EURO/USD Holistic Analysis

Trade Team Update

2008-10-21T17:03:00.000-07:00

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.

Trade Team Update

2008-10-20T17:20:00.000-07:00

The only word I can use to describe today's market activity is weird... maybe it's just me but nothing really made a whole of sense today... oil is up, gold is mostly stable, global equities rallied, overnight LIBOR rates eased, money-flows have been light going into Treasuries... add to that Bernanke's idiotic speech and rhetoric and you have all EUR+ factors yet the euro gets hammered by the dollar.

Could it be market participants are starting to think about the fundamentals of Europe now that other sectors of the global markets are showing signs of stability? I think it's too soon to make that call but it's certainly an issue I'm considering.

I think Bernanke was mostly responsible for sending Wall St. up today. These comments are what did it:

"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate." And then... "If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers. Such actions might be particularly effective at promoting economic growth and job creation."

Well... more rate cuts, more government bailouts, more debt, more pressure on the deficit, more foreign funding needed, more manipulated growth data, more inflation, and more cheap money. Sounds like a brilliant plan to me. If there was a law against stupidity, Bernanke would be getting a body cavity search right now before being introduced to his cell mate Bubba.

Crude showed some gains today as OPEC continued to put out the production cut rhetoric. I'm sure at their emergency meeting they will all agree to cut crude production by a million or more barrels a day and then pledge to further reductions in the near-term. Beware though... the market could be buying the rumor only to sell the news on this one...

Tomorrow:

Your guess is as good as mine for tomorrow... we have absolutely no euro or dollar data and there are no Fed speeches scheduled between London and NY. We have no bigname Eurozone speakers tomorrow. I think the market will remain disjointed tomorrow.

We do have that big CDS event tomorrow. I cannot even begin to predict how that will go or what affect it may have on the market. My personal feeling is that it's most likely going to be a non-event. Several traders have asked me to explain the CDS (credit default swap) situation.

Lets pretend my home's mortgage was sold to me by Bank of Earth. And lets pretend Bank of Earth sold mortgages to 500 other families in the community. Well, Bank of Earth packages up those mortgages and created a debt instrument, a security, and this security is sold as an investment product, rated as AAA debt, given an attractive yield.

Now lets pretend Bank of Earth sold this mortgage debt product to the Bank of Jupiter. Well, as good investors, these banks want to purchase insurance on the mortgage security. Here's where we run into a problem... Bank of Jupiter is the holder of the mortgage security but because this insurance aspect is unregulated in the open market Bank of Saturn, Bank of Mars, Bank of Venus, and Bank of Mercury buy insurance (CDS) on Bank of Jupiter's mortgage security.

I think you can see the issue there... again, I'm not sure how tomorrow's CDS event will affect the markets but be prepared for some shenanigans just in case.

EUR/USD:

At this early point in the week I still have no bias on the EUR/USD. The way the euro behaved was not orderly or proper based on how the market correlated variables were behaving today. I have an extremely low risk appetite for the market right now. The liquidity is almost non-existent and the market's overall appetite for risk seems muted.

As far as trading goes, I did buy at 1.3307 this morning but the euro just seems stalled right now and is looking to make another run at the 1.3280 level. There will be stops sitting around the 1.3260 and 1.3220-1.3200 levels. It's possible we may see Asia take a run at the stops... I'm open to this possibility playing out. The afternoon euro range has been extremely tight and we've been failing around the 1.3335 level as of the writing of this update.

Based on what I saw the euro do today I cannot even say with a high degree of probability that lower LIBOR, higher equities, and supported commodities are going to help the euro this week. It's still early, however, and we may get a better idea when London opens on Tuesday whether or not we'll have another disjointed market on Tuesday.

I have to mention that the third week in October, during the past two years, has marked the beginning of a euro bull run against the dollar. It happened last year between Halloween and Thanksgiving and it happened the year before that. Will these past price action patterns emerge and play out yet again?

I can't say for sure but part of my trade plan absolutely involves buying the euro on these dips like we took today. If we make a 200+ point drop, I'm buying the euro. I will take risk buying the dips in the event the market does what it has done in the past. If we do make a bull run back to the 1.3800 level or better, I certainly do not want to be stuck short down here at these levels.

I wish I had some really exciting crap to say about the euro but I really have nothing else at this point in the week. Risk management is imperative, especially between 1700 EST and 1900 EST today... the liquidity will be eerily low.

Be smart with your risk and money.

EUR/USD Weekly Outlook 10/19 thru 10/24 2008

2008-10-19T16:20:00.000-07:00

Guess what? This weekend I did something I almost never do. I was stuck at home with a bad cold and as I was going stir crazy I decided to do some research to see how other analysts, gurus, and traders are viewing the markets presently. I was mostly interested on their views for this week. Fundamentally there’s just not much on the books. The only big fundamentals out of Europe this week are manufacturing and those should be terrible. The only big events out of the US this week are a speech by Bernanke, Existing Home Sales, and Initial Claims.

The vibe I’m getting from the analysts is that this week will be orderly, the credit markets will flow nicely, and these issues we’ve been dealing with for the past few weeks will miraculously disappear. I’m going to take the contrarian view as I approach this week’s trading with an understanding the risks will be enormous and the volatility will be chaotic at times.

The fundamentals will absolutely come into play this week but not the “textbook” definition of fundamentals. First, Wall St. will get earnings reports this week from major US corporations like Caterpillar, Google, Intel, 3M, Microsoft, Boeing, McDonalds, and Amazon just to name a few. Why does any of that matter to EUR/USD traders? Reason being is because Wall St. money-flows are a major determining factor in the daily trends of the EUR/USD and I do not see this correlation going away this week.

If poor earnings or shocks on Wall St. lead equities lower and Treasuries higher the dollar will be the likely beneficiary of this move and the euro will be punished. That has been the clear correlation and I see no reason why this correlation evaporates this week. This week I will be watching the S&P 500 more closely to give me direction indication for the euro.

The reason I’ll be focusing more on the S&P 500 is because of the issue we still have within the credit markets. As a value weighted index, the S&P 500 has more connection to the credit market and to credit flows as compared to the Dow. While the Dow is a great overall indicator, right now I’m seeing more of an important correlation with the S&P 500. The thing you have to remember about correlations is that they should not be considered as constants. Real-time market conditions dictate the relative overall strength or weakness of a market correlated variable’s pull on the EUR/USD.

Interest rates will absolutely factor into this week’s trading. Towards the end of last week we finally saw overnight dollar LIBOR rates ease. While this didn’t send the euro rocketing back up I believe the easing of dollar LIBOR rates helped keep the euro from sustaining a break of the 1.3400 level as we closed out the week. While it’s encouraging to see LIBOR cooperating with the EUR/USD, I do not think we’ve been given a guarantee the credit markets have to operate in an orderly fashion this week just because they did last Thursday and Friday.

Its true Wall St. made a nice comeback at the end of the week which brought more talk of a bottom in equities. I do not subscribe to this kind of thinking. The fundamentals of the US economy will keep deteriorating. Our forecast on this has been clear and has been proven to be a reality. I do not see how it’s possible for equities to truly bottom when some of the worst is yet to come, especially in housing. I find it hard to believe market participants cured themselves of their panic, knee-jerk behaviors.

How this all ties into trading is quite clear in my view… should Wall St. find stability this week and equities make consistent gains I believe this will take downside pressure off the euro and will give the euro a fighting chance. But the same must hold true for interest rates. If we have a bank failure situation in Europe or more troubles on Wall St. this could send dollar LIBOR rates back up which would benefit the dollar against the euro.

Consumers and Global Economies:

For the past month I’ve been focusing a lot of commentary on the US consumer because I believe the consumer sector is a fundamental area putting an extreme amount of downside pressure on the economy and on growth. I stand by the forecast that the consumer will bring the economy to its knees during Q4 and Q1 of 2009.

Over the weekend I asked a friend who is very observant and detail-oriented to do some field research for me. I asked her to go to the top two upscale, high-end malls in Nashville and then to hit the two lowest-end malls. The task was to observe traffic, get an idea of how many bags were in shopper’s hands, what stores they were from, and which mall was “performing” the best.

Green Hills Mall, the most upscale in Nashville had the least amount of shopper traffic, the highest amount of “window shoppers” and the lowest amount of purchases per shopper as compared to the other three malls. The lowest-end mall had the most traffic and the most purchases per shopper. When classifying a mall as “low-end” I’m specifically referring to retailers who offer products that are priced for middle-class and poorer consumers… it’s like the difference of spending $58 for a shirt at Abercrombie compared to $14.99 at Old Navy.

Nashville serves as a great consumer indicator because our region has been largely unaffected by the recession. Nashville is the financial center of the South and is a major player in the healthcare and entertainment industries. When I see a mostly recession-proof economy like that of Nashville getting hit I can only come to the conclusion that areas of the country nailed by foreclosures, plunging home prices, job losses, and recession are suffering terribly.

In the US we have these things called food stamps. Food stamps are subsidized by the government and are available to individuals and families that are below a certain poverty level. According to government statistics, the number of individuals receiving food stamps has jumped by over 2 million between May and October of this year. Those are staggering numbers and further prove the state of the US consumer is abysmal and families are in serious financial jeopardy.

In any welfare state you will have a certain segment milking the system, this is what lazy and dishonest people do but I believe a good number of those 2 million new individuals receiving government subsidized food assistance did so out of dire necessity. The US consumer can no longer use their home as an ATM machine, the credit cards are maxed out, the easy access to lines of credit are all gone, and the entire mindset of the average US consumer will have to change, it simply cannot be any other way.

Under normal circumstances this situation with the US consumer would absolutely hammer the dollar into the ground. While I do believe at some point the dollar will have to pay for the dramatic decline of the consumer, the affects of this intense consumer/retail slowdown will be felt by the global economies as a whole. Under normal circumstances the euro would obviously benefit from a weaker dollar caused by a weaker consumer but the fundamental situation in Europe does not necessarily make this a possibility.

The US consumer will lead economies in Asia, South America, Latin America, and the Middle East to even lower points. I have not heard much talk at all about the stronger dollar’s negative affect on US exports, on the Trade Balance, and on big players like Caterpillar, John Deere, Boeing, etc. And what about all those savvy European and Asian carmakers who pulled up stakes in their own countries and set up shop in America to benefit from the weaker dollar and high consumer demand?

The lure of the worthless dollar brought giants like BMW, VW, Nissan, and Toyota to set up manufacturing plants in the US, mostly here in the South where taxes are low, land is cheap, and economic conditions are favorable (were favorable). That’s just one of many examples of how wide-ranging an affect the beaten-down US consumer is going to have on global economies.

Crude:

Crude has been a mess and the unwinding of crude has no doubt benefited the dollar. Now I see a new potential factor arising if crude is allowed to stay to the downside. I’m talking civil unrest in oil producing nations. Oil producing nations budget a barrel of crude at a specific level and they use this targeted price to determine how much to budget towards three things specifically:

1. Infrastructure and expansion
2. Sovereign wealth fund capital
3. Government subsidies (human control)

Based on my limited understanding of how crude plays a roll in the budgets of OPEC nations and other oil producing nations, I’m seeing that if crude sustains a break of between the $68 and $65 levels and stays below there for even a brief period of time that this will dramatically alter the spending plans of oil producing nations. They basically cannot have oil stay at or below $65 a barrel for the foreseeable future.

The first areas that will get hit are subsidies and expansion projects. This is where the civil unrest part can play a role. Again, I am not an expert on precisely how oil-producing nations handle their politics but I do know they use oil money as a way to subsidize the citizenry in order to wield a certain level of control and power. In nations such as India and China and certain parts of the Middle East the poorer classes have risen into a middle-class lifestyle almost overnight. This global economic slowdown put those folks in jeopardy of returning back to where they came from. They may not want to get downgraded without putting up a fight. I wouldn’t.

Add to that the taking away of government subsidies and programs funded with oil money and you have a decent recipe for a good civil uprising. This type of geo-political event would absolutely cause a tremendous amount of chaos and volatility in not only the crude market but also for the EUR/USD. This type of event won’t happen in the blink of an eye but it’s an issue we need to keep monitoring so long as crude stays at these lower levels.

EUR/USD:

As I said I expect trading conditions to remain frustrating, chaotic, volatile, and erratic this week. I see no reason for this to change. As far as trading goes I would like to offer a suggestion for traders who are serious about risk and money management… do yourself a favor and consider staying out of the market this evening and wait for the overnight dollar LIBOR rates to come out between 0630 EST and 0700 EST on Monday morning.

If you can be patient enough to wait for this fundamental interest rate data from LIBOR it may serve to give some clearer direction for the trade day. If we see a drop in overnight dollar LIBOR rates this will be a good indicator the euro at least has a fighting chance on Monday. The next indicator will be how equities are responding.

At this point on Sunday afternoon I have absolutely no bias for the dollar or the euro. I don’t even really need a bias because my trade plan will mostly depend on what the market correlated variables are showing me and what the euro price action is showing me. These conditions call for taking quick hits on the market, banking the profits, and getting out while you wait for the next trade opportunity to emerge.

Lets be real here… trying to pick a perfect bottom on the EUR/USD is just a complete waste of time and energy under present market conditions. It must not be forgotten that Europe’s banking system is as much a mess as the US banking system, if not more.

At least at the start of the week some important levels to keep an eye on are 1.3382, 1.3317, and 1.3263 on the downside. Topside levels to be aware of are 1.3584, 1.3648, and 1.3737. After the market opens and we get a few hours under our belt it may provide a clearer view of how market conditions may go.

Overall I’m going to say the euro does have a fighting chance to make some gains this week. This means I will be much more cautious with adding euro shorts unless I see the market give me the clear green light to keep shorting the euro, otherwise I will take risks buying the euro this week.

Risk and money management is imperative for all traders this week. I cannot stress this enough. Be smart with your trades and do not be greedy this week. Greed is an enemy that only the most disciplined and focused trader can beat. Please practice strict risk management!

Trade Team Update

2008-10-16T16:09:00.000-07:00

I'm not sure how great today's update will turn out... I got hit with a nasty cold early this morning and have not been very active in the market today, but there's a few key issues I want to cover...

Overall I'd say today's swings should not have come by any surprise. For weeks I've been talking about the re-pricing and re-valuing process taking place in the markets and this morning we saw more evidence of this process wielding its affect on the EUR/USD.

This morning several hedge funds were forced to liquidate and unwind heavy gold positions. Due to the already ill-liquid conditions in all markets, the hedge fund unwinding caused an intense amount of downside pressure on gold as it fell over $55 almost as soon as the gold liquidations began. At the very same moment the hedge funds were unwinding their positions and bringing gold down Treasury yields went up.

From this we see money flows stream out of commodities and into Treasuries. Then later in the afternoon I observed Treasury yields begin to rise while the Dow was beginning to rise. As this event was taking place, the euro was putting in a bottom at the 1.3380 level to eventually wind up pushing towards the 1.3500 level.

So as we look at today's events to make sense of why the markets did what they did, we simply connect the money-flow dots and its makes perfect sense why the markets behaved the way they did... as the money flows came out of commodities and equities, the euro dropped and stayed under downside pressure. Once the liquidation process with the hedge funds was over and those money-flows made their way back into equities, benefiting the Dow and S&P, this helped bring the euro back up.

These are the correlations of the market right now... they've been clear and will remain this way as long as market participants decide to respond this way during the re-pricing process. This doesn't exactly make trading easy because of the ill-liquidity and volatility but at least it makes sense.

Fundamentals:

Well I was wrong -- on Sunday I gave an opinion that I believed the fundamentals would take a bigger role in the market this week. This is not the case at all. Today's USD data was some of the worst seen since the 1970s. My overall forecast for worsening USD fundamentals is playing out but we are not seeing any punishment being given to the dollar.

Industrial Production fell a staggering 2.8% which is the worst drop since 1974. The Philly Fed Index printed at -37.5. It hasn't printed that low since 1990. The NAHB housing index printed its lowest number ever in the history of the index. The numbering of continuing jobless claims reached its highest level in five years. And we still have Wall St. Wonderboy Hank Paulson telling the world the fundamentals of the US are strong.

CPI printed flat... no rise in price pressures month-over-month. In this data we see further evidence of massive and rapid deflation... speaking of deflation, look at the gas pumps. The price of fuel is tumbling around the nation. Here in Nashville gas has dropped a $1 a gallon from its summer highs. That is a big deal to a lot of people here in my town!

I can already see the affect of fuel deflation -- the social establishments are more crowded now that fuel is cheaper. I see more people in restaurants and bars and in the tourist areas of town. These are very good things during times of recession and potential depression.

At some point the dollar will have to pay for these abysmal fundamentals because the negative affects will be seen in the deficit, Trade Balance, Current Account, TIC, and GDP data.

EUR/USD:

Tomorrow we get key housing and building data along with the important Michigan Sentiment. I'm forecasting all three pieces of data to print USD-. If that's how it plays out the bad could downward pressure on the Dow which would put downward pressure on the euro heading into the weekend.

Trading conditions tomorrow could be classified as schizophrenic... what I expect for tomorrow is terribly low amount of liquidity, a good deal of book squaring, and few bigger players with a little bit of liquidity to play with throw their weight around to make some end-of-week profits to satisfy whatever needs at the moment.

If the Dow can somehow manage to perform in the green I would expect the euro to find support against the dollar. Once again dollar LIBOR rates eased and during London the euro found support and strength to move up... it's a very simple process -- if LIBOR continues to ease the euro will be given more breathing room to gain against the dollar.

The hedge funds may do more liquidating tomorrow and this will cause some wild price swings. Crude remains a mess along with gold. I cannot even begin to predict what those two will do tomorrow, they could be brutalized again.

I got a report today from a company called TrimTabs. When I first heard the name I thought they were pushing diet pills or something but it turns out they do market intell. In one of their reports they showed over $43 billion was liquidated within the hedge funds in September. That is a monumental amount to evaporate from the markets. Margin call city...

In that report on the hedge funds we see proof that these markets are terribly ill-liquid and easy to push around, causing the violent and chaotic price swings. Trading tomorrow will carry an extremely high level of risk so please understand this before you decide to pull the trigger.

Trade Team Update

2008-10-15T16:54:00.000-07:00

Yet again we have another day of brutal US economic and financial data, panic on Wall St., and somehow the dollar comes out smelling like a rose. While it doesn't come as a surprise it's certainly frustrating... as I indicated last night and this morning, the Dow would likely come under pressure and take a hit which would pull the euro down with it.

We did see this scenario play out today as the Dow plunged 500 points by early afternoon, dragging the euro back into the mud. Crude has remained an unstoppable mess and for good reason. Crude demand fell a staggering 6.2% in September in just the US alone. I haven't had the time to even see what kind of demand decreases there are for the other industrialized nations and emerging markets but I can't imagine the news is good.

O/N dollar LIBOR rates continued to ease albeit slightly. But we can clearly see the benefit of this slight easing because the euro has been gaining ground on the dollar after London opens and especially after the LIBOR rates are fixed and released. The euro runs into problems when Wall St. enters the game.

Overall, interest rates continue to remain at the forefront of the markets... the MBA reported the rate on 30-year fixed mortgages rose a whopping 40bps in just one week. Remember when we said rate cuts and bailouts won't fix the issues facing the housing market? Is the Fed so nieve to think that rate cuts would really help the housing market?

What the rate cuts and what the US fundamental data is doing is affecting money flows into Treasuries in a very negative way. If bond yields go up mortage rates have to go up, it simply cannot be any other way. The 10-year bond is the key Treasury to watch as it relates to mortgage rates. Money flows have sent Treasury yields soaring the past week and this is only going to serve to put added pressure on mortgage interest rates which is going to keep housing and re-fi's under pressure.

Fundamentally, we received some of the worst US retail and manufacturing data in years. It's abysmal. I forecasted a nasty retail number and it even exceeded how bad I thought it was going to be. Retail sales plunged 1.2% in September which is the worst print in over three years. For weeks I've been talking about the non-functioning consumer and today we have our first good evidence of this. The consumer will entrench further as the year drags on. Retail sales will come under more downside pressure as the job losses continue, the bills pile up, and the discretionary spending dwindles to almost nil.

I believe this is going to be an extremely rough winter in the US and likely around the world. In the early 1990's I think the US had some sort of a recession. My dad a decent job in the financial industry back then. He lost his job when the company downsized and eventually went out of business. I seem to recall him saying he lost his job due to the recession.

I was still fairly young and nieve and I didn't understand anything about recessions and economics in those days. I remember my dad lost his job right before school let out for the summer. By winter things were really bad at home financially. The next few years we were flatout poor. Times were tough for our family and many families in our community. I remember during the worst winter we were so poor we couldn't afford to heat our house in the evenings and it got so cold in my room that the frost was on the inside of the window.

I see these types of situations playing out this winter for many families. The sheer number of unemployed people, coupled with high consumer staple prices, families taking substantial investment losses, and mounting debt obligations makes for a recipe of hardships for millions of families who are already on the edge, just barely scraping each day.

I'm not trying to hit anybody with the doom and gloom stuff but this is what I see likely happening over the next few months. What this means for us as traders is more volatility, more ill-liquidity in the markets, more price swings, more government interventions... all the good stuff we've been dealing with since July...

The worst has not been seen or felt yet.

Tomorrow:

Once again we get some extremely key fundamentals tomorrow... CPI, TIC, Industrial Production, Philly Fed, and Crude Inventories. Fundamentals are clearly taking a backseat to the other market correlated variables like equities and commodities but this data is important nonetheless because at some point it will matter and the dollar will be punished for this madness.

Today's Eurozone inflation data printed as expected but next month could certainly print to the downside. There is certainly cause for concern with the Eurozone inflation data. The ECB has clearly swtiched gears to a more balanced growth/inflation stance in light of the financial crisis. That policy shift has served to put the euro under a considerable amount of pressure.

Should US CPI print below forecast this could put an added dose of downside pressure on the euro. Typically, weak inflation data would be bad for the dollar but the markets are treating the fundamentals in a different kind of way while we're operating under this chaotic conditions.

The TIC data may not be as USD- as some are expecting. Don't forget this data is two months behind and as the financial crisis was kicking into high gear we saw heavy money flows pour into Treasuries. What we don't know is how much of that was foreign. A decent print on the TIC data shouldn't negate the fact that the US debt situation is on shaky ground.

With the $1 trillion+ of newly printed money flooded into the money supply and with the clear recessionary affects being seen in the economy, what would motivate foreign investors to buy US debt? I cannot see or understand how US debt would be attractive right now. And this presents a problem because the US will need more foreign buyers of US debt than ever before. The US deficit is skyrocketing. At this point it's not even sustainable. This is all just a terribly USD- situation but only the markets can decide when to punish the dollar for this.

I'm fully expecting the fundamental "battle of worsts" between the euro and dollar to rage on as we close out 2008.

EUR/USD:

The euro remains at the mercy of the market correlated variables -- equities, commodities, and money-market interest rates. Any idea of "dollar strength" is purely a myth. The fundamentals of the USD are in their worst shape since 2001 and will only get worse. But as I've explained a dozen or more times, the dollar has to remain supported under these types of recessionary conditions.

As of the writing of this commentary I see that the 1.3508 downside key level has put up a considerable fight in the midst of all the pressure on the euro. It's possible we see a clean break of this level during the Asian session. But it's been tested for hours on end now and is miracuously holding steady.

On Sunday I talked about downside testing for the euro and I'm still not rulling out another test of the 1.3320-1.3280 levels before the week comes to a close. If crude continues to plunge along with the Dow it's quite probable those levels will be tested. I gave some downside levels on Tuesday for crude of $75-$72 and I'm not ruling out a possible break of the $70 level as long as these conditions persist.

Gold seems to be stuck in some sort of state of confusion. I really don't have much to say about gold because it's behaving strange and I just don't care to deal with it right now, there are other factors moving these markets and they have zero to do with gold.

I can list several reasons the euro should find support and move up but at this point I believe the euro's health will remain largely dependant upon LIBOR, equities, and how money-flows are moving through the markets.

As far as trading goes the clear and safest game plan is just to wait for a euro rise and then to grab a short. I've tried buying the euro and it just doesn't work right now. It's much easier path to profits by sticking with the short game plan, take quick hits on the market and then getting out with your profits.

I cannot even begin to stress the value and dependability of the EUR/USD 30-minute price patterns. Even in the thick of the worst financial crisis since the 1930s the old euro price patterns continue to pay out time and time and time again. To be honest, the only time a trade has gone against me this week is when I've ignored the 30-minute price action data thinking I could sneak out a quick 20 or 50 pips. I highly encourage all traders who are taking risks in this market to stick to the proven and tested 30-minute EUR/USD price patterns.

The 1.3508 downside key level is critical and continues to hold as of right now (1546 EST). Be smart with your trades and be vigilent with your risk and money management.

Trade Team Update

2008-10-13T16:20:00.000-07:00

As Sarah Palin would say, I'm feeling pretty dog-gone, gee-golly, aw-shucks good today... not because the global financial crisis is fixed and not because Jessica Biel returned my phone call... in my opinion I believe we saw the very first positive and potentially productive step towards stabilizing the markets and towards liquifying the markets in order to bring a return to order and functionality.

What I'm talking about is the move being made in Europe to stabilize the interbank lending market by providing liquid capital and loan guarantees. The Germans have offered €400 billion in loan guarantees and €80 billion in accessible liquid capital. France said it would guarantee up to €320 billion worth of liquid for European banks.

On the back of this news over €1.1 trillion in new loans were approved within the European money markets. That's what I like to see -- instant positive reaction to a plan that actually can accomplish the goal of unfreezing the credit market and easing LIBOR. The markets needed a confidence boost and I believe the interbank plan not only provides that boost but also provides the resources for these banks to ease their way back into the lending and credit process.

Tomorrow will be this plan's first test -- now I need to see follow through. I need to see consistency. I need to see dollar LIBOR rates come down tomorrow morning. I need to see the euro hold ground against the dollar that it normally would have lost due to high USD interest rates. I need to see some of this newfound confidence sustain in Europe. If we can see these liquidity measures do what they are intended to do the euro may have half a chance against the dollar this week. So, let me say I'm cautiously optimistic about what I've been seeing today.

Equities have been on fire today as just about all global markets are rallying on the latest offerings from the central banks. Once again, I need to see some follow through and sustainability with these moves. It's great to see the Dow go up over 700 points but if it gives back all those gains tomorrow, we go back to square one again.

Commodities sit in an interesting spot, especially gold. I see the $830-$820 as an important testing zone along with $75-$72 on crude. If crude and gold can find some support and bring out the buyers this would certainly help support the euro. Money flows out of Treasuries should also help the euro and I'll be watching for evidence of this.

EUR/USD:

The euro's first fundamental test is tomorrow with ZEW and Industrial Production. I cannot call ZEW EUR+ at this point. I think the panic that has been running through Europe the past two months is going to weigh heavy on ZEW and I would expect to see a downside print. The key will be seeing how strongly the market wants to react against the EUR should we get a downside number.

Trichet will be in NYC to deliver a speech and I'm sure he will refer to monetary policy as it relates to the financial crisis. I will be listening for any clues or signs on future rate moves. The markets are speculating on Trichet's next move on rates... will be another cut or a hold? That is the burning question right now. I believe if the European banking plan finds some success it will give Trichet a reason to keep rates steady.

As far as trading goes, I'm working through a different risk strategy right now that is more negative on the dollar and slightly more positive on the euro. My appetite to keep buying the dollar has eased back today. Believe me, I've not turned into a euro bull but I have growing concerns with the dollar, mostly with the sheer number of dollars that have been pumped into the money markets and money supply.

We're talking well over $1 trillion in hot-off-the-presses greenbacks flooding the market. I'm trusting that at some point in the near future market participants are going to finally wake up and realize the depriciative affects of an additional $1 trillion+ of USD being flooded into the global financial system. That is just a terribly USD- thing in my view. Eventually I believe the dollar will have to pay for Bernanke and Paulson's transgressions.

I'm also thinking that low rates + access to credit + high money supply = strong gains for equities. The printing of money creates inflation and the equities market loves inflation... a season of loose monetary policy and inflationary conditions created by a more liquified monetary base should send Wall St. soaring again.

Now if equities go up because of the cheap interest rates and easier access to credit that should mean that Treasury prices should go down and yields would go up. Money flows would come out of Treasuries and back into equities as risk aversion would be set aside. And in this scenario it should be good for the euro and bad for the dollar. If we can add to this scenario weak TIC data and that my friends is a nice little recipe for a good 'ole fashioned USD butt-kicking.

The USD fundamentals are not going to turn around this year, we will see weaker data as the year rolls along, that I am very sure of. There's also new talk of another US economic stimulus plan that is even bigger than the $160 billion plan from earlier this year. Lets see... the last plan didn't do much, it's had no longterm positive results, it created more debt, more inflation, and we want to do it all over again and do it bigger? Yeah, that's going to be real great for the dollar... there's very little that shocks me and yet somehow I still get shocked by the stupidity in DC.

