Trade Team Update

Another interesting day in the markets... more fundamental smoke and mirrors, more ill-liquidity, and something new that I haven't seen in awhile, but we'll talk about that in a moment.

Today was all about GDP... as forecasted GPD printed strong to the upside showing the economy expanded by a healthy 3.3% verse an expected expansion of 2.7%. Looks pretty good, huh? Wrong.

That 3.3% represents gains in two sectors: exports and consumer spending. Last quarter when the USD was at its weakest levels and pushing towards a sustained break of 70 on the USD Index, U.S. exporters were living the good life as the worthless dollar translated into strong foreign sales. In addition, the stimulus checks contributed to the strong gains in the consumer sector.

So, on the surface this really looks like great news but if we were to strip out the gains made in the exporting and consumer sectors the economy would have likely only expanded by between 0.2% and 0.6% which is a far cry from 3.3%. The real GDP shows recessionary aspects when taken into consideration with the jobs and housing sector.

No matter though because Wall St. was sent into a state of euphoria this morning on the back of the strong GDP data. The Dow closed up +212 and we saw some downside pressure come of bond yields as money flows were sent into equities and out of securities leading to today's USD recovery vs. a euro that was looking very bullish prior to the data.

Before we move I also have to mention Initial Claims. The headline print was better than expected, but we still saw a print above well above the 380K level. The real story was the Continuing Claims which saw a worse than expected print by a wide margin in addition to seeing last week's data revised down. This claims data should make next Friday's NFP quite interesting...

New Correlation:

As I mentioned at the start of tonight's update, I saw something new today... not exactly never-before-seen, but something I've not witnessed in quite some time.

During today's London session and into early NY session crude and gold were on a mission, cruising through some decent resistance levels. They didn't go on a skyrocket to the top but over several 30-minute timeframes both commodities were laddering their gains which is a bullish price action pattern and not a false bullish pattern.

While crude and gold were making their gains the EUR/USD was sitting in an extremely tight range... the euro didn't move down, but it didn't move up either. Basically we had a fractured correlation and the price action was showing a real problem between the euro-gold-crude.

The problem was that the FX market wasn't buying into the moves commodities were making. Our market was viewing gold and crude's price action as a false bullish pattern and refused to take the euro up with them. This was blatant. Euro traders were not going to budge and the market said "nope, we're not going along for this ride".

This is to be noted. As I said, it's been ages since I've seen the EUR/USD watch crude and gold make substantial gains with no response. This could mean several things none of which are really a great sign for the euro in my opinion.

So now the key is to keep a really close eye on the EUR/USD price action and correlate that to moves in commodities as this will be a tremendously valuable trade indicator. If I see this non-responsive pattern get repeated over and over again this will cause me some considerable concern about buying the euro and shorting the dollar.

It could just be summer session antics and the symptom of ill-liquidity but it's going to be worth watching nonetheless.

Tomorrow:

We have a big fundamental day to close out the week. And don't forget almost no market players will be around tomorrow as it's the start of a holiday weekend. Expect extremely thin conditions and choppy price action!

Out of Europe we get the CPI Flash Estimate which I'm forecasting to print as expected. But be warned, a lower than expected print will likely put a serious amount of downside pressure on the euro. I don't believe the euro can handle weaker than forecasted CPI data tomorrow...

I'm forecasting all USD data to print USD+. Chicago PMI may come in weak, but I believe Core CPI and the Michigan Sentiment will reap the same benefits that retail sales, durables, and GDP have.

EUR/USD:

Just 24-hours ago the eur was display some incredibly bullish signs within its price action patterns. It did break above the 1.4800 level as I was expecting but as soon as we made each move above that level the momentum to keep pushing higher evaporated in the blink of an eye. Today's fundamentals and the sell-off that happened with crude and gold were the final nails in the coffin, sending us back below the 1.4700 level.

Now that those bullish price action patterns are gone I have to go back to a neutral bias for tomorrow's trading and hopefully the price action, fundamentals, and market correlated variables will give clues. If not, I'm not trading and will enjoy the weekend with piece of mind.

I really don't have a whole lot to see about the euro and trading at the moment. Tomorrow is going to be a ghostown in the markets as all the big players will be away and there won't be a drop of liquidity.

It is the end of the month so keep in mind that we could see profit-taking... if the bears want to close out profitible shorts this will be a positive move for the euro.

Be smart with your trades as we head into a holiday weekend. There could be some crazy shenanigans on Sunday when we open up...

Trade Team Update

Now this was a rather annoying day... the price action was extremely choppy and as soon as an intraday trend/direction was established we'd reverse and go the other direction... at least for me, it was quite frustrating today.

Thankfully, the market did cooperate with our fundamental forecast for today as German CPI printed weaker than expected and Core Durables printed better than expected. The euro ran up and hit my 1.4774 upside key level to the pip before reversing back down for 100+ pips. I took a short up there and several other traders reported doing the same, good job everyone...

The ECB was out in full-force today talking about inflation and basically telling the market's a rate cut is not going to happen this year. The word "vigilence" was used in regards to ensuring price stability. The ECB warned the markets not to assume rate cuts were a done deal in Q4. The ECB even made a veiled threat that another rate hike would come if "second round" effects emerge.

This is verbal manipulation at its finest. And the ECB weren't the only ones out and about... the Fed did their share of verbal manipulation basically telling the markets that growth would be nasty in Q4, that inflation is high but would likely pullback in 2009.

It's pretty obvious to me that both the Fed and ECB are growing uneasy with the EUR/USD trading around the 1.4600 level and the USD Index getting so close to the 78/80 level. This is not a situation either central bank wants to see their currency in right now based on the fact that inflation is still 4.0% in the Eurozone and U.S. growth prospects are dismal at best.

Bond yields continued to drop in the face of this extended USD strength. The 10-year made a move back below 3.78% again today. I'm still convinced the bond market is screaming bloody murder, but screaming it about a future catastrophic event that hasn't happened yet but is likely to happen in the next few weeks.

Tomorrow:

The big event tomorrow is GDP for the U.S. and Initial Claims. I have to forecast a USD+ print on GDP with the positive print being attributed to the economic stimulus program.

Fundamentals will not be the only factor moving the market tomorrow. We also have the issue of hurricane Gustav to contend with and its effects on the commodities market which will weigh on the EUR/USD.

Gustav has been downgraded but the forecasters are still calling for it to spin into a Catagory 3 and to make landfall on Monday in the Gulf states. Gustav is tracking right for the oil production industry in the Gulf of Mexico.

At this point we're looking at a potential of 85% of oil and gas production being shut down. I have to suspect the oil folks will be evacuating here pretty soon. This means oil rigs go down and drilling stops, shipping comes to a halt, refineries shut down, and demand increases while supply decreases for lack of production. We're looking at a lot of good reasons to see oil make some gains the next few days with the EUR benefiting.

There's also quite a bit of concern that Gustav will hit New Orleans. I truly hope this does not happen. I don't even want to imagine what kind of shock and devestation another hit would be on New Orleans.

EUR/USD:

This might sound crazy, but I'm getting a little more bullish and confident in the EUR. One reason is based on what I heard from the Fed and ECB today... if they are going to begin using rhetoric to support the EUR like the did today, it might just have an effect, but this rhetoric will have to coincide with another factor -- the fundamentals.

The past six weeks the USD has been on an almost endless streak of strong upside fundamentals and many upside surprises that shocked the markets -- FX and commodities.

I don't see any way possible this trend can sustain going into the Fall session and through Q4. Most of the strong data can be attributed to the $165 billion the Treasury handed out, so I expect to see a return to the downside for retail, consumer, and GDP data.

The only thing that will screw this up is the crappy EUR data we're likely to get. I'm not expecting them to, but if the Eurozone can somehow by a miracle of God not contract too sharply the rest of this year that should give the EUR/USD a strong boost after Labor Day.

Commodities is another factor that I know would put a hurting on the USD. I'm not ruling out we can see a return of $140 crude and $950 gold.

The equities market has been rather quiet lately. Wall St. has been choppy lately but I think they are due to take a hit. I can't honestly offer any concrete data or reasoning, but I just have a feeling Wall St. is due for some extended down days in the very near future. I guess the feeling comes from my opinion that a major bank or financial institution is about to fail.

As far as trading goes, I'm playing the exact same game plan. If I take a trade on an account, I take it on an intraday basis.

What it means is taking smaller risk entries, and being satisfied with 10, 20, or 50 pips and getting out of the market. It might mean I hold for an hour, 10 minutes, 20 hours, etc. This market is so ill-liquid and choppy it's almost impossible to use the price action to see an estabilished trend because it can reverse in the blink of an eye.

I'm definitely buying the euro on dips right now. We moved very quickly away from the 1.4590 level we briefly made a visit to. That is to be noted in my view.

As always practice good risk and money management and do not overleverage under these conditions. It's not worth the stress and loss.

Trade Team Update

Another rough day for the euro... the poor euro took its beating at the hands of more negative Eurozone data. It was basically just another battle of worsts today as the U.S. data wasn't exactly much to write home about either.

The markets saw some smoke and mirrors with the USD data this week... first of all with the Consumer Confidence print we can clearly correlate the upside surprise to the lingering effects of the economic stimulus checks that were still floating around. But, the number was still lower than May's data which first started to reflect consumer confidence connected to the free money from the Treasury.

New home sales printed lower than expected, but you have to dig into the actual data to see whether there are any data trends to show a bottoming out, and in my view, there's little to no signs of a bottoming out.

