Trade Team Update - - 7/16/08

After forging a new high all-time high, the euro came under some intesified pressure as most of the market correlated variables worked in favor of the USD in today's trading.

Early this morning during the London session the market made quite a few attempts to find momentum and traction to make a move back towards the 1.6000 level. What I saw within the price action was a market void of buyers and a market filled with anxious sellers waiting for the signal to make a move agaisnt the euro.

Today's slide down was purely fundamental in nature... the CPI data out of Europe printed as expected, so no big surprises there. The U.S. CPI printed a touch to the upside and this was the point where it became clear the only smart trade today was short as the sellers got the ammo they needed to make their move.

Not only was the CPI data hot as we forecasted but the Industrial Production number printed to the upside. The next move against the euro came during Bernanke's speech.

Bernanke's tone and rhetoric today was clearly different than yesterday's. During his testimony on Tuesday he was aloof in regards to the U.S. inflation issue. He didn't use any strong rhetoric and really just made it sound like no big deal.

But today was a totally different story. He used strong rhetoric and was very clear that the U.S. is indeed facing a problem with inflation and that it was the Fed's job to use monetary policy to combat this inflation.

The market picked up on his hawkish rhetoric and pushed the euro down to the 1.5800 level. For my own personal liking I don't think Bernanke went nearly far enough and wasn't strong enough but it was better than the BS we normally get from him.

I know why Bernanke was hawkish today. It was because he knew what the FOMC Meeting Minutes had to say and he couldn't conflict with that. If he painted a different picture than what the FOMC has painted it would be too contradictory and right now the Fed needs to do everything they can to build back credibility and restore market confidence.

FOMC:

Overall I have to give today's FOMC Minutes a B-grade on their views on inflation. It wasn't dovish, the rhetoric was a touch more hawkish, and I believe in the very near future inflation will be the Fed's flavor of the week.

It almost has to be because inflation talk is now on the evening news, the politicians are stirring up the inflation debate, and consumers are freaking out about it. We've got election season coming up and surely the two bonehead candidates will be addressing it.

The FOMC Minutes also said that some voting members were ready to hike rates soon. Now the key is to wait and see how the market responds to this. The FOMC came out too late in the day to get any response out of NY and London, so it will be interesting to see if the market players care to make their feelings known...

Overall, I call these FOMC Minutes more on the USD+ positive side and I believe they gave the markets a better notion that the Fed's next move (after the elections) may be a rate hike.

Tomorrow:

Tomorrow's big events are Housing Starts, Building Permits, and a speech by Fed Kroszner. I'm not looking at a USD+ print on the housing or building data. Kroszner will be the one to watch. There's a decent probability he will be more on the hawkish side.

It will be interesting to dissect what he says now that Bernanke's testimonies are over and the FOMC Meeting Minutes are out. Will he show a pattern of consistency or will we get a surprise? Stay tuned.

EUR/USD:

As we mentioned, the market correlated variables were mostly working for the USD today. Oil took another beating. The Dow was up. U.S. bond yields made a move up. Pretty simple stuff to follow...

For those of you that took our call to short the euro above the 1.6010 level I would strongly encourage you to hang on to that one. After what I heard form the Fed today I reduced my probabilities of seeing the euro go back to sustain a break of the 1.6000 level.

As far as trading goes, it's the same old story... I'm bearish on the euro. It can go to 1.6000, 1.6100, I'm shorting it. Bring it, whatever the rise is, I'm shorting it back down.

The fundamental and economic situation in Europe is abysmal. Many economic sectors in Europe are crumbling. The problem has been that the U.S. gets more attention and more focus. But I believe a time is soon coming that the issues in Europe will be revealed and will be under a more intense focus by the market.

There are two things that need to happen to send the EUR/USD on a real downtrend/correction. The first will have to be the market turning it's attention and focus on the terrible economic conditions in Europe and take them off the terrible U.S. economic conditions.

The other thing is that the Fed will have to truly go into a hawkish monetary cycle and the ECB will have to truly come out of their hawkish monetary cycle.

Once those two things happen, it's game on. I was told that after the euro broke 1.6000 the tech traders were calling for 1.7000. Don't listen to those idiots... these are the same idiots that went long at the top of an all-time high. As I said, I'm bearish, I'm shorting all rises, and I don't care what anybody tells me otherwise.

I'm not ruling out another attempt to move back up before the week is out. For now I'll wait to see what happens when London enters the market. London gave great clarity this morning and could do the same again.

You know the drill -- be smart with your trades and with your money management. If you're not feeling the market, sit on the sidelines until things become clear to your view.