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.