There's between a 10 and 11 month supply of unsold homes on the market right now. The supply of unsold homes hit an all-time high in July. Y/Y home sales are down over 13%. Median home prices continue to fall around the country. Y/Y home prices are down 7.1% and have dropped all the way $212K.

Why are home sales being somewhat supported? It's because of foreclosures and the fact homeowners are having to dramatically slash prices to attract buyers. 40% of home sales are foreclosures or distressed properties being bought. Can you see the smoke and mirrors within this data?

Tomorrow:

We get more key data tomorrow... German CPI, Core Durable Goods, and Crude Inventories. I'm expecting to see the German CPI data ease from it's recent highs the past few months.

I also have to forecast Core Durables showing a USD+ print. In my research of retailers that sell big ticket items like appliances, computers, and electronics I see many are still showing some postive numbers on the back of the economic stimulus.

Fundamentals might not necessarily drive the markets tomorrow... other factors may step into the limelight effecting the market. One such event being the hurricane Gustav.

Gustav is currently on track to snake its way through the middle of the gulf of Mexico and is tracking on a line that leads it right to the oil rigs and refineries off the coast of Mississippi, Louisiana, and Texas. Over 40% of U.S. oil operations sit right in the path of Gustav.

Forecasters are calling for this storm to potentially swirl into a catagory 4 which would be disasterous for that region and could send the markets into a tailspin. I'm expecting some of the oil companies to start evacuations as early as tomorrow and the more talk and forecasting that shows Gustav headed for the oil treasures in the gulf the more volatility we should see with crude which will translate into EUR/USD volatility.

Bond yields:

I'm still intrigued by what's happening in the bond market in relation to this sharp USD appreciation. There's a major inverse correlation relationship between the 10-year yield and the EUR/USD and I believe this wacked out relationship may offer some clues for what's been happening and for what the future may hold...

First of all, when the USD gains, bond yields go up. This is a simple correlation. What's been happening is that yields have been dropping and have remained to the downside as the dollar has been gaining ground against the euro.

This makes no sense because it's typically not possible for the dollar to gain and for yields to drop. But, here's where I believe we could be seeing signs of outright manipulation. Not directly from the Fed, more indirectly, but most likely from Asian players, especially China.

The Chinese are the second largest holder of USD reserves and U.S. debt instruments. U.S. debt has been vigorously bought up the past few weeks and based on my data the vigorous buying started around the same time the USD starting gaining against the EUR.

We know bonds have been eaten up because of their dropping yields. So, based on the fact we know bonds are being snatched up by the billion-load, we need to connect the dots and find out who's buying and why the dollar keeps gaining as it relates to falling bond yields.

My dots connect me directly to China. I believe the Fed and Treasury need China to buy debt to fund our deficit. And guess what it would take to sweeten the deal? A stronger USD. You see, if the Chinese or other Asian players are going to buy debt they are going to insist on a strong dollar to increase their buying power.

Who would buy debt to this degree with little buying power? Nobody in their right mind would do that. So, the give and take is... the Chinese get more buying power with a stronger dollar and the Treasury gets and infusion of liquid in order to fund the deficit and somehow manage the ballooning U.S. debt catastrophe.

This boils down to robbing Peter to pay Paul. But why is the Treasury so desperate to sell debt? Do they know something we don't? Do they know banks will fail after Labor Day?

Something is up. This I'm convinced of. In Sunday's update I shared many of my concerns but I'm just convinced something nasty is about to go down in September or October.

EUR/USD:

What can be said about the euro? Traders ask me every day when it's going back up. I can only offer the same answer I've given the past six weeks...

The euro has yet to find a bottom and a base of buyers, the fundamentals do not favor the euro, and we're in the absolute worst summer session conditions imaginable. The liquidity is so low this week and will keep dropping as the days go on. We could see another 2-3 weeks of this insanity before the market players return to the game and liquidity is brought back to reasonable levels.

As far as downside targets go, I still have to hold to my target I gave last week, which is a potential 328 pip downside correction from the 1.4680 level. According to my own numbers, as long as we sustain a downside break of the 1.4680 I see a decent probability we can make that 328 downside move, which would put us at the 1.4352 level.

Today's FOMC meeting minutes pretty much spelled it out that the next move is a rate hike but they are vague on their timing. The other factor I'm deeply concerned about is which side is going to see the first major bank failure after Labor Day.

My probabilities show a slight advantage on a U.S. bank or financial institution to fail first this fall. LIBOR contiues to show the credit markets are more concerned with the U.S. financial and banking system. I see no end to the credit crisis and I only see these issues widening throughout the rest of the year. This fact alone will keep the Fed's hands tied and unable to raise rates in the near-term.

After the Fed cut 325bps on Fed Funds and we're going on the first anniversary of the Fed's first cut there's been little easing of rates within LIBOR and the credit lenders. Look at mortgage rates in the U.S... they've come up, not down which was one of the desired effects of Fed rate cuts.

My view on the EUR/USD and trading is very neutral right now. The Eurozone fundamentals are weighing heavy on this pair, and conditions are thin, and we're dealing with a lot of stoploss triggering, testing of old support and resistance zones, and just general mindlesness within the markets.

As far as trading is concerned I'm more than willing and happy to wait things out another three weeks because I need to see how markets respond once this summer session madness is over. It's going to get very interesting this fall and I don't want to jeapordize any potentials by making some crazy moves in late August. That's just not a part of my trade plan right now.

We expect to see some more volatility between London and NY session tomorrow so please prepare accordingly. Do not overleverage and be smart with your entries.

Storm Brewing?

I’m a skeptic al and analytical person for the most part. Anything that has to do with trading, economics, and forecasting are issues I take pretty seriously and am passionate about. I do want to discuss a few issues that have been on my mind the past few days.

This stuff might sound like I’ve gone off the deep end but I believe it’s worth at least some food for thought. There’s a few fundamental and geo-political issues sitting in the frying pan and as soon as the pan gets some fire put to it they could become explosive resulting in global financial markets being rocked.

Basically I just have this gut feeling that we’re going to deal with a catastrophic event(s) that goes down between Labor Day and Thanksgiving. War, bank failure, surprise monetary policy move by the Fed or ECB, manipulation of crude, or all of the above or maybe something I haven’t even thought was possible.

One issue is with the U.S. banking/financial system and overall credit conditions in the U.S. and the banking system’s tight correlation with Wall St. I’m convinced we’re going to see a major bank or financial institution failure during the third quarter. The fact that the housing market has yet to show one single sign of hitting a bottom means there has to be more bank writedowns and bank failures in the third quarter.

If Fannie and Freddie see their equity zeroed out and the Treasury steps in to save them this should halt the dollar’s rise to glory in its tracks and cause a sharp reversal. At the same time I’m also convinced several European banks will fail before the end of 2008. Somebody has done a really good PR job at hiding the issues with European banks.

When the first European bank fails and the media runs images of angry European pensioners with clenched fists demanding their money, the euro is going to take a brutal beating unlike many of us have likely ever seen. Basically there’s equal dollar and euro risk in my opinion in this regard of banking and finance.

The next issue that has me concerned will sound off-the-wall but I’m going to put it out there anyway. I have this feeling that Bernanke and Paulson know something crazy is about to go down in the U.S. financial market and they have used their direct access to the currency market and gold market to manipulate the value of the dollar in turn to bring down commodities and push up the USD Index because they know if there’s a catastrophic systemic shock in the U.S. financial market it’s just going to send prices back up.

There’s no way Bernanke, Paulson, and Trichet could have the EUR/USD trading around the 1.6000 level in the event a major financial shock hits the global markets in September or October. It would have created a dire situation for both the Fed and ECB.

Where my thinking gets a little crazy is that I believe it’s possible the Treasury might have to tell debt holders that the Treasury can’t pay and may have to offer some kind of buyout for pennies on the dollar. When I say debt holders I’m specifically referring to buyers of U.S. debt – bonds. I’m talking U.S. government issued bonds.

One of the reasons bonds are called securities is because they are considered “no risk”. The U.S. government has never once defaulted on paying a debt holder. If budget deficit or monetary reasons somehow for some reason prevent the Treasury from meeting their debt payment obligations the effect on the dollar would be disastrous and could even start a military conflict. I only give this less than a 10% probability of ever happening, but it’s something I’ve thought of anyway.

The next issue is a geo-political one. It’s about the tensions with Russia. The media is portraying Russia as the bully and the aggressor who stirred up conflict with Georgia. Well, my understanding of the situation is not how the media reports have portrayed Russia.

I believe the real story is that Georgia provoked Russia into conflict and Russia reacted the same way the U.S. would likely react if a neighboring non-ally overstepped their bounds. In recent years Russia has become a force to be reckoned with as their economy has rebounded and vast wealth discovered from their trillion dollar crude market.

And now we have an agreement signed between the U.S. and Poland to allow missiles in Poland about 150 miles from Russian borders. Of course this is going to make Russia feel threatened by both the U.S. and Europe. I think it’s an extremely aggressive move against Russia and it goes against what the Constitution stands for and is extremely arrogant of the U.S. to make this kind of move.

I really don’t want to see the U.S., Europe, and NATO force Russia’s hand this fall because the Russians could really complicate global financial markets if they wanted to. Putin is clearly pulling the strings behind the scenes and I don’t think the dude is joking around. If the Russians wanted to they could shut off Europe’s energy supply and it could be a cold winter in Frankfurt and points west.

