Trade Team Update

Two words can be used to describe today's market action... ill-liquidity and risk. While it seemed many traders were scratching their heads to figure out what the problem was today, we're basically just seeing a repeat perfomance of yesterday with even less liquidty and more risk aversion behaviors.

Whenever the market begins to confuse me or I see disjointed price behavior between the EUR/USD and the market correlated variables the very first place I turn for answers is the bond market. I don't know any bond traders but I think I'd like to meet a few because these market participants are usually very fundamentally sound and being in the bond market means they are typically a step ahead of the herd.

The price action of Treasuries is one of the best tools I can use as a trader to help me make smart decisions about the euro. As always, interest rates (bond yields) will give the first clues. At one point today we saw the yield on the 10-year plunge over 18bps. Does it get any more clear what little liquidity are in the global markets are flooding into Treasuries?

That move right there in Treasuries is enough to signal extreme risk aversion which means the euro will be dead in the water, the dollar will be supported, and that it likely won't matter much if gold and crude go up because of what's happening with Treasuries and their yields/prices and the way money-flows are moving through the markets.

I was watching the euro's price action for hours on end looking for trades. As I mentioned last night I didn't feel comfortable shorting it down around the 1.3300 level but I also didn't feel comfortable buying. Finally a few hours after London opened I saw the potential for Treasuries to get bought up today which gave me a euro short bias and by just after 0800 EST my confirmations were in and I started shorting at the 1.3200 level.

I don't offer this example to brag but to explain a technique that was successfully used to get clarity on how to trade the euro under these extreme conditions. I've heard a few traders so they can't possibly make money under these conditions and I just do not feel that way at all. Yes it's a 100 times more difficult to make money while we're under the worst financial crisis since the 1930s but I think if traders step up their game and really look at the market instead of the up-and-down painted lines on a candlechart they will see where the money's hiding.

EUR/USD:

Today's CDS event has proven to be a mostly non-event as we expected. I'm sure market participants safe-havened their way into the dollar today, which certainly didn't help the euro, cable, and a few other majors. Once again we have almost no new data tomorrow. The only key piece of data is Crude Inventories.

Crude is just a flatout mess right now. Crude lost more than $3 today and if it's barely hanging on to the $70 level. The strength of the USD Index and the dramatically reduced to demand for crude and gas products will keep the downside pressure on crude at least in the short-term in my view.

Yesterday the talk was about a bottom being in on equities and strong USD fundamentals. I got so bored with CNBC and Bloomberg I didn't even watch them today. I have no idea what the "flavor of the day" is but I don't buy into the idea of a bottom being put in on anything... Dow, S&P, USD, EUR, crude, gold, you name it... I think it can all go lower because markets are still re-pricing assets and the re-valuation process will continue as markets re-price.

Any talk of USD fundamentals getting stronger is the stupidest stuff I think I've heard yet. They are getting worse. Three months ago we said they would get worse in Q3 and Q4 and this is playing out as expected. We're going to see a round of layoffs that will bring the US employment and consumer sector to its knees.

I think between now and December 31st we could see as many as 100,000 or more total layoffs across the board in all major sectors in the US. I expect the unemployment rate to hit 7.0% or better in the beginning of Q1 of 2009. I expect we see between 6.5% and 6.8% by the end of this year.

Let me give you an example... Ticketmaster just announced another round of layoffs. They are letting 1,000 employees go. So let's connect some dots on this one... if the US's largest entertainment and event ticket company is laying off workers what does this mean for the sports, music, and the general entertainment/amusement industry? That's all a multi-billion dollar industry. During most recessions the entertainment industry is usually mostly unaffected but this recession is so painful already that even the once immune are sick.

Sears, a major US retailer just announced they are closing four stores. KMart, whic is a discount consumer retailer like Wal-Mart just announced they are closing eight stores. Both Sears and KMart mostly serve middle-class shoppers and people looking for bargains on clothes, food, and general consumer goods. I cannot understand how some analysts are saying the US fundamentals are getting better when I see discount retails have to close their stores during a season when the discounters are the only businesses getting the consumer's cash right now. Only a crackhead analyst would say things are getting better.

As far as the euro goes, for now it seems all bets are off. To think of taking a euro short in the 1.3000's sounds crazy but after the way I played things this morning I'm prepared to do what seems crazy because that's what's been profitible for me under these extreme conditions.

I remember two years ago when I was just starting to come up through the ranks the euro was in the 1.2400's and then it went on a bull run against the dollar. Then in the middle of February of 2007 it was at the 1.3000 level and that's where it started another bull run against the dollar. I don't see any bull run happening but I'm also not going super heavy short down here mostly for the fact of what time of year it is and what's happening with the amount of USD being flooded into the markets. At some point the sheer volume of USD flooding the markets will have to be reckoned with.

I can't predict what tomorrow will bring for the EUR/USD. But I'm prepared to see more downside and more pain for the euro. I do believe the price action will largely depend on what we see with equities and how money-flows are affecting Treasuries. There's really no news. If the risk aversion gets set aside and market participants decide to grow a pair the euro may find support tomorrow.

Some levels to keep an eye on between now and Frankfurt would be 1.3042, 1.3004, and 1.2967 on the downside. On the upside 1.3098, 1.3121, and 1.3144. Trading conditions are at their most risky and extreme right now. The liquidity has just about completely evaporated. I see no evidence at all of major market participants trading currencies right now. That's why we can see the euro move 500+ points so far this week.