Trade Team Update - - 7/15/08

The last time the euro made a new high against the dollar was April 22nd.

Fundamentally there was no reason for the euro to go to 1.6037. German ZEW was absolutely abysmal and is only confirming our forecasts of economic doom and gloom in Europe. Today's oil sell-off was the second worst in history and the largest since 1991. Securities held their ground and the Dow was even in the green for a good part of the day.

It's safe to say that the majority of the EUR/USD's market correlated variables were all working for the dollar and working against the euro, so what is the explanation for this new all-time high?

Very simple -- the market sent a message that they no longer have faith in the Fed, that Bernanke has lost most if not all of his credibility, and that the Fed and Treasury do not have control of the spiriling U.S. economy.

I am certain this was the market's way of sending a message to the Fed and to the rest of the market players, our commrades...

What makes me certain is what I saw gold do today in addition to what Bernanke told the markets in his testimony.

Before we go any further, I want to explain the situation with oil. At one point oil was down almost $10 and I believe it settled being down over $6. Normally, this kind of massive oil sell-off would have hammered the euro and have skyrocketed the dollar. But, the sell-off had zero to do with anything USD+.

Banks (those people that actually move markets) went on a rampage to close net positive oil positions in order to add solvency to their cash liquid holdings. The U.S. banking system is on the edge of the cliff... investors have lost faith, customers have lost faith, politicians have lost faith, and market players have lost faith in the U.S. banking system.

Banks need to show solvency, they need to show cash reserves, and they had to liquidate net positive oil contracts and this is exactly why oil sold-off but did not give the USD any boost at all. The other reason for the sell-off was the simple fact that investors have no hope in the U.S. economy and believe the slowdowns will diminish demand for oil. There could be more oil selling this week, but I don't see any reason it won't also find buyers that will drive it back up.

OK, getting back to gold... gold gained today. Gold has been gaining and the reason why is because investors are scared of the U.S. economic situation, which is faced with staggering inflation and flat growth. The Fed is basically telling the market players to buy gold again.

With geo-political tensions rising, with inflation rising, and with growth slowing to an even greater degree gold has to gain and the USD will have to fall with it.

In my opinion gold is back on pace to test the $1K level. If this market sentiment that we saw today sustains throughout the rest of this week and into next week it's quite possible we see $1K gold or better, and this we know would not be very USD+.

I could be totally wrong, but I believe if this USD- sentiment persists it will only drive gold back up.

Bernanke:

I don't even know where to begin with Bernanke. These updates are family-friendly so I'll refrain from saying what I'd really like to say...

I'm going to quickly sum up the best of the worst from Bernanke today. Basically, Bernanke gave the greenlight for the market's to keep selling the dollar in my opinion.

Bernanke had the perfect opportunity today to hit the markets with rhetoric to show the Fed was seriously considering the use of hawkish monetary policy to fight the rising inflation situation. He was on stage, the whole world was watching, and he didn't do it.

Instead, Bernanke told the markets the Fed's hands were tied and they couldn't raise rates in the near-term. Bernanke said the Fed's number one main concern was the proper functioning of the financial markets. Not inflation, but Wall St.

Not the dying consumer, not the crumbling housing market, not the worthless dollar, not the trade deficit, not the employment meltdown, but his friends on Wall St.

Every time Bernanke speaks he paints a darker picture of the U.S. economic situation and doesn't use the opportunity to send a strong monetary policy message to the markets.

I could be the only trader on earth that has this opinion, but I believe Bernanke gave the markets the OK to keep buying commodities and keep selling dollars. The market will decide as it always does...

EUR/USD:

Today's euro data was terrible, absolutely awful. No surprise to the traders here because we know Europe's economic situation is terrible and it's just a matter of time before the ECB can't keep things swept under the rug.

Today's dollar data was very positive, especially in the inflation area. Tomorrow we have a monumental day as we get inflation data out of Europe and the U.S. Both should be hot and print to the upside.

There is more risk on the euro inflation data to print to the downside as opposed to the dollar inflation data, but if the truth is to be told tomorrow both sets of data should print positive for their respective currencies.

With bond yields dropping in recent weeks this is a signal that there's been heavy buying of bonds and I believe this will lead to a USD+ print on the TIC data.

But the two biggest events tomorrow are Bernanke and the FOMC meeting minutes. There's no telling what Bernanke will say tomorrow. Obviously he's well aware the euro made a new all-time high today and that the USD Index is fighting for dear life. So, there is risk that Bernanke may get a little more vigilent tomorrow to keep the market's calm.

I do expect the FOMC meeting minutes to address the inflation issue, but to what degree and to how hawkishly I have no idea and won't even try to speculate on that. But you know how it works... dovish inflation/rate rhetoric = USD-. Hawkish inflation/rate rhetoric = USD+.

Costly Techs:

I personally grabbed euro shorts at 1.6010, 1.6014, and 1.6019.

I took 101 pips on the 1.6014 short and 88 pips on the 1.6010 short while my 1.6019 is still open.

While we were shorting we heard reports of tech traders going long in the exact spot we were shorting. One trader took a big hit using some MACD thing that signaled a break-out above the 1.6000 level. Apparently another trader got caught long using some strength indicator.

This is exaclty why I say techs are worthless and why I can't stand them. By the time those lagging indicators caught up with the price action, the market had already made its move and was ready to go the opposite direction. And this is why we use leading indicators here, not lagging and historical indicators which prove to be failures.

And yes, I'm bragging. I don't care either because once again price action was right and the techs were wrong. If today's example isn't enough to motivate traders to learn how to read the most reliable leading indicator - price action - I don't know what else is.

Have you ever been to a good ole fashioned Southern Baptist tent meeting? I've been to plenty... one of the favorite lines of the revival speakers is, "I hate the sin, not the sinner..."

EUR/USD Trading:

Can we test the all-time high again? Yes, absolutely I believe we can and it may happen before the week's over. But, tonight's price action will be absolutely critical, especially after London opens.

It's imperative we see how the market responds and where the market wants to take the euro. Last time we made a high we tanked the proceeding days. I'm not getting the sense this will be the case again but it's way too early to speculate on those things.

For me, I'm sticking to the same exact game plan as always: buy the dips, short the rises. The euro has no business being up at these levels, but the dollar has no reason to get bought.

Bernanke already told the markets he's not raising rates this year. If euro CPI prints hotter than expected and Bernanke bends over and grabs his ankles tomorrow, this will just give the markets more fuel to buy euros and sell dollars.

For now I'll hold my best short and sit patient to see what the market brings us later on. Again, I'm not going to speculate on anything because we need to see how Asia, Frankfurt, and London respond to the EUR/USD.

I suggest you also patiently wait before making any moves that could put you in an uncomfortable situation. Later on I will post my key levels. If I see anything happening in the markets to be aware of I'll post this as well.

Be smart, do not overleverage, and wait for the trade to come to you...