The other factor that is giving me caution against buying the dollar is the seasonal price patterns of the EUR/USD. The prior two years the euro begins to make strong gains against the dollar starting around the third week in October and lasting at least through to the end of November. If this old price pattern returns I do not want to be stuck with euro shorts down here at these levels.

The fundamentals, of course, are different this year compared to last year and the year before. The euro is clearly in trouble and has severe fundamental issues to deal with. But I have to forecast some very weak dollar fundamentals in Q4. The Q3 growth, retail, and consumer data should be abysmal and I'm forecasting a nightmare holiday shopping season.

I think retailers will be at the mercy of a terrified consumer who won't bust out the credit card unless they see some serious discounts. I see the retailers and consumers having a battle of wills... the consumers holding out for the sales and the retailers holding out for the consumer to bend and begin to buy. Overall I see a very USD- scenario here.

The realist, idealist, and optimist side of me is thinking along these lines as it relates to trading the EUR/USD. At this point I'm not willing to take too many risks on the euro but I certainly do not want to be stuck in low euro shorts should market participants finally wake up and see what a mess the dollar is and why this smoke-and-mirrors strength cannot sustain over the longterm view.

In terms of where to put risk, my trade plan calls for taking risk on the euro unless the market shows me otherwise. I still may short the rises but as I said, I'm getting cautious with euro shorts at these levels. I don't think the euro is all healed up and back in the fight but if we can get some of these factors working I believe the dollar comes under selling pressure.

Right now we need the credit markets to stabilize and confidence to return to market participants in addition to dollar LIBOR easing. Tomorrow will be our first real test to see if this is actually possible.

Please be smart with how you handle your risk and money under these evolving conditions. Don't listen to me, take everything into consideration and mostly trust your gut and what you're seeing in the markets. The risks are enormous right now and most on the retail side should be sitting out until the markets stabilize.

The end-of-day surge in the Dow gave the euro a real nice boost in late afternoon... keep an eye on how Tokyo decides to respond to what Wall St. did today. If market conditions allow, I will post some key levels later on this evening. Overall, keep an eye on the 1.3720-50 level on the upside and the 1.3540-1.3480 level on the downside during Tokyo.

EUR/USD Weekly Outlook 10/12 thur 10/17 2008

2008-10-12T16:44:00.000-07:00

Once again we start the week with more questions than answers, more unknowns, more speculation, and more save-the-world rhetoric from the world’s top central bankers, finance ministers and politicians.

One thing I will not do in today’s update is regale you with numbers, facts, and figures. There’s an art and science to analyzing and trading markets. As I’ve said in the past, I am not the “science” of the market, I’m more the “art” of the market. If you want the “science” part (facts, figures, and technical views) I suggest you read John Mauldin’s latest commentaries. Mauldin is the only market analyst I trust these days and the only market participant I will endorse.

Overall, here’s what the markets will be dealing with this week… reaction to the G7, reaction to rhetoric and moves made by the central banks, reactions to moves made on the global equities and commodities market, and yes, we will see a return of the fundamentals this week. The fundamentals have largely taken a back to the other issues market participants have been responding to but this week we have key inflation, growth, retail, consumer, and foreign investment data. I am certain the fundamentals will play a bigger role this week as compared to weeks past.

G7:

Over the weekend central bankers and finance ministers were led by the IMF in a series of meetings designed to give the global markets a decisive plan to not only calm all world markets but also to instill confidence in the banking system, to unfreeze the credit markets and to stabilize the rapidly declining asset values of investors.

I’m thrilled to report the G7 accomplished none of this. The G7 communiqué is a joke. In the midst of the worst financial crisis since the Great Depression of the 1930s the best the G7 could come up with is a plan filled with more empty rhetoric. There is no exact and definitive plan of attack given in the communiqué. There is no step-by-step course of action. I wouldn’t even line the bottom of a birdcage with that piece of trash.

Reading the communiqué made me dumber, I think. At the risk of making you dumber, I’m going to cut and paste a few gems from the communiqué just so you can get an understanding of how this G7 plan offers absolutely nothing to the global markets:

Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

That’s it… those five points right there is how the G7 intends to fix the markets. In there we read rhetoric that says “take action” and “take steps” and “programs”. Gee that’s great but what are these programs and what are these actions? When do they begin? What will they cost? What segment of the market will be tackled first? Will the US get the G7’s help first or will Europe? Why are the Asian market participants so quiet?

Those were just a few questions I thought of within the first 30-seconds of reading that garbage. The central banks of the world are playing a game with the markets and I do not believe this game will work. These central banks are using monetary action and monetary policy as a form of psychotherapy on the markets.

But what these brilliant men do not understand is that the markets are using psychotherapy on the central banks. It’s what you call getting the tables turned on you. All participants involved know it’s nothing but a lose-lose situation… during this painful and violent re-pricing and re-valuing process the majority loses and a small minority of smart players come out unharmed.

The central bankers think they are in control but they are not. The markets have the central bankers by the throat and they won’t let go until they’re ready. The markets wanted lower rates and they got lower rates. Of course this didn’t fix anything, but hey, at least money is cheaper now. The central bankers of the world are getting played by the numbers they see on Bloomberg and read in the Financial Times. They are being pressured by the publically-traded and privately-owned banks they have undisclosed relationships with.

Bernanke, Trichet, and Paulson are behaving like children in their responses to this financial crisis. These are grown adult men who are clearly powerless to stop the runaway freight train of the re-pricing process. When I read between the lines of this communiqué I read nothing but disagreements and uncertainty between the world’s financial leaders.

I shouldn’t even call these men leaders because they are followers. They are leading nothing and I think it’s painfully obvious these men do not even believe the G7 plan will work or that any plan will work. Central bank monetary policy is the catalyst for financial booms and busts. Surely these educated men of economics understand these events happen at their hand.

I’ve watched a few clips of the central bankers and finance ministers at the G7 meeting. I was observing how they were interacting with each other. After studying the G7 communiqué, watching images from their meetings, and then reading their comments it struck me that these men have no common plan of attack and it would likely take weeks or months for this group to get on the same page for how to solve the issues faced by the global markets.

I grew up in the Southern Baptist church. That won’t mean much to our friends here from other countries, but when I was growing up we had a lot of preachers talking about the New World Order – a one-world government, the rise of the anti-Christ, war with Russia… all kinds of doom and gloom they could conjure up out of the book of Revelation.

I’ve sat through a few old timey Southern Baptist tent meetings hearing how the governments of the world would band together to form a single government entity with the goal of controlling all peoples of the world so the anti-Christ could rule. Now I’m not saying that won’t happen but the point is, after what I observed with this G7 meeting in regards to the utter lack of agreement, I can’t imagine how the governments of the world are going to be able to unify in a way to solve the issues facing the financial markets let alone create a one-world government.

My opinion – the G7 accomplishes only one thing – adding more confusion and volatility in the markets.

Fundamentals:

Unlike the past few weeks, some of the fundamental data we get this week will weigh on the market in my opinion. Of course all speeches by Trichet, Bernanke, and officials from the Fed and ECB can and will move the market this week. But in addition to that we get extremely key inflation data out of Europe and the US. CPI and PPI are critical right now.

If Eurozone CPI prints at or below expected you can be sure this will put downside pressure on the euro because it will cause the markets to believe the ECB has room to cut rates even lower. Trichet has clearly backed away from his over-the-top hawkishness on inflation. The same may also be true for the US if Core CPI comes in cooler than expected. Many believe Bernanke is willing to take rates down to 1%.

Retail Sales is another key piece of data we get this week. I am forecasting a USD- print on this data. My preliminary research shows a very sharp pullback from the consumer in the month of September. The US consumer is basically non-existent at the moment and will likely remain as such throughout the rest of 2008.

We also get the Treasury International data this week. TIC data is two months behind but last month’s print showed a dramatic pullback in foreign investment. My forecast is for more USD- TIC data. The print may come in as expected. Reason being is because we have seen heavy money-flows into Treasuries the past two months and this may help the print but overall it’s still going to be very bad for the US deficit.

In addition we also get manufacturing, production, and consumer sentiment data. I have to remain extremely bearish on both the US and European economies and I believe their fundamentals reflect the weakness these nations are suffering from. Many regions in Europe are a flat out mess. I don’t know any other way to put it.

EUR/USD:

As of the writing of this update the euro was at 1.3518 during weekend trading but it may open lower than that. I am certainly not ruling out another test of the 1.3320 to 1.3280 level sometime this week. I am still very bearish on the euro and will use more caution buying the dips. That being said I’m not at all bullish on the dollar either.

In my opinion the EUR/USD will remain correlated with equities this week in addition to more of a correlation with commodities. Some of those key fundamentals will come back into play this week. LIBOR will also be a factor in this week’s trading. If dollar LIBOR rates manage to come down this may take some pressure off of the euro.

Crude is a disaster. Crude closed down 17% last week and while I do not believe we’ll see another massive loss like that, I do think crude can go lower which would put more downside pressure on the euro. If crude goes much lower I expect OPEC to start stepping up the rhetoric. A break of the $70 level on crude could cause an emergency OPEC meeting and a large supply cut. There’s only so much of a hit OPEC is willing to take before they decide to manipulate the crude market.

Rate cuts will continue to be speculated on this week. Over the weekend ECB Almunia basically said there’s more room to cut rates. He says:

“Supported by the easing of commodity prices, the presently high inflation is on a downward trend and long-term inflation expectations are stabilizing at a lower level consistent with price stability, if confirmed, these new developments could justify some monetary easing in the near-term”.

That is a very cut-n-dry statement right there. There is also speculation that the Fed will cut rates again on October 29th. I think rate cuts are possible for both banks if the financial crisis drags on because rate cuts are what these bankers think will help solve the problems.

The rate cuts will supply the markets with cheap money. The central banks want market participants to start buying equities with cheap money. This isn’t happening. So, what the central banks do next is cut rates lower and then they print more money in addition to keeping loose monetary policy. There’s all this cheap money and quite an abundance of it in the monetary base. This is inflation.

The cheap money, the abundance of money, and the inflation are the exact three things needed to re-inflate equities. Equities thrive when there’s tons of cheap money and high prices (inflation). The central bankers answer is to pump up the equities markets therefore restoring confidence to investors and all market players.

As far as trading goes, expect more chaos, more volatility, more price swings, more choppy and confusing price action and no real slowdown in the crisis-conditions. The markets will remain extremely ill-liquid this week. These are purely speculative markets. The risks of trading this market are astronomical. Whatever you decide to risk in the market this week you should be prepared to lose because violent price swings could happen at any moment.

Don’t forget US banks are closed on Monday which means the liquidity will be almost nothing and that can give certain market players who might be slightly more liquid than the rest the ability to move the market whichever direction they desire. I’m just bearish, bearish on anything and everything. I think I could make money shorting anything right now. The worst has not been seen in my opinion.

After the market is open for a few hours I hope to see some signs of direction and to get a better idea of how the market may want to respond after London opens. The Frankfurt and London openings will be key. The euro typically benefits from G7 meetings, so I will be looking for signs of possible euro strength.

Be smart with your trades and do not take any unnecessary risks. We could see some very violent moves this week that you do not want to be caught on the wrong side of. Risk and money management is imperative under these extreme conditions.

Trade Team Update

2008-10-09T16:34:00.000-07:00

Here's a fun dose of irony... exactly one year ago the Dow and S&P hit all-time highs and today I think we can officially declare Wall St. crashed... what does this have to do with the EUR/USD? A lot.

It is Wall St. has the focus of the global markets and international market players... what's happening with Wall St. right now is directly affecting the euro, commodities, and bonds. The Dow/Euro correlation has especially kicked into high gear the past two trading sessions and I expect this correlation to be there tomorrow.

Crude is an absolute mess right now. Crude was down another $4 today and broke below the key $85 level. Gold, on the other hand, has a mind of its own and is trading under a completely different set of fundamental circumstances right now. At this point I'm really not evening using crude and gold as trading indicators as I do under normal circumstances. I'm trying to keep it as simple as possible and just following the market correlated that is more connected to the EUR/USD, and right now that is the Dow.

The coordinated rate cuts had some initial affect on the European bourses and it did bring dollar LIBOR rates down to more comfortable levels but overall the desired affect has not been felt and may not be felt as long as these types of conditions persist.

Last week I talked about markets having to go through a re-pricing process. The re-pricing of markets is the only reason I can give traders to explain what we've seen the past 12-weeks and will likely see through the rest of 2008. All markets are being re-priced and this re-pricing process is a necessary function and one that must accompny the deleveraging process -- the two always go hand-in-hand.

What does re-pricing mean? It's a very simple but painful process the market goes through when price can no longer be supported for lack leverage, lack of liquidity, and lack of available credit. In all markets there's always a re-pricing process happening because markets are always in a re-valuing process.

Lets use the euro as an example. Between September of 2007 and April of 2008 the euro was on a relentless bull run against the dollar. We're talking roughly 2,500 points with very little retracement along the way. That was a re-pricing process for the euro and the dollar and as the market was in the re-pricing process for the EUR/USD, the euro bulls took command of the re-valuing aspect as the underlying fundamentals led market participants to re-price and re-value the EUR/USD to the upside.

During the second week of July the deleveraging process began as liquidity dried up and the central banks stepped in to manipulate the markets into thinking "deflation". This deflation we're experiencing right now comes with the deleveraging and the re-pricing of all asset classes.

The more overleveraged a market is, the more painful the deleveraging process is -- the once great investment banks of Wall St. are a perfect example of what being overleveraged can do to your capital when your card gets pulled. And now we have the first sovreign nation facing total economic collapse... Iceland is the most overleveraged sovreign nation on earth and they are the first sovreign nation to "margin call" and suffer the pain of their actions.

Look who comes to Iceland's rescue... it wasn't the US, UK, Japan, China, or any of Iceland's allies. An enemy of Iceland has stepped up to liquify their economy -- Russia. And Iceland will have to do the deal. The Russians are smart and they are just doing as JP Morgan did during the Great Depression... where others are seeing disaster, they are seeing opportunity. Iceland is rich in natural resources that Russia needs. It will be interesting to see how that relationship evolves in the months to come.

I hope my explanation about re-pricing of the markets is clear. I'm not saying it's right, I could be on another planet with my view but this is the only reason I can give to traders who are seeking answers for why markets and certain asset classes are collapsing.

EUR/USD:

Clearly the market is unsure of how to handle the EUR/USD after the joint Fed/ECB rate cut. The liquidity is almost non-existent right now but it has provided for some great intraday opportunities on both the long and short side.

Our big data tomorrow is the Trade Balance. I absolutely cannot see how this data will be USD+. With global economies in recession or on the brink of recession, with the freezing of credit, the terrified consumer, and strong dollar I find it impossible to believe this data could be good for the dollar.

So if the Trade Balance is USD- and the Dow can somehow stop bleeding to death tomorrow the euro may actually have a fighting chance. The price action is extremely choppy but I am seeing evidence of buying and I have been buying the euro on a strictly intraday basis.

Don't forget we have a monumental G7 meeting this weekend. Most G7's cause some Sunday volatility but then it goes away. I'm expecting the communique released by this G7 to rock all global markets. In addition to a strong, over-the-top communique it's possible the G7 will take action in the markets -- this could mean another coordinated rate cut, a liquidity injection, manipulation in the FX market, they may even announce a plan to start buying equity indexs on the open market... expect anything!

This means that whatever price your broker closes your platform at will be different when your broker opens your platform for trading on Sunday. I am certain the banks will move the market throughout the weekend as news and rhetoric comes out of the G7 meeting. Get your house in order before market close tomorrow, it's imperative.

The volatility tomorrow could be massive as liquidity will be low and it's likely market participants will do round after round of profit-taking to square up their books before the weekend. I cannot reccomend any trader try to make money tomorrow but if you can't help yourself be smart with your margin.

We may see 1.3500 tonight or we could see 1.3800 tomorrow and then another sell-off at that level. I'm just depending on my numbers, the 30-minute price openings, and the real-time price action to lead the way. I have to keep trading as simple as possible with as few distractions as possible.

Trade Team Update

2008-10-08T16:41:00.000-07:00

This is a very rare thing, but I'm mostly at a loss for words... obviously the big news is the nuclear bomb the central banks of the world dropped on the markets this morning... this move is certainly a game-changer here going forward...

Clearly the big question on the mind's of traders is how the ECB cut will affect the euro and how the Fed cut will affect the dollar. That's what we're going to look at first tonight. For those looking for a definitive, "should I go long or should I go short" analysis let me save you the time and say that I don't have an answer to that question at this point.

This is not the first time that the major central banks of the world banded together to do a joint rate cut. Apparently it was rather popular in the 1980's and according to the historians these types of moves have mostly worked to bring order to the markets.

Just because it worked in the past doesn't give me any comfort that today's coordinated rate cut will do the trick. I was skeptical of the idea and I'm skeptical now that it's a reality. The markets were all over the shop today... equities went from red to green to red and back to green... the euro went up, then down, then up, then back down.

This is the kind of price action I'm expecting to see in the markets at least the rest of this week. I do believe the rate cuts will bring overnight LIBOR rates down and that would be a good thing for the euro. The ECB's rate cut should also lift some of the doom and gloom off of Europe.

Trichet was under tremendous pressure to cut rates and yet he would not relent from the hawkish price stability stance. In my opinion this whole thing was the Fed's idea and they pushed it on Trichet. Trichet was surely the hardest one to convince to go along with it but the ECB's cut may have the most impact out of all the banks who cut rates.

Most market participants were looking for a 25bps cut and Trichet gave them 50bps in one shot. This should raise investor confidence and hopefully take some pressure out of the European money markets. This rate cut does not solve the issues facing European banks and the fact they are highly overleveraged and many are facing insolvency issues.

The rate cut may change Europe's growth fundamentals in the next few months, so that is an area we need to keep a close watch on. As far as the rate differential between the US and Europe is concerned, it's a wash. The Fed is at 1.50% and the ECB is at 3.75%. But the fact that the European rate of return is 50bps lower than yesterday is certainly cause to consider other sources that pay better rates.

At this early stage in the game it cannot be realized how this joint rate reduction will affect the EUR/USD. If it was just the Fed that cut rates the trade would be a no-brainer. If the ECB had cut 50bps and the Fed had held rates steady, again, it would be an easy call to make.

I think it will be required to give market participants some time to consider the implications of a European rate reduction and then to begin speculating on Trichet's next move. With Fed Funds a 1.50% and the ECB still at 3.75% it's possible market participants will look at the ECB has having more room to drop rates further. Trichet did make a comment today about not expecting more rate cuts but don't forget two months ago he told the markets that the ECB would hold rates steady through 2009.

Back in January we forecasted the first ECB rate cut to happen during the second half of 2008 and while that was expected, I certainly did not expect it to go down this way. As far as trading goes it's imperative that all traders realize that there is no known pattern behavior based on this joint rate cut event.

Let me explain... since the euro was introduced and allowed to float on the open market at no time has the Fed and ECB cut rates on the same day, or during the same quarter, or the same exact amount. So when I say there is no known pattern behavior based on this event it means that the market will be trading in unchartered waters at least for the short-term while market participants reposition and align themselves based on the euro and dollar interest rate differentials.

The billions of dollars worth of liquidty the banks provide to the market has been absent ever since we started the summer session and that liquidity has yet to return as the summer session turned into the worst financial crisis in modern history.

If these coordinated rate cuts serve to bring some order to the markets we may see some of that liquidity come back. And it may take that liquidity, which provides order, to get a feel for how the market is going to punish either the dollar or the euro for their respective rate cuts.

Both the euro and dollar fundamentals are both abysmal. I'm expecting both Eurozone and US GDP to show negative prints for Q4. I'm expecting more uncertainty about future monetary policy, and I'm still expecting much stress within Europe's banking system.

It never seems to get less complicated does it? I know traders will be anxious to know whether the trade is euro long or short but it will be important to keep in mind that the this coordinated rate cut effort is less than 24-hours old and the markets will need time to digest and position themselves. As always we will do our best here to keep reading the market's behavioral patterns and trying to give the most accurate forecasts as possible.

EUR/USD:

Tomorrow's big fundamental even will be Initial Claims. Focus and attention will be on other matters of course... equities, commodities, and the market's response to today's actions will likely dictate where the EUR/USD goes from here.

The euro was very correlated with the Dow today... as the Dow went up the euro went up and vice versa. Gold and crude seem to just have a mind of their own right now. They are moving for totally different reasons right now, so we have a quite a mixup on our correlations. But, there's always a correlation that can be used a great trade indicator and today the Dow was one of those great indicators.

The 1.3730-50 resistance level is still holding solid so far. There is some support at 1.3620 and 1.3580 levels currently. Overall my bias is still bearish on the euro but I'm now opening my mind to the possibilities of buying the euro again should the market cooperate. I will be more cautious with adding shorts at these levels. I'm not yet ruling out another possible downside test below the 1.3500 level. And I'm also not ruling out a test of the 1.3800 level before the market closes on Friday.

Tokyo was closed when the rate cut announcement hit the wires so we will need to see how they respond in Asia. My guess would be that the Nikkei enjoys the news. If the Dow shows strength tomorrow is possible the euro moves up right alongside.

I am expecting a test of the 1.3600 level during Asia and possibly lower. Current price action is more to the downside right now but we could find some buyers on a 1.3580 level break.

Just be extremely smart with your risk and money. Allow this to develop and allow yourself the time to read these new patterns of behavior we're about to see in the short-term. If you're not feeling the market and you don't see your trade, just wait it out. The market will always be here and you don't have to be in every second.

EUR/USD Weekly Outlook 10/5 thru 10/10 2008

2008-10-05T14:38:00.000-07:00

Financial booms and financial busts are nothing new to United States. The financial crisis of 2008 in many ways is just a repeat performance of the first great economic depression that started in 1837 and did not end until 1843.

By the early-1830’s the US was in a height of economic superiority. Foreign capital, especially from Great Britain was pouring into the US. Commodity prices were at staggeringly high levels. Hard currency (gold and silver) was being “avoided” by banks. The money supply rose 200% during that time. The US government was issuing debt and foreign money flows helped vast infrastructure expansion throughout the States.

At the very center of this financial boom was – real estate. It wasn’t referred to as real estate in those days, it was known as land speculation and the investment banks were the financiers of this land speculation which contributed to an overall time of strong economic growth, a manufacturing boom, a strong bull market for commodities, small business growth, and western expansion.

The whole boom was backed by easy credit and floated on debt. The appetite for gain was fed by the banks as they gave loans to just about anybody with a heartbeat. High leverage, quick access to credit and loose lending standards was the common theme of the day. In a short period of time land values skyrocketed and prices rose accordingly.

By 1835 the dance was about to be up. The US Trade Balance was in terrible shape as imports greatly exceeded exports. In the summer 1837 the entire house of cards came crashing down as commodity prices depreciated with fury. The speculative land market crashed. There was a major crop failure. Foreign money flows dried up.

The panic began when President Andrew Jackson issued an order that basically called for a return to hard currency. As the panic set in foreign banks and investors demanded immediate payment. US banks refused to make payment and as you can imagine a series of financial failures… bank failures, land foreclosures, and defaults on debt repayments.

In 1837 Andrew Jackson plundered the central bank and redistributed the banks funds to smaller regional banks. Meanwhile the US financial system was collapsing and it was spreading to foreign investors who made high risk loans and investments in the US.

Unemployment hit 10%. Poverty hit record levels in the US for that time. New York City was hardest hit and the depression caused by the panic of 1837 wiped out over half of those employed in the NYC financial sector. Ultimately the roots of the Civil War can be traced backed to what happened during this period of time that started with the Great Panic of 1837.

That’s the “Readers Digest” version of what happened, but what we learn from history is this first great depression in American history was rooted in cheap credit, debt, real estate, and politics. Sound familiar? Do we find any similarities between the depression started in 1837 and the recession started in 2008? I think it’s hard not to see the correlations.

I will not go as far as to call our current situation a depression but it’s certainly a recession and can certainly get much worse than what we are experiencing now. We need to keep a few issues in perspective… during the Panic of 1837 and the Great Depression of 1929, how many citizens had the type of access to credit as they had between 1998 and 2008? The other issue is what role did housing play during those two financial disasters?

Consumers did have credit during both of those historical depressions but it was not nearly to the degree as in the late 20th-centruy and early 21st-century. The average US consumer that uses credit lines holds nine or more credit cards – there were no such things as credit cards and home equity loans in those days. In our modern financial landscape we have an economy driven by the consumer, by debt and credit, and by the ability to use assets to obtain more credit and leverage.

This landscape did not exist during the Great Panic and Great Depression and I believe those issues further complicate the current financial crisis that has fully engulfed the US economy and world economies. In other words, history is being repeated and history is about to be made.

All the time I hear talking heads saying how great it is to have Bernanke leading during this crisis because he was a student of the Great Depression. I fail to see the benefit of this because if Bernanke was truly a student of the Great Depression his policies would not continue to intensify the very issues he’s been appointed to fix.

It was easy credit and loose monetary policy which contributed to the housing and commodity boom. Based on my study of the bailout bill I see that the Fed and Treasury have a plan to inject liquidity into the money markets, creating more debt, and taking on risk by purchasing assets that cannot be priced by the free market and have no determinable market value.

I won’t deny the credit markets have been tight and money has been more “expensive”. The dollar’s “strength” is just a byproduct of a market that is hoarding cash and needing the USD. Supply and demand issues coupled with high USD interest rates on the money markets create the perfect storm for the dollar to stay relentless against some of the majors.

So the Treasury is going to unfreeze the credit markets by injecting billions of dollars of cheap money at low rates… and this ultimately solves the problem how? I really do not see how this solves major issues of an inflated money supply, a dismal trade balance and current account, and a plunging jobs market.

The past 12-weeks have been a time of massive and dramatic deflation. Between the investment banks deleveraging, crude, gold, and the euro giving up all their 2008 gains… they were all booms that went bust. Just about all asset classes that made historically high gains the past two years have deflated. The biggest boom that went bust has been the housing market.

The Fed and Treasury have now used politics to achieve what basically looks like a plan to add some boom back to that busted market. Some of the methods are what caused some of those other asset classes that are now bust to potentially go boom one more time. The market will ultimately decide and only time will tell how this all plays out.

If this season of hyper deflation comes to a halt and inflation returns to the global economies you can be sure equities will make a strong recovery. If the Fed, BOJ, ECB, and BOE want to re-inflate their equities markets it will take inflation to do so. The S&P 500, Dow, Nikkei, and the European bourses will not truly begin to recover until the deflation stops and the inflation kicks up again.

The trillion+ worth of liquidity that has been and will be pumped into the markets should eventually weigh on inflation and within a year or so inflation levels should be moving back up noticeably. Right know it is very likely we’ll see CPI data come in slightly better than expected in the near-term which will give the central banks justification to maintain loose monetary policy. The market will keep begging the central banks to liquefy them as long as the central banks continue to show a pattern of being at their beck and call.

I do not believe we have seen the worst of the worst yet. I have little faith in this bailout to really accomplish much and I believe retailers will suffer this Christmas and the housing market will continue to weaken throughout the rest of the year. Credit has dried up for the American consumer and for many Americans this will mean a total lifestyle adjustment. I see this being a painful process for the economy to go through but one that is necessary. The re-pricing process of markets must not be manipulated or else the next boom will come faster than the last and the bust that follows it will be more painful.

Fed and ECB:

There is strong talk going around the markets about a Fed cut of 50bps and an ECB cut of 25bps happening at any moment. Like a coordinated rate cut type thing. Fed Funds futures are showing a 100% probability of another 50bps cut before the end of the year. The banks are calling for an ECB cut in November.

So what would the EUR/USD do if the Fed and ECB both cut rates at the same time this week? Nobody can say because it’s never been done before. It would be a completely unique event unlike the markets has ever seen. My best educated guesstimate would be that the dollar would likely benefit because it would be more of a shocking move on the ECB’s part and it would send the markets into a panic that the ECB has taken their focus off of their number one mandate of price stability and they are cutting rates to fight the European recession and stimulate growth.

I won’t say a surprise rate cut can’t happen as early as this afternoon or at any point this week. Nothing will shock me any more. A move by the Fed or ECB would not surprise me at all whatsoever and I’m ready to do some nasty battle with the market should we get a crazy move on interest rates. All traders should be ready just in case this scenario plays out. I don’t see how a Fed rate cut would benefit anything but this is Bernanke we’re talking about…

Fundamentals:

The fundamentals this week will be more about the Fed and ECB. Bernanke is speaking and Trichet will be speaking several times this week. Other members of the Fed and ECB are speaking throughout the week and this means the central banks will be using their opportunities to manipulate the markets and to sell whatever ideas they are trying to get the markets to buy this week.

As far as fundamental data is concerned, we do get key housing, production, and growth data. We have Pending Home Sales, Trade Balance, Initial Claims, and Crude Inventories. Out of Europe we German Factory Orders and German Industrial Production.

