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.