Trade Team Update

Today was probably the most widely anticipated trade days of the year and it certainly delivered the volatility, theatrics, and insanity we were all expecting.

I've got a lot on my mind, I've got a lot to cover, and we as traders have much to consider going forward. Basically I want to cover today's events, the implications, and the possibiliies for the future.

As always, the proceeding are my own personal thoughts, ideas, and opinions. It's up to you to do your own research and come to your own conclusions.

Trichet:

As expected, the ECB hiked rates by 25bps bringing the ECB's key lending rate to 4.25%. This was no shock to the market and had no immediate effect on the EUR/USD price action because the market's were then waiting to hear what Trichet had to say at the press conference.

Although the ECB's rate policy move was no shock to the markets, the shock came when Trichet said eight simple words... and it was those eight words that sent the euro down 230 points top to bottom against the dollar...

This is an exact quote of what Trichet said:

"Today's decision will contribute to achieving our objective."

That comment halted the euro in its tracks and sent it on a nosedive against the dollar. Through that comment Trichet told the market this rate hike was a one-and-done deal, that the ECB was not moving into a rate hike cycle, and that this hike has the potential of being taken back in the near-term. In addition, he said there were downside risks to growth and warned of a coming economic downturn within the Eurozone.

That's all the market needed to hear to bring out the profit-takers and the bears to help push the market down... they got help with some pretty heavy stoploss triggering which only added more fuel to the fire.

We did not get a hawkish Trichet and the market's got the sure-fire signal that there would be no more rate hikes and that this hike would likely be revoked due to the worsening economic conditions that Trichet clearly stated exists.

It's really that simple -- the explanation for today's move is that simple... and it's those eight little words that the market will remember going forward...

I did gain a new appreciation for Trichet today for something he said. Towards the end of his speech he took the opportunity to throw some hate at the Fed and call them out for their lack of credibility. And he did it knowing the entire world was watching and knowing the Fed was watching. I thought that was pretty cool... it's nice to see a central banker get subversive on the crooks and criminals at the Federal Reserve.

USD Fundamentals:

Obviously the biggest event today was the ECB but we absolutely must talk about today's USD fundamentals and their implications on future Fed monetary policy...

NFP -- with NFP showing another net loss of 62K jobs, the data did come in at general market expectations but this is absolutely abysmal for the U.S. economy. Today's NFP is terribly USD-. So far this year the U.S. economy has lost a total of 438K jobs.

Some of the talking heads in the market were saying how great it was that NFP didn't print a triple digit loss... as if losing 62K jobs is a good thing...

This NFP will only serve to diminish the market's expectations of a Fed rate hike in the near-term. An economy that's bleeding jobs is not an economy that can handle a rate hike cycle without further crimpling growth and credit expansion.

In addition, the unemployment rate was expected to tick down but it stayed at an elevated level of 5.5%. Bernanke has repeatedly warned that the unemployment rate will likely increase in the coming months and I certainly have to agree with that forecast. The elevated unemployment rate is another reason why the Fed won't be able to hike.

Initial Claims -- we got a shocking number this morning... an increase of 16K new jobless claims from the prior week bringing the total to 404K. This is terrible news and extremely USD-. Today's data took the 4-week moving average on Initial Claims to 390K which are the worst levels seen since October of 2005. Another very bad sign for the labor market and another reason why the Fed can't jack up rates...

ISM -- we got awful ISM services data this morning with a 48.1 print. With ISM services printing well below the key 50 level, this too will weigh heavy against any market expectations of a Fed rate hike. The U.S. economy is very dependant upon the service sector and this weakness will only serve to put downside pressure on growth and the consumer. The service sector has cleary become a victim of the freightened consumer and the recessionary conditions that are prevelent in the economy.

When the market returns from the holiday next Monday it will be interesting to see how they digest this data and it will critical to see how Fed Funds Futures responds to this data...

EUR/USD:

The big question is: where does the EUR/USD go from here... if you want an easy answer, you're not getting one from me... if you're one of those mindless traders that just wants to be told to "go short" or "go long" I have zero to offer you...

What I can offer are my opinions and analysis of what I think will happen in the short-term... first of all it's imperative to keep in mind that we have an even wider interest rate differential between the EUR and the USD... we have a full 225bps differential that favors the EUR even more now.

Is this rate hike going to send the euro up and above 1.6000? At this point I have to say no, I don't think so. Of course there's a probability we could see this happen but based on current market conditions and the coming downside on the euro's fundamentals I see an extrememly low probability we sustain a break of 1.6000.

Today's 230 point drop doesn't faze me in the least. It's was very obvious why we dropped and it had zero to do with a "dollar rally". There was no dollar strength today... this was not the case at all.

And I'm not gauging anything on what the market did today or what it will do tomorrow as tomorrow will be extremely thin with all U.S. markets closed for the holiday.

Tomorrow's thin market conditions can open the door to sending the euro to 1.5400 just as easily as it could send the euro to 1.5800. There will be a severe lack of liquidity and this will just give the banks and brokers ample opportunity to trigger stops and cause choppy price action that makes no logical sense.

As far as trading goes I took some profits on euro shorts and added some longs on this move down. I believe we need to make another run to test the 1.5800-1.5900 level. But, this test will have to happen soon or else the euro is at severe risk of dropping back to 1.5400-1.5300.

Next week will be very critical for the euro... normal trading will resume and the market will be dissecting and digesting today's data and likely acting upon it. I think more risk is on the euro at this point and there will be more pressure on the euro.

As far as tonight and tomorrow go, the euro will first have to sustain a break above 1.5724 if it wants to pick up any traction and momentum to move back up.

It's made repeated failures to even move above 1.5700 and this is certainly a sign of more downside. There should be decent support between 1.5650 and 1.5640, but there will also be stops sitting down there and conditions will be perfect for the banks and brokers to run those stops.

Overall I'm still bearish on the euro and will be shorting all rises... same gameplan I've had for the past two months. We may be in a season of general ranging until the market gets more clarity on what it thinks the Fed and ECB will do this fall.

Next week when things return to normal I will get a much better read on the market and feel for what the price action is telling me. My best advice is to sit on the sidelines tomorrow and not expose your money to any unneeded risk. It's really not worth it.

If you do decide to trade tomorrow be smart, don't overleverage, and don't make any knee-jerk trades.