Trade Team Update

Well, the market's been pretty quiet the past 24-hours, so I guess we really don't have much to talk about today...

WAIT!

In case you were hibernating, we basically had the EUR/USD make a 500 pip roundtrip between the market's open yesterday and the NY session today...

First, lets re-cap what happened, then we'll look at tomorrow's fundamentals, FOMC, and some possibilities for the euro in the near-term...

As is typical between 5:01 p.m. EST and 5:59 p.m. EST, which is super-low on liquidity, I believe we saw some stop hunting and stoploss triggering yesterday as the market ran up, taking off at 1.5682, only to return back to 1.5682 exactly 90 minutes later...

But not too long after that we got the big news over the wires that the Fed cut interest rates on the discount lending window (not to be confused with the Fed Funds target rate).

That's all the market needed to take us back up to make a string of new all-time highs before topping out at the 1.5900 level... that very violent and exaggerated move we saw last night is what happens when anything related to interest rates are suddenly changed... it is rare for the EUR/USD to make that big of an extended move -- typically, the only thing that will ever cause such a move is a terrorist attack or a change in interest rate policy... so once again we see how critical the matter of interest rates and interest rate policies is to our market...

By mid-morning, the EUR/USD had once again returned back to the point of lift-off which fits right in with it's consistent price patterns...

Now what? First thing we need to do is get through tomorrow in order to paint a clearer picture of the future...

Tomorrow:

In addition to the FOMC, we have a string of key U.S. data release, however, none are as important and critical as what will happen at 1415 EST.

Besides the interest rate policy, the two biggest pieces of data are PPI and Housing Starts...

PPI -- producer/manufacturer inflation data... the market is forecasting a rather sharp decline in producer inflation from last month... I don't believe this at all, but as we saw with CPI, I suppose the number will print to show zero or almost zero inflation in the production sector... based on my research and based on what's happened with commodities during Q1 of this year, we should see a PPI number of between 1.5% and 2.5%.

This will never be revealed as long as the Fed stays in a rate cut cylcle -- you can't admittedly have consumer and producer inflation and cut rates, so we'll surely be lied to again tomorrow.

Housing Starts -- there's been absolutely no visible or viable signs of relief in the new construction sector... construction layoffs continue to persist... new home loans are down, plus with the sharp decline in the employment sector and the overall slowdown with the consumer, there's almost no way we see a USD+ positive print on this one... banks are not lending, consumers are not buying, builders are not building, pretty simple.

Overall, I don't expect any upside USD+ surprises tomorrow on this data...

FOMC:

What's the Fed going to do tomorrow? I have no idea. I don't even really care to be honest... My accounts are ready to take whatever the Fed throws our way...

I've spent the last two weeks preparing my accounts for tomorrow... I've cut euro shorts that were in the negative and have not taken any euro longs at the top of the range... I'm net euro long and I have tight take-profit orders on my highest euro longs and I have tons of free margin to take shorts should we get a surprise tomorrow...

I'm not bragging, just explaining why I have little concern with what the Fed does tomorrow and revealing how I prepare my accounts and protect my margin for rate decision times, especially when there's a lot of unknowns...

Lets take a look at some of the possibilities for tomorrow:

No cut -- this is a no-brainer... if the Fed shocks the markets by holding rates steady at 3.00% we could very well see a violent drop in the EUR/USD tomorrow. A no cut would be the first step in the direction of correction... I have little expection of Bernanke holding rates, he's too much of a manipulative price-fixer to do such a thing, but I'm certainly prepared for a shock of this magnitude.

25bps -- there's probably a better chance of a no cut than there is for a measly 25bps cut... if it were to happen, I think it could initially be USD+ but a cut is a cut and it would just further widen the interest rate differential between the U.S. and Europe...

50bps -- there's a decent probability we see a half point cut tomorrow... if this were to happen we might see some initial volatility but I would imagine the market would just continue on selling dollars and buying euros in the near term...

75bps -- I hate trying to predict these things, but if I had to venture a guess it would be that we get a 75bps cut tomorrow... a good number of economists are forecasting this and most of the market players are expecting this... again, it would just serve to further widen the already lopsided interest rate differential between the dollar and the euro and just give the banks more reason to keep pushing the euro higher in the near-term...

100-125bps -- any cut of 100bps or higher would be a real shock to the markets, I believe, and the result would likely be a violent dollar sell-off acrossed the board. The bond market is clearly begging for this kind of cut, Wall St. wants this kind of cut, and with the Fed lying about the lack of inflation, it would not at all surprise me to see a fat 100bps cut.

If the Fed cut by 100bps tomorrow that would put the Fed Funds target rate at 2.00% vs. the ECB's key lending rate of 4.00%. The 200bps differential between the dollar and the euro could be the final nail in the coffin for the dollar and ultimately send the USD Index into the 60's...

Should the Fed cut more than 100bps tomorrow, we could see a very violent crash of the dollar at which point the only saviour of the dollar would be a tag-team operation between the Fed, ECB, BOE, and BOJ to physically buy dollars...

Thus far all verbal intervention has failed miserably... we got some more verbal intervention today which dropped the euro 80 pips, then it was back to business as usual... somebody will have to cowboy up if they want to see the dollar resurrected from the dead..

I think if the Fed shocks the market with a no cut or a small rate cut, it's entirely possible we saw our top for now at 1.5900... many traders have asked my target for this move we've been on and as I wrote last night I'm looking at anywhere from a 1550 to 1750 pip move from the bottom we made at 1.4380.