If this week’s housing data is bad that will cast doubt on whether the Treasury can turn a profit on the mortgage debt they are purchasing. If credit is truly as seized up as Paulson and Bernanke are saying, this should correlate into USD- homes data. The weak jobs market would also be a contributing factor to a downside print on the data.

In my opinion this week’s fundamentals are all about the Fed and ECB and what they have to say to the markets. The fundamental events we need to be most concerned about is a surprise rate cut, a bank failure, or some sort of financial rescue plan out of Europe. I don’t expect great data out of the US or Europe this week and the battle of the worsts will continue to rage on…

EUR/USD:

At this early point in the week buying the euro is not a part of my trade plan. That being said, I’m open to the idea of buying the euro and I believe the euro may actually have a fighting chance if the following factors begin to work in favor of the euro and against the dollar:

LIBOR: dollar interest rates have to drop, plain and simple. If the overnight USD lending rates on LIBOR continue to stay elevated and exceed the Fed Funds Target Rate and ECB Key Lending Rate, this shows there is strong demand for USD and this demand will translate into USD strength no matter how bad the USD data is or what commodities are doing.

USD Demand: this is tied into LIBOR as well. If the strong appetite and demand for dollars subsides this week and there is a renewed demand for euros, this would help the EUR/USD gain some traction to move up.

Commodities: it will be imperative for crude and gold to find support and find buyers in order to put some sort of roadblock in front of the dollar to slow it down. I’m not too worried about gold because a case to buy gold can be made. Crude worries me. I don’t see any reason why we cannot test the $88 level this week if crude stays on this course. Another leg down on crude and the crude may take another leg down with it.

Rate Cut: if the Fed did a surprise rate cut of 25bps or more and the ECB held rates steady at 4.25% we should see money flows go back into the euro and out of the dollar just based on Europe offering an ever more attractive rate of return. Now if the ECB does a surprise cut I would expect a test of the 1.3200 level this week.

Wall St.: this will be our first test of how Wall St. and the global markets respond to the reality of our new bailout package. Trying to predict how these markets will respond would fry too many brain cells that I can’t afford to lose right now. I am hoping the markets realize what a massive amount of debt will be created the next year and remember how many dollars have been flooding the market and decide to respond accordingly.

Europe: Over the weekend the leaders of the top four European economies along with Trichet and the EU Commission met to discuss the financial turmoil in Europe and to begin working towards a coordinated plan to intervene. I’m trying to figure out how they could actually do a joint effort because their entire financial, economic, and banking system runs differently than the US system. Europe doesn’t have a “Treasury” and they don’t have a Hank Paulson, thank God. Based on the ECB mandate and Maastricht Treaty, I cannot see how there is a possibility to bailout the European banking system.

The UK is clearly in trouble. Gordon Brown seemed a little stressed at the weekend meeting. I don’t follow UK politics much so maybe he’s always that way, but he was extremely vocal about putting together a plan to not let a single bank fail in Eurozone and that included the UK. I could be wrong but I have a feeling Mr. Brown is not too thrilled about Ireland’s plan to backstop Irish banks with deposit and bond guarantees. If I lived in Europe right now you better believe my money would be pulled from my bank and I’d have a new bank account set up with an Irish bank.

If the rest of the European countries follow Ireland’s lead we could see some renewed faith in the European banking system. I don’t see how they can avoid doing what Ireland did. If they don’t I would think most Europeans would start opening bank accounts in Ireland to get that guarantee.

How good is an Irish guarantee? I have no idea. I can’t speculate on that but the problem with this guarantee is that it could cause a liquidity issue with the EUR. And what if the Irish are pressured by their old adversaries in Great Britain to repeal the guarantee and they take it back? That means there would be a run on Irish banks and that could start a chain reaction of European bank runs and that would destroy the euro. This stuff just doesn’t get any easier does it?

As far as trading goes my plan is to continue shorting the euro on the rises and I will not take risk on buying the euro unless I see some of those factors from above begin working in favor of the euro and against the dollar. The euro will have a fighting chance if calm returns to Europe and the markets go from panic mode to more of a normal mindset. The optimist in me believes at some point the markets will realize what terrible financial and economic shape the US is in and how terrible the fundamentals and the bailouts are for the dollar and they will respond accordingly against the dollar.

I’m going into this week expecting to see the same kind of volatility and chaos we’ve seen the past four weeks and I will be pleasantly surprised to see normal price action should the markets decide to calm themselves down and start behaving like adults. I don’t see anything that says order should return this week, so I’ll expect the worst and be happy with the best.

oil tycoon T. Boone Pickens updates

2008-09-25T21:21:00.000-07:00

Many traders have been wondering about oil tycoon T. Boone Pickens. For the past six month's he's been making crude calls that have been some of the worst calls made this year. A trader sent me this:

Reuters
Pickens funds down about $1 billion this year: report
Wednesday September 24, 7:14 am ET

(Reuters) - Texas oil magnate T. Boone Pickens' hedge funds have lost around $1 billion this year, including $270 million of personal losses, The Wall Street Journal said.

One fund focused on energy stocks was down almost 30 percent through August, the paper said adding that a smaller commodity-focused fund is down 84 percent.

"It's my toughest run in 10 years," the paper quoted Pickens as saying.

Key levels updates

2008-09-25T21:20:00.000-07:00

We had our largest ever bank failure in U.S. history go down tonight and the story has been completely ignored by the markets... clearly the markets are focused on this bailout fiasco and will be paralyzed and panicked until it's either passed or we find out what the actual details of the plan are. If we go through the trade day this morning and throughout tomorrow without any kind of comfort from DC the markets could be a mess.

From the AP wires:

NEW YORK - JPMorgan Chase & Co. Inc. came to the rescue of Washington Mutual Inc. Thursday, buying the thrift's banking assets after WaMu was seized by the Federal Deposit Insurance Corp. in the largest failure ever of a U.S. bank. This is the second time in six months that JPMorgan Chase has taken over a major financial institution crippled by bad bets in the mortgage market.

The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement it planned to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase, which acquired Bear Stearns Cos. last March, also said it would sell $8 billion in common stock to raise its capital position.

Here the key levels. Keep in mind when I'm posting these and that any piece of news or rumor could totally change the ballgame.

Key downside levels:

1.4621
1.4602
1.4574
1.4552
1.4528

Key upside levels:

1.4689
1.4721
1.4755
1.4784
1.4815

I wanted to add that I'm not buying the USD. I will not short the euro. I've bought the dips today and this evening and will stick to that game plan for now. All of these events happening are very bad for the USD and if the market does as it should do we should expect to see the USD sold-off.

Trade Team Update

2008-09-25T21:15:00.000-07:00

Well it looks like we've ended the day exactly where we started yesterday... the euro's in the same spot, there's no bailout bill passed, the market's continue to panic and speculate, and the erratic moves continue across the board in all markets.

As far as the bailout plan goes, it appears as if congress has made some progress on the fundamental aspect of the plan but it seems clear the Republicans are not sold will drag this process out.

That may have more to do with the fact Republican voters are pressuring their legislators much more than Democrat voters. This makes sense because of the Republican view on government intervention, but the longer this painful process keeps the markets in limbo, the longer it's going to take to return to order.

There's very little concensus on exactly how the bill will affect the markets, especially the EUR/USD because we don't really know the details of the plan and the argument for it being USD+ or USD- can be made. There just happens to be a much better argument on the USD- side when you take the situation as a whole in light of the U.S. fundamental landscape.

Speaking of fundamentals, the data continues to prove my view that the fundamentals of the USD are getting worse, not better. New Home Sales fell to their worst levels in 17-years. The average new home price fell in August by 11.8% to $263,900. That was the biggest one-month drop on record. The median home price was down 5.5% to $221,900. These kind of numbers are pointing to a possible negative print on the next GDP...

Here's what I would really like to know... with home prices continuing to fall and inventories continuing to rise, how in the world can the Fed and Treasury properly price the mortgage-backed securities they intend on purchasing from the banks?

Under the plan as we know it, the market will not get an opportunity to price the mortgage assets, the Fed will do this and then attempt to sell the assets back to the market for a profit. I believe this plan can be done but what I do not understand is how these assets can be valued when the physical asset that is supposed to give the paper its value is declining every 30-days?

I just don't believe an asset can be price-fixed by the government nor can the asset be properly valued while the product that is giving that asset its worth or lack thereof is unstable and is on a downward trend.

There is no bottom in housing and I see no signs of a bottom. Unless I've missed it or I'm completely off in left field, I just cannot understand how these banks, the government, and potential buyers can value a mortgage security whose worth is based on the health of the housing market and the prices of homes.

And that really gets to the bottom of why I do not believe the plan, as we know it, is actually going to solve any problems in the housing market. It's not going to stop foreclosures, it won't stop home prices from plunging and inventories from staying at elevated levels.

Credit markets are siezed up and there won't be much relief there. Every morning the central banks are injecting liquidity to ease LIBOR and to keep credit flowing. I'm not convinced this bailout will solve those issues either because in my view, it all still goes back to the housing market issue in the U.S.

U.S. and Europe:

At this point I don't believe we'll have the bailout bill passed tomorrow. Just a few moments ago this came over the wires:

Sen. Shelby says that he does not believe there is an agreement, still opposed to the bailout 9/25/2008 5:00:26 PM

The fight will go on as these legislators juggle the political pressures, constituent pressures, and pressures from Wall St. and the other central banks.

Europe needs this bailout just as bad as the U.S. does. A few days ago I told you the big European banks came crawling to Paulson to get a piece of the bailout money. Well, now we find out that European banks are leveraged as much as 50 times.

There is a catastrophic meltdown waiting to happen within the European banking system. I made this call at least three months ago and I'm sticking to it because I do not believe every single overleveraged European bank can escape unharmed.

If Europe doesn't get a piece of this taxpayer money they better have a clever Plan B. Fundamentally, I'm calling the Eurozone in recession. Europe's overall growth situation has been plunging too far to the downside and the challenges moving forward are mounting, especially as the fundamental landscape of the U.S. continues to crumble

The Eurozone has contracted for four straight months now. Compared to the U.S., Europe does not have a total disaster in the housing market, but there are certain sectors within EU countries like Ireland and Spain where the housing bubble has burst and they are suffering many of the same affects seen in the U.S. housing market. It's a very bad situation in certain pockets of Europe but gets little media attention because of the mess across the Atlantic.

Growth, production, and manufacturing are all falling at there fastest levels in Europe in over five years. GDP may print negative for Q3 and Q4. There's growing pressure on Trichet to cut rates immediately. Add in the high probability of a large European bank failure and you have your recipe for why the euro can't gain any real traction against the dollar.

Today's Initial Claims printed well below market expecations and further show the jobs market is in recession and will keep shedding jobs throughout the rest of 2008. I believe we'll end up having twelve straight months of negative growth and the unemployment rate should rise to over 6.2% in the near-term.

If the credit and money markets do not accomodate the business and corporate and manufacturing sectors, companies will be forced to layoff employees in order to fight for their lives.

Employees will be the first to go in order to cut costs and reduce benefits. There may be wage pressure as employees will seek higher wages to pay for elevated food, fuel, mortgage, and general living costs.

If these issues with credit, housing, employment, and the consumer persist even just a few more weeks I think that could spoil this year's holiday spending season. I think we could see anywhere from an 8% to 10% decline in holiday spending in the U.S. A decline of that magnitude would put serious pressure on the economy and the USD.

Bottomline is, there's a lot of really bad crap that could go down between now and the end of the year. This is going to make trading very complicated and stressful. I'm not into the doom and gloom stuff, but these are real issues happening in the U.S. and Europe and I think we need to be aware of what's happening.

EUR/USD:

The only big data we get tomorrow is the Michigan Sentiment which should print USD-. Tomorrow could very well be chaotic. It's the end of the week and the end of the last full week of trading in September. Add the drama with the bailout plan and the panic on Wall St. and we're likely in for more volatility between now and market close.

I think the euro took a hit on some profit taking that started around the 1.4730 level. Gold had a rough day and crude didn't do much to support the euro.

Even though the euro continues to get rejected on the topside, I still do not feel comfortable buying dollars right now and would rather take my risks buying the euro on the dips. If we can stay supported above the 1.4660 level I believe we can make a run to the 1.4850 level. On the downside it's important that the euro maintain support above the 1.4545 level.

Speaking of risks, that's exactly what this market is right now -- a giant risk. Putting a penny into this market under these conditions is basically a gamble... you're playing scratch-off's at the 7-11...

Some traders have been mentally abused by this market. I don't really see conditions getting any better or more normal any time soon. Reason being is because the herd still needs to be thinned.

The global money-markets are highly overleveraged and their equity has run dry and it's time for a worldwide margin call. The traders that are not overleveraged are the ones learning a priceless lesson that will result in good profits once conditions stabilize.

Things will get back to normal. This is not the Great Depression Part II. But I tihnk the markets still need to purge themselves. The unproductive are the ones that get zapped from the market... those banks that were leveraged 40 times and were upside down on their assets couldn't anymore. They were unproductive because their hands were tied, their accounts were tanking, and their ability to produce was taken away from them.

So I think in order for markets to find equilibrium the herd will need to be thinned even further. This afternoon a broker sent an email promoting some thing where you could open a mini account with as little as $25.

There's nothing wrong with a $25 mini account if that's your risk tolerance, but the advertisement looked desperate to me. I'm sure FX brokers would like to fill the herd right about now...

If you're taking the risks of trading this market use smart risk management because things could change at any moment based on a piece of news, a rumor, or an announcement.

I will not buy the USD at all. I'm not ruling out downside testing but if I take a trade, I will buy the euro because I think we can go back up to the 1.4800+ level and it's possible to do it tomorrow as long as market conditions are working as they should.

I will try to post some key levels later. Be smart going into the weekend. If the bailout bill isn't passed on Friday it could be passed over the weekend and cause chaos on Sunday. Something has to get done and has to get done soon.

Expect the unexpected.

Trade Team Update

2008-09-24T18:36:00.000-07:00

As the debate in DC and the panic on Wall St. rages, all markets have basically come to a grinding halt today. Volumes on global exchanges are near non-existent and the liquidity within the FX market is at severely diminished levels.

Bailout:

Overall, I do not think today's testimony did much to comfort the legislators who are under pressure from their constituents to tell the Fed and Treasury to screw off while trying to manage the pressure Bernanke and Paulson are putting them under to get this bill passed ASAP.

This may just be political grand-standing, but I get the sense that DC lawmakers are not sold on the main facets of the plan and this is why almost every lawmaker asks the same questions:

1. Why does it have to be $700 billion?
2. Why does the Treasury have to buy toxic assets at prices higher than the true market value?
3. What exactly will happen if the Treasury doesn't get authorization to access all $700 billion?
4. How will the bailout fix the housing market?

Will the bill be passed into law by Friday? No, I don't think so but I believe DC and the Fed are eager to give the markets something they can hold on to and work with in the time being.

Bernanke:

Bernanke made some very interesting comments today... comments we need to consider as FX traders.

Bernanke's claim is that if this bill doesn't get passed that unemployment will rise rapidly, access to credit would completely dry up, growth would come to a standstill, the housing market would suffer, and Wall St. would take billion-dollar hits.

Excuse me Ben, but haven't those issues been happening for at least the past 16 months? I remember not too long ago the unemployment rate was comfortably under 5.0%... where are we at now?

Other idiotic comments included Bernanke saying this bailout plan would not cause any inflation and that inflation would continue to moderate over the medium-term. I almost fell out of my chair when I heard that. They must have stopped teaching at Princeton that creating debt and printing money, and adding currency to the money-supply is the true cause of inflation...

When questioned about how this creation of debt would affect fiscal issues and deficit issues, Bernanke threw Paulson under the bus... his response was that Paulson's Treasury was responsible for handling those deficit issues and it wasn't the Fed's concern.

Bernanke did say that the $700 billion bailout would, and I quote, "add difficulty to the economy and fiscal health". Great, so he admitted it after throwing Paulson under the bus and passing the buck his way.

What could end up hurting the euro is Bernanke's comments on rates... he basically said current interest rates are artificially low and that they would rise sooner than later... the dollar bulls enjoyed hearing that comment today.

Paulson:

Paulson failed once again at selling his plan. We did get an interesting confession from Paulson... he said, "A rescue plan was studied over a period of months, hoped it would not become necessary; did encompass small banks as well as larger institutions".

A period of months? Wait a minute... just a few short weeks ago Paulson was saying the fundamentals of the U.S. economy are sound and that our banking and financial sector was sound.

If that was the truth why would they have started this process months ago while telling the markets everything is A-OK? You can see what kind of crap we're dealing with here... lies, cover-ups, politics, glad-handing, and a whole bunch of BS.

The Solution:

Many traders have asked me what I would do in this situation and what the solution is. I don't have the brains, the arrogance, or the wisdom to answer that question.

But, traders are asking so I'll going to throw an idea out there anyway...

I hate to say this, but I do believe government involvement is required. But, only to get the process started and not any more involvement than putting the wheels in motion of handling the toxic assests and selling them back to the market.

I think it is wrong for the Treasury to basically write a multi-billion check to Wall St. in exchange for all of their near-worthless assets. Those assets aren't totally worthless and this is where I think the government can come in to act as an "auctioneer" of these assests.

Under the current plan, the Fed and Treasury price these assets at what they believe they're worth. This is price-fixing. Price-fixing is not going to solve the issue because these assets need to be valued by the market and not price-fixed by the government.

In order for the Treasury to eventually sell these assets back to the market, only the market can decide what they are worth and not the Treasury. The Treasury wants to use the free market to participate in solving the issue, but the free market can't do what free markets do if the assets are pre-priced by the government.

That is one of my biggest issues with this plan and why I think it's potentially disasterous to go about it that way. In my view, I think the Treasury can ease the equities and securities markets and comfort the credit markets by stepping in to orchestrate an auction type situation where the free market could value the mortgage-backed securities (MBS) and then the Treasury could facilitate the transaction between the seller and the buyer.

The Treasury could then set-up an escrow facility to minimize the risk and give comfort to the markets that the government is in control of the risk and that the free market is in control of deciding prices. The Treasury could collect a small transaction fee or maybe charge 1 point per transaction.

That's a very primitive and simple plan. I don't have an economics degree so that idea may not even be workable. But the bottomline is, the Fed and Treasury almost have to be involved, DC has to back the plan, and the taxpayer exposure and debt burden needs to be kept at the absolute rockbottom minimum.

If the Treasury creates billion of dollars worth of debt, it's going to hurt securities and both of those factors are USD-. If the Treasury does a bailout job and can do it significantly cheaper than $700 billion, both of those factors are USD+.

For every $12 dollars the Treasury gets in taxpayer money, $1 goes to paying debt holders back for buying our securities. Under the Treasury's plan, at least $700 billion worth of new debt will need to be created, the defecit level will be raised to over $11 trillion, and because of economic conditions taxes cannot be raised. Plus, fewer securities will be purchased by foreigners.

I think you can see the risks there...

Tomorrow:

Home sales fell 2.2% vs. an expected fall of 1.6%. Home sales are down 10.7% year-over-year. There's a 10.4 month supply of unsold homes which is an improvement but still at recessionary levels.

Median home sales are continuing to plunge, falling 9.3% year-over-year. This is the largest plunge in the data's recorded history. The dollar should be paying a price for this data. It didn't today but that doesn't mean it won't in the near future.

Tomorrow we get a ton of data... New Home Sales, Initial Claims, Durable Goods, and a bunch of Feds speaking all over the place. Fundamentally I have no real views for tomorrow. I can make an argument for the data to be USD+ or USD-. It may not even matter if the market's are focused on this bailout bill or we have big moves in commodities or a potential breakdown in Treasuries or a surprise event.

Basically, there's a crapload of stuff happening right now and these issues and potential events can change the market in the blink of an eye. The trends can change with every passing rumor that market manipulations want to throw out to the wolves.

EUR/USD:

The longer the euro stays in this range between 1.4600 and 1.4720, the closer we get to making a bigger and more exagerrated move. I'm still very cautious on buying the USD.

It's frustrating to see the euro running out of steam up at these levels and there's certainly room to correct more, but what I know about these issues on Wall St, with the USD fundamentals, and issues happening with Treasuries, I see risk on the dollar and I do not want to be caught should the market make a sharp move against the dollar.

The euro is not without its own risks. The pressure growing on Trichet to cut rates and the possibility of a large European bank failure make the euro a risky trade. Basically both currencies suck.

The euro is still showing bullish signs within the price action but the upside momentum is sporadic and is preventing it from holding onto gains. The lack of decent buying liquidity is also a factor weighing on the euro and no one can predict if and when this buying liquidity will return.

Today's low (ask) was on my downside key level of 1.4611 and so far that level is proving to be solid support after several tests at the close of NY and start of Asia.

This whole bailout plan is nothing but USD-. Why the market isn't burning the dollar at the stake doesn't make much sense to me but we have to play the hand we're dealt.

The 1.4611 level is still very key right now. A sustained break there shold send us down to test 1.4580 and then potentially to the key 1.4550 level. I still have longs at 1.4555 and will hold those open for now.

We need to make a sustained break of the 1.4730 and then the 1.4790 levels in order to even think about getting above the 1.4800 level at this point. Maybe now that the testimonies are over the markets can refocus on the the tasks at hand and we'll see more volatility. This is what I'm expecting.

As always, use strict risk management and do not overleverage.

buffet updates

2008-09-23T21:04:00.000-07:00

This move by Warren Buffet to invest $5 billion into Goldman Sachs is a total game-changer I think. It already caused a Japanese bank to announce an investment into Goldman.

I believe we see Wall St. rally tomorrow based on this news. This announcement by Buffet is huge. He's pulling a JP Morgan move and it's very smart and will certainly be welcomed and applauded by the Fed, Treasury, and the lawmakers in DC.

I would expect the Nikkei to rally and Wall St. to rally tomorrow which means volatility in the yen crosses and likely for the euro.

Trade Team Update - - 9/23/08

2008-09-23T20:59:00.000-07:00

Most all markets were relatively quiet today, a lot quieter than I expected them to be. I guess global market players were busy watching the Fed and Treasury testify in front the lawmakers and were left confused by the political grand-standing we saw in DC.

Circus comes to town:

I don't really like the circus too much, it's kind of weird to me but I did enjoy today's circus on Capitol Hill. The clown car brought in Bernanke, Paulson, and Cox to testify before a Senate banking panel. Some of the politicians hit the Fed and Treasury hard, I was surprised.

Several Senators ripped up the plan and basically called it unworkable. Paulson's clause to give him free reign in decision making was challenged. Most Senators offered an alternative that made much more sense and wouldn't cost nearly $700 billion.

The idea is to tackle the issue a piece at a time and work through it sensibly and economically instead of creating a mass amount of debt and a mega burden being placed on the taxpayer at a time when the taxpayer (consumer) has gone into survival-mode.

From the wires:

Senator Dodd: Draft legislation from Treasury is unacceptable in current form - Insists it remains possible to get lawmakers to pass the plan before the November election if changes are made. 9/23/2008 2:34:05 PM

Senator Shelby: Reiterates that Congress will not rubber stamp the Treasury plan, will consider alternatives 9/23/2008 2:34:37 PM

As I said, I do not believe this program will get signed this week. The Senators overall displayed very strong concern and showed a real lack of faith in Paulson and Bernanke.

Paulson never expected this fight. He's up against the ropes and he's not pushing the plan through as easily as he expected. He has no real answers to offer and keeps repeating the same lines about how the plan must get signed this week in order to save Wall St. from Armeggedon. DC isn't buying it.

Paulson did more stuttering and circle-talking than selling. Bernanke was way more comfortable and more forthright with his answers. Bernanke said in very plain terms that the cost could exceed $700 billion and that the plan "might turn a profit, but couldn't be sure". At least he was honest about that...

Bernanke also made it clear risk was on the taxpayer. Bernanke painted a different picture of the bailout compared to that of Paulson. Paulson is a spaz and he's not doing a very smart job selling this to the lawmakers.

I think Paulson's in for a bigger battle tomorrow. Our favorite politician, Ron Paul, will get a shot at the goon squad and it should be at least entertaining. I really hope Ron hammers the Fed on this plan.

We knew there was going to be a political battle and we're seeing it play out in real-time. I do believe the legislation gets passed eventually, but it won't come easy. Americans are bombarding their legislators with calls and emails and telling them not to let the Treasury have the $700 billion. People are really pissed and are pressuring their representatives.

Stay tuned...

EUR and USD Risks:

Today I was talking with a respected trader and wanted to relay our conversation... we were talking about the EUR/USD and the risks on the pair -- equal risks on the euro and the dollar. This is food for thought type stuff, but issues that must be considered as we draw close to the extremely volatilie October through December session.

One of the equal risks is that of a rate cut. The Fed and ECB are both in positions to cut rates. The ECB has a slight advantage over the Fed and is not as likely as the Fed to cut, but there's a high enough probability the ECB gets forced to cut in the near-term.

How would the market handle a dual Fed and ECB cut? I can't answer that question because it will put us in unchartered waters. And speaking of unchartered waters, the EUR is also at risk because we've yet to have a real fundamental or financial disaster in Europe.

The market has not had to deal with a failure or a large downside shock out of the Eurozone. I'm still very much concerned about a larger European bank failure and what that could do to the euro.

Paulson has urged the ECB to enact a similar bailout plan for European banks. And as I said yesterday, we know Credite Suisse, UBS, and a few other big European banks have come to the Treasury for a piece of the $700 billion. Does Paulson know a failure is probably going to happen in Europe?

Look at this comment that came over the wires today:

EU Bank Supervisory: EU financial system exposure to LEH and AIG are somewhat muted 9/23/2008 1:52:18 PM

Lets read between the lines... this dude is not saying Europe's financial system isn't exposed to risk from those companies. So, if he's not saying there's no exposure, then he's probably saying there is exposure, especially when you read the last part of his comment about the exposure being "somewhat muted".

The question is, we know they are at risk, but what does "somewhat muted" in liquid cash terms?

I think any signs of weakness or some big downside surprises in the euro fundamentals, or a shocking bank failure, or a surprise move by the ECB cannot be ruled out and taken off the table. Those are valid risks and just another reason why we cannot establish a clear trend under current market conditions.

Bernanke made a comment this afternoon that was related to an issue I've been talking about with bonds. He said something about not knowing how the credit rating agencies would look at the U.S. debt. Two seconds later the euro started moving up and made an 80 pip retracement in under an hour. That's a miniscule example of what the euro would do if a bond downgrade were to happen.

Fundamentals:

Most of today's euro data was worse than expected and shows further proof that growth is weak in Europe. Today's Home Price Index showed that home prices dropped a dramatic 5.3% y/y in July. We are not close to a bottom. The bailout will not fix these housing issues, it won't stop foreclosures, and it won't create easier access to credit.

Bernanke said that if the House doesn't pass the bailout plan the U.S. "might" go into recession. We're already there based on what we've seen in the housing, consumer, and jobs sectors. Forget this "two negative quarters of growth" textbook crap. We're not in the Great Depression, but overall economic condition points to recession. The fundamental landscape is worse now than when the euro was at 1.6000. Europe is not far behind...

Fundamentally, we have another big day with the circus show part II. We get German IFO and the Eurozone's Current Account. I don't expect any big downside surprises with tomorrow's euro data.

Existing Home Sales is the big piece of data in addition to Crude Inventories. I have mixed view on the home data. Mortgage apps have been stabilizing and based on some reseach I believe we could see a print at expected or even above. I would be more surprised to see a strong downside number.

Obviously the big event is on Capitol Hill. I really hope this next group of politicians hammer Bernanke and Paulson on two fundamental issues that don't sit well with me...

1. Allowing foreign banks to get a piece of the bailout money.
2. Adding credit card debt and student loans to the bailout plan.

EUR/USD:

The euro retraced just as we expected. Our low today hit my 1.4621 downside key level to the pip and held before moving up after Bernanke's credit comments.

I'm not ruling out further downside testing and I have not taken any new longs above the 1.4550 level. I'm short from up at these levels above 1.4720. I mostly sat on the sidelines today and may do the same tomorrow if the markets behave the way they did today.

Now is not the time to get impatient about trading. With this bailout plan potentially getting signed into law at any moment, the whole ballgame could change in a matter of seconds. I don't want to get caught up in that kind of risk and chaos.

If the Asian markets are quiet we may see some decent ranging during Tokyo. I expect to see the volatility pick up after London and we'll hopefully get a better idea of the markets at that time.

1.4660-1.4680 is a key area to watch along with 1.4620 and 1.4580 levels on the downside. There's some decent resistance ahead of the 1.4730 and 1.4775 levels.

Today's key levels worked out well so I will post more later on. Be smart with your trades and your risk management.

Key Levels

2008-09-22T21:18:00.000-07:00

Right now we're in the expected downside retracement from the 1.4860 level. We do have some more room to drop but there's downside resistance within the real time price action currently.

With more normalized market conditions, I'm going to post some key levels to watch. News or panic trading could certainly affect these numbers, but we'll see how they hold up.