I really don’t like the relationship that exists between Russia and Iran. But I can understand why a Russia-Iran partnership is mutually beneficial for both sides. It just bothers me that they are allied because collectively they could wreak some havoc in geo-political realm.

Those are some issues I’ve been thinking about and I believe could cause some chaos this Fall. I’m also sure we’re going to see a big bank failure or financial institution failure sometime after Labor Day. Maybe Fannie and Freddie will finally be put out of their misery and taken to the field and shot by Paulson and Bernanke. That should be a several hundred billion dollar tab for the taxpayers to pick up.

The U.S. budget deficit, current account, and trade balance issues put risk on the rising dollar. When is enough debt enough? How much more can the Treasury inflate the money supply and how much debt can we possibly sell to try to cover our deficit? How many more bailouts can we afford? Those issues are extremely USD- and it’s hard for me people are buying dollars so vigorously the past few weeks.

These extremely USD- issues have not gone away the past six weeks. The U.S. financial system is more unstable and on the edge of the cliff than they were last August went money markets went haywire. There’s absolutely no way the Fed can even dare to think about raising rates at least through the rest of this year.

The credit and equities markets are way too unstable for the Fed to raise rates, it would be a disaster. All you have to do is look at USD LIBOR rates and you can see that the Fed’s 325bps worth of rate cuts haven’t done their job yet. The housing, consumer, and employment sectors are still too much to the downside for the Fed to raise rates even though the inflation data tells us that Fed Funds should at least be above 5.50% right now.

How much more will the Fed allow the USD to appreciate? U.S. exporters, which have been the backbone of the Trade Balance will be screaming bloody murder if the dollar gains too much ground against the euro. If the USD breaks through the 80 level on the USD Index this puts exporters at risk and that puts the Trade Balance at further risk and I don’t believe this is a situation the Fed wants right now.

At the same time the depreciated euro makes Trichet’s job a whole lot easier. The dude is serious about inflation and with the euro dropping several hundred points vs. the dollar it gives him more leeway to keep the ECB’s key lending rate where it’s at and prolongs the process of starting the rate cut cycle.

Fundamentally, the crap is hitting the fan in Europe. It’s not going to be pretty from here on out in Europe as far as growth and production data is concerned. Recession has already hit in some of the Eurozone and will likely spread in the near-term. I’m very bearish on the euro’s fundamentals and the ability for Trichet to stay hawkish too much longer.

I think you can see where’ I’m going with all this. There’s a lot that could all go terribly wrong in the next few weeks and this means we all need to stay at the top of our game and manage risk with the precision of an orthopedic surgeon.

For me, the worst case scenario is that I just went off the deep end a little bit and over analyzed all the markets and erred on the side of strict risk and money management.

Last night we were watching the women’s 4X400 relay race and it was a classic. It came down to the last lap and the last few meters. The Russians were in the lead coming down the homestretch. Right towards the end of the race the camera caught the last Russian sprinter do something that likely cost her team the gold medal.

The sprinter took her eyes off the finish line and looked up to the video board to see how close the U.S. sprinter was. It was at that point that the Russian lost the race and the U.S. sprinter took control to win the gold for her team.

The exact same thing can happen in this market. Being careful with your trading and with your risk management strategies will be key in order to survive the next few weeks. I’m not even going to waste my time or energy trying to call a top or bottom under these conditions. It’s pointless in my opinion and it wouldn’t serve any purpose to how I actually trade the market. MIG, a broker from Switzerland made a bold call on the EUR/USD’s near-term range – 1.4300 to 1.7000. Now, that’s a way to take a stand and narrow things down…

It’s pretty simple… the markets are going to be razor thin between now and the first week of September. The price swings will likely be volatile and extended at times. Prices will be moved by data, commodities, Fed and ECB, and any geo-political events, so those are the areas I’m to stay focused on.

Be smart with your trades and please do not overlevarage.

EUR/USD Weekly Outlook - 8/24 thru 8/29 2008

If you thought the past few weeks have been crazy, this week may exceed anything we’ve seen so far this summer. There’s about a half dozen or more key things happening in the global markets and around the world right now that are weighing heavy on the currency market. In addition, this week and next are going to be the most ill-liquid of the summer as it’s a holiday week for many in the U.S. and Europe.

One way that I can tell how liquid equities markets are is by watching their daily volume. Volume cannot be measured in Forex because there’s no central exchange, but with the Dow, S&P 500, and Nikkei I can see their volume. The volume levels on those equities exchanges are extremely low and have been dropping as the summer has dragged on.

As the volume and liquidity has dropped in the equities markets the volatility has increased… the rollercoaster rides have gotten wilder and this has translated into some of the volatility we’ve seen in commodities and currencies the past few weeks.

We have the factor if ill-liquidity to contend with this week in addition to the rising tensions between Russia the U.S., Europe, and NATO. Next we have the Olympics finally coming to a close which means China should re-open the factories and put production back online.

I have no way to actually verify if it’s true that China shut down all the factories in Beijing during the Olympics but if the theory is true this means oil consumption should pick up in the short-term. What is true is that China’s crude imports during the month of July were down by 7% which is quite a large measure in my opinion. I think it’s safe to make a clear correlation between China’s decreased demand for crude, the timing of this decrease, and the price fluctuations we’ve seen with crude since July and throughout this time during the Olympics.

If tensions with Russia heat up this week the oil market may respond because Russia is the world’s second largest oil giant. Russia also holds the power to cut off energy supplies to Europe. With cooler weather right around the corner its possible Russia may play that card if the U.S. and Europe overstep their bounds and force Russia’s hand.

Oil really is spending most of the time in the limelight and will stay in the limelight once again this week. On Friday oil took a beating losing $6 on the day. It was the second biggest drop in crude prices in the past two decades. Fortunes were won and lost during that historic move on Friday.

A $6 drop is huge but what does it mean? I don’t think it really means anything. In my view a move like that is so ridiculous and overextended it’s more just the result of heavy profit-taking in extremely ill-liquid market conditions and certain market players with decent liquidity taking advantage of market conditions to make easy profits by pushing the market around.

Fundamentals:

The other factor that will complicate things this week is the bulk of fundamental data we have on the books. It concerns me to have this much key data on housing, growth, inflation, consumers, retail, and monetary policy while the market is so ill-liquid and easy to push around. It’s imperative you practice strict risk and money management this week because the price swings and volatility at unexpected times is probable this week and next.

The U.S. housing data will also take center stage this week. Housing has been one of the main catalysts for the dollar’s demise over the past year and a half. If the housing fundamentals show signs of life this week, which I believe there’s a decent probability of happening, this should put an intense amount of pressure on the euro.

Out of Europe we’ll get growth, inflation, and consumer data which I have to take an overall bearish bias stance on. What I’ll also be closing watching for out of Europe is the rhetoric we hear from the ECB this week. The ECB has been trying to talk up the euro the past two weeks during this slide but their efforts have received little notice from market players.

The central bankers at the ECB are different from those at the Fed when it comes to granting media interviews and making sure their sound bytes hit the news wires. ECB central bankers are more accessible to the media and a little looser with their friends than their comrades at the Fed. I’ll be watching closely to see how the ECB plays the verbal intervention card the next two weeks.

Don’t forget we have the FOMC meeting minutes being released this week. This report will be closely watched by all markets for any signs or signals of coming rate hikes and on how the Fed is currently viewing inflation, growth, and the state of the credit and financial markets.

EUR/USD:

At this point I cannot take away my bias that more risk remains on the euro. In last week’s trading we had a 24-hour time period where the market made a genuine attempt to move the euro up and to keep it supported but by Friday afternoon those gains were returned to the dollar. One thing I did find interesting was the fact that the euro was able to stay above and close above the 1.4750 level.

With crude dropping $6 I was expecting to see the euro break the 1.4750 level but by some miracle it stayed supported in the 1.4770’s. This could be significant. I will be closely watching how the markets react when we open on Sunday.

It may just keep dropping Sunday and even break the 1.4700 level but that doesn’t necessarily mean that will be the trend for the week. With all the key fundamental data we have on the books this week plus with potential volatility within the crude and equities markets we have the potential to see quite a few up and down days. We could see a “trend” that lasts for less than 24-hours. I’m personally prepared to see the toughest challenge the market can throw my way the next two weeks.

The learning that is possible under these types of market conditions is priceless. With all these different fundamental, liquidity, and geo-political variables that are effecting the markets just imagine how much of a better trader you will be when the market finally stabilizes and returns to more orderly chaos.

That’s another reason risk management is imperative because as long as your accounts remain in the safe-zone and you’re not overleveraged you can focus your attention on all the lessons these market conditions have to offer. If I had to worry about managing an overleveraged account in addition to trying to make sense of the market and forecast its next moves I would be trading with anxiety, and that’s no way to trade.

Trade Team Update

We certainly had an interesting start to the week... the euro mostly stayed in a range that was pretty easy to trade -- buy the dips, short the rises, no-brainer stuff. The markets are mostly waiting for tomorrow's big data releases which made for some easy pocket-picking today and likely some easy pocket-picking during early Asia session.

Gold stay surprisingly supported today. Crude was up and down. Equities saw another round of losses as Wall St. panicked again about the state of the U.S. financial system, banking system, and credit conditions.

