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.