Key downside levels:

1.4752
1.4727
1.4684
1.4666
1.4621

Key upside levels:

1.4838
1.4856
1.4883
1.4918
1.4944

I don't see any reason we can't make another attempt at sustaining a break of the 1.4800 level sometime before London opens. The 1.4760 level is initial key support. There should also be a battle between the 1.4680 and 1.4700 level should we drop that low.

Tomorrow's events in DC could play havoc on the markets, especially if no confidence is instilled in the markets and the panic trading continues.

A few traders have asked who I would recommend reading to get other points on the current situation facing the markets.

Here's my no-BS list:

John Mauldin

Mauldin is the only commentator/analyst I read. Where my analysis might be the art of the market, he's got the science. He's a trader too and he does his homework.

Financial Times

I prefer to stick to the news that comes over my newsfeed because it is what it is... they don't have copywriters manipulate the data or the delivery of the data.

But I like the FT when I want to see how certain events are being reported. I don't trust any newspapers, but FT stands out.

Trade Team Update - - 9/22/08

2008-09-22T21:15:00.000-07:00

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.

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

2008-09-21T14:41:00.000-07:00

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.

EUR/USD Weekly Outlook 9/21 thru 9/26 2008 part 1

2008-09-21T14:33:00.000-07:00

USD:

Is the great dollar bull run of 2008 over? Possibly, but in my view, it never existed and was mostly smoke and mirrors. The dollar’s unstoppable run the past ten weeks, in my opinion, was manufactured by the Fed and ECB. Here’s why I believe this to be true.

First, look at the timing of the dollar’s rise. It happened while market participants were on summer holiday and the markets were completely ill-liquid. The field was ripe for harvest and the odds were in the Fed and ECB’s favor to manipulate the dollar during this timeframe. While Europe was on a seven-week holiday and the rest of the financial markets were focused on Wall St., the Fed and ECB used verbal and physical intervention to push the USD Index up and drop commodities. In fact the ECB started the gold sell-off which helped fuel the dollar’s run.

Do you remember our good friend Jean-Claude Juncker from the ECB? Do you remember how he shocked the markets three weeks ago by saying “the euro is overvalued in real terms”? He said that two times and both times he used that verbal intervention it pushed the EUR/USD down several hundred points. I do not believe it was pure coincidence he made those comments right before the U.S. financial markets melted down to the point they did last week.

The Fed and ECB knew all along what Wall St. would come to. Both central banks knew the government would have to take the entire U.S. financial system into receivership. And they knew what this was going to do to the dollar – destroy it. I’m not ruling out the possibility of more manipulation because this mess could ultimately send the USD Index and gold to places that are very dark and scary.

At this point we do not have full disclosure on the Fed and Treasury’s plan to save the financial system and to bailout Wall St., and to stop the housing market from collapsing. Basically, the U.S. government is going to buy bad mortgage assets, take on the risk, fund the programs with taxpayer money, and overtime re-price and resell these almost worthless assets to banks and financial institutions for a higher premium than what they are worth now.

For example, if Lehman Brother’s is only able to get $0.20 on the dollar for an asset, the Fed may be able to get $0.40 on the dollar. Then the asset is in the hands of another creditor, the original debt holder is off the hook for the worthless paper, the Fed makes a small profit, and everybody’s happy. That’s how it’s supposed to work, but the fact government is handling this delicate operation means it could be a disaster.

The Treasury says the plan will cost $700 billion and last a minimum of two years. The Treasury is raising the national debt ceiling to $11.3 trillion from its current level of $10.6 trillion. I put the cost at $1 trillion minimum. This is $1 trillion we don’t have and $1 trillion that will be created out of thin air. Debt must be created by the Treasury and sold to foreign investors. I’m not convinced that will happen right now, but more on that later.

We joke about the Treasury’s “printing presses”. It’s not a joke anymore because the presses will run. Bernanke and Paulson will have to inflate the money supply. You know what that means… inflation. That is the true definition of inflation – printing money – adding money to the economic system. We won’t really know how much money the Treasury prints because we don’t get M3 from the Fed.

But it makes sense now that we saw a season of dramatic deflation because the central banks knew we were headed into a prolonged period of inflation caused by flooding the money supply with a worthless currency. And that is the exact reason why I say the dollar’s bull run could be over.

Only further manipulation can prop the dollar up now. This is economics 101. This is the epitome of what Austrian economics teaches us. The Fed and Treasury’s programs and the money it’s going to take to run them are inflationary and suck the value right out of the dollar.

The dollar should be slaughtered. Gold should steadily rise. Foreign investment in U.S. debt instruments should continue to decline. More banks should fail. More panic should ensue in the weeks to come. And, in a perfect world, the dollar should be sold-off. Will it happen the way it “should”? Only the markets can decide the fate of the dollar… and if the dollar does get heavily sold-off I would expect to see more intervention.

Politics:

Politics are now coming into play and that’s a very bad thing. We are going to see some political battles over this plan to completely bailout the entire U.S. financial sector. Republicans and Democrats will battle and each party will use this disaster for their own political advantage.

The involvement of politicians means it will cost the taxpayers more money, it will be mismanaged, and it may even decide who the next president is. Both McCain and Obama are already using the issue to gain political leverage.

Last Thursday McCain said he would have fired the chairman of the SEC and on Friday he said he would not bailout Wall St. McCain better be sure all of his constituents and supporters and political allies feel the same way he does before he keeps running his mouth…

There are only two politicians in DC that I trust to do the right thing – Ron Paul and Jim Bunning. Paul and Bunning are the only two that understand free market capitalism and the problems with fiat currencies, inflated money supplies, and big government. They will be ignored during this process even though they are the only two voices of reason in DC.

Both Obama and McCain will fail miserably at their jobs as it relates to the economy and fixing the financial system. It’s a losing situation for both candidates. McCain knows as much about economics as I know about multivariable calculus (I never made it past algebra 1.2). McCain believes interest rates should be at 0.00%. Enough said.

I’m not real clear on what Obama thinks about the situation or what his plans are to fix it if he’s elected because he never says anything that makes sense. He talks in circles but you never get a definitive answer on anything. What I do know about Obama doesn’t give me any comfort that he has a clue.

McCain has a few big name corporate CEO’s and business people are aligned with him, but that doesn’t mean much to me. Warren Buffet is aligned with Obama… that doesn’t mean much to me either. No matter what, we’re in for a painful political war that will drag on while Wall St. continues to go from euphoric to schizophrenic and back again.

Bonds:

For weeks I’ve been talking about irregularities with U.S. bonds. I’m getting extremely concerned about bonds and it gives me just another reason to believe the dollar’s run could be over. When Paulson announced his bailout plan at the end of last week, bond yields shot up, prices dropped, and money flows poured back into equities.

This is a problem. The bailout plan is going to need heavy money flows going into bonds and not necessarily into stocks. We know that in July foreign buyers of bonds dried up to almost nothing. This is terribly USD-.

There are some very smart bond traders and very smart strategists in the bond market. I have to think they see what I see, which is a potential collapse of certain U.S. bonds and or the possible default by the Treasury.

Right before the big bailout plan was unveiled, panic-money poured into the 3-month T-Bill driving the yield to almost negative. I’ve never seen anything like that, it was shocking. But now that Wall St. is saved, money is going into equities and out of securities. The other issue is that I think the foreign view on the U.S. will be downgraded while this mess in the financial sector gets political and continues to drag on.

The U.S. government relies on billions of dollars of foreign money to buy debt in order to feed the deficit and keep the lights on in DC. If we see panic in the bond market or a collapse or the Treasury defaults, the dollar is going to take a whipping unlike anything we’ve ever seen.

As a currency trader I usually only focus on bond yields but now the prices matter because if the yields keep flying up that means the prices are dropping. If the prices collapse, we have issues. If we see a panic collapse with treasuries or treasuries get downgraded or the Treasury defaults on debt re-payments there will be a violent dollar sell-off. The central banks could try to intervene against that but the point to understand is any of those events would be highly USD-.

Fundamentals:

The data on the books this week is only going to serve to further complicate the issues were dealing with right now. We get a lot of growth data out of Europe. The bulk of this week’s fundamentals will come out of the U.S. as we get key housing, consumer, growth, and inflation data. Overall, I’m not expecting to see strong USD+ data this week.

Let’s not forget the fundamental landscape is not in great shape either. We’re still going to have a battle of to see whose data is worse, the USD or the EUR. But more important than this week’s data are the numerous speeches we get from the Fed and ECB this week.

The markets will be watching and listening for any clue, sign, or signal from the Fed and ECB on future monetary policy. Many believe the ECB will be forced to cut rates by at least 50bps before 2008 is over. I expect this speculation to ramp up as the pressure is put on the central banks to provide cheap money and easier access to credit.

We hear from Trichet, Bernanke, and Paulson this week. We also hear from several ECB’s plus we get Fed speeches from Fisher, Plosser, Warsh, Bullard, Lacker, and Evans. Bernanke and Paulson will be on Capitol Hill testifying.

updates

2008-09-18T18:32:00.001-07:00

Once again the Fed and Treasury is propping up the dollar as news starts to emerge about this new plan to take on all the billions of dollars worth of bad assets from financial institutions.

The dollar may continue to gain on this news and especially as details are released. But take note, when the government used this plan in the late 1980's to bailout the Savings and Loans the U.S. taxpayers lost almost $80 billion on that deal...

Equities should rally on this news and the euro, gold, and crude may find themselves back under pressure.

Trade Team Update

2008-09-18T18:32:00.000-07:00

The chaos and carnage continues... market events were happening so quickly today that if you blinked you probably missed the latest development. What we're dealing with is a global-wide lack of liquidity and pure panic seizing market participants.

In today's update I'm going to give you my best "hillbilly economist" perspective on today's events... I never went to school for finance or economics, I'm a very simple person so the best I can offer is a simple view on these markets.

Wall St.:

The Dow closed up over 400 points today. The Dow literally went on a 400 point run when a rumor hit the markets right before Wall St. closed shop for the day.

I call it a rumor because that's exactly what this is, a rumor, it's not been verified by the Fed or Treasury. The rumor is about a new government bailout program where either the Fed or Treasury sets up a depository for the banks and financial institutions to dump their bad mortgage debt, their overleveraged mortgage backed securities (MBS), and these institutions can concievably take those bad debts off their books and put them on the government's balance sheet for an extended period of time.

This is a disasterous plan in my view. This bailout puts the taxpayer at risk, it adds default risk to the government's balance sheet, it adds downside pressure to the deficit, and relieves the overleveraged lenders of their responsibilities to clean up the mess they got into. We're talking about hundreds of billions of dollars of bad overleveraged debt going under the obligation of the U.S. taxpayer.

But Wall St. loved it... they bought the rumor, but they may have to sell the fact. I think there will be a few lawmakers that are going to take the Fed and Treasury to task on this plan, at least I'm hoping they do because this is one of the worst ideas I've heard yet.

If you trade the yen pairs be on guard for how the Asian equities markets react this evening. We could see heightened volatility within the yen crosses tonight and early tomorrow morning.

Central Bank Manipulations:

Early this morning the Fed, ECB, BOE, SNB, BOJ, and BOC tag-teamed to pump $180 billion into the markets. Not $180 billion of their own respective currencies but $180 billion USD.

Here's how this works... Europe, UK, Switzerland, Japan, and Canada take USD from the Fed and in return give the Fed their own currencies. Then, those central banks auction off the USD in their own money markets.

I've been telling you for over a week now that there's a vicious demand for the dollar and I'm not seeing any pullback on this ferocious demand for U.S. dollars. Today's tag-team liquidity injection prove this to be true.

Global banks are hoarding cash... like stuffing it under the mattress kind of thing. Banks are not lending. When banks don't lend interest rates go up. LIBOR goes up and these high USD interest rates and strong demand for the dollar keeps the EUR/USD stronger to the downside.

Now as soon as news hit the wires of this liquidity injection the dollar was sold-off. This is a great sign in my view. Not only did the $180 billion bring down the USD interest rates it caused a strong euro rally. Maybe the markets are finally getting the idea...

All of this is nothing but USD- no matter how you slice it. As I explained yesterday, the Treasury creates a product to sell -- this product is called debt -- what gives this product re-sale value is the full faith and gaurantee of the U.S. government to honor the debt obligation with points paid.

By selling debt products the Treasury can print money. The Fed gets their money from the Treasury. The NY Fed coordinates with the Treasury to ship varying amounts of dollars to the regional Fed banks who then distribute it in their district.

The other aspect is what we've seen this week where the Treasury will "manufacture" billions of dollars worth of "products" to sell to central banks and lending institutions. The lenders get "risk free" assets to put on their books and the Treasury creates money it can't afford to pay back with interest.

Finally, the other aspect is that the Treasury will accept collateral from banks to lend money to and then after a specified period of time the cash is returned to the Treasury with points paid.

No matter how you slice it, it's a flawed system and it's all USD-, and I really hope that market participants realize how much these actions by the Fed and Treasury are devaluing the dollar over the long-term.

Commodities:

Gold certainly enjoyed the news as it went on a near unstoppable run above my key $910 level. The commodity was unable to hang on to gains and as soon as the last batch of bailout news hit the wires, gold sold-off hard.

Crude made a cameo appearance above the $100 level but was sold-off and has been hovering around the $98 level. I believe as long as we stay above the $88 level crude can make a few more attempts at sustaining a break above the $100 level.

There's still not a very strong correlation between the EUR/USD and commodities right now. It's there a bit, but not strong during normal market conditions. I believe there may be a gold contract expiring tomorrow.Nonetheless keep an eye on gold and crude tomorrow.

Tomorrow:

Today's jobless claims were crap and very USD-. The only event on the books tomorrow is German PPI which should print showing a decline in producer inflation.

As far as the euro goes, I still see bullish signs within the price action. We did have another choppy day but it was somewhat more orderly today than it was yesterday, which is another good sign.

At this point I have to stay very cautious of the dollar. I don't like these events that are happening and each one are strongly USD-. The problem is that nobody is buying euros. I don't see a strong dollar right now like I did even just last week.

I see the market not having an appetite for euros and I see a lot of panic trading. Making problems worse is the complete lack of liquidity in the market. This is the worst I've ever seen and it makes finding a trend and picking levels almost impossible.

Anybody who is banking daily profits and not taking losses is beating all odds and should be commended.

The bullish signs of the euro continue to show in the price action and it's been good see crude and gold make upside gains. I don't trust anything right now so that means my trading is limited and conservative.

If you are shorting the euro or buying the dollar on any other pair I would use good risk and money management. Things are happening by the minute in these markets and the price swings should be expected to continue.

Going back to this liquidity injection issue, I'm expecting to see another tag-team event go down during London or early NY tomorrow morning. Watch those LIBOR rates as they will give you great clues. LIBOR has been a tremendous indicator for me this week while the money markets are in turmoil.

I still have the 1.4500 level as a resistance area. 1.4350 level is one to watch for signs of the euro deciding to make an extended move in either direction. 1.4200 level should hold decent support under current market conditions.

Be smart with your trades and do not overleverage.

Bond Trouble

2008-09-17T18:30:00.001-07:00

I'm watching the bond market extremely closely now and I see that the U.S. 3-month T-bill is trading with a yield of 0.0456%. The 3-month T-bill is about to collapse and the 6-month T-bill is right behind it.

If the yields on the major bonds like the 2-year, 10-year, and 30-year continue to plunge we could be looking at an emergency Fed rate cut situation happening.

As I said earlier, do not get into new dollar long positions. Stay out of the dollar. I am not letting EUR/USD shorts that are in profit go into drawdown, I have +1'd all profitible shorts that are in this market range.

Trade Team Update

2008-09-17T18:30:00.000-07:00

Just when you think you've seen it all... another historic day in the markets as gold closed up over $90 marking a single-day gain of 11%. This is an unprecendted move unlike the markes have ever seen.

What happened to gold? That's the big question on trader's minds as we close out the day... in my view that's a move rooted in pure panic buying. It's not even a fundamental move, it's a strong emotional reaction to what's happening in the U.S. financial system.

But there was one piece of news that hit the wires this morning that gave gold the fuel it needed to run all the way up to the $865+ level. And this piece of news ties directly into something I talked about a few weeks ago. From Standard and Poor's securities rating division came these comments:

Pressure is building on the AAA US sovereign rating, notes the ratings remain stable - says the AIG bailout weakens the US fiscal profile, the AAA rating must be earned, its not guaranteed

Pressure building on the 2-year, 10-year, and 30-year Treasury debt? Ratings not guaranteed? I called this issue in the 8/24/08 EUR/USD weekly outlook:

I believe it’s possible the Treasury might have to tell debt holders that the Treasury can’t pay and may have to offer some kind of buyout for pennies on the dollar. When I say debt holders I’m specifically referring to buyers of U.S. debt – bonds. I’m talking U.S. government issued bonds.

One of the reasons bonds are called securities is because they are considered “no risk”. The U.S. government has never once defaulted on paying a debt holder. If budget deficit or monetary reasons somehow for some reason prevent the Treasury from meeting their debt payment obligations the effect on the dollar would be disastrous and could even start a military conflict. I only give this less than a 10% probability of ever happening, but it’s something I’ve thought of anyway.

It was a crazy call at the time but now that we have the S&P ratings agency telling the markets pressure is mounting on the spectacular AAA rating on U.S. debt was a real wake-up call to the markets.

Nobody listens to me but they listen to players like S&P and when S&P comes out with comments like that it's only natural to see "safe-haven" buying of gold. It has to be that way.

Let me be clear -- if U.S. debt gets downgraded it's very likely we'll see the single biggest move ever against the dollar. That being said, if the U.S. either defaults on debt or has to enact some kind of deferred payment plan not only will the USD die we could be looking at an international incident leading to a world war. No, I'm not a conspiracy theorist, I don't get into that crap but I'm telling you what's going to happen should this issue with U.S. treasuries keep unfolding in a negative way.

A trader commented today that I "have no idea about anything". Well, I called the post-Labor Day meltdown of the financial system and referenced this issue with bonds. So, keep throwing hate and I'll keep working harder to predict and forecast moves in these markets that nobody else will make or even thinks of.

Wall St.:

The Dow was massacred today losing another 450 points. Wall St. is an absolute mess. AIG stockholders are well on their way to seeing their stock zeroed out. Morgan Stanley was on the hot seat today, selling off hard. You might recall just a few short days ago Morgan was at the bargaining table to supposedly help bail-out Lehman Brothers.

As of this afternoon Wachovia was putting together a bail-out plan to save Morgan Stanely. This is madness. And this mess on Wall St. is not going away anytime soon. This proves the Fed and Treasury are putting on another smoke and mirrors act and using big household Wall St. names as props to bail-out our entire financial system.

The Fed nationalised AIG and the U.S. taxpayers are on the hook for at least $85 billion. Oh, and guess what, the U.S. taxpayers now own the popular English football team Manchester United! I love it... how's that for some irony! Go Chelsea!

Some rough numbers show the Fed has put out over half a trillion dollars of taxpayer money in Wall St. bail-outs starting with Bear Stearns all the way to where we're at today. I believe that number is higher because I know the Fed makes backroom deals with these firms to sweeten the pot.

The Fed is in trouble and they are running out of cash in their reserves. The Fed's reserved are so low that the Treasury had to create a $40 billion debt auction this afternoon. Basically, the Treasury is going to create $40 billion worth of debt out of thin air and then sell this debt.

The proceeds from the sale of magical debt will be given to the Fed. It's amazing how the central bank can avoid securing credit and liquid cash like normal people do. Now do you see why the Fed is unconstitutional and will be the ultimate financial demise of America?

These debt auctions will get more frequent and will get even bigger. Watch.

EUR/USD:

The crazy thing is that all these events and issues are terribly USD-. The Wall St. bail-outs, the printing of money, the creation of debt, the pullback in foreign investment, the expanding Trade Balance and Current Account, the sharp decline in growth, the increase in unemployment... all USD-.

Our financial and economic condition is worse now then when the Fed first started cutting interest rates. It's worse now then when they stopped cutting interest rates and started getting hawkish about inflation.

Right now inflation is not the top economic priority as it was a few months ago. We're in a period of massive delfation with commodities unwinding and the dollar rocketing up the USD Index.

Inflation is an issue but price pressures have dropped dramatically since July. The real inflation issue is going to arise in a few months because real is the creation of money without the backing gold. Real inflation is created when the Treasury runs the printing presses and adds physical currency to the money supply through the creation of credit and debt. It's a flawed system and now the system is sick and has no one but itself to cure the illness.

The euro made strong gains today. With what's happening in the bond market, on Wall St., and with our continually weakening fundamentals I must urge strong caution against holding USD long positions.

It's a fact the dollar has been on a historic run, especially against the euro. The dollar has just beat the crap out of the euro and it's showing few signs of letting up.

In a "normal" world the EUR/USD should be above the 1.5000 level right now based on what's happening within the financial and banking system in America. A few weeks ago we spoke about the Fed needing the dollar to be strong knowing a meltdown was on the way.

So for me and my trading, I'm going to do whatever I can to keep my positive open euro shorts from going into drawdown. If the market decides to come back to earth and realize what a mess the Fed is making and that the USD printing pressures are working 24/7, market players could send the euro up rapidly. You don't want to be caught in a move like that.

The market correlated variables are in shambles. All correlated markets have broken down and are operating with minds of their own. Today the euro was slightly correlated with crude and the Dow, and then it finally tried to catch up with gold. Tomorrow it could be a different story.

Tomorrow we get the Philly Fed Index and Initial Claims. I don't expect to see USD+ data from either one of those. It may not even matter. We could have a new catastrophe to deal with in the markets tomorrow and the fundamentals may not even matter.

I literally cannot count on or trust anything right now in these market conditions and season of extreme volatility and risk. The only thing that can be trusted is our own instincts and trying to keep an advantage on the markets.

The euro made a nice run, but I don't exactly trust it yet. Today's move had a lot to do with profit-taking on euro longs. That run up from the 1.4100 level to the 1.4300 level showed some big profit-taking within the price action. But there is serious risk with adding new shorts because of the financial turmoil.

No trader can trade on "hope". That's not part of the equation, but it is my hope that the market finally realizes what a mess the dollar is in and the powers that are proping up the dollar can no longer hold the euro back from crushing it. I don't think the manipulation can go on forever.

If you're trading, use strong risk and money management with your trades. We've seen wild moves this week and they could get even wilder before the week's closed out.

Be smart.

Trade Team Update

2008-09-16T19:41:00.000-07:00

Another day, another bail-out... we might as well cover the latest news first... the biggest potential failure of all, AIG, was bailed-out this evening by none other than our good friend Hank Paulson. And just a reminder, Paulson said he wouldn't be putting the taxpayers at risk by bailing out AIG.

This bail-out won't be referred to as a bail-out but don't be fooled. The government is brokering an $85 billion loan to keep AIG afloat and they are taking control of 80% of the firm.

There's not a private sector firm on earth that has the money to save AIG. All of the details are not out yet, so I don't have much to say, but I believe the shareholders are going to get screwed on this bail-out and of course the taxpayers are at risk and under added burden.

Fed:

As you know by now the Fed held rates at 2.00%. That was expected by us here. We put out the no-cut call on Sunday and never flip-flopped even when Fed Funds Futures showed a 100% probability of a cut and just about every talking head was calling a 50bps cut.

The idea that the Fed could cut rates was driven by pure emotional reactions to the volatility of the markets and the meltdowns we had on Wall St. yesterday. Now is not the time to get caught up in these speculations and predictions.

Everyone voted to hold rates steady. That's what saved the euro from a massive sell-off. If the hawk Fisher had voted for a cut again I think the market would have hammered the euro, but all voters were on the same page.

The FOMC statement was tempered with dovish and hawkish rhetoric. The Fed was hawkish on inflation but as we can all see, there's a major round of deflation happening in the real-time as commodities continue to collapse.

The Fed was dovish on growth, as expected. There were no real surprises in the FOMC statement and Bernanke didn't give the market any special reason to buy up dollars.

I'm sticking to the call that the Fed is going to hold rates steady through the rest of the year unless we get some major catastrophe on Wall St. Speaking Wall St., they weren't happy with Bernanke's decision but they'll get over it. The fact that the Fed held rates has no real negative impact on Wall St.

TIC:

One of the pieces of the puzzle came together today. The data that shows foreign money flows into Treasury debt instruments during the month of July was only $6.1 billion vs. $55.0 billion expected. That's some of the most abysmal data I've ever seen. I thought it was a typo when it came over the wires. And the total TIC Flows were -$74.8 billion vs. $40.0 billion expected.

This is one of the explanations for why the USD has had to rapidly appreciate. Starting when? Mid-July. I don't think that's a coincidence at all. Without foreign investors funding the deficit and the U.S. government through buying bonds, the dollar would have to be strengthened in order to cover that major hit.

Now things make a whole lot more sense to me after finally getting the July TIC data. Bottomline is, that data is terribly USD- and I'm shocked the market hasn't responded, but I can understand why with everything else melting down.

It would be cool if the market could take a look at this TIC data and understand what a vulnerable spot this puts the USD in.

Tomorrow:

Yes the madness will continue tomorrow as we get Housing Starts, Building Permits, and Crude Inventories. I have found some signs within my research that indicate we could see a USD+ print on the homes data.

Crude Inventories is anybody's guess. Over 92% of all energy production in the Gulf is shutdown right now. Ten platforms are offline. And the last I heard, there was still at least one oil platform adrift and unaccounted for. Be advised this data should cause added volatility.

The fundamentals may not be the only factors the market is responding to tomorrow, so be prepared for that.

EUR/USD:

If you're even trading the pair, you're definately taking some big risks. There are no real established price patterns, trends, or strong support and resistance zones being established.

The euro was quickly rejected out below the 1.4100 level but I'm not calling that a clear sign of support. The price action is erratic and not at all behaving the proper way. This morning it took a 50 pip nosedive in under five seconds. Never saw that before.

As for my trading I'm just taking quick hits on the market and attempting to limit market exposure under these extreme trading conditions. I don't need to be sidelined but the risk management is imperative.

All market correlations have gone out the window. Crude continues to plunge and is showing no signs of stopping. I still believe we can see the $88 level or lower on crude. Gold has been doing well and lending support to the euro. If gold's support gives way and corrects it would likely bring the euro down with it.

Wall St. will continue to weigh heavy on our market and on the EUR/USD. The Dow finished the day up 140 points but this doesn't mean it will have a strong day tomorrow. We still have to get all the details from the Fed on AIG. It could be a wild ride. The bulls may get some control playing off this AIG news... we'll find out tomororw.

The euro has shown some bullish signs the past few hours but this could easily change once we get into later Tokyo and then when London enters the market.

If you're trading, be smart with your trades and manage your risk with precision. Do not overleverage or get greedy.

update #2

2008-09-15T20:08:00.001-07:00

Conditions are deteriorating rapidly... Asian equity markets are getting slaughtered and crude is under tremendous pressure. Gold is also selling-off. We're seeing extreme risk measures being taken by the markets right now.

The issue with AIG is coming to the meltdown point. Moody's has downgraded AIG and should the firm fail to raise at least $75 billion they could be facing bankruptcy by Wednesday and this would cause catastrophic shocks across all markets in all corners of the globe.

It's my understanding the Treasury is trying to broker a bridge loan deal to help AIG stay solvent... more like a "bridge loan to nowhere". Keep you eye on this situation...

I forget to mention this in the update, but in addition to the FOMC we have several key fundamental events... out of Europe we have CPI, ZEW and out of the U.S. we have CPI, Core CPI, and TIC.

I've not done any normal research on those events as I'm focused on the FOMC and trying to keep pace of what's happening within the markets. But be aware we do get that key data throughout the morning and we have potential to see market reactions.

Trade Team Update - - 9/15/08

2008-09-15T16:00:00.000-07:00

Looks like just another boring, routine day in the markets...

This I can say, I now know what it's like to trade the GBP/JPY... with the euro making a 400-point top to bottom move in addition to recovering about 200 points in the middle, once again we see unprecedented and historical volatility and it's only Monday.

I warned you last night there would be chaos today but I honestly never expected to see the depth of these price swings. For today's update I'm going to first cover the most important aspects of what's going on with Wall St. as it directly relates to trading and the EUR/USD. Then of course we'll hit the FOMC as there's no bigger event this week.

Wall St.

When the Dow closes down over 500 points, you know it probably wasn't a great day... overnight Lehman Brothers, one of the largest investment banks on earth went bankrupt. The Treasury basically forced another mega investment bank, Merrill Lynch, into finding a buyer. That buyer was Bank of America.

Meanwhile, Lehman's stock price dropped 95% today and is basically zeroed out. The other meltdown occured with AIG which I believe is the largest insurance house on the planet. I know they have assets of $1 trillion.

AIG is actually the most critical of them all because if they fail the affects would be catastrophic and on a global scale whereas the global-wide affects of Lehman and Merrill are not quite as much.

AIG begged the Treasury for $70 billion and was turned away. Now why did the Treasury turn away AIG yet rescue Bear Stearns? I think the Treasury's balance sheet is incapable of taking on AIG's risk. Plus, the Treasury knows there's more failures to come in the next few weeks. So, what Paulson is doing is using his powers to broker a deal between Goldman Sachs and JP Morgan to hook AIG up with $70-$75 billion.