Bond yields continued to stay to the downside. First of all, low bond yields keep the dollar somewhat pressured against the euro and unable to keep pushing higher vs. the euro. Low bond yields also signal the market has an appetite for "no risk" securities as opposed to other asset classes such as equities, commodities, and currencies.

Plus, low bond yields are an important signal from the bond market... low yields can be the bond market's way of telling the other market that they think the Fed is either on hold or is going to cut rates again and that credit conditions are extremely tight. These signals from the bond pits are to be noted. We need to keep an eye on the 10-year and 2-year this week as we get key data.

Gold surprised me today as it made a strong recovery off of last week's lows and seems to be sitting comfortably at the $800 level. Even when the euro dropped 80+ points from its early morning high gold stayed supported. This is a bit of a bright spot because it's imperative gold stops sliding in order for the euro to gain any momentum to make a move up.

I believe crude fell victim to the tropical storm news reports flying around today. The forecasts for this storm are all over the place... some are saying it's going to be a hiccup while others are calling for it to form into a catagory 2 and then veer off into the gulf towards the oil rigs in the area of Louisiana and Texas. I suppose we just need to see how that event plays out and crude will follow accordingly.

Tomorrow:

More risk for the euro tomorrow. Two mega pieces of data could potentially do some serious harm to the euro. First we get German PPI which is forecasted to print cooler than last month. I'm not so inclined to believe we'll see a cooler print but the way some of the euro data trends have been going the last week, it's anyone's guess.

German ZEW I must forecast to print at expected, but likely to print below expected. Currently I'm running a 56% probability that we see a print below expectations and below last month's print of -63.9. We also get Eurozone ZEW which I'm forecasting to print below expectations and print worse than the German data.

The fact is economic conditions, growth, manufacturing, housing, industrial production, and credit conditions have been steadily deteriorating rapidly over the course of the summer. I believe there's a full recession happening in Spain right now and some of the smaller EMU countries have either joined Spain's recession or are just a few steps behind. Ireland is under real threat of recession and overall growth has been contracting in the Eurozone's heavy hitters like Germany, France, and Italy.

My views on the Eurozone's economy and near-term growth potential remains tremendously low and I believe investors will voice the same thoughts in tomorrow's ZEW data.

The euro's not the only one under threat tomorrow as we get Housing Starts, Building Permits, and PPI.

I believe we could see a PPI print at or slightly above expected. It's very important to the dollar that PPI prints hot. If PPI prints cool this may cause some of the market players to question whether prices are truly being based on to the consumer, and how this will then effect CPI, which then leads to how the Fed will handle monetary and rate policy this fall. A strong PPI print just serve to give the dollar another boost.

Housing Starts and Building Permits I am not very bullish on for tomorrow. I've yet to see any significant reason to have any confidence in the U.S. housing market. The fundamentals and the data doesn't support a positive view of housing nor does it give me any belief the housing market has yet to bottom.

Credit is tight, consumer credit is low, banks still have to crawl over broken glass to borrow money, and homeowners are slashing prices Freddy Krueger style just to get their homes off the market.

Lastly we get to hear from Fed Fisher. He's a hawk, pretty simple. I fully expect Fisher to talk up the dollar by either saying inflation is too high or by saying rates need to go up or by saying both.

EUR/USD:

I can't help but remain bearish on the euro. That being said, I did see signs of life in the euro today. Some of the price action showed that there was actually buyers and not as many sellers. And that there were likely some dollar-long profit takers ahead of tomorrow's data.

Tomorrow's fundamentals likely hold the euro's life in their hand. In addition to crude and gold. Right now things seem really crazy in the market and really crazy with the EUR/USD, but I don't see any craziness at all. This is a very simple process that's happening.

The fundamentals are shifting, the Fed and ECB are shifting monetary policy, and the market is shifting the trend as the fundamentals evolve, the Fed and ECB change monetary and rate policy course, and the markets seek the way towards equilibrium and order through price action that begins to behave properly.

Basically I'm going to keep shorting the rises and carefully picking entries to take a few pips on the long side. I'm holding all of my best euro shorts and will just keep shorting.

If the dollar-long profit takers decide to sneak up on us this week and the euro gets pushed up, I'll keep shorting those profit-taking rises.

Fundamentally the euro is under a lot of risk tomorrow. If the data prints overall EUR- and USD+ it would take a miracle from God to stop the market from selling it off again. Price action does show some potential to test the 1.4780 level, but we need the data and the market correlated variables working for the euro to make that possible.

Be smart with your trades over the next 12-hours. Do not overleverage and do not get yourself into a trade you're not willing to deal with at 0830 EST tomorrow.

EUR/USD Weekly Outlook 8/17 thru 8/21 2008

Once again we have another interesting week before us and that could be potentially explosive for the EUR/USD with a high probability of seeing the euro make a sixth straight week of extended losses against the dollar.

There is an intense amount of risk on the euro and very little risk on the dollar this week. The factors I’m looking at and will most focus on this week to determine how I’m going to trade the EUR/USD will be: fundamentals, moves in commodities and bond yields, equities, and verbal manipulation from central bankers and other market players, and geo-political happenings.

Fundamentals:

This week is very light on USD data and heavily weighted with euro data. Where the euro falls into fundamental risk is the fact the data on the books are centered on growth (PMI, Industrial Orders), economic sentiment (ZEW), and GDP correlated data (Current Account, Trade Balance).

I think some of the forecasters and economic are a little overzealous with their predictions for this week’s euro data. I’ve not completed my normal fundamental research for the entire week but based on some preliminary data collection I’m overall bearish on this week’s euro data.

Obviously if we do get some strong upside prints on the growth data this will give the euro a desperately needed boost and should serve to halt the slide for the time being or at least slow it down. ZEW is going to be one of the real keys this week to whether or not the euro takes another beating at the hands of the fundamentals. Keep your eye on that data.

Fundamentally speaking, there is absolutely some risk on the dollar. First with the Building Permits and Housing Starts data… housing has been one of the biggest drags on the dollar. Should the housing data show continued weakness I believe this could take some of the thunder away from the dollar bulls.

Of course, we get speeches from Fed Bernanke and Fisher this week. Fisher will likely come out with his hawkish guns blazing and it wouldn’t surprise me at all to see the market react favorably to what he has to say. Bernanke is the real wild card. This will be Bernanke’s first speech since the dollar became an overnight sensation. What I’m convinced of is that he’ll use the opportunity to manipulate the markets.

My gut tells me if he does play the verbal manipulation game that he’ll say something to cool the rapidly appreciating dollar. I can’t imagine Bernanke is too thrilled about the dollar being the hottest new rising star in the global markets. It’s not healthy for the U.S. economy and under these economic conditions should do damage to factors that have already been set in motion to try and heal the economy.

A stronger dollar is going to hurt U.S. exports which are a key area the economy has depended on to stay alive. It will also negatively impact the Current Account and Trade Balance. Our Trade Balance didn’t really gain a whole lot of ground even when the dollar was at its weakest.

In a matter of just six or so weeks the dollar has gained 800+ points on the euro and has broken key resistance levels on the USD Index. The U.S. economy really cannot afford to see the dollar move up much higher on the USD Index. It’s getting into dangerously high territories. So, Bernanke has a lot of reasons to talk the dollar down from the pedestal the market has put it on.

Commodities:

One thing that is straightforward and simple: the euro will not stop falling if oil and gold keep falling. If you did nothing more than watch the euro’s real-time price action and watch gold and crude move in real-time you should have no problems making money this week.

For example, suppose you see crude start falling, there’s a very high probability the euro is going to follow it, same with gold. There is one market correlated variable that I believe could serve to stop the dollar’s gains – bond yields. Throughout the dollar’s rise to stardom bond yields have been unable to make any strong gains. The 10-year is sitting comfortably below 4%. Mortgage rates are rising and bond yields are not. The dollar is rising and bond yields are not.

Is the bond market giving us some clues? I believe so. I think the bond could be telling us this whole idea about the Fed raising rates in the fall and winter is a bunch of crap and they aren’t buying into the Fed hype. I’ve been a euro bear for the past few months but this doesn’t mean I’m a dollar bull. Not even close.

How much more can the dollar gain if U.S. bond yields stay at degraded levels? Not much more in my view. We need to watch how bond yields behave this week as these observations could yield more clues to help us trade smart and profitably.

ESF:

One of the “theories” going around the markets is that the Fed intervened to save the dollar from falling further on the USD Index and they used the Treasury’s Exchange Stabilization Fund (ESF) to carry out this intervention. I don’t really have an opinion on this one way or the other.

I can see it happening and it makes sense for them to do it. But what doesn’t make any sense is that they would rapidly appreciate the dollar and move it down to the 1.4700 level in just a matter of weeks. This makes no economic sense at all and will only complicate things for the Fed.

So, maybe they meant to stop the USD Index from going below 70 but going above 80 isn’t going to make Bernanke very happy along with U.S. exporters or oil companies. The ESF is a function of the Treasury and allows the central bank to directly intervene in the currency market to either appreciate or depreciate a currency in a drastically short period of time and to an extended degree. If the intervention theorists are right, the Fed would have likely used the Treasury’s ESF to price fix the dollar and manipulate the USD Index.

EUR/USD:

I’m going to keep shorting the crap out of this thing until price action, commodities, and fundamentals tell me otherwise. Traders that think it can’t go any lower, that’s its so-called “overbought” are fooling themselves if they truly believe the worst is over for the euro.

