EUR/USD Weekly Outlook 9/21 thru 9/26 2008 part 2

EUR/USD:

This week will start with a lot of questions that are unanswered. In reality, nothing has been fixed. The government has dropped a nuclear bomb on the markets and will take the responsibility for cleaning up the mess and rebuilding. Politics have become part of the equation. Banks will still fail, Wall St. will still panic at times. More jobs will be lost and more turmoil will hit the economy.

I don’t like to get emotionally caught up in panic, rumors, and speculation about anything extreme happening, but I do believe the USD fundamental landscape is in worse shape now then when the Fed stopped cutting interest rates. In the near-term I expect the unemployment rate to continue rising, job losses will stay at elevated levels, manufacturing should remain to the downside, and growth should remain non-existent.

I don’t care what the GDP numbers tell us, the U.S. economy is not growing and expanding. Those strong growth numbers we saw this summer were the result of the stimulus program. The next round of GDP data in the next quarter should be USD-. There is little access to credit right now. LIBOR is stressed and banks are hesitant to lend.

The U.S. economy will only truly begin to recover when the housing market finds a bottom, home values stop falling, inventories drawdown, and potential buyers get easier access to secure credit. I do not see a housing turnaround happening the rest of 2008.

The euro made a nice dip early Friday morning but as the market regained some of its sanity, the dollar bulls began covering their short positions and euro bulls returned with strong buying to drive the euro back up towards the 1.4500 resistance level.

All markets have been disjointed while this mess on Wall St. plays out. On Friday I finally saw some order in our market and I saw some proper price action behavior. Everything the Fed and Treasury are proposing is USD-. If the market decides to respond the correct way, we should expect to see the USD sold-off across the board.

As you know, the market’s not being behaving properly the past few weeks and I believe this is mostly due to the intervention and manipulation we’ve seen from the central banks and the utter lack of liquidity. If the big money movers decide to test the waters and do the right thing by selling the dollar, we will see the EUR/USD make its way back to the 1.5000+ level. A bottom should be in at the 1.3880 level and we should begin making higher lows and testing higher highs – if the markets do the right thing.

This doesn’t mean I’m closing from euro shorts from the 1.5800 and 1.5600 levels, but it does mean I’m going to take risk by buying the euro on dips and make an attempt to play the “logical” side.

I really don’t have much to say about the EUR/USD until the market opens, and I have adequate time to watch the price action and run my numbers. London will change the ballgame this morning as will NY and Wall St. money flows. So, be advised conditions are likely to be volatile, exaggerated, and we could see erratic price swings as the markets work through this mess.

Trading:

My view is clear: these events on Wall St., the government’s bailout plan, and the current fundamental health of the U.S. economy are all USD-.

On Friday I began scaling out of my USD long positions. My GBP/USD short at 2.1105 was closed at 1.8304 on Friday. All other dollar long positions in other pairs were closed for profits. I will not close my euro shorts from 1.5600 and 1.5800, they will remain open but I may begin closing euro shorts from 1.4600 and lower.

If you’re still holding short EUR/USD at 1.6010 and higher, you may want to consider taking some profits… maybe close a portion of the trade and lock in that tremendous ROI. I know some of you are still patiently holding, now you may be the time to reward your patience.

I will take risk on the euro long side. Last Thursday I gave strong warning against USD long positions on any of the majors. This warning remains even though we could see the euro test the 1.4300 level or lower. I believe there is now more risk on the dollar than on the euro even though the euro’s fundamentals remain weak.

I’m not really a yen trader, but watch out for those pairs. As these issues on Wall St. and on all global markets persist, the yen crosses will keep going schizo and the volatility will remain heightened. Trading any of the yen pairs is well beyond the realm of my risk tolerance and I urge strong caution there.

The best thing to do is keep a level head and not go into panic mode. It’s not the end of the world and these markets will eventually work themselves out no matter what. Most of you should not even be trading under these conditions. The risks are extremely high. What should may not always be what is.

I do not think the entire global financial system is collapsing and I do believe the markets will work toward equilibrium in the weeks ahead. None of this has come unexpectedly and we knew it would be ugly. Markets will be disjointed, volatile, and ill-liquid for at least the short-term.

I expect trading conditions this week to remain extremely difficult. As I said, I do not believe anything has really been fixed, but we’ve just seen a lot of political maneuvering and manipulation in order to calm the irrational and panicked market participants.

Expect the guerilla warfare conditions to continue this week. The games between the banks and brokers and retail traders will surely stay at criminal levels. Nothing can be done about this. Some brokers are worse than others, but they will all be playing games.

The fields are ripe to run stops this week… on both sides of the EUR/USD. As the central banks calm the markets I believe we’ll see more players come back, big time and smalltime players alike. Some risk will get put back on the table and we should see some higher liquidity levels.

Trading won’t be easy but it’s not impossible to pullout profits from this market. Many here have been doing it week in and week out despite the chaotic conditions. Traders here have reported ROI of 5% or more per week. Not only are those traders beating Wall St., they are beating impossible odds.

Be smart tonight and this week. Use strict risk and money management and do not overleverge. If you can be disciplined to do just that much, you will not only survive this market, you will come out of this mess better than when you went into it.