Here's the problem. If AIG doesn't secure that funding by Wednesday their securities rating will get downgraded. That's a big problem because banks and institutions are holding billions worth of AIG bonds and if those bonds get downgraded it reduces their value and that value reduction will cause a nasty chain reaction across all markets. I think this story is to be continued...

Wall St. equities closed below some key levels and unless the Fed does something Wall St. wants, it could be another ugly day. Keep an eye on the Nikkei tonight to see how Asia is handling the Wall St. debacle. Expect more volatility with the yen pairs. I urge extreme risk management if you are trading the yen crosses under these chaotic conditions.

This I can tell you -- all of these solvency and liquidity and writedown issues are rooted in exactly one thing: housing. When the U.S. housing market was on fire due to loose lending standards and tons of easy money from the Fed, these banks got greedy and overleveraged themselves thinking the good times would keep on rolling...

When housing started to take a sharp turn in early 2007 I think the losses snowballed on the financial industry. Housing has fallen so sharply that it's only served to wipe-out these firms almost overnight. We are talking about investment houses that have been in existance for over a century getting wiped clean in a matter of months.

Wall St. will not heal until the housing market heals. These investment banks and commercial banks and financial institutions will remain at highly probable risk of complete failure as long as house prices continue to drop, inventories continue to go up, foreclosures continue to rise, and we get through the next round of ARM raises.

The housing market must find a bottom in order for the bear market on Wall St. to get off the ground and get back in the fight. I see no bottom in housing. I see no sustainable signs of a housing bottom forming, and as long as the jobs market continues to contract I do not see housing finding a bottom and making gains.

Crude and Gold:

The EUR/USD and commodities were very disjointed today. Gold had a total mind of its own. Overall gold had a strong afternoon which gave the euro quite a bit of support to test back over the 1.4300 level which has been rejected thus far.

Yesterday I gave a crude target of $95 which was hit. I am still targeting a move to the $88 level. I think at certain points today crude and the euro were correlated but it didn't last long. Crude also has a mind of its own and that market is totally wacked right now. I just do not see the sell-offs stopping because it's too easy to make the money shorting it.

Of course, the FOMC could easily cause extended moves in commodities tomorow, so be on the look out for this as well.

FOMC:

Tomorrow's FOMC is by far the most important and critical so far this year. The FOMC could massacre the markets based on their rate decision and rate statement. Tomorrow holds a risk level of 10 out of 10... the trading conditions will be extreme. And the price moves may not make a bit of sense.

The probabilities for tomorrow have changed in less than 24-hours. Just a few days ago there was almost no expectation for another Fed rate cut. In fact, the probabilities were showing a Fed rate hike as their next move.

As of this afternoon, Fed Funds Futures was running a 66% probability of a 50bps cut tomorrow. I'm shocked to even consider that. 66% is not a a high probability but high enough to make you think twice.

I forced myself to watch CNBC today and there was overwhelming support for a 50bps cut tomorrow from the various commentators and guests. I also heard 25bps and 100bps cuts. They all presented a compelling case. A few said there would be no cut.

I cannot call a rate cut for tomorrow. There are two dissenting rate cut voters on the FOMC. They voted for rate hikes at the last meeting. Unless Bernanke forces them to vote for a cut I do not see those hawks doing a 180.

A rate cut wouldn't exactly solve some of the issues plauging Wall St. and plauging the consumer. A cut in the Fed Funds Rate doesn't really make credit for consumers any cheaper or easier to access. It may help the business sector, but overall a rate cut won't solve issues.

I could see the Fed cutting the discount window rate by 50bps or more. That would make sense to me. I'm not ruling out a Fed Funds rate cut. I don't see it happening but that's great if it does happen.

If the Fed does cut I don't think it would be any less than 50bps. If they are going to use up more rate cut ammo they will probably want to make a statement to the markets.

Of course the only thing we need to worry about is how the rate cut will affect the EUR/USD. Well, in a normal and logical world, a rate cut would be a terrible thing for the USD and would send the EUR/USD up a minimum of 200 points and likely much more.

As you know, nothing has behaved normal and logical the past nine weeks. I could see the markets interpreting a rate cut as a good sign for the economy and for the U.S. financial sector and this would instill confidence in the USD. Or, the other explanation would be that a rate cut showed continued market strains and the "safe-haven" money flows continue into the USD.

This FOMC event will be huge and will likely cause strong volatility. Should the Fed do the right thing and hold rates, the other key will be the FOMC statement. If the Fed follows their current trends, they should stick to the hawkish rhetoric on inflation and remain dovish on economic conditions.

With these newest developments on Wall St., the Fed may not want to say anything to spook the markets. Bottomline, I'm ready to see the unexpected and illogical happen should the Fed cut. If the market decides to do the right thing and hammer the USD, that will be great too.

EUR/USD:

The price swings we saw today were unprecedented as far as I know. It was very interesting to watch but not very interesting to trade in. The price action is not behaving with much order and it's really not possible to even know to be a bear or bull.

The euro is still showing some bullish price action signs just like it did last night before it ran up to 1.4480. Overall my trade will be very conservative, especially as we get close to the FOMC decision. I don't want to see my trades getting bounced around from profit to negative every three seconds.

1.4188 is still a very key downside level as well as 1.4350 being a key upside level. Trying to establish any levels in between is pointless as there are so many improbable factors influencing the Forex market right now.

The best thing to remember is the extreme risk in the markets right now. I do not encourage any traders to add new entries right now unless you plan on managing them very tightly. Unless it's a hedge trade feeding you equity, take your money and run...

We could see some movement after Tokyo opens depending on what kind of volatility is happening on the Nikkei. Be smart with your trades and practice strict risk management the next 24-hours.

EUR/USD Weekly Outlook 9/14 thru 9/19 2008

2008-09-14T14:30:00.000-07:00

Once again we have a volatile and chaotic week set before us… this week marks “round ten” between the heavyweights EUR and USD. The first nine rounds have belonged to the USD and the new champ is poised to continue commanding the fight.

That being said, there is risk on the USD and this risk goes by the acronym FOMC. But before we get into that, there are a few issues we need to cover and be mindful of, especially at the start of the week.

There are going to be three big issues to deal with between now and Tuesday’s FOMC… those issues are how the market intends on responding to the Lehman debacle, fallout from Hurricane Ike (economic impact), and of course issues within the commodities market.

Lehman:

As I commented last week, I still believe a multinational response will be needed to rescue Lehman in addition to the Treasury playing a role, even if it’s behind-the-scenes and kept secret from those not in the know and diminutive players like you and I. I don’t really care what happens to Lehman, their stockholders, or their reputation. My only concern is how the deal will affect the EUR/USD. Based on current trends I have to believe almost any deal is going to be USD favorable.

As of the writing of this commentary no official deal has been announced but I expect to hear something around Tokyo’s opening or before Wall St. opens on Monday. Paulson likes doing Sunday evening announcements to help his friends in Asia, so we may hear something soon.

The reason I believe the market will take the news favorably and USD+ is because this deal will just give the markets another false sense of hope and euphoria thinking that even though the Treasury can’t do a direct bail-out, they can use their unbridled powers to create a magical bail-out solution. They should start calling Hank Paulson “Walt Disney” because Paulson’s got a great skill for bringing fantasy to reality and influencing people to believe even their wildest dreams can come true if you just wish hard enough.

My hope is that the markets do the correct thing and punish the USD which should be the end result of this fiasco. Whether or not the markets behave the proper way is something no one can predict.

Ike:

Ike was catastrophic but at this point the damage and economic impact is still being estimated. There are no official numbers but I expect this to be quite a costly hurricane. The only thing we need to be concerned with is how the storm affected crude and gasoline production.

I’ve been getting conflicting reports on how Ike damaged the oil rigs and refineries. The U.S. Minerals Management Service said there were two confirmed reports of drilling rigs loose in the central Gulf of Mexico. Some refineries are reporting they’ll be shut down for nine days. Shell said they are already sending staff back to their crude operations.

The power outages could be an issue for the oil producers and refineries. Here in Tennessee I’ve already seen gas jump $1 or more per gallon and we have gas stations that have either run out of gas or are rationing just like in the Richard Nixon days before I was even born. I’m not sure how long this price gouging will go on for but it’s caused an uproar with consumers here in my neck of the woods.

Crude and Gold:

Last Sunday I promised crude would hit $100 during the week, which it did on Friday. Crude could be extremely volatile this week as we find out the state of the oil industry in Texas and as crude traders respond to this week’s USD and crude fundamentals.

Now if the USD fundamentals and FOMC continue to support the dollar this will only serve to put further downside pressure on crude and gold and this is certainly a valid risk for this week. As long as these conditions persist I see no reason why we can’t test below $95. Of course, the Fed could change the course of things very easily on Tuesday.

FOMC:

Although we have a week packed with key growth, consumer, production, employment, and inflation data, nothing is bigger than the FOMC this week. The past two weeks this idea of the Fed cutting rates again has been gaining steam.

The advocates and proponents of another Fed cut say Bernanke will cut at least another 25bps sometime between Tuesday and the end of the year. Other more wishfully-thinking rate cut proponents are saying the Fed will cut 50bps. And then there’s even a few saying the Fed will lop off another 100bps… we’ll put those folks in the delusional category for now.

I’m unable to make a rate cut call for Tuesday. The last two FOMC rate meeting saw two dissenting votes and although crude prices have come down and inflation fears have dialed back I do not see those two dissenters, who are known hawks, reversing their vote and opting for a rate cut. Unless all FOMC members are being forced to vote for a cut, I do not see Bernanke getting the support he needs to make it happen.

I expect to see rates held at 2.00% and I expect to see a relatively hawkish-toned FOMC statement. Besides the fact that the Fed manipulates data, they are extremely lagging with their monetary policy decisions. I’m not sure the massive deflation we’ve seen the past few weeks is going to be enough to cause the Fed to declare an end to their “war on inflation”.

The Fed should be dovish on the employment sector and that could certainly put some pressure on the USD. If the Fed talks up the retail or GDP sectors I’m not sure the market will buy it. Last week we saw evidence that the stimulus checks have run their course through the economy and will no longer contribute to over-inflating the retail sales and GDP data.

Now if the FOMC does pull a surprise cut, depending on the size of the cut, you can expect the market to move against the dollar. But, we’ll further discuss the FOMC and probabilities in Monday’s update.

EUR/USD:

At this point it is looking as if the euro will open higher on your broker’s platform than where it closed on Friday. Don’t forget the Forex market never closes and trading goes on between banks at all hours of the weekend.

Although our brokers closed us at 1.4218 on Friday, this weekend’s trading has moved the euro up at this point. If you’re one of the so-called “gap traders” exercise some caution and be smart with your trades because as you know we have many issues going on right now and we could see some heavy volatility and price swings between now and London’s open.

On Friday I warned not to add any new euro shorts and not to allow any euro shorts to fall into drawdown. I have to stick with this call at least until London opens. If the market does decide to slide down, so be it. But as for me and my trade plan, I cannot add new euro shorts and I have to manage my open euro shorts to prevent them from falling into drawdown.

Last Thursday we indicated some bullish signs had returned to the euro, mostly within the real-time price action. I will be continuing to look for these signs as we open up and trade through London. 1.4188 remains a very important key level. If we go back down to sustain a break of 1.4188, it leaves the door open to test as low as the 1.3818 level.

A sustained break above 1.4188 opens the door to test above the 1.4300 level. Be advised there’s quite a bit of resistance above 1.4350, so we’ll be watching the real-time price action and moves in commodities to keep a clear view on where we go.

These looming events we spoke about earlier will keep trading complicated. I think once we get passed the Lehman issue, we can then better focus on the FOMC for Tuesday and we can get a better view on where the market wants to take the EUR/USD.

As things further develop tonight I will update as things change and evolve. You know the drill – use strict risk and money management. Be extremely careful when our brokers open our platforms to the market. There’s been a tremendously amount of volatility and price swings already and it could easily persist once us retail players enter the game.

There’s blood in the water, the sharks are circling, and you can count on some serious attacks tonight and throughout this week… be smart with your trades… don’t take those knee-jerk trades and stay away from the revenge trading. Dumb money doesn’t make money.

Trade Team Update

2008-09-11T18:28:00.000-07:00

Although the EUR/USD hit a 1-year low and the USD Index sat comfortably above the key 80 level, this was minor news compared to moves with commodities, equities, and copious amounts of gossip, speculation, and conjecture on the fate of Wall St.

The Dow was a mess today... early this morning futures were down and this put an intense amount of pressure on the yen crosses with the weakness in the EUR/JPY putting downside pressure on the euro. Adding to the euro pressure was more gold sell-offs, crude staying weak to the downside, and more USD euphoria as it was looking like the Treasury was going to bailout Lehman Brothers.

Long story short, the euro basically followed the Dow around today as rumor after rumor hit the markets about who was going to change Lehman Brother's diapers. You can read the rumors elsewhere if you're interested, I won't waste time on that.

It's my opinion that Lehman is unable to secure a buyer and the Treasury has stepped in to use their powers to find an international player to bailout Lehman. It will likely be a major player in Asia, the Middle East, or a some combo of both. You can count on the Treasury offering some special "backroom" incentives to sweeten the deal and prevent Lehman from collapsing.

The Treasury has used up their bailout ammo. There's no financial institution America that has the capital or resources to bailout Lehman. Word that Bank of America was going to do it is ridiculous in my opinion. BOA can't afford it plus they have their hands full with Countrywide.

So, we'll look for word of an international player to step in and we may hear this announcement at any moment. As far as how the EUR/USD responds, your guess is as good as mine. It should be USD-, but I'm not counting on logic to prevail.

Fundamentally it was another battle of worsts between the U.S. and Eurozone today. The winner was the Eurozone even though the euro didn't beat up on the dollar. Our already abysmally weak Trade Balance got even more abysmal today. How the dollar can continue gaining with a bleeding Trade Balance defies sanity.

Today's jobs data was crap. The labor market is in a full-fledged recession and has been since January. The jobs sector is in shambles and there's absolutely no light at the end of that tunnel. Retailers and sellers of discretionary goods are going to have a depressing Christmas this year based on the state of the jobs market.

The Import Price Index was heavily USD-. It printed well below market expectations and shows a rapid decline in high prices. Dovish members of the FOMC will really like that piece of data.

While we're on the subject of the a negative dollar, this piece of news came over the wires a few minutes ago:

"(US) Reportedly, the US gov't is mulling putting the GSEs $5.2T of debt into the federal budget - The report notes that a conclusion has not been reached."

This is shocking. That's the most USD- negative rumor I've heard all day. If the Treasury is allowed to add further burden on the U.S. taxpayer by holding them responsible for all $5.2 trillion of their fellow taxpayer's mortgages I can't possibly imagine how the market will be unable to respond negatively to the dollar.

In a logical world this move should hammer the dollar but as you know we're not operating under logical conditions right now...

Tomorrow:

We have a huge day to close out the week. Eurozone Industrial Production which is likely to print at or below expected. The big data is U.S. Retail Sales and the Michigan Sentiment. Based on my research I have to believe the retail data will print with an upside surprise. Those are my expectations.

Be advised that the EUR/USD may not be most the under control of the fundamentals. There are other bigger and stronger factors at play as we've mentioned above. For example, if crude finally cracks that $100 level that may have a strong pull on the euro.

Speaking of crude, we have to keep an eye on Hurricane Ike as it's on a bee line to the Texas refineries and is expected to hit the Houston area hard. Houston is a very important energy center and financial hub. It also floods very easy so if Ike does what it's expected to do it could get nasty and good push commodities up.

EUR/USD:

As of the writing of this update I have no plans to add any new euro shorts. Price action and order flow show a demand for euros this evening and these price action patterns are on the bullish side and something I've not seen in quite some time.

So now I need to keep watching and see how things play out because it's been awhile since I've seen the euro show bullish signs. I don't want to see any euro shorts go into drawdown at these lower levels. I will not let that happen.

With the level of heavy euro shorting that's been non-stop for the past few weeks we know there are a ripening harvest of stops sitting right above the 1.4050 level and higher.

Tonight or tomorrow would be a great opportunity to run those stops and allow the brokers to add to their netcaps and help make their weekly reports look good. Just some food for thought...

That being said, at this point I am not looking to take any euro longs. I need to see some real confirmation that this strong downside momentum is easing and that market players have returned to buy the euro.

Tomorrow's Friday so expected heightened volatility and wild price swings as we close out the week. If the Treasury doesn't announce their Lehman bailout plan tomorrow, they may hit the markets with the news on Sunday right before Tokyo opens. I guess it all depends on how fast they can broker a deal.

I didn't take a single trade today and I may not take one tomorrow in order to keep strict risk management on my accounts. For me it really all depends on how the price action is responding and how things play out on Wall St.

You know the risks that are in the markets right now, so please use strict money management under these extreme conditions.

Trade Team Update

2008-09-10T17:35:00.000-07:00

We certainly have a lot to cover today... it's almost hard to know where to begin as there's so many crucial things happening across the globe in all markets. So I give you my best attempt at tying everything together to hopefully make sense of things as they stand right now...

I suppose we should start with our good friend Jean-Claude Juncker. It seems he wanted to make a certain point abundantly clear... At 0640 EST today, Mr. Juncker told the markets:

"The euro remains overvalued in real terms".

That got the ball rolling for today's round of euro, gold, and oil sell-offs. Gold took a nasty beating today losing over $35. Oil managed to keep its head above the $100 level.

The dollar hit a 1-year high on the USD Index as the 80 level was breached. 80 is a tremendously key level on the Index and a level we must monitor closely. I see the potential to move to 82 or better as long as these conditions persist in the short-term. If the resistance at the 80 level sustains a clear break we could see some rapid dollar appreciation. Be advised.

Equities are continuing to make rollercoast moves... Wall St. had a good day, the financial stocks had a good day, and traders somehow forgot our banking and financial system is on the brink of collapse.

Beyond Fundamentals:

I don't know about you but I'm the type of person that I have to put my heart and soul into whatever I do and I have to learn as much as I possibly can to gain the advantage.

I've spent more time connecting the dots than I have trading this week. These are just my opinions and thoughts of course, so take them with a grain a salt.

At the risk of sounding arrogant, one place I started doing research was with my own market analysis and commentary. The past two weeks we've heard a lot about the "global recession" that the world is suffering from. The so-called global recession is being blamed on several of the issues we're seeing now, especially within the commodities market.

Recession -- After yesterday's abysmal ISM services data, once again the markets were talking recesion... not just the U.S. recession, but a global recession. These recession fears are real, not unfounded. Fundamentals point to true recession happening. The problem with this recession issue as it relates to the euro and the dollar is where things get a little weird and tricky.

I'm still firmly believing that a full-blown U.S. recession will negatively impact growth in Europe and will negatively impact the value of the euro and will negatively impact demand for the euro. Logic would tell you that a U.S. recession should keep the dollar under the gun and keep it weak against higher yielders like the euro, but almost by the day I'm more convinced the dollar is somehow going to come out smelling like a rose as the year rolls on.

And here's where I start thinking like a bank would think -- if the U.S. causes a global slowdown which would directly effect European growth, are the banks going to be as over-the-top bullish on the euro as they were in 2007? No way. Much of the euro's strength is built upon strong growth fundamentals, a very hawkish central bank, a central bank that so far has been very tight on monetary policy and hawkish with rates.

At the same time, the euro rose to stardom the past few years on the back of the U.S.'s weakening fundamentals and the fore-knowlege from the banks that the Fed would eventually have to slash rates. In addition, the EUR/USD was bolstered by rising gold, rising oil, lower bond yields, and skyrocketing equities markets.

But in today's market landscape, we need to paint a different picture... many of those factors that have compelled the banks to keep buying the euro and to keep pushing it higher against the dollar are turning the other direction...

We've said it a million times, but growth in Europe is slowing and will keep slowing -- the European fundamentals will be weak this year overall. The ECB while remaining hawkish on price stability, will have to cut rates later this year because Trichet eventually will have to address Europe's growth issues and the only way central banks deal with slow growth is to cut rates.

If we do fall into recession, commodities should level off or decrease in value. Equities may have a tough time this year. And if the markets decide to go heavily into risk aversion mode, this usually means they flock to so-called save havens like U.S. securities, and believe it or not, the USD.

I hope you don't think we're beating a dead horse here, but I just want to explain why our concerns about the euro are mounting as the year rolls along. I want to state our case clearly... and give you some food for thought.

I'm sticking to this analysis as one of the main catalysts for the rapid rise in the dollar, the rapid fall of crude and gold, and the meltdown we've seen in the markets.

The second to last paragraph there sums it up completely.

Tomorrow:

We have a big day tomorrow... Trichet speaks, Fed Kohn speaks, and we get key Trade Balance, Initial Claims, and Import Inflation data. This may sound shocking to those that know me well, but the USD fundamentals are of little circumstance to me right now.

There is such a ferocious demand for dollars right now, a crappy Trade Balance is not likely to hold the dollar back but rather just give another good short opportunity.

I believe Trichet is fully supporting this sharp decline in the euro therefore he puts the euro at risk tomorrow. As long as he continues to allow top ECB officials like Juncker to run his mouth and make comments that are unheard of for any central banker to make, he's going to keep supporting this euro drop.

Where was Juncker when the euro was at 1.6000 or 1.5000 even? Do you think it's a complete coincidence that Juncker makes shocking comments knowing the market has a severe appetite to buy dollars and sell euros? This is manipulation at its finest.

EUR/USD:

On Sunday I mentioned that there is a vicious demand for dollars which has helped lead to this massive dollar appreciation. Some didn't believe me. Fair enough. So, if you want some evidence, here you go:

This morning the ECB alloted USD$10B in 28-day fixed rate tender.

To put this in simple terms, the ECB auctioned off "Benjamins". $10 billion doesn't sound like it's a wild demnand for dollars, but you have to know the rest of the story... the ECB recieved $43 billion worth of bids for that USD$10 billion. That demand ratio between allotted amount and bid amount is off-the-charts. And it's wildly USD+.

Banks want cash, they need cash, and it's dollars they are after. This is a big reason why we can see the dollar gain 300 pips in a day on the euro.

As far as trading goes, I'm still shorting the rises and absolutely refuse to take a euro long. All of my downside targets are still intact and I see no bottom at all whatsoever forming.

Crude is a mess. To put things in perspective... we have a Catagory 3 hurricane headed for the oil rigs in the Gulf, we had mega crude+ data today, we have well respected traders saying crude is going back to $150+, we have OPEC cutting production by half a million barrels a day, and we have geo-political tensions all over the map yet crude continues to fall. I think you can see where I'm going with this... look for $100 or lower by Friday.

Gold is an even bigger mess and I see no support for gold. It's possible we see some buyers sub $750, but as I promised last week, gold is very likely to hit that $750 target and go even lower.

With these tremendously bearish conditions within the commodities market I can't possibly see a bottom forming on the EUR/USD. In my view it's going to take some shockingly strong euro fundamentals and some unexpected dovishness from the Fed to slow the dollar's rise.

There's literally not a single market correlated variable working for the euro right now. I see no signs or signals and I will not buy the euro.

On a different note, the NZD/USD short call is off to a strong start... just like the aussie call, the kiwi call was a pure fundamental play, following RBNZ interest rate policy. The RBNZ did a surprise 50bps cut and this is an even more bearish sign for the kiwi than first expected.

As for me, I took shorts at 0.6618, 0.6566, and 0.6564. I plan to hold them on a swing basis just like the other interest rate trades that I take. Those fundamental plays are just too easy to pass by.

Now if I see a potential meltdown in equities I may even look to add some heavy shorts on the USD/JPY, but we'll see on that one...

That's it for now. If I see any further developments in the market, I'll post. As always be smart with your trades and your risk because won't be getting back to normal any time soon.

Trade Team Update

2008-09-09T18:36:00.000-07:00

To be honest I'm not even really sure what to say about all these events happening and resulting chaos in the markets. You can read some really great articles at the Financial Times if you're not able to watch the markets all day long.

For the rest of us that do this full-time I don't see a whole lot of mystery here and things are very self-explanatory. We knew this madness was coming and we know it's not going away anytime soon.

Tomorrow:

I hope I'm not catching the market madness that's going around the trade rooms of the world but I'm sensing there's a high probability the euro takes another extended leg down between tomorrow and Friday.

Tomorrow's big event is Trichet of course. He speaks right as London opens and he will be testify before a government panel on economic and monetary issues. This certainly puts the euro at tremendous risk because as we talked about before last week's rate meeting, I do not see there is much Trichet can say to help the euro. And that the higher probability is that his comments will hurt the euro. Same potential holds true tomorrow.

The other factor tomorrow will be the Crude Inventories. I'm still calling $100 or lower crude this week. We dipped below $102 and I believe if the data prints negative for crude that we can hit the target.

Gold certainly has more room to drop. Just a few days ago gold was able to hold onto gains above $800 but this is no longer the case. Should crude break the $100 level this could easily spark a strong sell-off in gold and then in the euro. Be advised.

EUR/USD:

Today's housing data printed strong to the downside, exceeding my forecast. There was almost no move against the dollar based on this abysmal housing news. It's signs like that keeping me shorting the euro because it takes away any potential to form a bottom.

The weakness in commodities will also prevent the euro from finding a bottom. Simply put, the euro will not stop falling until crude and gold stop selling off. If crude has to test the low $90's or high $80's, the euro is just going to keep falling with it until crude buyers emerge and the bulls are firmly in control of the game.

As far as trading goes, I've been using price action to make a certain move and it's been paying out beautifully. Basically, whenever we retrace back up close to a round number, I short. For example, on Sunday I shorted at 1.4406 and 1.4412. Today I shorted at 1.4195 and 1.4216. I've been taking those kinds of trades on those types of moves for the past week and a half and as I said, the results are been awesome. You may want to look for those opportunities as long as these types of conditions continue in the short-term.

Tomorrow's trading is looking to be volatile in all markets across the board. We could easily see another extended move with the euro tomorrow as all the big players to continue to re-position themselves, liquidate positions, suffer margin calls, redirect money flows, and pour liquidity into certain sectors.

My trades will be nothing but euro shorts for the next 20-hours unless the market shows me otherwise. If I see opportunities on other pairs like the yen I may even short those especially if the equities market moves in a way to cause pairs like the USD/JPY and EUR/JPY to fall.

There's a RBNZ rate decision this week and I will likely look for an opportunity on the NZD/USD, especially if they do a surprise and cut more than expected. If a shocking rate cut occurs you can be sure I'm going heavy short on the kiwi for at least 200 pips.

If these confusing market conditions are screwing with your trading you may want to look for those types of opportunities to take a trade that will actually follow the fundamentals and respond logically. Plus, trades like those based on interest rate decisions are great because they grow quickly and can be used to cover losses on another trade(s).

Even though the Bears are firmly in control this doesn't mean you can go heavier on your trades. I encourage all traders to practice strict risk and money management even when the trade seems like a no-brainer because things can turn quickly in this market.

Be smart the next 20-hours...

OPEC update

2008-09-08T19:28:00.000-07:00

I forget to mention tomorrow's OPEC meeting... this is likely to cause volatility and price swings with crude which means the euro is likely going to follow it up or down.

OPEC oil ministers from all over the globe have been running their mouths today... from the wires:

Libyan Oil Minister: Oil market is over supplied at present, OPEC members must respect production quotas. Expects oil prices to rise slightly after the OPEC conference in Vienna opens tomorrow.

Kuwaiti Oil Minister: Oil inventories are building, reiterates that there is no need for OPEC to cut output in Vienna tomorrow.

Qatari Oil Minister: Oil market is oversupplied, economic woes will reduce demand, OPEC's decision tomorrow will not be affected by hurricanes in the Gulf of Mexico.

Indonesian OPEC Minister: OPEC does not need to cut output at Vienna conference, sees $80-90 price as acceptible.

UAE Oil Minister: global oil markets are well supplied.

Kuwaiti Oil Minister: There is no need to cut production at the next OPEC meeting.

Nigerian Oil Minister: OPEC should hold production steady unless a substantial change occurs in the market.

Libyan Oil Minister: Studying Venezuelan proposal to lower OPEC oil output as the oil market is oversupplied.

Be advised of this event and be prepared to expect the unexpected from this meeting...

Trade Team Update

2008-09-08T16:25:00.000-07:00

Well if you traded today you were a part of history whether you liked it or not... we had a historical downside move on the euro, one of the biggest defaults and bankruptcies in U.S. history (Freddie and Fannie), and the start of the largest taxpayer-funded government bailouts any market has ever seen.

As far as the euro is concerned, I've never seen anything like today. i was short 1.4406 euro short last night and closed that short on most of my accounts for modest gains because I never saw this violent and extended move happening today. Over 350 pips top to bottom is unprecedented.

But just as the dollar was fast approaching the key resistance level of 80 on the USD Index, the EUR/USD stopped dead in its tracks and did an about face closing the day over the 1.4100 level.