The euro will be at the mercy of its own fundamentals, crude, and gold. As I mentioned earlier, I do believe there is risk on the dollar this week. One of the biggest risks for the dollar is the Fed or ECB verbally intervening in the market.

Last week the ECB tried their best to talk up the euro but their words fell on deaf ears. Now, should the Fed come out with guns blazing to talk down the dollar, this might have more of a positive effect on the euro. The Fed could be more effective to help the euro than the ECB could. Also, should the euro’s growth data print surprisingly to the upside this would allow the ECB’s jawboning to carry more weight.

It’s very unlikely I’ll add any new positions before London opens. I need to see what happens when their liquidity hits the market as it will give me a much clearer view of where we may move on Monday. There’s not much data at all tomorrow and liquidity will still be in summer-session mode, so we need to prepare for some price swings.

Right now I have no plans of adding any new shorts under the 1.4705 level. I’m not seeing any reason to buy right now, but I don’t want to add any new shorts below that level for the time being.

I don’t have much more to add at this point. I think trading this week should be fairly straightforward and easy to figure out as long as you have your eyes on the right things and aren’t over-thinking things and over-complicating your trading.

Should all factors keep working against the euro and for the dollar I see the potential for the EUR/USD to drop 328 points this week – this is my “worst case scenario” for the EUR/USD based on my own numbers and forecasting of the market.

The potential for upside gains certainly exists this week but we all know what it’s going to take to make that happen and there will be a lot of resistance along the way up. On the upside I see current potential of a 142 point gain.

Be smart, do not overleverage, and please don’t make any knee-jerk trades. Allow the trade to come to you, wait for your price, and when you’re in doubt, stay out.

Trade Team Update

Once again what little price support the euro found the past two trading sessions was smashed under the weight of strong USD fundamentals. Both the Core CPI and CPI data printed hot and above expectations, just as we forecasted last night.

In addition, Eurozone CPI printed a tick below market expectations. Hot USD CPI and cool EUR CPI was the perfect storm for the dollar to keep chipping away at the euro and to keep erasing month's worth of euro gains.

The markets are already convinced the ECB is cutting rates in December. Today's data only served to justify their beliefs and as long as the fundamental data trends continue to print EUR-, I see no reason for this slide to come to an end.

The other factor obviously is the continued strong sell-off's with crude and especially gold. There's absolutely no way the euro can find support and traction to move up if commodities continue to make new lows on a daily basis.

Tomorrow:

The same advisement I gave for yesterday's trading stands for today's trading: the euro remains firmly at risk. Where a lot of the risk lies is the simple fact Europe is on holiday and European banks are closed until Monday.

Let's think about it... during the past year or so of trading the euro was on a strong bullish trend against the dollar. And what was the price action pattern we saw play out time and again during a U.S. bank holiday? The dollar would get hammered. So, the main reason I say all risk remains on the euro tomorrow is because now that the tables have turned the market has the perfect opportunity to hammer the euro while Europe is on holiday.

This will be the first European holiday we've seen in a long time while the euro is behaving bearishly vs. the dollar. It will be interesting to see what the market does and how it moves the EUR/USD. For me, it'll be a new experience and something that should provide valuable insights.

As far as the USD data is concerned, I believe one of the surprise bright spots we could see is within the Michigan Sentiment. This data comes out every two weeks. Think about what the price of fuel at the pump has done the past two weeks? It's plummeted dramatically. In my neck of the woods the price has dropped to $3.50 a gallon down from a high of $4.09 a gallon just four weeks ago. That's huge!

The other piece of key data tomorrow is the TIC flows -- net cash outlays for U.S. debt instruments by foreign investors. I believe we could see some USD positive data here as well. Reason being is because what I've observed with the bond yields...

Bond yields have remained relatively low. When bond yields stay low, this means they are being bought up. The Fed has been auctioning bonds like there's no tomorrow. And now even in light of the dollar's rebound bond yields continue to remain low. The 10-year has been unable to sustain a break of even the 4.00% level. Again, another sign of buying. Bond buying keeps yields low and prices high. Bond selling drives up yields and pushes prices down.

Now where the dollar could get hit is with the Industrial Production data. Forecasts are for production to show no gains and to stay flat. I have to agree based on my own research. In fact, it would not surprise me to see some negative production data.

Bottom line is, weak USD data will not likely hurt the dollar tomorrow and data that prints at or above will only serve to put more pressure on the euro in the short-term.

EUR/USD:

Really there's not much to be said about the euro... we know why it's weak, we know why it's continued to sell-off, and we know what it's going to take to stop the slide.

The problem is, there's nothing working in favor of the euro and all fundamentals, central bank monetary policies, and market correlated variables are strongly working against the euro. As soon as the euro finds support and buyers emerge we get another round of data that serves to crush support and send it lower.

My trading under these conditions is simply to add new shorts on the rises and then to play it tight in the ranges, taking 5, 10, or 20 pips and then getting out. There's too much risk in trying to find a euro long to hold on a swing basis without any clear support established.

We saw something very interesting today... it wasn't until literally a few short minutes after London closed that the market took the euro down. The bears couldn't make it happen while London's liquidity was still at play, but as soon as the traders in London closed up shop and hit the pubs, it was game on for the dollar and game over for the euro.

This trading strategy we saw play out is one of the main reasons I believe the market could use the opportunity to hammer the euro some more tonight and tomorrow.

That's about all I have to say right now on the euro...

Be smart tomorrow and do not overleverage. And, don't plan on taking any trades you can't get out of by market close as we could see some jaw-boning over the weekend.

The ECB tried to talk up the euro today... the ECB was talking about analysts are undervaluing Eurozone growth and how about how hawkish they are on price stability. Be careful here...

Trade Team Update

The big event for the of course was the U.S. Retail Sales data, which printed weaker than expected.Now this didn't have quite the negative effect on the USD as I thought it would, but provided great trading opportunities nonetheless.

Both gold and crude stayed well supported today as well and this too took pressure off the EUR. Volatility in the equities and securities markets continue, but most of the effect of those markets are being absorbed by the yen crosses.

Tomorrow:

Fundamentally, tomorrow looks like a trainwreck waiting to happen... we have key growth data out of Europe and of course both U.S. and Eurozone inflation data, which all markets will be watching closely.

German and Eurozone GDP should print at or below expectations in my view. The growth slowdown in the Eurozone has been picking up steam all summer long and tomorrow's data should be ugly. Now if we get downside GDP data for both the Eurozone and Germany, this will likely look to hammer the euro again.

I don't believe hot CPI data out of Europe will do much to save the euro should the growth data be as ugly as I'm expecting. The pattern the past three weeks has basically been to kick the crap out of the euro everytime a piece of bad EUR data comes out. I don't expect to see anything different tomorrow. I've seen no clear break of this data.

The 1+2 punch knock-out combo that the EUR needs to avoid is getting a weak print on both inflation and CPI data, which I'm not at all ruling out and will be prepared for accordingly.

Turning to the Core CPI and CPI data for the U.S. my forecast is to see a print at or slightly above expected. I don't have to tell you what that means for the USD... on the Core I believe we can see a print of 0.3% or better.

A hot print on the USD data combined with a cool print on the EUR data will likely send the pair to lows we haven't seen in awhile. Don't forget that we're getting July's inflation data tomorrow and during July overall prices on everything from fuel to fuel to discretionary and non-discretionary goods were running at serious highs.

The price's paid component on the manufacturing data during July was heightened, the Import Price Index printed very hot, and the USD was weak while commodities were running at extended levels.

When I piece all the components together, I get a forecast that shows me we'll see hot CPI data, even the part of CPI that doesn't account for food and fuel should print hot.

EUR/USD:

Clearly all risk is on the EUR heading into tomorrow's fundamental events. As a trader I like to play out all the possible scenarios in my head when we have a day like tomorrow -- growth and inflation data which directly correlate to interest rates and central bank monetary policy.

Most the scenarios basically involve the euro taking a beating should the data print the way I believe it will. Should there but upside surprises, that's great, but I'm preparing for the worst and I think all traders should prepare for the worst.

The only other scenario I can see playing out, which has happened many times in the past, is that the market reacts like a deer caught in the headlights... it's so overloaded with monumental data that it doesn't know what to do and it basically does nothing at all.

In the euro's defense, price action patterns have shown clear signs that the slide is over and support has been found at the 1.4860 level.

Right now the euro is remaining supported above the 1.4900 level. While this is a good sign, as we know things can change in a heartbeat once the market either squares up before the data or trades the data as it's released.

Resistance remains between 1.4980 and 1.5010 under current market conditions while we're seeing support between 1.4860 and 1.4840. Within the real-time price action I continue to see buyers emerge on each dip below 1.4900 and during all attempts to go even lower than that.

There should be some good ranging and scalping opportunities the next few hours but be ready for some price swings after 0200 EST all the way through the NY session tomorrow.

If you're tight on margin, I strongly reccommend you think about all the possible scenarios and come up with a gameplan for tomorrow. In fact all traders should have a gameplan whether your margin's tight or not.

Be smart with your trades and please do not overleverage.

Trade Team Update

After a wild late-Asia session this morning, it appears the markets have taken a bit of a breather today...

For now crude and gold have stabilised while the euro has formed some "temporary" support at the 1.4860 level... but we'll cover this in a bit.

Today's big data printed better than expected as we forecasted but the reaction was muted at best. I think the weak reaction was for the exact reason we discussed last night...

We know the dollar was very weak in June which obviously correlates to a higher demand for U.S. exports. While on the surface this looks like really good news for the USD, it's really not and the data won't put any further pressure on the euro.

