even the most bullish investors. Today, the Hang Seng and STI indexes surged more than 5%.

Tokyo is out until Wed for the Golden Week holidays, so forex liquidity is lesser, but that did not stop the Euro and Pound from climbing higher against the dollar on continued stock outperformance.

Both the EURUSD and EURJPY stopped short of somewhere near 100 pips higher from the open. AUDUSD surged to a 7 month high at near 0.74.

However, around GMT 0420 onwards, the rallies took a turn for the worse and eventually gave up all gains hours later as traders took profit. ECB member Weber's statement that the EZ banking system needs more 'cleaning up' and downgrading of EZ growth forecasts by the EC compounded sentiments.

But, I don't think now is the best time to jump right into the carry trades on this correction as we will see announcements from the stress test results, BOE and ECB this week.

Still too much uncertainty.

The ECB might surprise everyone by announcing more than expected QE measures, though I doubt that will happen. What is likely to happy though, are milder measures that include an expansion of the repo agreements etc.