1550 pips, bottom to top, would have put us around 1.5930... 1750 pips, bottom to top, would put us around 1.6130. Last night we came within less than 30 pips of my first target of 1.5930...

How I arrive at those targets, based on pip moves, is a combination of fundamental and price action factors, market momentum, overall market sentiment, and interest rate factors...

Now at this point I do not see a clear signal to cause me to close out most of my best euro longs and start adding shorts... I need more confirmation and I believe tomorrow's FOMC will give me a good deal of confirmation for what I'm looking for...

Should the Fed give the market a fat rate cut tomorrow, we'll likely be back on the train to 1.6000 unless somebody blows up the tracks before we get there...

Trade Team Update

Surprise, surprise, another day, another new all-time high... we've got a lot to cover today, so lets get right into it...

Well, the excitement from yesterday's Fed liquidity move didn't last long and the market was back to pushing the euro north... no big shock there...

There were two very specific comments made early this morning that got the ball rolling and helped light the torch to push the EUR/USD to new all-time highs at 1.5570. And here they are:

UAE Economic Minister: Changing USD peg may ease inflation

China Commerce Minister Chen: China wants to invest more FX reserves abroad

And that's all the market needed to hear to go nuts and start buying euros and selling dollars... I don't want to say "I told you so," but I do want to call to your memory something I posted in Sunday's update:

China -- with the USD at multi-week lows against the euro and as reflected through the USD Index, it's very likely we could hear from one or more Chinese government finance officials about the weak dollar, about currency reserve shifting, re-positioning with U.S. debt instruments, or a combo of the three.

The EUR/USD was also helped along by oil pushing well over $110 and by gold continuing it's bullish run... in addition, as the dollar plunged against the euro the 10-year yield tanked, only further helping to fuel the fire... basically all of the key market correlated variables were working against the dollar and for the euro in today's market action...

EUR/USD:

First of all, we have some mega fundamentals tomorrow, the biggest of which is Core Retail Sales... to be honest, my brain is fried after today, so I can't get into any big fundamental analysis on tomorrow's data... basically, the retail numbers should be crap. End of story on that one.

Am I still biased euro long? Of course, I have been for over a month and I'm not changing my bias now... I have not seen a single sign or signal in the market to cause me to change my bias at all whatsoever...

But, the longer we extend this bull run and the higher we go into unchartered territories, the more cautious and conservative I get when I add new euro longs...

One reason my caution is growing is because of what a central banker or what several central bankers could do about the crashing dollar and the skyrocketing euro... the more this exaggerated bull run is extended the higher the probability that we get some type of intervention in the market... just something to keep in mind...

For the past two days I've cautioned about some "interesting" things happening during the early European/London/NY sessions and I have to give the same cautions again... we may see some ranging during most of Tokyo, but that could all change after 0400 EST tomorrow morning...

Trade Team Update

These are the types of day I live for as a trader... tons of money making opportunities, tons of volatility, tons of liquidity, tons of banks triggering stoplosses which helps our entries, and lots of general mayhem in the markets...

There are two very exact and specific reasons why the euro jumped up to make a new all-time high at 1.5497 and then why we dropped from 1.5497 to 1.5281... both reasons are fundamental in nature and stemmed from the ECB and the Fed.

Early this morning our good friend Axel Weber from the ECB basically told the markets that the ECB is not cutting rates, bottomline. That's all the market needed to hear to send the euro to the moon -- remember, interest rates, interest rate policy, and interest rate futures are the #1 key drivers of this market...

OK, so a few hours later, Ben Bernanke comes out with this great plan to offer $200 billion to banks in exchange for just about any type of security that they could throw at the Fed... the Fed said they'd even take worthless and risky mortgage backed securities as collateral... this was the Fed's way of easing the credit crisis and liquidity crisis that has plagued the markets for months and months, despite steep rate cuts...

To break it down as simple as possible, you give the Fed securities, private or institutional, and they give you money... not money to lend to the general consumer, but money to lend to other banks... plus, the Fed said the banks could take 28-days to cover instead of the normal 24-hours, and they went as far as saying they would be willing to extend this program as need be...

This news immediately sent the market down for one very key and specific reason... you guessed it... INTEREST RATES! It's very simple, when the market saw this move they immediately got the idea that the Fed may not cut rates next week or may cut them by just 25bps...

Just yesterday Fed Funds Futures showed a 100% chance of a 75bps cut. As soon as this news hit the wires, there was no more 100% chance of a 75bps cut, it was gone, and the banks responded to those interest rate futures by taking the market down...

EUR/USD:

So, we got some really big news from the Fed. And I have to be honest and say that this type of plan is much better and much smarter than slashing and hacking up interest rates, it might, just might do something worthwhile and positive...

Overall it's not going to help our inflation issue, but it could turn out to be one of the more "dollar positive" moves the Fed has made in months.

First, let's talk about tomorrow's fundamentals... the two biggest pieces of data is French CPI and Crude Inventories... I believe we see very EUR+ CPI data out of France, there's no clear signs inflation is slowin in France.

The Crude data is key as oil continues to be on an unstoppable run the past few weeks... the legendary commodities trader Boone Pickens was all gung-ho about his big oil short a few weeks ago, but word is that his trade, which is reportedly massive, is down almost 15% and if oil goes any higher, he's going to have to do some serious short-covering... I don't think Mr. Pickens wants to see $110 oil but he just might soon...