Trade Team Update - - 9/22/08

It finally felt like the good old days today... you remember those days when the euro would kill the dollar, gold and crude would go up, the Dow would get hammered, and treasuries would sell-off... now you can see why I've been saying there's a tremendous amount of risk on the USD right now.

The EUR/USD moved over 400 points bottom to top today, which is the single biggest gain by the euro against the dollar since 2001. Crude was up over 16% today marking its best gains in history. Gold was up over $35 and the Dow closed down over 370 points.

The 10-year yield has been skyrocketing and bond prices are falling dramatically. We are seeing a continuation of panic trading as money flows are pouring out of securities and into the safety of gold.

I think everybody is buying gold... the central banks, the conspiracy-theorist goldbugs, hedge funds, daytraders, and institutional players. At one point crude was up $25 today. Today was the last day of the October crude contract and going into the final two hours the bulls ambushed the bears and put on a short squeeze. It was certainly a beautiful move and one unlike we've ever seen.

I believe all of this is stemming from the continued uncertainties surrounding the Treasury bailout plan and the political tensions that are beginning to rise. There will be no comfort for the markets and little respect for the USD during this process and while the markets are left in limbo waiting for facts and the actual legislation to be signed into law.

One of our senior FXI members posted an article by these people called the London Forex Blog and these folks are already calling the Treasury's plan an "absolute success". This is irresponible commentary in my opinion. I caution all traders to beware of this mindless rhetoric.

Obviously smart money doesn't agree with with this London group. If smart felt the same way then gold, crude, and the USD Index would not be sitting where they're at now. I told you yesterday that these issues could send commodities and the USD Index to very dark and scary places... I think we saw some of this today.

We do not even have full disclosure of the entire plan, let alone government approval to carry it out. It may not even happen this week. Here's what Senator Reid said:

"A rubber stamp of the market rescue plan will not be tolerated, Congress taking situation seriously and necessity for legislation."

Senator Shelby says he:

"Has concerns that the Treasury rescue plan is not workable or comprehensive; wants to explore alternative solutions. More discussion is needed and not swift passage of the current plan."

Neither Democrats or Republicans are 100% sold on the bailout. I may be wrong but I believe Paulson submitted a measly 3-page report outlining the entire plan and basically expecting the Senate and House to pass it in a day or two. I don't believe we'll even see it completed this week.

We don't even know the market value of the assets the Treasury is offering to buy from the holders of the toxic MBS's. As I said yesterday, there are a lot of unanswered questions and too much speculation for the markets.

The markets have no confidence and this is why we see keep seeing extended and exaggerated moves almost every 24-hour period. An unconfident market is ill-liquid, and the brave money will use what liquidity they have to move their positions to into profits.

Tomorrow:

The euro will be tested tomorrow as we get consumer data out of France and manufacturing and services data out of Germany and the Eurozone. Fundamentally the euro has very weak to the downside. I haven't found a whole lot of evidence to show a strong turnaround the past 30-days, so we may see EUR- data.

If this price action momentum sustains into London and we get strong EUR data I expect we move up again.

But the real risk is with the testimony of Bernanke and Paulson. Each goon will be testifying before a different government committee and I would expect the exchange between Bernanke, Paulson, and the politicians to get heated at times.

These testimonies could cause quite a bit of volatility in our market and within the global markets. I can't stress that this is a high risk event. Any mispeak or confusing rhetoric could send the markets into panic selling again.

The other issue is that both Bernanke and Paulson know they're in front of the entire world markets, everyone will be watching and looking for clues. If they want to, they will use the opportunity to manipulate the markets. If the Fed and Treasury have gone back to being uninterested in a strong USD, they will not stop themselves from making commentary they know will weaken the dollar. If they want to prop the dollar up they will do this as well. Be prepared for anything.

EUR/USD:

Right now some of the upside momentum has eased but the risk is still clearly on the USD at this point. This move on the has more to do with gold's strength and the lack of confidence market players are feeling.

The euro is not suddenly getting strong overnight because the fundamental and financial problems in Europe haven't magically disappeared.

I've been waiting months for a big European bank to fail and the failure hasn't materialized. Today we discovered that UBS, Credite Suisse, and a few other big name banks have come to the Treasury with their hand's out, asking for a piece of the bailout cash.

It's not fun having to borrow from others, so if these European banks supposedly have no exposure to the same issues Wall St. banks have, why would they go to the Treasury for bailout money?

It's been great seeing the euro move up, but my concern remains on the possibility of a European bank failure going down soon. If this were to occur, I think there would be a run on European banks, the images would get broadcast all over the world of the nervous pensioners beating on the doors of their village bank, demanding their savings. That would put a hurting on the euro.

As far as the USD is concerned, all of these events on Wall St., the planned bailout, and the mass exodus out of Treasuries is very USD-. If commodities keep running and the market keeps buying crude and gold on dips, the euro should keep moving up towards the 1.5000 level this week. Strong EUR fundamentals will help the upside momentum.

After running a solid 400 points I would expect to see some retracement over the next 12-hours at some point. Price action is currently not showing a whole lot of retracement but things can change fast under these market conditions.

Be smart with your entries and your risk and be advised tomorrow could be extremely volatile.