With the dollar becoming an "overnight success story" it doesn't take a brain surgeon to figure out the strong Trade Balance data we saw today won't be sustainable when August's data prints in October. The same should be true with the Current Account, and both of these reports are extremely correlated to the overall strength or weakness of the dollar.

Tomorrow:

Tomorrow's fundamentals are extremely important for the USD. Before we get dollar data we get an important relase out of Europe -- Eurozone Industrial Production. In the past this piece of data wasn't very closely watched by now that the Eurozone's growth fundamentals are on notice, this type of data will face more scrutiny.

My forecast is a print of 0.1% or lower. I do not believe the data will print as weak as last month's but I cannot forecast a print at or better than expected. I'm not expecting too much of a reaction on this data as there will be much bigger fish to fry later on...

U.S. Retail Sales take center stage tomorrow. Last month both the core and non-core printed strong to the upside, for very good reason of course. Americans were spending their free cash from Uncle Sam and gas prices were at all-time highs. Those were the two biggest contributing factors to the USD+ data.

Now comes the true test of the consumer... the U.S. consumer makes up approximately 65% to 70% of GDP. As you'll recall we got strong GDP data last go around. If tomorrow's retail data prints to the downside, which I'm expecting it to, guess what the market will be thinking about GDP? They won't be happy thoughts, that's for sure.

Based on my own research with data from top retailers like Wal-Mart, Target, etc., I find it terribly difficult to maintain a USD+ bias for tomorrow's retail data. And I believe should the data print weaker than expected this is going to make the market stop and think about their bullishness on the USD.

Weak retail data will mean downside revisions to GDP and this will put the dollar back under pressure. If this scenario plays out tomorrow as I'm forecasting the only thing that could screw it up is weak EUR data and more sell-offs in commodities.

Commodities:

I think crude and gold could be nearing a crossroads. Bear in mind I'm not a commodities trader, but I believe the more they sell-off the closer they get to finding a bottom and finding support and then attempting to make a move back up.

If weak USD data the rest of this week confirms, I believe buyers will emerge to buy up gold and crude. And this is a real key for the euro's survival.

Last night's I was seeing central bank selling of gold within gold's price action and this was the likely catalyst of gold's sharp sell-off, which of course was further fueled by the appreciating dollar.

Sure enough... today the ECB reported making large gold sales. I had no idea this particular report was be released today, but that sharp sell-off stank of central bank operations. The ECB's done selling for now in my opinion.

We also got another report on crude today that showed demand has dropped to it's lowest levels in 26 years in the U.S. Well, no wonder crude topped out and has sold off... the old supply and demand principles still hold true in the futures market.

It will be very important to watch how commodities react to tomorrow's USD data. Should the data print below expected, the euro may get a nice boost if commodities work hand-in-hand to hammer the dollar.

EUR/USD:

Today was the first day I've actually seen visible evidence within the price action that some of the big boys were buying the euro. Buyers stopped the run to 1.4800 dead in its tracks and buyers have kept the euro fairly supported throughout the day.

Now this won't continue if we get EUR- and USD+ positive news tomorrow, but at least the euro is showing some signs of life and the market is showing some signs of getting over their sudden love affair with the dollar.

Based on what I saw in the price action I'm not going to be adding a new shorts and will be looking to add small euro long positions until the fundamentals, price action, and market correlated variables tell me otherwise.

Am I still bearish on the euro? Absolutely. I will short the more extended rises, but price action has shown me that the momentum to continue this strong slide down is pulling back.

I still believe we can work our way back to the 1.5300 level in the near-term as long as some of the factors working against the euro start working against the dollar.

I'm not ruling out another run to the 1.4800 level, especially if the euro data prints weak this morning, but should we make this move, I'll be watching the price action closely for signs of buying and may likely buy down there.

As I've mentioned many times, the only way I'm going to buy the euro is first when the price action shows me the strong downside momentum is disappearing and for the market to begin showing an appetite to buy the euro again.

The bottomline is, fundamentally, the landscape has not changed in the U.S. Sure, there's been signs of life here and there, but the credit crunch is still crunching, financial markets are extremely unstable, the jobs and housing sectors are a mess with no end in sight, and the I believe the consumer is still in pull-back mode.

That's about it for now... be smart with your trades and do not overleverage. Be careful taking new shorts down here...

Risk Management: Back To Basics

August 8, 2008 will be a day no FX trader should ever forget as the EUR/USD made an unprecedented move. Never in one 48-hour period had the euro ever lost so much to the dollar.

With a historic move of that proportion comes some lessons, a few of which are painful and expensive for many traders. By Friday afternoon there was a lot of slow singing and flower bringing as many traders flat out could not survive a move like that.

I heard some of the horror stories from several traders who were brave enough to reveal they suffered a margin call. I spoke with somebody at FXCM and she told me the margin calls, in terms of dollar amounts, totaled in the 8 figures. I’d be willing to bet it was even higher than that.

I rarely allow the market to stress me out but what stresses me out the most is knowing traders are getting beat by the market and are losing every penny to the market for lack of proper risk and money management. I can empathize with the loss because I’ve been there myself. I know what it feels like. But, I know why I was in that situation.

So, I think we need to go back to basics. It’s very simple – traders that cannot control their emotions and cannot help themselves from overleveraging will never get out of the group of traders that lose 90% of the time.

Calculating Usable Margin:

The net bottom line on risk management is your usable margin percentage. Usable margin and usable margin percentage is your guiding light and is what you use to determine what trades you can make, how many trades you can make, and when you must stop trading.

Usable margin percentage is also what you use to determine when to cut a loss or when to hedge against negative entries. In order to even have a trading plan and a game plan to get yourself out of a bad situation it’s imperative you know what your usable margin percentage is at all times.

Usable margin can only run on a scale of 0% to 100%. Some brokers, especially MT4 brokers trick traders and deceive them with astronomical usable margin percentages like 3592%. Sorry, but you can’t have a usable margin percentage higher than 100% or lower than 0%.

No matter who your broker is, there’s only one way to calculate your usable margin percentage. The calculation is:

Usable margin divided by equity.

Example: your equity is $18,528 and your usable margin is $15,928 your usable margin is 85.96%. $15,928 divided by $18,528 equals 85.96%.

Usable margin in terms of liquid cash is determined by taking the amount of liquid you have in the market minus what your equity is.

Example: your equity is $15,000 and you have $550 in liquid cash usable margin live in the market. Your usable margin in terms of liquid cash is $14,450. Based on a liquid cash value of $14,450 your usable margin percentage is 96.33%.

Not to be rude, but if you cannot master these simple calculations and stay disciplined to always know what your usable margin situation is, you cannot trade the Forex market because in the end you will always lose and the market will always win.

Equity:

Equity is real simple – it’s the real-time true value of the account. For me account balance means absolutely nothing. I don’t even look at account balance because if I want to know what the real value of my account is at any given moment I need to look at equity.

Your equity does not reflect how much usable margin you have in the market. Reason being, if you get a margin call you still get your usable margin back. For example, if you have $1,000 in liquid cash in the market and you get an MC, you get your $1,000 worth of usable margin back.

Equity is the other number I keep a close eye on but not nearly as close as I watch my usable margin and usable margin percentage.

Calculating Entry Size:

Preventing yourself from getting into a margin call situation starts with making the proper entry sizes. If you don’t know how to calculate what a 0.5% used margin entry is you’ll never know when enough is enough and you’ll have no way of coming up with a game plan in case you go into “oh crap” mode.

Entry size is never based on account balance. I base entry size on the liquid cash value of my usable margin. Reason being, my broker determines a margin call based on what my usable margin is, not my account balance or my equity.

My broker requires me to maintain a usable margin percentage of 1% or higher at 100:1 leverage. At 200:1 leverage I’m required to maintain a usable margin percentage of 0.5%. You need to check with your broker to know what they require because not all brokers are the same.

Example: I have $20,000 in usable margin and I want to make a 0.5% entry. To determine how much margin comes out if I make a half percent entry I simply multiply my usable margin by 0.05 which is the mathematical equivalent to half of one percent. $20,000 X 0.05 = $100. At 200:1 leverage a $100 liquid used margin entry will pay me $2 per pip on the EUR/USD.

Now if it were me, I’d only be making 0.2% entries on an account of that size. So, in this case a 0.2% entry would take $40 liquid cash out of my usable margin and at 200:1 leverage will pay me $0.80 on the EUR/USD.

Usable margin, equity, and entry size are the holy trinity of risk management. These calculations are kindergarten simple yet neglected by the vast majority of retail FX traders. Almost no one teaches risk management. Brokers will teach traders how to use every crap tech indicator on the planet but they never teach them proper risk and money management. No shock there…

One of the so-called gurus was teaching to use 10% used margin entries per trade. This is insanity. In order to survive making those kinds of entries you literally have to pick the perfect tops and bottoms of the market. Your entries have to be flawless or you have to do the other thing they preach which is using 30 pip stoplosses.

The bottom line is, if you do what we say and stick to making 0.5% used margin entries and not allow your account to fall below 92% usable margin, it’s almost impossible for the market to move against you to such a degree that you’ll margin out.

Trading Multiple Pairs:

One of the other ways you can get in trouble is not knowing how to calculate your risk when you start trading multiple pairs on one account. I do not advocate this at all. If you want to trade multiple pairs, open up multiple accounts and trade each pair on a separate account.