I'm confident that 80 level must be tested again and I see no reason we can't break the 80 level. More on the USD Index in a bit...

Commodities behaved very weird today. With the euro losing that much ground I expected to see gold make a strong extended break of the $800 level and expected to see crude move down to about the $102 level. Didn't happen.

I'm not trying to overthink anything right now but what concerns me is that as the euro continues to lose against the dollar at excellerated pace, if commodities don't keep pace with the dollar's rapid gains, what's going to happen when crude and gold do decide to begin to violently sell-off?

This could easily lead to the euro taking heavy losses against the dollar should we have a perfect storm scenario of dollars being agressively bought and euros being agressively sold along with crude and gold taking heavy losses. Be advised that this potential exists in the short-term while these conditions persist.

The Freddie and Fannie bailout has brought out the crackheads in the markets. I'm not going to waste any time commenting on this issues. What I said yesterday was enough and if you want to learn more I suggest you read up on this at the Financial Times.

As we suspected the bailout would likely give the USD another boost. Sure enough. I won't even try to predict how long the boost will last. These markets are so disjointed and continue to be ill-liquid.

Liquidity has not returned to the market and I believe this is mostly due to the fact there's a considerable amount of risk aversion happening in the markets and the other fact that hedge funds, banks, and financial institution aren't investing or trading because the risk exceeds their pain threshold and lack of liquidity.

USD Index:

The USD Index will not quit and is not being stopped at any resistance points at all whatsoever. 80 is the next resistance point I have for the USD Index. Based on the real time price action and price momentum to push lower, if 80 sustains a break I believe a test of 82 is possible.

I'm sure there's som techs you could throw on a USD Index chart if you're into that sort of thing. But, if you're like the rest of us and looking for signs of a bottom on the EUR/USD you may want to watch the USD Index as a guide. I will be watching it.

Tomorrow:

We have two big fundamental events tomorrow -- Pending Home Sales and Bernanke. I believe we'll see a USD+ print on the home data, but even if it prints at or below expexted I do not see that as a catalyst to slow the dollar down. The market is so thrilled with Paulson and the Treasury that they think the housing market is now at a bottom and that the bailout is going to magically solving the rest of the issues in the housing market.

Well, the bailout is not going to stop foreclosures, it's not going to reduce the supply of unsold homes sitting on the market, it's not going to stop home prices from plunging, and it's not going to solve the sharp decline in home-equity lending which is a vital part of credit and growth expansion.

The other wishful thinking going around the markets right now is some idea about the Fed cutting rates by 25bps this fall. This idea is something I have to laugh at. There are at least two FOMC voting members who not only voted against a rate hold but they wanted a rate hike. Even if the Fed did cut rates the EUR/USD might go up 200 pips and then get slaughtered again. If you're depending on a Fed rate cut to get out of euro longs, you might want to think of plan B.

Bernanke speaks tomorrow but not about the economy. This does not mean he can't use the platform to say something he's not scheduled to speak on, so be aware of that.

EUR/USD:

I really don't have anything special to say about the euro. Nobody is buying it. It cannot sustain any momentum to break through resistance and climb back up. The fundamentals are against it, commodities are against it, the ECB is against it, traders are against it, and banks aren't demanding it.

I see no signs of a bottom forming and I see no reason to take any risks buying it. I'll continue to short rises and hold all my best shorts for more downside.

Today my 1.4188 target was reach and well exceeded. As long as we maintain a sustained break of the 1.4188 level 3983 and 3818 come into view as my next downside targets.

If we can magically move up to sustain a break of the 1.4188 level we will likely struggle above 1.4200 and I may add more shorts there depending on how the market looks when this happens.

Volatility should increase after London opens and when we get data throughout the morning. At this point I see no reason or indication we can't continue to go lower and test USD resistance levels.

Risk and money management is paramount if you are trading under these conditions. It's the best defense.

EUR/USD Weekly Outlook 9/7 thru 9/12 2008 part 2

2008-09-07T14:07:00.000-07:00

You may hear a lot of traders saying the euro can’t possibly go down any further but I’m not one of them. I do not believe in the bizarre idea of “overbought” or “oversold” or any of the other garbage traders and analysts perpetuate to support their bias.

The dollar will be “overbought” when the market’s appetite and demand for dollars slows down. There’s no chart or indicator on earth that can predict when central banks, hedge funds, banks, financial institutions, and traders are going to stop buying dollars and or selling euros. Anybody who thinks a line on a chart is going to reveal this is delusional.

For two weeks I gave a downside target of 1.4352 and last Sunday I said we’d hit that target during the week. The target was reached and exceeded by the time we closed on Friday. The next target I gave was 1.4188 after the break of 1.4352. The 1.4188 target was missed by 10 pips as we made a low of 1.4198.

Now fundamentally the dollar can be under some pressure this week as we get housing, retail, consumer, growth, and inflation data in addition to several speeches by Trichet. If housing and retail fall short of market expectations I would expect some pressure gets taken off the euro.

What will keep pressure on the euro are commodities, surprise rhetoric from the ECB, and the potential for an illogical reaction to news of a government bailout. I do believe crude will have to touch the $100 level and it could easily happen this week as long as market conditions continue staying aligned to support the dollar.

Not only do I believe crude can touch $100 I believe we can dip into the low $90’s. As far as gold is concerned I see no reason why it can’t test the $750 level or better. These moves may not happen this week but I see them happening in the short-term view.

There’s going to be a lot of gold bugs running around talking about gold going to $1000 or better by the end of the year but please don’t get sucked into these unsubstantiated conjectures. Most of those people have an agenda for saying gold’s going to $1000 or $2000 and it’s because they have something to sell.

Fundamentally, it’s going to continue to be a “battle of worsts” between the EUR and USD. Based on current data trends and patterns there’s a higher probability that USD data prints to the upside compared to how EUR data will potentially print.

Friday’s NFP was a mess just as we suspected it would be. Friday’s loss of 84K job brings this year’s job loss total to 550K. Unemployment jumped to 6.1% which is the highest number in five years. Why didn’t the dollar get hammered?

The dollar didn’t get hammered because the markets are viewing these job losses as a sign of companies positioning themselves for growth and recovery in 2009. If that logic and thinking makes sense to you, that’s fantastic. It makes zero sense to me and I don’t see how it’s a good thing to have an economy bleeding jobs. This means fewer consumers, less credit and growth expansion which only cause further job losses.

All I can really say is, as traders now is not the time to loose the mental battle or get sucked into the insane speculation by those who have a product to sell or by those who’ve already lost the mental battle and are talking out of another place than their mouth.

Please don’t go down that road. If you go off the deep end with the rest of the herd your trading is going to suffer, your ability to think and reason rationally is going to be hindered, and you’re probably going to drive yourself nuts. Is it worth it? If you’ve lost or you’re in the process of losing the mental battles to the markets go on sick leave and return when you’re ready to get back into the fight.

Trading:

The first thing we need to do is learn exactly what the Treasury’s game plan for Freddie and Fannie is and then to see how the market responds. Let’s first get past this event and that should make things a little clearer at least for the short-term.

I do believe quite a bit is riding on how things play out with the Treasury and the affects will be felt across the board in all markets and sectors of markets… currencies, commodities, equities, and securities. The Treasury’s bailout is not going to be called a bailout of course. The Fed and Treasury are going to spin this one in a way that makes it sound like the taxpayers are off the hook, that the federal government is not bailing out a financial institution, and that the Treasury’s function is to save investors from losses.

I’m sure Hank Paulson has brought in a top Madison Avenue PR firm to ensure this bailout is as smooth and orderly as possible. The former chief of Goldman Sachs knows how this game is played. Paulson knows what Wall St. wants, what Bernanke and Trichet want, and he knows how to manipulate the markets to meet their agenda.

As far as trading goes, my trading game plan will be largely dependent on what the markets are showing me, especially the key market correlated variables. I do not expect the markets to return to order this week or to function the proper way. I expect chaotic and illogical trading conditions and price action to continue behaving improperly.

I know some traders just want to be told to either go long or short and exactly where to go long or short and then exactly where to exit the trade and bank the profits. If your trading is fully dependent on me or anyone else giving you this info you’re going to pay a hefty price.

As I said, I’m taking one day at a time. I see no need to over think things, to succumb to outlandish conjecture and speculation, or to trick my mind into seeing things that don’t exist. I have no reason to think the intense volatility and massive price swings have to come to an end. I don’t see a bottom formed on the EUR/USD or on commodities. I can see it falling further this week and in the short-term.

We may need to see the 80 level on the USD Index tested before the euro can do any retracing. We may even need to go higher than 80. We may need to break the 1.4000 level on the EUR/USD before we find any real support. The point is, do not rule anything out.

The best weapon you can use to attack the market from a defensive position is strict risk and money management. Under these market conditions that’s all that we as traders have – smart risk management.

I haven’t made the smartest decisions the past seven weeks. If I could go back and do it all over again I’d do some things differently. That being said, I don’t beat myself up over moves I’ve made in the past, rather, I look to do things better and smarter in the future. All the mistakes and bad moves I’ve made this summer can be blamed on one thing – me.

I’ve hit my tolerance threshold of trader’s that are blaming everything and everyone on their losses, margin calls, and drawdowns. Unless somebody hacked into your account and placed buy and sell orders, nobody but yourself is responsible for the situation you’re in, bad or good.

It’s funny how traders are thrilled and quick to take credit when a trade goes their way but as soon as a trade goes against them they instantly look for somebody else to blame. If you’re going to play that flip-flop game play it somewhere else because this is not the place and you won’t find any shoulders to cry on here or anybody to accept blame.

If you think I suck and my forecasting sucks go somewhere else, I don’t care. If you’re tired of the crap on other Forex websites stop going there. If you’re tired of hearing the mindless insanity on CNBC, stop watching it. The point is, you’re a trader so start acting like a trader.

As many of you know I put a tremendous amount of time and energy into this market and into staying one step ahead of the market.

Bottom-line… market conditions can get crazier than they’ve been, the euro can keep tanking, commodities can keep tanking, and the Fed and ECB can continue saying shocking things that catch the market off guard as long as it enables the market to do their bidding.

Risk and money management disciplines are absolutely imperative this week. Expect the unexpected and be prepared to see actions and moves not witnessed by the markets in some time. Obviously the market’s not even opened yet but as things come into better view I will update accordingly.

Please be smart, do not make knee-jerk trades, do not overtrade, do not revenge trade, and be vigilant with your entry sizes. You know the drill and you know what’s at stake…

EUR/USD Weekly Outlook 9/7 thru 9/12 2008 part 1

2008-09-07T14:04:00.000-07:00

The summer session is officially over and all market players should be back at their desks and ready to go. Unfortunately this does not guarantee market conditions will stabilize and return to order.

We’re entering our ninth week of an ill-liquid and dysfunctional market. The prior eight weeks have given us historic moves never before seen by the markets. At this point I do not see any reason why the chaos will stop now.

A couple weeks ago we talked about the potential of a big event or several big events going down sometime after Labor Day. As I’m sure you’re aware, the big story today is the Treasury’s plan to rescue Freddie and Fannie. It’s now official that the government has taken over Freddie and Fannie.

This bailout of Freddie and Fannie will be called “temporary” and will be spun as a brilliant move by the Fed and Treasury to divert financial disaster… you can tell your daughters fairytale’s really do come true because this move is one of the biggest fairytale’s I’ve ever heard in my life and now it’s a reality.

Here’s a 30-second overview of what Freddie and Fannie are. They are entities basically partially owned by the U.S. government. They are the holders of 50% or more of all home loans originated in the United States. Freddie and Fannie buy home loans from banks and banks use the cash generated from these debt sales to loan money to other investors to continue the process of credit expansion.

Freddie and Fannie raise cash by bundling up home loans and creating bonds and then selling bonds to financial institutions in addition to being publicly traded. So, we have Freddie and Fannie buying mortgages that have gone into foreclosure which means the bonds they’ve sold financial institutions are not worth the paper they’re printed on. I think you can see the issues here…

Here’s the scary part you probably won’t hear on the mainstream news… the fact that the Treasury took over control of Freddie and Fannie means that the government has an almost unlimited debt ceiling. The only other option would have been to pump equity into the two companies but that would have put limits on how much taxpayer cash could have been utilized. Now with this plan it means the Treasury can pump in the cash equivalent of the national debt – trillions of dollars. Think about that for a moment…

Freddie and Fannie equity holders will suffer. Dividends will no longer be paid and it’s likely their stock will be zeroed out and this very well could send shockwaves on Wall St. and on the global markets.

The big question is how this bailout move will affect the EUR/USD. There are a few possibilities. It would be great to be able to clearly see the exact answer. Market conditions have been so disorderly the past few weeks I can’t rely on expecting things to play out as they should but to expect them to defy logic.

The dollar has been on a historic and unprecedented rise across the board on all currency pairs. The dollar is climbing up the USD Index chart like some crappy pop band on the Billboard Hot 100 list. One possibility is that the Treasury’s bailout of Freddie and Fannie will only further strengthen the dollar because it will show the markets that the Fed and Treasury aren’t going to let any mega financial and credit institutions fail.

The markets will be lured into a false sense of security and will trick themselves into thinking they have Bernanke and Paulson’s shoulders to cry on. The euphoria created by Paulson handing Freddie and Fannie a checked signed by the U.S. taxpayers and then hyped up by CNBC and Bloomberg could easily add new value to the dollar.

In February when the Fed stepped in with JP Morgan to bail out Bear Stearns the dollar took a nasty hit. At that time though the fundamental landscape of the market was different and the euro was at the start of another strong bull run against the dollar. Fed and ECB monetary policy were different at that time as well. The Fed was still in a rate cut cycle and the ECB was still in a rate hike cycle. Those conditions don’t exist anymore.

Logic tells me that a government bailout of a financial institution should be terrible for the dollar. It should cause a strong move against the dollar. Let me be clear – if the markets respond the proper way to this move, the USD will take a hit. But, as market conditions are now I cannot rely on the market to respond the way it is supposed to, so once again I’m expecting the worst and will be thrilled to see the best.

Another reason this bailout may strengthen the dollar is because in one respect it could be viewed as another event contributing to the sharp deflationary season the markets and central banks have miraculously found themselves in the past two months.

The billions of USD that were lost in the winter and spring have helped contributed to the dollar’s surge and instantaneous appreciation this summer. There’s a vicious appetite for dollars, as you very well know. This vicious demand for dollars as it relates to the diminished supply of dollars has helped fuel this historic appreciation of the dollar.

If Freddie and Fannie’s equity gets zeroed out, this will cause a chain reaction of losses. Hedge funds, global financial institutions, and even central banks that are holding paper from Freddie and or Fannie will take a massive hit. This round of USD losses could easily add more fuel to the supply/demand situation we have the USD.

EUR/USD price action from the prior seven weeks supports this possibility because there’s literally been no demand at all for euros. Nobody is buying euros. And when I say nobody, I mean nobody of market-moving significance. The EUR/USD price action tells it best.

Last week several of what I call “B-list” central banks like Brazil, Indonesia, India, Taiwan and a few others intervened in the open market to halt their respective currencies from their massive depreciation against the dollar. These B-list central banks are fighting a losing battle because of the global demand for dollars right now.

There is no solid fundamental basis for the rise of the dollar. The fall of the EUR/USD has certainly been hastened by the Eurozone’s weakening fundamental situation but the bulk of the blame cannot be put on Europe. Now, it certainly doesn’t make matters any better when top ECB central bankers hate on their on currency and call the euro “overvalued”.

Why would the ECB want to see the euro depreciate? There are a few good reasons… the depreciating euro contributes to declining commodity prices which contributes to price stability, it bolsters exports, it relieves political tensions and quiets outspoken critics of the ECB’s tight monetary policy, it gives Trichet more flexibility to keep rates at 4.25%, and it levels the playing field on a global basis. It just relieves a lot of headaches that were caused by the strong euro and the USD Index moving towards a sustained break of the 70 level.

This is all well and good but the rapidly appreciating dollar is going to create a new round of negative affects on the U.S. economy if it’s allowed to persist. While the dollar was worthless the U.S. economy benefited by selling more big ticket items which helped support GDP and overall growth conditions.

U.S. exports are going to take a hit which means the already abysmal Trade Balance and Current Account will take a hit, and all three of those factors are very USD-. Add to the fact that global economies are strangled with high inflation, slow growth, and recessionary characteristics. This means global demand for U.S. exports will slow because global need can’t keep pace with supply.

Can you see why these are such complicated and confusing times were in? The Fed and ECB will be thrilled to see crude break $100. But with supply and demand issues pushing crude down, this pushes the dollar up. The question is how comfortable can the Fed get with the strengthening dollar? What is the Fed’s tolerance? I can’t answer that question but at some point the rapid dollar rise is going to further complicate near-term monetary policy.

I could sit here and write a novel making a case against the dollar’s rapid rise and making against why it should stop. I could also make a case for the rapid decline of the euro and why it will persist in the near term but I don’t see the point in doing that.

For me I’m just taking one day at a time. I’m not even trying to make sense of everything but rather just to keep pace with what’s happening on a daily basis.

CONTINUE

2 Ways to Get Out of Debt

2008-09-05T18:11:00.000-07:00

Are you trying to get out of your mountain of credit card debt and afraid of filing chapter 7 bankruptcy but just cannot find the solutions? There are many ways to get out of debt, but there are really only two solutions to get out of your credit card debt. Here are your options for debt relief

The first solution to pay off credit card debt is earning more cash, so you can pay off your credit card debts faster. The second solution to get out of debt is spend less than you earn. The best solution is to combine both methods to accelerate quickly how fast you get out of credit card debt. These are just two ways to get out of credit card debt and you can only do it with some discipline and hard work.

Trade Team Update

2008-08-28T18:24:00.000-07:00

Another interesting day in the markets... more fundamental smoke and mirrors, more ill-liquidity, and something new that I haven't seen in awhile, but we'll talk about that in a moment.

Today was all about GDP... as forecasted GPD printed strong to the upside showing the economy expanded by a healthy 3.3% verse an expected expansion of 2.7%. Looks pretty good, huh? Wrong.

That 3.3% represents gains in two sectors: exports and consumer spending. Last quarter when the USD was at its weakest levels and pushing towards a sustained break of 70 on the USD Index, U.S. exporters were living the good life as the worthless dollar translated into strong foreign sales. In addition, the stimulus checks contributed to the strong gains in the consumer sector.

So, on the surface this really looks like great news but if we were to strip out the gains made in the exporting and consumer sectors the economy would have likely only expanded by between 0.2% and 0.6% which is a far cry from 3.3%. The real GDP shows recessionary aspects when taken into consideration with the jobs and housing sector.

No matter though because Wall St. was sent into a state of euphoria this morning on the back of the strong GDP data. The Dow closed up +212 and we saw some downside pressure come of bond yields as money flows were sent into equities and out of securities leading to today's USD recovery vs. a euro that was looking very bullish prior to the data.

Before we move I also have to mention Initial Claims. The headline print was better than expected, but we still saw a print above well above the 380K level. The real story was the Continuing Claims which saw a worse than expected print by a wide margin in addition to seeing last week's data revised down. This claims data should make next Friday's NFP quite interesting...

New Correlation:

As I mentioned at the start of tonight's update, I saw something new today... not exactly never-before-seen, but something I've not witnessed in quite some time.

During today's London session and into early NY session crude and gold were on a mission, cruising through some decent resistance levels. They didn't go on a skyrocket to the top but over several 30-minute timeframes both commodities were laddering their gains which is a bullish price action pattern and not a false bullish pattern.

While crude and gold were making their gains the EUR/USD was sitting in an extremely tight range... the euro didn't move down, but it didn't move up either. Basically we had a fractured correlation and the price action was showing a real problem between the euro-gold-crude.

The problem was that the FX market wasn't buying into the moves commodities were making. Our market was viewing gold and crude's price action as a false bullish pattern and refused to take the euro up with them. This was blatant. Euro traders were not going to budge and the market said "nope, we're not going along for this ride".

This is to be noted. As I said, it's been ages since I've seen the EUR/USD watch crude and gold make substantial gains with no response. This could mean several things none of which are really a great sign for the euro in my opinion.

So now the key is to keep a really close eye on the EUR/USD price action and correlate that to moves in commodities as this will be a tremendously valuable trade indicator. If I see this non-responsive pattern get repeated over and over again this will cause me some considerable concern about buying the euro and shorting the dollar.

It could just be summer session antics and the symptom of ill-liquidity but it's going to be worth watching nonetheless.

Tomorrow:

We have a big fundamental day to close out the week. And don't forget almost no market players will be around tomorrow as it's the start of a holiday weekend. Expect extremely thin conditions and choppy price action!

Out of Europe we get the CPI Flash Estimate which I'm forecasting to print as expected. But be warned, a lower than expected print will likely put a serious amount of downside pressure on the euro. I don't believe the euro can handle weaker than forecasted CPI data tomorrow...

I'm forecasting all USD data to print USD+. Chicago PMI may come in weak, but I believe Core CPI and the Michigan Sentiment will reap the same benefits that retail sales, durables, and GDP have.

EUR/USD:

Just 24-hours ago the eur was display some incredibly bullish signs within its price action patterns. It did break above the 1.4800 level as I was expecting but as soon as we made each move above that level the momentum to keep pushing higher evaporated in the blink of an eye. Today's fundamentals and the sell-off that happened with crude and gold were the final nails in the coffin, sending us back below the 1.4700 level.

Now that those bullish price action patterns are gone I have to go back to a neutral bias for tomorrow's trading and hopefully the price action, fundamentals, and market correlated variables will give clues. If not, I'm not trading and will enjoy the weekend with piece of mind.

I really don't have a whole lot to see about the euro and trading at the moment. Tomorrow is going to be a ghostown in the markets as all the big players will be away and there won't be a drop of liquidity.

It is the end of the month so keep in mind that we could see profit-taking... if the bears want to close out profitible shorts this will be a positive move for the euro.

Be smart with your trades as we head into a holiday weekend. There could be some crazy shenanigans on Sunday when we open up...

Trade Team Update

2008-08-27T18:13:00.000-07:00

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.

Trade Team Update

2008-08-26T17:18:00.000-07:00

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.

Storm Brewing?

2008-08-24T17:27:00.000-07:00

I’m a skeptic al and analytical person for the most part. Anything that has to do with trading, economics, and forecasting are issues I take pretty seriously and am passionate about. I do want to discuss a few issues that have been on my mind the past few days.

This stuff might sound like I’ve gone off the deep end but I believe it’s worth at least some food for thought. There’s a few fundamental and geo-political issues sitting in the frying pan and as soon as the pan gets some fire put to it they could become explosive resulting in global financial markets being rocked.

Basically I just have this gut feeling that we’re going to deal with a catastrophic event(s) that goes down between Labor Day and Thanksgiving. War, bank failure, surprise monetary policy move by the Fed or ECB, manipulation of crude, or all of the above or maybe something I haven’t even thought was possible.

One issue is with the U.S. banking/financial system and overall credit conditions in the U.S. and the banking system’s tight correlation with Wall St. I’m convinced we’re going to see a major bank or financial institution failure during the third quarter. The fact that the housing market has yet to show one single sign of hitting a bottom means there has to be more bank writedowns and bank failures in the third quarter.

If Fannie and Freddie see their equity zeroed out and the Treasury steps in to save them this should halt the dollar’s rise to glory in its tracks and cause a sharp reversal. At the same time I’m also convinced several European banks will fail before the end of 2008. Somebody has done a really good PR job at hiding the issues with European banks.

When the first European bank fails and the media runs images of angry European pensioners with clenched fists demanding their money, the euro is going to take a brutal beating unlike many of us have likely ever seen. Basically there’s equal dollar and euro risk in my opinion in this regard of banking and finance.

The next issue that has me concerned will sound off-the-wall but I’m going to put it out there anyway. I have this feeling that Bernanke and Paulson know something crazy is about to go down in the U.S. financial market and they have used their direct access to the currency market and gold market to manipulate the value of the dollar in turn to bring down commodities and push up the USD Index because they know if there’s a catastrophic systemic shock in the U.S. financial market it’s just going to send prices back up.

There’s no way Bernanke, Paulson, and Trichet could have the EUR/USD trading around the 1.6000 level in the event a major financial shock hits the global markets in September or October. It would have created a dire situation for both the Fed and ECB.

Where my thinking gets a little crazy is that I believe it’s possible the Treasury might have to tell debt holders that the Treasury can’t pay and may have to offer some kind of buyout for pennies on the dollar. When I say debt holders I’m specifically referring to buyers of U.S. debt – bonds. I’m talking U.S. government issued bonds.

One of the reasons bonds are called securities is because they are considered “no risk”. The U.S. government has never once defaulted on paying a debt holder. If budget deficit or monetary reasons somehow for some reason prevent the Treasury from meeting their debt payment obligations the effect on the dollar would be disastrous and could even start a military conflict. I only give this less than a 10% probability of ever happening, but it’s something I’ve thought of anyway.

The next issue is a geo-political one. It’s about the tensions with Russia. The media is portraying Russia as the bully and the aggressor who stirred up conflict with Georgia. Well, my understanding of the situation is not how the media reports have portrayed Russia.

I believe the real story is that Georgia provoked Russia into conflict and Russia reacted the same way the U.S. would likely react if a neighboring non-ally overstepped their bounds. In recent years Russia has become a force to be reckoned with as their economy has rebounded and vast wealth discovered from their trillion dollar crude market.

And now we have an agreement signed between the U.S. and Poland to allow missiles in Poland about 150 miles from Russian borders. Of course this is going to make Russia feel threatened by both the U.S. and Europe. I think it’s an extremely aggressive move against Russia and it goes against what the Constitution stands for and is extremely arrogant of the U.S. to make this kind of move.

I really don’t want to see the U.S., Europe, and NATO force Russia’s hand this fall because the Russians could really complicate global financial markets if they wanted to. Putin is clearly pulling the strings behind the scenes and I don’t think the dude is joking around. If the Russians wanted to they could shut off Europe’s energy supply and it could be a cold winter in Frankfurt and points west.

I really don’t like the relationship that exists between Russia and Iran. But I can understand why a Russia-Iran partnership is mutually beneficial for both sides. It just bothers me that they are allied because collectively they could wreak some havoc in geo-political realm.

Those are some issues I’ve been thinking about and I believe could cause some chaos this Fall. I’m also sure we’re going to see a big bank failure or financial institution failure sometime after Labor Day. Maybe Fannie and Freddie will finally be put out of their misery and taken to the field and shot by Paulson and Bernanke. That should be a several hundred billion dollar tab for the taxpayers to pick up.

The U.S. budget deficit, current account, and trade balance issues put risk on the rising dollar. When is enough debt enough? How much more can the Treasury inflate the money supply and how much debt can we possibly sell to try to cover our deficit? How many more bailouts can we afford? Those issues are extremely USD- and it’s hard for me people are buying dollars so vigorously the past few weeks.

These extremely USD- issues have not gone away the past six weeks. The U.S. financial system is more unstable and on the edge of the cliff than they were last August went money markets went haywire. There’s absolutely no way the Fed can even dare to think about raising rates at least through the rest of this year.

The credit and equities markets are way too unstable for the Fed to raise rates, it would be a disaster. All you have to do is look at USD LIBOR rates and you can see that the Fed’s 325bps worth of rate cuts haven’t done their job yet. The housing, consumer, and employment sectors are still too much to the downside for the Fed to raise rates even though the inflation data tells us that Fed Funds should at least be above 5.50% right now.

How much more will the Fed allow the USD to appreciate? U.S. exporters, which have been the backbone of the Trade Balance will be screaming bloody murder if the dollar gains too much ground against the euro. If the USD breaks through the 80 level on the USD Index this puts exporters at risk and that puts the Trade Balance at further risk and I don’t believe this is a situation the Fed wants right now.

At the same time the depreciated euro makes Trichet’s job a whole lot easier. The dude is serious about inflation and with the euro dropping several hundred points vs. the dollar it gives him more leeway to keep the ECB’s key lending rate where it’s at and prolongs the process of starting the rate cut cycle.

Fundamentally, the crap is hitting the fan in Europe. It’s not going to be pretty from here on out in Europe as far as growth and production data is concerned. Recession has already hit in some of the Eurozone and will likely spread in the near-term. I’m very bearish on the euro’s fundamentals and the ability for Trichet to stay hawkish too much longer.

I think you can see where’ I’m going with all this. There’s a lot that could all go terribly wrong in the next few weeks and this means we all need to stay at the top of our game and manage risk with the precision of an orthopedic surgeon.

For me, the worst case scenario is that I just went off the deep end a little bit and over analyzed all the markets and erred on the side of strict risk and money management.

Last night we were watching the women’s 4X400 relay race and it was a classic. It came down to the last lap and the last few meters. The Russians were in the lead coming down the homestretch. Right towards the end of the race the camera caught the last Russian sprinter do something that likely cost her team the gold medal.

The sprinter took her eyes off the finish line and looked up to the video board to see how close the U.S. sprinter was. It was at that point that the Russian lost the race and the U.S. sprinter took control to win the gold for her team.

