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.