I’m very much against trading multiple pairs on one account because it’s extremely difficult to know what your risk situation is at any given moment. For example, if you trade the EUR/USD and then you take a trade on the USD/JPY, and then the GBP/JPY, it’s going to throw off your numbers because you’re not making or losing the same pip value.

Not all pairs pay the same price per pip as the EUR/USD does. Suppose you have two EUR/USD trades in profit and you also have a trade on the AUD/USD in the negative, this too will complicate your ability to know what your risk situation is at all times. I think you can see where I’m going with this…

The more open trades you have on multiple pairs the more difficult you make risk management on yourself. To me it’s just not worth it.

Broker:

Part of proper risk and money management is trading through the right broker. If your broker doesn’t offer you the tools you need to manage risk according to your standards, this too will further complicate the issue.

For my trading style, I need a broker that will give me 200:1 leverage and the ability to take a trade on the same pair going both ways… if I have a euro long and I want to take a euro short, my broker has to allow this. I play both sides of the market. Plus, I have to have this ability in the event I need to hedge my account.

I also need my broker to allow me to take the opposite side for free. I call these free margin trades. If I have a euro long and the entry size for that long was $1000, I need my broker to allow me to take a euro short for $1000 and not have it take any usable margin out.

I also need my broker to show me what my usable margin percentage is on a scale of 0% to 100%. MT4 brokers are notorious for using a wacked out usable margin percentage number and this just confuses traders, it’s just a big scam to be honest.

There’s no perfect broker, they all suck in one way or the other, but I cannot trade unless my broker affords me those requirements.

That’s it. This is simple stuff. The calculations are simple. If you can’t grasp these basics, you can’t trade and the Forex market is going to eat you alive. There are times when you’ll find yourself in a situation where you have some negative entries and you need to formulate a game plan to get out of the situation. It’s a whole lot easier to think straight when you don’t have a low margin situation in addition to having negative entries to deal with.

If you have the 1+2 combo of low margin and negative entries, the market will first win the psychological battle and then will move on to win the war by cleaning you out. A trader can’t think straight and can’t have a clear mind if he is within 200 pips of a crap out before he decides to take measures to rectify the situation.

EUR/USD Weekly Outlook 8/10 thru 8/15 2008

To my knowledge, never since the introduction of the euro currency in 1999 has there ever been a larger, more pronounced one week sell-off like we had last week. The entire week last week we emphatically discouraged traders from buying the euro and to stay short.

The big question on every trader’s mind is – where do we go from here? Well, if I could give you a definitive, take-it-to-the-bank answer I wouldn’t be writing this update, I’d be busy calling friends, family, and associates to get my hands on every penny I could to place an “all in” trade.

So I can do the next best thing which is distill the whole situation down and lay out the probabilities using the three factors that are responsible for moving the EUR/USD on a daily basis:

1. Fundamentals/Central Bank Monetary Policy
2. Commodities/Equities/Securities
3. Geo-political Events

Fundamentals:

Looking at what’s on the books for this week, fundamentally, the euro remains at risk. That being sad, the dollar is also under fundamental risk this week. Last week’s fundamental data clearly favored the dollar because that particular set of data was bolstered by the $100+ billion worth of free money the government handed out in the spring.

Three fundamental areas dominate the market this week: Retail Sales, Inflation, and Growth.

Based on data from Wal-Mart, consumers blew out their stimulus checks on discretionary items like flat panel TV’s, the latest video games for Xbox, junk food, beer and wine, and have since pulled back now that the free money is hanging from their walls and the empty beer cans are sitting in the trash can. I’m not too terribly optimistic on the USD retail data because in July gas prices were at their worst with the national average being about $4.06 per gallon.

Plus, what I saw during my own “field research” in July were empty stores, empty restaurants, empty roads, and empty social gathering establishments. The only thing that concerns me with a USD- forecast on retail data is the fact that the underlying fundamentals of the market have already begun their shift and based on past fundamental data patterns, the trend of USD+ upside surprises can go on indefinitely while Europe’s fundamental landscape continues to erode.

Turning to consumer-side inflation, we get CPI data out of both the U.S. and Europe. Once again, the euro takes on more risk than the dollar. One of the main catalysts for last week’s historic euro sell-off was Trichet’s dovish rhetoric on growth coupled with no strong vigilance against inflation. In addition, Trichet already told the markets that the ECB’s last rate hike would suffice to solve Europe’s inflation issue.

In fact, Trichet told the markets twice that the last rate hike would bring inflation down to desired levels, so this leads me to believe that we’re definitely not getting any upside surprises on Europe’s CPI data. In my view, anything less than an upside surprise on CPI is going to do more damage to the euro.

The U.S. CPI data prints 3.5 hours after Europe’s. If the European data prints below 4.0% and the U.S. CPI data prints at or above expectations, this could easily put the market back in the mood for another massive sell-off of the euro. And it’s that scenario that I’m expecting and will be prepared for.

The other fundamental factor that puts the euro under tremendous pressure is their GDP data which also prints on Thursday. I am very bearish on Europe’s growth, you know this if you’ve been reading any of my commentaries since January. For months we’ve been forecasting that the growth sector would be the first to crumble in Europe and we’re now seeing this reality play out right before our eyes.

In addition we get industrial production data for Europe and the U.S., plus Trade Balance, TIC Flows, and the Michigan Sentiment – all USD data. I’ll cover those pieces of data throughout the week, but be aware those can be market movers.

This week could really just boil down to a battle of worsts… most of the data we’ll see this week for the USD and the EUR shouldn’t be too pretty or too promising. So I think it could just come down to whoever’s data isn’t as nasty is the one that doesn’t take a beating.

Market Correlated Variables:

With the dollar’s massive gains the past two weeks the natural reaction in the commodities market is to sell-off, which in turn only pushes the dollar further up. The dollar really started gaining momentum when gold and crude topped out and began their sharp descent.

Right now gold is sitting in the mid $850’s and crude is around $115. Don’t forget just a few short weeks ago crude was at $147 and gold was in the $950’s. If commodity bulls step up to the plate and add their bullish liquidity into the crude pits and the gold market, the euro slide will likely come to an end.

In my view the euro will not be able to gain any traction until gold and crude stop selling off. It’s really that simple. And this is where some of the geo-political events can come into play, namely the battle between Russia and Georgia.

But before we cover the geo-political aspect, the other thing I’ll be watching is bond yields and the Dow of course. The bulls on Wall St. are flying high despite tremendous instability with the big U.S. financial institutions, the meltdown of Fannie Mae and Freddie Mac, and the likelihood of more U.S. bank failures in the weeks to come.

I believe some of the big players like Merrill Lynch and Citi are going to come crawling to Asian and Middle Eastern financiers to add liquidity. I don’t believe all of those big firm’s assets have been properly marked to market which means the dollar remains at risk if and when the big players show more signs of weakness and even bigger losses on their books.

Geo-political:

Last week tensions between Russia and their former Soviet-era stronghold Georgia went at it. The fighting is in a region called South Ossetia, which is an autonomous region that is occupied with Russians and with people who want to be Russian citizens.

Georgia is a strong U.S. ally, much stronger than Russia claims to be. Obviously there’s a cultural issue at play here, but there’s also another factor which I think is driving tensions, and this is: crude. That area in South Ossetia is oil rich and is also an area for oil transport.

Again, this is just my opinion, but I believe oil is a strong underlying factor in this conflict. I also believe the strong euro sell-off on Friday was likely fueled by this conflict to some degree. It’s been some time since the markets have seen a geo-political event like this, so naturally there will be a pronounced reaction and there could be more to come this week if the fighting escalates and peacekeepers fail at their mission of ending the violence.

What we will need to watch is whether or not crude gains in response to this fighting and whether or not the so-called “flight to safety” back into the USD continues. This geo-political event has me concerned because I don’t quite understand why Russia is taking such aggressive actions against Georgia when it’s clear they have the power to crush them without even really blinking an eye.

If it’s just about oil I suppose those intentions will be made clear soon enough but if there’s more to the story, like Russia showing the world it’s military might, this could lead to some real wackiness in global markets and our market of course.

I will be watching to see how the U.S. decides to play “big brother” and what Europe has to say, NATO, and the U.N. I lived in Russia and only have a rudimentary understanding of Russian politics and military mindset but I do not see the Russians succumbing to political pressures from the U.S. and Europe.

EUR/USD:

As I’m writing this market’s not even open yet and right now the euro is trading at a pre-market price of 1.5045. My bias, just as it’s been for the past three months is still strongly bearish on the euro. I do not see any firm establishment of a bottom at this point.

The 1.5000 level held up under intense pressure and low liquidity on Friday. I need to see the price action and the euro price patterns in order to feel confident we’ve established a stronger base of support. Until then, I’m not buying the euro and I will stay short and keep shorting every rise.

Last week the euro lost over 3.5% to the dollar and a total of over 5.0% in the past three weeks of trading. This is a dramatic and unprecedented depreciation for the euro. Shifting monetary policy at the ECB and the decline in commodities are the main catalysts for these moves.

Fundamentally, the U.S. has not turned the corner. In my opinion the housing market has not bottomed, the jobs market remains under intense downside pressure, the consumer remains in pullback mode, and there could be more financial woes on the horizon.

Those are my basic arguments for why the euro should not loose too much more ground to the dollar. The other factor is where the USD Index is at. It’s sitting right around some strong resistance. So, I will also need to see if how that resistance level on the Index holds up this week.