The exact same thing can happen in this market. Being careful with your trading and with your risk management strategies will be key in order to survive the next few weeks. I’m not even going to waste my time or energy trying to call a top or bottom under these conditions. It’s pointless in my opinion and it wouldn’t serve any purpose to how I actually trade the market. MIG, a broker from Switzerland made a bold call on the EUR/USD’s near-term range – 1.4300 to 1.7000. Now, that’s a way to take a stand and narrow things down…

It’s pretty simple… the markets are going to be razor thin between now and the first week of September. The price swings will likely be volatile and extended at times. Prices will be moved by data, commodities, Fed and ECB, and any geo-political events, so those are the areas I’m to stay focused on.

Be smart with your trades and please do not overlevarage.

EUR/USD Weekly Outlook - 8/24 thru 8/29 2008

2008-08-24T17:22:00.000-07:00

If you thought the past few weeks have been crazy, this week may exceed anything we’ve seen so far this summer. There’s about a half dozen or more key things happening in the global markets and around the world right now that are weighing heavy on the currency market. In addition, this week and next are going to be the most ill-liquid of the summer as it’s a holiday week for many in the U.S. and Europe.

One way that I can tell how liquid equities markets are is by watching their daily volume. Volume cannot be measured in Forex because there’s no central exchange, but with the Dow, S&P 500, and Nikkei I can see their volume. The volume levels on those equities exchanges are extremely low and have been dropping as the summer has dragged on.

As the volume and liquidity has dropped in the equities markets the volatility has increased… the rollercoaster rides have gotten wilder and this has translated into some of the volatility we’ve seen in commodities and currencies the past few weeks.

We have the factor if ill-liquidity to contend with this week in addition to the rising tensions between Russia the U.S., Europe, and NATO. Next we have the Olympics finally coming to a close which means China should re-open the factories and put production back online.

I have no way to actually verify if it’s true that China shut down all the factories in Beijing during the Olympics but if the theory is true this means oil consumption should pick up in the short-term. What is true is that China’s crude imports during the month of July were down by 7% which is quite a large measure in my opinion. I think it’s safe to make a clear correlation between China’s decreased demand for crude, the timing of this decrease, and the price fluctuations we’ve seen with crude since July and throughout this time during the Olympics.

If tensions with Russia heat up this week the oil market may respond because Russia is the world’s second largest oil giant. Russia also holds the power to cut off energy supplies to Europe. With cooler weather right around the corner its possible Russia may play that card if the U.S. and Europe overstep their bounds and force Russia’s hand.

Oil really is spending most of the time in the limelight and will stay in the limelight once again this week. On Friday oil took a beating losing $6 on the day. It was the second biggest drop in crude prices in the past two decades. Fortunes were won and lost during that historic move on Friday.

A $6 drop is huge but what does it mean? I don’t think it really means anything. In my view a move like that is so ridiculous and overextended it’s more just the result of heavy profit-taking in extremely ill-liquid market conditions and certain market players with decent liquidity taking advantage of market conditions to make easy profits by pushing the market around.

Fundamentals:

The other factor that will complicate things this week is the bulk of fundamental data we have on the books. It concerns me to have this much key data on housing, growth, inflation, consumers, retail, and monetary policy while the market is so ill-liquid and easy to push around. It’s imperative you practice strict risk and money management this week because the price swings and volatility at unexpected times is probable this week and next.

The U.S. housing data will also take center stage this week. Housing has been one of the main catalysts for the dollar’s demise over the past year and a half. If the housing fundamentals show signs of life this week, which I believe there’s a decent probability of happening, this should put an intense amount of pressure on the euro.

Out of Europe we’ll get growth, inflation, and consumer data which I have to take an overall bearish bias stance on. What I’ll also be closing watching for out of Europe is the rhetoric we hear from the ECB this week. The ECB has been trying to talk up the euro the past two weeks during this slide but their efforts have received little notice from market players.

The central bankers at the ECB are different from those at the Fed when it comes to granting media interviews and making sure their sound bytes hit the news wires. ECB central bankers are more accessible to the media and a little looser with their friends than their comrades at the Fed. I’ll be watching closely to see how the ECB plays the verbal intervention card the next two weeks.

Don’t forget we have the FOMC meeting minutes being released this week. This report will be closely watched by all markets for any signs or signals of coming rate hikes and on how the Fed is currently viewing inflation, growth, and the state of the credit and financial markets.

EUR/USD:

At this point I cannot take away my bias that more risk remains on the euro. In last week’s trading we had a 24-hour time period where the market made a genuine attempt to move the euro up and to keep it supported but by Friday afternoon those gains were returned to the dollar. One thing I did find interesting was the fact that the euro was able to stay above and close above the 1.4750 level.

With crude dropping $6 I was expecting to see the euro break the 1.4750 level but by some miracle it stayed supported in the 1.4770’s. This could be significant. I will be closely watching how the markets react when we open on Sunday.

It may just keep dropping Sunday and even break the 1.4700 level but that doesn’t necessarily mean that will be the trend for the week. With all the key fundamental data we have on the books this week plus with potential volatility within the crude and equities markets we have the potential to see quite a few up and down days. We could see a “trend” that lasts for less than 24-hours. I’m personally prepared to see the toughest challenge the market can throw my way the next two weeks.

The learning that is possible under these types of market conditions is priceless. With all these different fundamental, liquidity, and geo-political variables that are effecting the markets just imagine how much of a better trader you will be when the market finally stabilizes and returns to more orderly chaos.

That’s another reason risk management is imperative because as long as your accounts remain in the safe-zone and you’re not overleveraged you can focus your attention on all the lessons these market conditions have to offer. If I had to worry about managing an overleveraged account in addition to trying to make sense of the market and forecast its next moves I would be trading with anxiety, and that’s no way to trade.

Trade Team Update

2008-08-18T16:57:00.000-07:00

We certainly had an interesting start to the week... the euro mostly stayed in a range that was pretty easy to trade -- buy the dips, short the rises, no-brainer stuff. The markets are mostly waiting for tomorrow's big data releases which made for some easy pocket-picking today and likely some easy pocket-picking during early Asia session.

Gold stay surprisingly supported today. Crude was up and down. Equities saw another round of losses as Wall St. panicked again about the state of the U.S. financial system, banking system, and credit conditions.

Bond yields continued to stay to the downside. First of all, low bond yields keep the dollar somewhat pressured against the euro and unable to keep pushing higher vs. the euro. Low bond yields also signal the market has an appetite for "no risk" securities as opposed to other asset classes such as equities, commodities, and currencies.

Plus, low bond yields are an important signal from the bond market... low yields can be the bond market's way of telling the other market that they think the Fed is either on hold or is going to cut rates again and that credit conditions are extremely tight. These signals from the bond pits are to be noted. We need to keep an eye on the 10-year and 2-year this week as we get key data.

Gold surprised me today as it made a strong recovery off of last week's lows and seems to be sitting comfortably at the $800 level. Even when the euro dropped 80+ points from its early morning high gold stayed supported. This is a bit of a bright spot because it's imperative gold stops sliding in order for the euro to gain any momentum to make a move up.

I believe crude fell victim to the tropical storm news reports flying around today. The forecasts for this storm are all over the place... some are saying it's going to be a hiccup while others are calling for it to form into a catagory 2 and then veer off into the gulf towards the oil rigs in the area of Louisiana and Texas. I suppose we just need to see how that event plays out and crude will follow accordingly.

Tomorrow:

More risk for the euro tomorrow. Two mega pieces of data could potentially do some serious harm to the euro. First we get German PPI which is forecasted to print cooler than last month. I'm not so inclined to believe we'll see a cooler print but the way some of the euro data trends have been going the last week, it's anyone's guess.

German ZEW I must forecast to print at expected, but likely to print below expected. Currently I'm running a 56% probability that we see a print below expectations and below last month's print of -63.9. We also get Eurozone ZEW which I'm forecasting to print below expectations and print worse than the German data.

The fact is economic conditions, growth, manufacturing, housing, industrial production, and credit conditions have been steadily deteriorating rapidly over the course of the summer. I believe there's a full recession happening in Spain right now and some of the smaller EMU countries have either joined Spain's recession or are just a few steps behind. Ireland is under real threat of recession and overall growth has been contracting in the Eurozone's heavy hitters like Germany, France, and Italy.

My views on the Eurozone's economy and near-term growth potential remains tremendously low and I believe investors will voice the same thoughts in tomorrow's ZEW data.

The euro's not the only one under threat tomorrow as we get Housing Starts, Building Permits, and PPI.

I believe we could see a PPI print at or slightly above expected. It's very important to the dollar that PPI prints hot. If PPI prints cool this may cause some of the market players to question whether prices are truly being based on to the consumer, and how this will then effect CPI, which then leads to how the Fed will handle monetary and rate policy this fall. A strong PPI print just serve to give the dollar another boost.

Housing Starts and Building Permits I am not very bullish on for tomorrow. I've yet to see any significant reason to have any confidence in the U.S. housing market. The fundamentals and the data doesn't support a positive view of housing nor does it give me any belief the housing market has yet to bottom.

Credit is tight, consumer credit is low, banks still have to crawl over broken glass to borrow money, and homeowners are slashing prices Freddy Krueger style just to get their homes off the market.

Lastly we get to hear from Fed Fisher. He's a hawk, pretty simple. I fully expect Fisher to talk up the dollar by either saying inflation is too high or by saying rates need to go up or by saying both.

EUR/USD:

I can't help but remain bearish on the euro. That being said, I did see signs of life in the euro today. Some of the price action showed that there was actually buyers and not as many sellers. And that there were likely some dollar-long profit takers ahead of tomorrow's data.

Tomorrow's fundamentals likely hold the euro's life in their hand. In addition to crude and gold. Right now things seem really crazy in the market and really crazy with the EUR/USD, but I don't see any craziness at all. This is a very simple process that's happening.

The fundamentals are shifting, the Fed and ECB are shifting monetary policy, and the market is shifting the trend as the fundamentals evolve, the Fed and ECB change monetary and rate policy course, and the markets seek the way towards equilibrium and order through price action that begins to behave properly.

Basically I'm going to keep shorting the rises and carefully picking entries to take a few pips on the long side. I'm holding all of my best euro shorts and will just keep shorting.

If the dollar-long profit takers decide to sneak up on us this week and the euro gets pushed up, I'll keep shorting those profit-taking rises.

Fundamentally the euro is under a lot of risk tomorrow. If the data prints overall EUR- and USD+ it would take a miracle from God to stop the market from selling it off again. Price action does show some potential to test the 1.4780 level, but we need the data and the market correlated variables working for the euro to make that possible.

Be smart with your trades over the next 12-hours. Do not overleverage and do not get yourself into a trade you're not willing to deal with at 0830 EST tomorrow.

EUR/USD Weekly Outlook 8/17 thru 8/21 2008

2008-08-17T17:26:00.000-07:00

Once again we have another interesting week before us and that could be potentially explosive for the EUR/USD with a high probability of seeing the euro make a sixth straight week of extended losses against the dollar.

There is an intense amount of risk on the euro and very little risk on the dollar this week. The factors I’m looking at and will most focus on this week to determine how I’m going to trade the EUR/USD will be: fundamentals, moves in commodities and bond yields, equities, and verbal manipulation from central bankers and other market players, and geo-political happenings.

Fundamentals:

This week is very light on USD data and heavily weighted with euro data. Where the euro falls into fundamental risk is the fact the data on the books are centered on growth (PMI, Industrial Orders), economic sentiment (ZEW), and GDP correlated data (Current Account, Trade Balance).

I think some of the forecasters and economic are a little overzealous with their predictions for this week’s euro data. I’ve not completed my normal fundamental research for the entire week but based on some preliminary data collection I’m overall bearish on this week’s euro data.

Obviously if we do get some strong upside prints on the growth data this will give the euro a desperately needed boost and should serve to halt the slide for the time being or at least slow it down. ZEW is going to be one of the real keys this week to whether or not the euro takes another beating at the hands of the fundamentals. Keep your eye on that data.

Fundamentally speaking, there is absolutely some risk on the dollar. First with the Building Permits and Housing Starts data… housing has been one of the biggest drags on the dollar. Should the housing data show continued weakness I believe this could take some of the thunder away from the dollar bulls.

Of course, we get speeches from Fed Bernanke and Fisher this week. Fisher will likely come out with his hawkish guns blazing and it wouldn’t surprise me at all to see the market react favorably to what he has to say. Bernanke is the real wild card. This will be Bernanke’s first speech since the dollar became an overnight sensation. What I’m convinced of is that he’ll use the opportunity to manipulate the markets.

My gut tells me if he does play the verbal manipulation game that he’ll say something to cool the rapidly appreciating dollar. I can’t imagine Bernanke is too thrilled about the dollar being the hottest new rising star in the global markets. It’s not healthy for the U.S. economy and under these economic conditions should do damage to factors that have already been set in motion to try and heal the economy.

A stronger dollar is going to hurt U.S. exports which are a key area the economy has depended on to stay alive. It will also negatively impact the Current Account and Trade Balance. Our Trade Balance didn’t really gain a whole lot of ground even when the dollar was at its weakest.

In a matter of just six or so weeks the dollar has gained 800+ points on the euro and has broken key resistance levels on the USD Index. The U.S. economy really cannot afford to see the dollar move up much higher on the USD Index. It’s getting into dangerously high territories. So, Bernanke has a lot of reasons to talk the dollar down from the pedestal the market has put it on.

Commodities:

One thing that is straightforward and simple: the euro will not stop falling if oil and gold keep falling. If you did nothing more than watch the euro’s real-time price action and watch gold and crude move in real-time you should have no problems making money this week.

For example, suppose you see crude start falling, there’s a very high probability the euro is going to follow it, same with gold. There is one market correlated variable that I believe could serve to stop the dollar’s gains – bond yields. Throughout the dollar’s rise to stardom bond yields have been unable to make any strong gains. The 10-year is sitting comfortably below 4%. Mortgage rates are rising and bond yields are not. The dollar is rising and bond yields are not.

Is the bond market giving us some clues? I believe so. I think the bond could be telling us this whole idea about the Fed raising rates in the fall and winter is a bunch of crap and they aren’t buying into the Fed hype. I’ve been a euro bear for the past few months but this doesn’t mean I’m a dollar bull. Not even close.

How much more can the dollar gain if U.S. bond yields stay at degraded levels? Not much more in my view. We need to watch how bond yields behave this week as these observations could yield more clues to help us trade smart and profitably.

ESF:

One of the “theories” going around the markets is that the Fed intervened to save the dollar from falling further on the USD Index and they used the Treasury’s Exchange Stabilization Fund (ESF) to carry out this intervention. I don’t really have an opinion on this one way or the other.

I can see it happening and it makes sense for them to do it. But what doesn’t make any sense is that they would rapidly appreciate the dollar and move it down to the 1.4700 level in just a matter of weeks. This makes no economic sense at all and will only complicate things for the Fed.

So, maybe they meant to stop the USD Index from going below 70 but going above 80 isn’t going to make Bernanke very happy along with U.S. exporters or oil companies. The ESF is a function of the Treasury and allows the central bank to directly intervene in the currency market to either appreciate or depreciate a currency in a drastically short period of time and to an extended degree. If the intervention theorists are right, the Fed would have likely used the Treasury’s ESF to price fix the dollar and manipulate the USD Index.

EUR/USD:

I’m going to keep shorting the crap out of this thing until price action, commodities, and fundamentals tell me otherwise. Traders that think it can’t go any lower, that’s its so-called “overbought” are fooling themselves if they truly believe the worst is over for the euro.

The euro will be at the mercy of its own fundamentals, crude, and gold. As I mentioned earlier, I do believe there is risk on the dollar this week. One of the biggest risks for the dollar is the Fed or ECB verbally intervening in the market.

Last week the ECB tried their best to talk up the euro but their words fell on deaf ears. Now, should the Fed come out with guns blazing to talk down the dollar, this might have more of a positive effect on the euro. The Fed could be more effective to help the euro than the ECB could. Also, should the euro’s growth data print surprisingly to the upside this would allow the ECB’s jawboning to carry more weight.

It’s very unlikely I’ll add any new positions before London opens. I need to see what happens when their liquidity hits the market as it will give me a much clearer view of where we may move on Monday. There’s not much data at all tomorrow and liquidity will still be in summer-session mode, so we need to prepare for some price swings.

Right now I have no plans of adding any new shorts under the 1.4705 level. I’m not seeing any reason to buy right now, but I don’t want to add any new shorts below that level for the time being.

I don’t have much more to add at this point. I think trading this week should be fairly straightforward and easy to figure out as long as you have your eyes on the right things and aren’t over-thinking things and over-complicating your trading.

Should all factors keep working against the euro and for the dollar I see the potential for the EUR/USD to drop 328 points this week – this is my “worst case scenario” for the EUR/USD based on my own numbers and forecasting of the market.

The potential for upside gains certainly exists this week but we all know what it’s going to take to make that happen and there will be a lot of resistance along the way up. On the upside I see current potential of a 142 point gain.

Be smart, do not overleverage, and please don’t make any knee-jerk trades. Allow the trade to come to you, wait for your price, and when you’re in doubt, stay out.

Trade Team Update

2008-08-14T18:45:00.000-07:00

Once again what little price support the euro found the past two trading sessions was smashed under the weight of strong USD fundamentals. Both the Core CPI and CPI data printed hot and above expectations, just as we forecasted last night.

In addition, Eurozone CPI printed a tick below market expectations. Hot USD CPI and cool EUR CPI was the perfect storm for the dollar to keep chipping away at the euro and to keep erasing month's worth of euro gains.

The markets are already convinced the ECB is cutting rates in December. Today's data only served to justify their beliefs and as long as the fundamental data trends continue to print EUR-, I see no reason for this slide to come to an end.

The other factor obviously is the continued strong sell-off's with crude and especially gold. There's absolutely no way the euro can find support and traction to move up if commodities continue to make new lows on a daily basis.

Tomorrow:

The same advisement I gave for yesterday's trading stands for today's trading: the euro remains firmly at risk. Where a lot of the risk lies is the simple fact Europe is on holiday and European banks are closed until Monday.

Let's think about it... during the past year or so of trading the euro was on a strong bullish trend against the dollar. And what was the price action pattern we saw play out time and again during a U.S. bank holiday? The dollar would get hammered. So, the main reason I say all risk remains on the euro tomorrow is because now that the tables have turned the market has the perfect opportunity to hammer the euro while Europe is on holiday.

This will be the first European holiday we've seen in a long time while the euro is behaving bearishly vs. the dollar. It will be interesting to see what the market does and how it moves the EUR/USD. For me, it'll be a new experience and something that should provide valuable insights.

As far as the USD data is concerned, I believe one of the surprise bright spots we could see is within the Michigan Sentiment. This data comes out every two weeks. Think about what the price of fuel at the pump has done the past two weeks? It's plummeted dramatically. In my neck of the woods the price has dropped to $3.50 a gallon down from a high of $4.09 a gallon just four weeks ago. That's huge!

The other piece of key data tomorrow is the TIC flows -- net cash outlays for U.S. debt instruments by foreign investors. I believe we could see some USD positive data here as well. Reason being is because what I've observed with the bond yields...

Bond yields have remained relatively low. When bond yields stay low, this means they are being bought up. The Fed has been auctioning bonds like there's no tomorrow. And now even in light of the dollar's rebound bond yields continue to remain low. The 10-year has been unable to sustain a break of even the 4.00% level. Again, another sign of buying. Bond buying keeps yields low and prices high. Bond selling drives up yields and pushes prices down.

Now where the dollar could get hit is with the Industrial Production data. Forecasts are for production to show no gains and to stay flat. I have to agree based on my own research. In fact, it would not surprise me to see some negative production data.

Bottom line is, weak USD data will not likely hurt the dollar tomorrow and data that prints at or above will only serve to put more pressure on the euro in the short-term.

EUR/USD:

Really there's not much to be said about the euro... we know why it's weak, we know why it's continued to sell-off, and we know what it's going to take to stop the slide.

The problem is, there's nothing working in favor of the euro and all fundamentals, central bank monetary policies, and market correlated variables are strongly working against the euro. As soon as the euro finds support and buyers emerge we get another round of data that serves to crush support and send it lower.

My trading under these conditions is simply to add new shorts on the rises and then to play it tight in the ranges, taking 5, 10, or 20 pips and then getting out. There's too much risk in trying to find a euro long to hold on a swing basis without any clear support established.

We saw something very interesting today... it wasn't until literally a few short minutes after London closed that the market took the euro down. The bears couldn't make it happen while London's liquidity was still at play, but as soon as the traders in London closed up shop and hit the pubs, it was game on for the dollar and game over for the euro.

This trading strategy we saw play out is one of the main reasons I believe the market could use the opportunity to hammer the euro some more tonight and tomorrow.

That's about all I have to say right now on the euro...

Be smart tomorrow and do not overleverage. And, don't plan on taking any trades you can't get out of by market close as we could see some jaw-boning over the weekend.

The ECB tried to talk up the euro today... the ECB was talking about analysts are undervaluing Eurozone growth and how about how hawkish they are on price stability. Be careful here...

Trade Team Update

2008-08-13T17:35:00.000-07:00

The big event for the of course was the U.S. Retail Sales data, which printed weaker than expected.Now this didn't have quite the negative effect on the USD as I thought it would, but provided great trading opportunities nonetheless.

Both gold and crude stayed well supported today as well and this too took pressure off the EUR. Volatility in the equities and securities markets continue, but most of the effect of those markets are being absorbed by the yen crosses.

Tomorrow:

Fundamentally, tomorrow looks like a trainwreck waiting to happen... we have key growth data out of Europe and of course both U.S. and Eurozone inflation data, which all markets will be watching closely.

German and Eurozone GDP should print at or below expectations in my view. The growth slowdown in the Eurozone has been picking up steam all summer long and tomorrow's data should be ugly. Now if we get downside GDP data for both the Eurozone and Germany, this will likely look to hammer the euro again.

I don't believe hot CPI data out of Europe will do much to save the euro should the growth data be as ugly as I'm expecting. The pattern the past three weeks has basically been to kick the crap out of the euro everytime a piece of bad EUR data comes out. I don't expect to see anything different tomorrow. I've seen no clear break of this data.

The 1+2 punch knock-out combo that the EUR needs to avoid is getting a weak print on both inflation and CPI data, which I'm not at all ruling out and will be prepared for accordingly.

Turning to the Core CPI and CPI data for the U.S. my forecast is to see a print at or slightly above expected. I don't have to tell you what that means for the USD... on the Core I believe we can see a print of 0.3% or better.

A hot print on the USD data combined with a cool print on the EUR data will likely send the pair to lows we haven't seen in awhile. Don't forget that we're getting July's inflation data tomorrow and during July overall prices on everything from fuel to fuel to discretionary and non-discretionary goods were running at serious highs.

The price's paid component on the manufacturing data during July was heightened, the Import Price Index printed very hot, and the USD was weak while commodities were running at extended levels.

When I piece all the components together, I get a forecast that shows me we'll see hot CPI data, even the part of CPI that doesn't account for food and fuel should print hot.

EUR/USD:

Clearly all risk is on the EUR heading into tomorrow's fundamental events. As a trader I like to play out all the possible scenarios in my head when we have a day like tomorrow -- growth and inflation data which directly correlate to interest rates and central bank monetary policy.

Most the scenarios basically involve the euro taking a beating should the data print the way I believe it will. Should there but upside surprises, that's great, but I'm preparing for the worst and I think all traders should prepare for the worst.

The only other scenario I can see playing out, which has happened many times in the past, is that the market reacts like a deer caught in the headlights... it's so overloaded with monumental data that it doesn't know what to do and it basically does nothing at all.

In the euro's defense, price action patterns have shown clear signs that the slide is over and support has been found at the 1.4860 level.

Right now the euro is remaining supported above the 1.4900 level. While this is a good sign, as we know things can change in a heartbeat once the market either squares up before the data or trades the data as it's released.

Resistance remains between 1.4980 and 1.5010 under current market conditions while we're seeing support between 1.4860 and 1.4840. Within the real-time price action I continue to see buyers emerge on each dip below 1.4900 and during all attempts to go even lower than that.

There should be some good ranging and scalping opportunities the next few hours but be ready for some price swings after 0200 EST all the way through the NY session tomorrow.

If you're tight on margin, I strongly reccommend you think about all the possible scenarios and come up with a gameplan for tomorrow. In fact all traders should have a gameplan whether your margin's tight or not.

Be smart with your trades and please do not overleverage.

Trade Team Update

2008-08-12T18:25:00.000-07:00

After a wild late-Asia session this morning, it appears the markets have taken a bit of a breather today...

For now crude and gold have stabilised while the euro has formed some "temporary" support at the 1.4860 level... but we'll cover this in a bit.

Today's big data printed better than expected as we forecasted but the reaction was muted at best. I think the weak reaction was for the exact reason we discussed last night...

We know the dollar was very weak in June which obviously correlates to a higher demand for U.S. exports. While on the surface this looks like really good news for the USD, it's really not and the data won't put any further pressure on the euro.

With the dollar becoming an "overnight success story" it doesn't take a brain surgeon to figure out the strong Trade Balance data we saw today won't be sustainable when August's data prints in October. The same should be true with the Current Account, and both of these reports are extremely correlated to the overall strength or weakness of the dollar.

Tomorrow:

Tomorrow's fundamentals are extremely important for the USD. Before we get dollar data we get an important relase out of Europe -- Eurozone Industrial Production. In the past this piece of data wasn't very closely watched by now that the Eurozone's growth fundamentals are on notice, this type of data will face more scrutiny.

My forecast is a print of 0.1% or lower. I do not believe the data will print as weak as last month's but I cannot forecast a print at or better than expected. I'm not expecting too much of a reaction on this data as there will be much bigger fish to fry later on...

U.S. Retail Sales take center stage tomorrow. Last month both the core and non-core printed strong to the upside, for very good reason of course. Americans were spending their free cash from Uncle Sam and gas prices were at all-time highs. Those were the two biggest contributing factors to the USD+ data.

Now comes the true test of the consumer... the U.S. consumer makes up approximately 65% to 70% of GDP. As you'll recall we got strong GDP data last go around. If tomorrow's retail data prints to the downside, which I'm expecting it to, guess what the market will be thinking about GDP? They won't be happy thoughts, that's for sure.

Based on my own research with data from top retailers like Wal-Mart, Target, etc., I find it terribly difficult to maintain a USD+ bias for tomorrow's retail data. And I believe should the data print weaker than expected this is going to make the market stop and think about their bullishness on the USD.

Weak retail data will mean downside revisions to GDP and this will put the dollar back under pressure. If this scenario plays out tomorrow as I'm forecasting the only thing that could screw it up is weak EUR data and more sell-offs in commodities.

Commodities:

I think crude and gold could be nearing a crossroads. Bear in mind I'm not a commodities trader, but I believe the more they sell-off the closer they get to finding a bottom and finding support and then attempting to make a move back up.

If weak USD data the rest of this week confirms, I believe buyers will emerge to buy up gold and crude. And this is a real key for the euro's survival.

Last night's I was seeing central bank selling of gold within gold's price action and this was the likely catalyst of gold's sharp sell-off, which of course was further fueled by the appreciating dollar.

Sure enough... today the ECB reported making large gold sales. I had no idea this particular report was be released today, but that sharp sell-off stank of central bank operations. The ECB's done selling for now in my opinion.

We also got another report on crude today that showed demand has dropped to it's lowest levels in 26 years in the U.S. Well, no wonder crude topped out and has sold off... the old supply and demand principles still hold true in the futures market.

It will be very important to watch how commodities react to tomorrow's USD data. Should the data print below expected, the euro may get a nice boost if commodities work hand-in-hand to hammer the dollar.

EUR/USD:

Today was the first day I've actually seen visible evidence within the price action that some of the big boys were buying the euro. Buyers stopped the run to 1.4800 dead in its tracks and buyers have kept the euro fairly supported throughout the day.

Now this won't continue if we get EUR- and USD+ positive news tomorrow, but at least the euro is showing some signs of life and the market is showing some signs of getting over their sudden love affair with the dollar.

Based on what I saw in the price action I'm not going to be adding a new shorts and will be looking to add small euro long positions until the fundamentals, price action, and market correlated variables tell me otherwise.

Am I still bearish on the euro? Absolutely. I will short the more extended rises, but price action has shown me that the momentum to continue this strong slide down is pulling back.

I still believe we can work our way back to the 1.5300 level in the near-term as long as some of the factors working against the euro start working against the dollar.

I'm not ruling out another run to the 1.4800 level, especially if the euro data prints weak this morning, but should we make this move, I'll be watching the price action closely for signs of buying and may likely buy down there.

As I've mentioned many times, the only way I'm going to buy the euro is first when the price action shows me the strong downside momentum is disappearing and for the market to begin showing an appetite to buy the euro again.