It’s really pretty simple… if the USD Index hits a brick wall up here at these levels, commodities can rally, and the euro fundamentals don’t print with serious downside surprises, I see no reason the euro can’t find a bottom and attempt a move back up after getting hammered so hard and so dramatically the past three weeks.

We know from EUR/USD price action patterns that the euro will always move faster and further to the downside than it will to the upside. I believe after moving down about 600 points last week that the pair is due for some upside retracement.

It wouldn’t surprise me to see a few more tests to sustain a break of the 1.5000 level, but down here I’m just not comfortable adding any more shorts. Also, I will wait for price action to confirm the euro has established some solid support and once I get my confirmations, I will likely begin buying again and taking profits on some shorts that are well into profit.

Many of you will recall me saying that my forecast was for the euro to give 1,000 points to the dollar from the all-time high. Well, our all-time high is 1.6038 and we’ve given back those 1,000 points.

Risk Management:

The last point I want to cover is risk management. Poor risk management sent MC buzzers ringing around the world like church bells on Sunday morning. Painfully expensive lessons were handed out last week. I wish it didn’t have to be that way, but that’s the nature of the market we trade.

I just hope that my constant mantra of “not overleveraging” will be justified after traders sit back and reflect on what a beast the Forex market can be. I cannot stress enough the need for proper and strict risk management this week.

We could easily see some volatile price swings and more exaggerated moves as liquidity remains low and many factors are at play within the markets. Be prepared for the unexpected please.

That's it for now. Be smart...

Key levels

So far there's been no recovery from the slide down in early Tokyo when the market was completely ill-liquid. The price indicated a clear stop hunt move which usually recovers back to the point of lift-off within 2-4 hours, but every attempt has been pushed back.

Gold took a hit on the euro drop but oil has remained mostly flat. I'm now waiting for Frankfurt and London to give more clear directon. We will need their liquidity to move out of this range between 1.5209 and 1.5234.

Key downside levels:

1.5202
1.5184
1.5168
1.5152
1.5137

Key upside levels:

1.5241
1.5259
1.5274
1.5317
1.5338

All risk remains on the euro at this point and I have zero plans to buy until it shows me some life.

Trade Team Update

"The uncertainty surrounding this outlook for economic activity remains high. The latest economic data point to a weakening of real GDP growth in mid-2008. We consider that there is some materialisation of the risks that we have identified. Overall, downside risks prevail."

Those aren't my words, those are Trichet's words, and those are the words that sent the euro on another free fall in today's trading...

Trichet said and the euro did exactly as we forecasted, so no big surprises there... but, I have to mention something I observed with Trichet's body language which I believe had a very negative "psychological" effect on the euro. Well maybe more so of a negative psychological effect on those trading the euro...

When Bernanke and Trichet speak I don't just listen to what they say I watch how they say it because their body language can not only tell me if they are speaking the truth but it can tell me how confident they are and how much they believe their own words. Plus, reading body language is a tremendously valuable tool that helps me read between the lines.

Trichet was not his usual confident, comfortable, and cocky self. Trichet's got a much stronger personality than Bernanke, but this wasn't visible today. Trichet appeared extremely uncomfortable revealing his current assesment of Eurozone economic conditions.

The way he delivered the "bad news" was like how a kid tells his parents he got in a fight at school and is suspended for three days... you know the news is bad, you want to put it as nicely as you can, but no matter what your parent's punishment is going to be way worse than what the principal gave you.

This is why Trichet repeated no less than a dozen times his mantra about price stability and maintaing price stability. One of his lines were:

"We emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability."

The fact that Trichet had to pepper every piece of bad news with strong reinforcement about price stability and hawkish monetary policy on rates, coupled with his body language was a sure fire sign the market was going to give the euro another beating. Plus, constantly repeating his mantra actually did more harm than good... this is where the whole negative "psychological" effect comes in.

Basically, Trichet was begging the markets to stop hammering the euro. Where Trichet screwed up was that he didn't infuse his mantra with any real threats or promises. Two months ago he promised the markets a rate hike. A month later he gave the markets a rate hike and two weeks after that the EUR/USD made another all-time high. Pretty simple stuff...

The problem that Trichet faces is the fact that he can't raise rates anymore and he will have to cut rates next year. But, he knows how bad Eurozone inflation is running and he knows what the ECB's number one mandate is: ensuring price stability.

A rapidly depriciating euro only further completes things for Trichet. He can't maintain price stability with any more rates hikes, so he needs the euro to stay strongly supported against the dollar in order to help keep a lid on inflation.

Trichet's body language was screaming "don't short the euro my dear friends!" But, the market had other plans of course. As I said yesterday, no matter what Trichet says today the euro is going to get whipped.

Even now as I'm writing this commentary I see the market has just dropped 100 points in less than 30-minutes. Looks like a text book stop hunt and stoploss trigger move. Good job Tokyo!

The net bottom line is, Trichet's up against the ropes and the market knows it. Eurozone fundamentals are bad and Trichet confirmed this in his speech today. Trichet's hopes and dreams of a strong euro to fight inflation are quickly evaporating right before his eyes.

To be honest, I don't believe Trichet or the euro is going down without a fight. Yes, we've seen some violent moves against the euro the past week, but this rapid depriciation will not only be undesirable to the ECB, I don't believe the Fed is going to be having a tea party over the rapidly accelerating dollar. It's really not desirable or healthy for either central bank.

Fundamentals:

As we forecasted last night, Pending Home Sales printed with a strong upside surprise and of course this has fueled more talk of a bottom in housing. I'm not singing that song. I think this piece of data is just following the exact data trend we've seen the past month now that the rebate checks are in everyone's bank account and everything is peachy again.

Fundamentally tomorrow is a rather slow day. I do expect the European data to print at or below expected while the Non Farm Productivity data should print inflationary which is obviously USD+.

EUR/USD:

Look ahead to next week's fundamentals, we have some serious data on the books... retail sales, growth, inflation, and the consumer sector. Be mindful of this as we close out the week.

I do not expect any monumental moves in the market tomorrow. Now right at this moment the market is still in the 1.5250's after making that sharp stop hunt move. This price pattern looks very similar to what the market does when it wants to suck traders in and then reverse the market on them, so I'm fully expecting a return to the point of lift-off, which in this is the 1.5300 level.

Once we make our way back there, things might be a little more clear, but there's no way I'm buying the euro. I'm only shorting. I haven't bought the euro in a week and a half and I have no intentions of buying it now.

I'm not one of those traders that says "it can't possibly go any lower". Yes, it absolutely can go lower and current price and fundamental trends stay the way they are, the short side will be in play for the time being.

Many traders have been asking me when I'll start buying the euro again. Well, the first I will need to see is a clear pattern within the price action that shows me the euro is capable of sustaining any upward momentum.

This week it's been barely able to make a 50 pip upside retrace. That price action shows me there's no momentum and buying power to support the euro. When I can see within the price action that the euro actually has a fighting chance, I will consider a long.

Next of course is the underlying fundamentals of the market... as I mentioned current trends have all been USD+ and EUR-. I need to see a break in this trend. I need to see euro data start printing stronger and I need to see renewed signs of weakness in the U.S. economy. Right now, neither of those exists.

Next is the market correlated variables. Gold has been brutalized the past two weeks. There's absolutely no way the euro can move up with gold getting hammered day after day. Same thing with crude. With crude being USD denominated every little dollar gain is going to push crude down and vice versa.

If Wall St. emerges from its bearish season that will put more pressure on the euro and boost the dollar. What is really odd right now are securities. With this robust dollar gain, bond yields have been acting weird. There's been a lot of bond buying the past two weeks. With bonds getting bought up yields are naturally low, but what I'm trying to truly understand is why there's such a demand for bonds.

Anyway, unless the market correlated variables stop working hand-in-hand to boost the dollar, I can't buy the euro.

For tomorrow the euro remains at risk. I don't expect any major moves, like 200 pips or more, but I'm certainly prepared to be proved wrong. I may have more comments on the euro after I see whether or not we can retrace back up from this stop hunt move.

Please be smart with your margin and do not overleverage.

Finding the Best Credit Card

As an internet Marketer, having a credit card is a must. Almost all online transaction use credit cards. You can use your credit card to verify your PayPal account, buying domain, etc. There are many different credit cards offered in the market.

My friend, if you cannot pay all your monthly credit card billing, then you must consider getting a low interest credit card and begin saving. But if you want the credit card advantages without the risk of overspending you can choose pre-paid debit cards, with this cards, the money you can spend is based on the money you have deposited into the account.

If you are the owner of a small or medium sized business, you should choose business credit cards, Use your business card frequently and you can earn cash back, bonuses, free online reporting that enable you to watch your business spending closely. With all the advantages available having one in your wallet is just brilliant business.

Key Levels update

One point I wanted to cover for tomorrow is about Trichet and the euro. I don't think the high value of the euro has ever really concerned Trichet. Bernanke obviously didn't want a strong dollar so he used monetary policy to achieve his goals.

But Trichet has never given a sign or signal that he purposely wanted to weaken the euro. With the euro CPI being at 4.1% I don't think Trichet would be too thrilled with a rapidly depriciating euro, so this could be a valid reason why he wouldn't say anything too crazy that would tank the euro.

Key upside levels:

1.5456
1.5473
1.5489
1.5504
1.5527

Key downside levels:

1.5391
1.5378
1.5362
1.5343
1.5321