The bottomline is, fundamentally, the landscape has not changed in the U.S. Sure, there's been signs of life here and there, but the credit crunch is still crunching, financial markets are extremely unstable, the jobs and housing sectors are a mess with no end in sight, and the I believe the consumer is still in pull-back mode.

That's about it for now... be smart with your trades and do not overleverage. Be careful taking new shorts down here...

Risk Management: Back To Basics

2008-08-10T16:14:00.000-07:00

August 8, 2008 will be a day no FX trader should ever forget as the EUR/USD made an unprecedented move. Never in one 48-hour period had the euro ever lost so much to the dollar.

With a historic move of that proportion comes some lessons, a few of which are painful and expensive for many traders. By Friday afternoon there was a lot of slow singing and flower bringing as many traders flat out could not survive a move like that.

I heard some of the horror stories from several traders who were brave enough to reveal they suffered a margin call. I spoke with somebody at FXCM and she told me the margin calls, in terms of dollar amounts, totaled in the 8 figures. I’d be willing to bet it was even higher than that.

I rarely allow the market to stress me out but what stresses me out the most is knowing traders are getting beat by the market and are losing every penny to the market for lack of proper risk and money management. I can empathize with the loss because I’ve been there myself. I know what it feels like. But, I know why I was in that situation.

So, I think we need to go back to basics. It’s very simple – traders that cannot control their emotions and cannot help themselves from overleveraging will never get out of the group of traders that lose 90% of the time.

Calculating Usable Margin:

The net bottom line on risk management is your usable margin percentage. Usable margin and usable margin percentage is your guiding light and is what you use to determine what trades you can make, how many trades you can make, and when you must stop trading.

Usable margin percentage is also what you use to determine when to cut a loss or when to hedge against negative entries. In order to even have a trading plan and a game plan to get yourself out of a bad situation it’s imperative you know what your usable margin percentage is at all times.

Usable margin can only run on a scale of 0% to 100%. Some brokers, especially MT4 brokers trick traders and deceive them with astronomical usable margin percentages like 3592%. Sorry, but you can’t have a usable margin percentage higher than 100% or lower than 0%.

No matter who your broker is, there’s only one way to calculate your usable margin percentage. The calculation is:

Usable margin divided by equity.

Example: your equity is $18,528 and your usable margin is $15,928 your usable margin is 85.96%. $15,928 divided by $18,528 equals 85.96%.

Usable margin in terms of liquid cash is determined by taking the amount of liquid you have in the market minus what your equity is.

Example: your equity is $15,000 and you have $550 in liquid cash usable margin live in the market. Your usable margin in terms of liquid cash is $14,450. Based on a liquid cash value of $14,450 your usable margin percentage is 96.33%.

Not to be rude, but if you cannot master these simple calculations and stay disciplined to always know what your usable margin situation is, you cannot trade the Forex market because in the end you will always lose and the market will always win.

Equity:

Equity is real simple – it’s the real-time true value of the account. For me account balance means absolutely nothing. I don’t even look at account balance because if I want to know what the real value of my account is at any given moment I need to look at equity.

Your equity does not reflect how much usable margin you have in the market. Reason being, if you get a margin call you still get your usable margin back. For example, if you have $1,000 in liquid cash in the market and you get an MC, you get your $1,000 worth of usable margin back.

Equity is the other number I keep a close eye on but not nearly as close as I watch my usable margin and usable margin percentage.

Calculating Entry Size:

Preventing yourself from getting into a margin call situation starts with making the proper entry sizes. If you don’t know how to calculate what a 0.5% used margin entry is you’ll never know when enough is enough and you’ll have no way of coming up with a game plan in case you go into “oh crap” mode.

Entry size is never based on account balance. I base entry size on the liquid cash value of my usable margin. Reason being, my broker determines a margin call based on what my usable margin is, not my account balance or my equity.

My broker requires me to maintain a usable margin percentage of 1% or higher at 100:1 leverage. At 200:1 leverage I’m required to maintain a usable margin percentage of 0.5%. You need to check with your broker to know what they require because not all brokers are the same.

Example: I have $20,000 in usable margin and I want to make a 0.5% entry. To determine how much margin comes out if I make a half percent entry I simply multiply my usable margin by 0.05 which is the mathematical equivalent to half of one percent. $20,000 X 0.05 = $100. At 200:1 leverage a $100 liquid used margin entry will pay me $2 per pip on the EUR/USD.

Now if it were me, I’d only be making 0.2% entries on an account of that size. So, in this case a 0.2% entry would take $40 liquid cash out of my usable margin and at 200:1 leverage will pay me $0.80 on the EUR/USD.

Usable margin, equity, and entry size are the holy trinity of risk management. These calculations are kindergarten simple yet neglected by the vast majority of retail FX traders. Almost no one teaches risk management. Brokers will teach traders how to use every crap tech indicator on the planet but they never teach them proper risk and money management. No shock there…

One of the so-called gurus was teaching to use 10% used margin entries per trade. This is insanity. In order to survive making those kinds of entries you literally have to pick the perfect tops and bottoms of the market. Your entries have to be flawless or you have to do the other thing they preach which is using 30 pip stoplosses.

The bottom line is, if you do what we say and stick to making 0.5% used margin entries and not allow your account to fall below 92% usable margin, it’s almost impossible for the market to move against you to such a degree that you’ll margin out.

Trading Multiple Pairs:

One of the other ways you can get in trouble is not knowing how to calculate your risk when you start trading multiple pairs on one account. I do not advocate this at all. If you want to trade multiple pairs, open up multiple accounts and trade each pair on a separate account.

I’m very much against trading multiple pairs on one account because it’s extremely difficult to know what your risk situation is at any given moment. For example, if you trade the EUR/USD and then you take a trade on the USD/JPY, and then the GBP/JPY, it’s going to throw off your numbers because you’re not making or losing the same pip value.

Not all pairs pay the same price per pip as the EUR/USD does. Suppose you have two EUR/USD trades in profit and you also have a trade on the AUD/USD in the negative, this too will complicate your ability to know what your risk situation is at all times. I think you can see where I’m going with this…

The more open trades you have on multiple pairs the more difficult you make risk management on yourself. To me it’s just not worth it.

Broker:

Part of proper risk and money management is trading through the right broker. If your broker doesn’t offer you the tools you need to manage risk according to your standards, this too will further complicate the issue.

For my trading style, I need a broker that will give me 200:1 leverage and the ability to take a trade on the same pair going both ways… if I have a euro long and I want to take a euro short, my broker has to allow this. I play both sides of the market. Plus, I have to have this ability in the event I need to hedge my account.

I also need my broker to allow me to take the opposite side for free. I call these free margin trades. If I have a euro long and the entry size for that long was $1000, I need my broker to allow me to take a euro short for $1000 and not have it take any usable margin out.

I also need my broker to show me what my usable margin percentage is on a scale of 0% to 100%. MT4 brokers are notorious for using a wacked out usable margin percentage number and this just confuses traders, it’s just a big scam to be honest.

There’s no perfect broker, they all suck in one way or the other, but I cannot trade unless my broker affords me those requirements.

That’s it. This is simple stuff. The calculations are simple. If you can’t grasp these basics, you can’t trade and the Forex market is going to eat you alive. There are times when you’ll find yourself in a situation where you have some negative entries and you need to formulate a game plan to get out of the situation. It’s a whole lot easier to think straight when you don’t have a low margin situation in addition to having negative entries to deal with.

If you have the 1+2 combo of low margin and negative entries, the market will first win the psychological battle and then will move on to win the war by cleaning you out. A trader can’t think straight and can’t have a clear mind if he is within 200 pips of a crap out before he decides to take measures to rectify the situation.

EUR/USD Weekly Outlook 8/10 thru 8/15 2008

2008-08-10T10:03:00.000-07:00

To my knowledge, never since the introduction of the euro currency in 1999 has there ever been a larger, more pronounced one week sell-off like we had last week. The entire week last week we emphatically discouraged traders from buying the euro and to stay short.

The big question on every trader’s mind is – where do we go from here? Well, if I could give you a definitive, take-it-to-the-bank answer I wouldn’t be writing this update, I’d be busy calling friends, family, and associates to get my hands on every penny I could to place an “all in” trade.

So I can do the next best thing which is distill the whole situation down and lay out the probabilities using the three factors that are responsible for moving the EUR/USD on a daily basis:

1. Fundamentals/Central Bank Monetary Policy
2. Commodities/Equities/Securities
3. Geo-political Events

Fundamentals:

Looking at what’s on the books for this week, fundamentally, the euro remains at risk. That being sad, the dollar is also under fundamental risk this week. Last week’s fundamental data clearly favored the dollar because that particular set of data was bolstered by the $100+ billion worth of free money the government handed out in the spring.

Three fundamental areas dominate the market this week: Retail Sales, Inflation, and Growth.

Based on data from Wal-Mart, consumers blew out their stimulus checks on discretionary items like flat panel TV’s, the latest video games for Xbox, junk food, beer and wine, and have since pulled back now that the free money is hanging from their walls and the empty beer cans are sitting in the trash can. I’m not too terribly optimistic on the USD retail data because in July gas prices were at their worst with the national average being about $4.06 per gallon.

Plus, what I saw during my own “field research” in July were empty stores, empty restaurants, empty roads, and empty social gathering establishments. The only thing that concerns me with a USD- forecast on retail data is the fact that the underlying fundamentals of the market have already begun their shift and based on past fundamental data patterns, the trend of USD+ upside surprises can go on indefinitely while Europe’s fundamental landscape continues to erode.

Turning to consumer-side inflation, we get CPI data out of both the U.S. and Europe. Once again, the euro takes on more risk than the dollar. One of the main catalysts for last week’s historic euro sell-off was Trichet’s dovish rhetoric on growth coupled with no strong vigilance against inflation. In addition, Trichet already told the markets that the ECB’s last rate hike would suffice to solve Europe’s inflation issue.

In fact, Trichet told the markets twice that the last rate hike would bring inflation down to desired levels, so this leads me to believe that we’re definitely not getting any upside surprises on Europe’s CPI data. In my view, anything less than an upside surprise on CPI is going to do more damage to the euro.

The U.S. CPI data prints 3.5 hours after Europe’s. If the European data prints below 4.0% and the U.S. CPI data prints at or above expectations, this could easily put the market back in the mood for another massive sell-off of the euro. And it’s that scenario that I’m expecting and will be prepared for.

The other fundamental factor that puts the euro under tremendous pressure is their GDP data which also prints on Thursday. I am very bearish on Europe’s growth, you know this if you’ve been reading any of my commentaries since January. For months we’ve been forecasting that the growth sector would be the first to crumble in Europe and we’re now seeing this reality play out right before our eyes.

In addition we get industrial production data for Europe and the U.S., plus Trade Balance, TIC Flows, and the Michigan Sentiment – all USD data. I’ll cover those pieces of data throughout the week, but be aware those can be market movers.

This week could really just boil down to a battle of worsts… most of the data we’ll see this week for the USD and the EUR shouldn’t be too pretty or too promising. So I think it could just come down to whoever’s data isn’t as nasty is the one that doesn’t take a beating.

Market Correlated Variables:

With the dollar’s massive gains the past two weeks the natural reaction in the commodities market is to sell-off, which in turn only pushes the dollar further up. The dollar really started gaining momentum when gold and crude topped out and began their sharp descent.

Right now gold is sitting in the mid $850’s and crude is around $115. Don’t forget just a few short weeks ago crude was at $147 and gold was in the $950’s. If commodity bulls step up to the plate and add their bullish liquidity into the crude pits and the gold market, the euro slide will likely come to an end.

In my view the euro will not be able to gain any traction until gold and crude stop selling off. It’s really that simple. And this is where some of the geo-political events can come into play, namely the battle between Russia and Georgia.

But before we cover the geo-political aspect, the other thing I’ll be watching is bond yields and the Dow of course. The bulls on Wall St. are flying high despite tremendous instability with the big U.S. financial institutions, the meltdown of Fannie Mae and Freddie Mac, and the likelihood of more U.S. bank failures in the weeks to come.

I believe some of the big players like Merrill Lynch and Citi are going to come crawling to Asian and Middle Eastern financiers to add liquidity. I don’t believe all of those big firm’s assets have been properly marked to market which means the dollar remains at risk if and when the big players show more signs of weakness and even bigger losses on their books.

Geo-political:

Last week tensions between Russia and their former Soviet-era stronghold Georgia went at it. The fighting is in a region called South Ossetia, which is an autonomous region that is occupied with Russians and with people who want to be Russian citizens.

Georgia is a strong U.S. ally, much stronger than Russia claims to be. Obviously there’s a cultural issue at play here, but there’s also another factor which I think is driving tensions, and this is: crude. That area in South Ossetia is oil rich and is also an area for oil transport.

Again, this is just my opinion, but I believe oil is a strong underlying factor in this conflict. I also believe the strong euro sell-off on Friday was likely fueled by this conflict to some degree. It’s been some time since the markets have seen a geo-political event like this, so naturally there will be a pronounced reaction and there could be more to come this week if the fighting escalates and peacekeepers fail at their mission of ending the violence.

What we will need to watch is whether or not crude gains in response to this fighting and whether or not the so-called “flight to safety” back into the USD continues. This geo-political event has me concerned because I don’t quite understand why Russia is taking such aggressive actions against Georgia when it’s clear they have the power to crush them without even really blinking an eye.

If it’s just about oil I suppose those intentions will be made clear soon enough but if there’s more to the story, like Russia showing the world it’s military might, this could lead to some real wackiness in global markets and our market of course.

I will be watching to see how the U.S. decides to play “big brother” and what Europe has to say, NATO, and the U.N. I lived in Russia and only have a rudimentary understanding of Russian politics and military mindset but I do not see the Russians succumbing to political pressures from the U.S. and Europe.

EUR/USD:

As I’m writing this market’s not even open yet and right now the euro is trading at a pre-market price of 1.5045. My bias, just as it’s been for the past three months is still strongly bearish on the euro. I do not see any firm establishment of a bottom at this point.

The 1.5000 level held up under intense pressure and low liquidity on Friday. I need to see the price action and the euro price patterns in order to feel confident we’ve established a stronger base of support. Until then, I’m not buying the euro and I will stay short and keep shorting every rise.

Last week the euro lost over 3.5% to the dollar and a total of over 5.0% in the past three weeks of trading. This is a dramatic and unprecedented depreciation for the euro. Shifting monetary policy at the ECB and the decline in commodities are the main catalysts for these moves.

Fundamentally, the U.S. has not turned the corner. In my opinion the housing market has not bottomed, the jobs market remains under intense downside pressure, the consumer remains in pullback mode, and there could be more financial woes on the horizon.

Those are my basic arguments for why the euro should not loose too much more ground to the dollar. The other factor is where the USD Index is at. It’s sitting right around some strong resistance. So, I will also need to see if how that resistance level on the Index holds up this week.

It’s really pretty simple… if the USD Index hits a brick wall up here at these levels, commodities can rally, and the euro fundamentals don’t print with serious downside surprises, I see no reason the euro can’t find a bottom and attempt a move back up after getting hammered so hard and so dramatically the past three weeks.

We know from EUR/USD price action patterns that the euro will always move faster and further to the downside than it will to the upside. I believe after moving down about 600 points last week that the pair is due for some upside retracement.

It wouldn’t surprise me to see a few more tests to sustain a break of the 1.5000 level, but down here I’m just not comfortable adding any more shorts. Also, I will wait for price action to confirm the euro has established some solid support and once I get my confirmations, I will likely begin buying again and taking profits on some shorts that are well into profit.

Many of you will recall me saying that my forecast was for the euro to give 1,000 points to the dollar from the all-time high. Well, our all-time high is 1.6038 and we’ve given back those 1,000 points.

Risk Management:

The last point I want to cover is risk management. Poor risk management sent MC buzzers ringing around the world like church bells on Sunday morning. Painfully expensive lessons were handed out last week. I wish it didn’t have to be that way, but that’s the nature of the market we trade.

I just hope that my constant mantra of “not overleveraging” will be justified after traders sit back and reflect on what a beast the Forex market can be. I cannot stress enough the need for proper and strict risk management this week.

We could easily see some volatile price swings and more exaggerated moves as liquidity remains low and many factors are at play within the markets. Be prepared for the unexpected please.

That's it for now. Be smart...

Key levels

2008-08-07T22:09:00.000-07:00

So far there's been no recovery from the slide down in early Tokyo when the market was completely ill-liquid. The price indicated a clear stop hunt move which usually recovers back to the point of lift-off within 2-4 hours, but every attempt has been pushed back.

Gold took a hit on the euro drop but oil has remained mostly flat. I'm now waiting for Frankfurt and London to give more clear directon. We will need their liquidity to move out of this range between 1.5209 and 1.5234.

Key downside levels:

1.5202
1.5184
1.5168
1.5152
1.5137

Key upside levels:

1.5241
1.5259
1.5274
1.5317
1.5338

All risk remains on the euro at this point and I have zero plans to buy until it shows me some life.

Trade Team Update

2008-08-07T18:02:00.000-07:00

"The uncertainty surrounding this outlook for economic activity remains high. The latest economic data point to a weakening of real GDP growth in mid-2008. We consider that there is some materialisation of the risks that we have identified. Overall, downside risks prevail."

Those aren't my words, those are Trichet's words, and those are the words that sent the euro on another free fall in today's trading...

Trichet said and the euro did exactly as we forecasted, so no big surprises there... but, I have to mention something I observed with Trichet's body language which I believe had a very negative "psychological" effect on the euro. Well maybe more so of a negative psychological effect on those trading the euro...

When Bernanke and Trichet speak I don't just listen to what they say I watch how they say it because their body language can not only tell me if they are speaking the truth but it can tell me how confident they are and how much they believe their own words. Plus, reading body language is a tremendously valuable tool that helps me read between the lines.

Trichet was not his usual confident, comfortable, and cocky self. Trichet's got a much stronger personality than Bernanke, but this wasn't visible today. Trichet appeared extremely uncomfortable revealing his current assesment of Eurozone economic conditions.

The way he delivered the "bad news" was like how a kid tells his parents he got in a fight at school and is suspended for three days... you know the news is bad, you want to put it as nicely as you can, but no matter what your parent's punishment is going to be way worse than what the principal gave you.

This is why Trichet repeated no less than a dozen times his mantra about price stability and maintaing price stability. One of his lines were:

"We emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability."

The fact that Trichet had to pepper every piece of bad news with strong reinforcement about price stability and hawkish monetary policy on rates, coupled with his body language was a sure fire sign the market was going to give the euro another beating. Plus, constantly repeating his mantra actually did more harm than good... this is where the whole negative "psychological" effect comes in.

Basically, Trichet was begging the markets to stop hammering the euro. Where Trichet screwed up was that he didn't infuse his mantra with any real threats or promises. Two months ago he promised the markets a rate hike. A month later he gave the markets a rate hike and two weeks after that the EUR/USD made another all-time high. Pretty simple stuff...

The problem that Trichet faces is the fact that he can't raise rates anymore and he will have to cut rates next year. But, he knows how bad Eurozone inflation is running and he knows what the ECB's number one mandate is: ensuring price stability.

A rapidly depriciating euro only further completes things for Trichet. He can't maintain price stability with any more rates hikes, so he needs the euro to stay strongly supported against the dollar in order to help keep a lid on inflation.

Trichet's body language was screaming "don't short the euro my dear friends!" But, the market had other plans of course. As I said yesterday, no matter what Trichet says today the euro is going to get whipped.

Even now as I'm writing this commentary I see the market has just dropped 100 points in less than 30-minutes. Looks like a text book stop hunt and stoploss trigger move. Good job Tokyo!

The net bottom line is, Trichet's up against the ropes and the market knows it. Eurozone fundamentals are bad and Trichet confirmed this in his speech today. Trichet's hopes and dreams of a strong euro to fight inflation are quickly evaporating right before his eyes.

To be honest, I don't believe Trichet or the euro is going down without a fight. Yes, we've seen some violent moves against the euro the past week, but this rapid depriciation will not only be undesirable to the ECB, I don't believe the Fed is going to be having a tea party over the rapidly accelerating dollar. It's really not desirable or healthy for either central bank.

Fundamentals:

As we forecasted last night, Pending Home Sales printed with a strong upside surprise and of course this has fueled more talk of a bottom in housing. I'm not singing that song. I think this piece of data is just following the exact data trend we've seen the past month now that the rebate checks are in everyone's bank account and everything is peachy again.

Fundamentally tomorrow is a rather slow day. I do expect the European data to print at or below expected while the Non Farm Productivity data should print inflationary which is obviously USD+.

EUR/USD:

Look ahead to next week's fundamentals, we have some serious data on the books... retail sales, growth, inflation, and the consumer sector. Be mindful of this as we close out the week.

I do not expect any monumental moves in the market tomorrow. Now right at this moment the market is still in the 1.5250's after making that sharp stop hunt move. This price pattern looks very similar to what the market does when it wants to suck traders in and then reverse the market on them, so I'm fully expecting a return to the point of lift-off, which in this is the 1.5300 level.

Once we make our way back there, things might be a little more clear, but there's no way I'm buying the euro. I'm only shorting. I haven't bought the euro in a week and a half and I have no intentions of buying it now.

I'm not one of those traders that says "it can't possibly go any lower". Yes, it absolutely can go lower and current price and fundamental trends stay the way they are, the short side will be in play for the time being.

Many traders have been asking me when I'll start buying the euro again. Well, the first I will need to see is a clear pattern within the price action that shows me the euro is capable of sustaining any upward momentum.

This week it's been barely able to make a 50 pip upside retrace. That price action shows me there's no momentum and buying power to support the euro. When I can see within the price action that the euro actually has a fighting chance, I will consider a long.

Next of course is the underlying fundamentals of the market... as I mentioned current trends have all been USD+ and EUR-. I need to see a break in this trend. I need to see euro data start printing stronger and I need to see renewed signs of weakness in the U.S. economy. Right now, neither of those exists.

Next is the market correlated variables. Gold has been brutalized the past two weeks. There's absolutely no way the euro can move up with gold getting hammered day after day. Same thing with crude. With crude being USD denominated every little dollar gain is going to push crude down and vice versa.

If Wall St. emerges from its bearish season that will put more pressure on the euro and boost the dollar. What is really odd right now are securities. With this robust dollar gain, bond yields have been acting weird. There's been a lot of bond buying the past two weeks. With bonds getting bought up yields are naturally low, but what I'm trying to truly understand is why there's such a demand for bonds.

Anyway, unless the market correlated variables stop working hand-in-hand to boost the dollar, I can't buy the euro.

For tomorrow the euro remains at risk. I don't expect any major moves, like 200 pips or more, but I'm certainly prepared to be proved wrong. I may have more comments on the euro after I see whether or not we can retrace back up from this stop hunt move.

Please be smart with your margin and do not overleverage.

Finding the Best Credit Card

2008-08-07T08:00:00.000-07:00

As an internet Marketer, having a credit card is a must. Almost all online transaction use credit cards. You can use your credit card to verify your PayPal account, buying domain, etc. There are many different credit cards offered in the market.

My friend, if you cannot pay all your monthly credit card billing, then you must consider getting a low interest credit card and begin saving. But if you want the credit card advantages without the risk of overspending you can choose pre-paid debit cards, with this cards, the money you can spend is based on the money you have deposited into the account.

If you are the owner of a small or medium sized business, you should choose business credit cards, Use your business card frequently and you can earn cash back, bonuses, free online reporting that enable you to watch your business spending closely. With all the advantages available having one in your wallet is just brilliant business.

Key Levels update

2008-08-06T21:12:00.000-07:00

One point I wanted to cover for tomorrow is about Trichet and the euro. I don't think the high value of the euro has ever really concerned Trichet. Bernanke obviously didn't want a strong dollar so he used monetary policy to achieve his goals.

But Trichet has never given a sign or signal that he purposely wanted to weaken the euro. With the euro CPI being at 4.1% I don't think Trichet would be too thrilled with a rapidly depriciating euro, so this could be a valid reason why he wouldn't say anything too crazy that would tank the euro.

Key upside levels:

1.5456
1.5473
1.5489
1.5504
1.5527

Key downside levels:

1.5391
1.5378
1.5362
1.5343
1.5321

Trade Team Update

2008-08-06T18:27:00.000-07:00

Before we take a look at tomorrow's monumental event, lets do a quick re-cap... as we forecasted, German Factory Orders printed worse than expected and even printed negative. No big surprise there, but that data pretty much set the tone for the day...

The only way to go was down but the question was how far down do we go... that was up to commodities to decide. Gold and oil took another beating which sent the euro on a short break of the 1.5400 level before quickly recovering.

We made another attempted break of the 1.5400 level after NY closed and the euro has now recovered from that as well. So, that's one attempt of a 1.5400 break starting the new day today... keep your eye on that level.

ECB and Trichet:

The short-term life of the euro hangs in the balance tomorrow as we get the ECB's interest rate decision and more importantly, Trichet's monetary policy press conference.

If I have to tell you what's at stake tomorrow, go back to your demo account... I'm not going to waste precious time with that. I'm more concerned with probabilities and potentials...

As I said on Sunday, the euro is clearly at risk this week and the risk level jumps to a 10 out of 10 tomorrow. First of all we know the ECB's not going to move on rates. They are done hiking. The next move will likely be a cut, but that's not ready to happen quite yet.

The euro has formed a price action pattern that must be noted heading into tomorrow's press conference. The two press conferences Trichet had prior to tomorrows translated into a strong down move in the euro. It wasn't dollar buying, but it was profit-taking and then the normal stop hunting and stoploss triggering that goes along with a big extended move.

We've had two weeks of profit-taking, two weeks of euro selling and dollar buying, two weeks of stoploss triggering, and two weeks of shifting fundamentals that favor the dollar.

These factors make for a potentially chaotic day tomorrow and the proceeding days after Trichet's press conference. In addition, all market correlated variables are working against the euro and working for the dollar. Even the crappy FOMC statement didn't hurt the dollar.

My question is... what can Trichet possibly say or do to support the euro? He can't hype up Eurozone growth... even Germany is starting to show signs of weakness. Add that to the shaky situations in Spain, Ireland, Italy, and France and I can't expect to hear anything other than dovish rhetoric on growth.

At the last meeting Trichet told the markets that the rate hike to 4.25% would fix Europe's price stability issue. That was the main reason the euro tanked the last time he did a press conference.

Trichet is a cocky central banker and prides himself on transparency, credibility, and upholding the good name of the ECB. Do you think Trichet's going to flip-flop and say that the last rate hike isn't going to achieve price stability after he already told the markets it would? Not a chance in my opinion. Trichet is the most respected central banker on earth and knowing what I know about him, he's not about to put his status in jeapordy.

One of the reasons the euro has remained supported these past few months was because of Trichet's hawkish rhetoric on rates and inflation. In my view, he's already played that card and it won't work any more.

In addition, the euro has remained supported because of their strong fundamentals, the dollar's weak fundamentals, and most of all because of the Fed's 325bp's worth of rate cuts.

Those glory days are over for the euro. Sure, inflation is a major issue in Europe and isn't going anyway anytime soon, but Trichet's hands are tied and he won't be able to fight price instability with rate hikes.

The fundamental shift between the U.S. and Europe is in the works and there's not much Trichet or Bernanke can do about it. Don't mistake my words... I'm not saying the U.S. is out of the woods yet, in fact there are some sectors which will see further declines and weakness. What I am saying is, I believe we're entering a season of extended weakness with Eurozone fundamentals and a season of a more dovish ECB.

EUR/USD:

For tomorrow's circus sideshow in Frankfurt I'm expecting Trichet to be largely ineffective at supporting the euro. Of all the possible scenarios I have running in my head, not one includes him seducing the market into selling dollars and buying euros.

If I'm wrong, so be it, I don't really care, I'm still bearish on the euro and nothing will change my view at this point. I will short the crap out of the euro on any rise we get.

If it spikes, I'm shorting. If it steadily rises, I'm shorting. I'm adding shorts ahead of the meeting on any rises we get tonight and this morning. Even if the euro somehow makes its way back to 1.5700 or 1.5800, I'll stay short, it can go as high as it wants and I'm shorting it all.

It's just not cool to buy euros any more... kinda like how uncool it is to wear a mullett and a pair of stone washed jeans.

That being said, I certainly can't rule out some retracement after this extended move down, but as I've said all week, this will largely depend on what Trichet tells the markets. I really need to hear what he says and then make a game time decision when I see how the markets react.

It's imperative you watch his press conference tomorrow. Every market player on God's green earth will be watching and reacting. For you techies this mean's you need to minimize your candle charts and keep your eyes on Trichet's press conference and the euro's real-time price action and not on the pretty colored lines crossing or uncrossing. Deal?

I really have no other comments on the euro until I see what happens after 0830 EST tomorrow. It all hinges on Trichet at this point. Oh, and don't forget we have Pending Home Sales which I'm forecasting to print better than last month and print better than forecasted.

If you're margin is in a scary spot, you better get a game plan together now for how you're going to handle tomorrow... Trichet is not Bernanke. Trichet is animated, cocky, opinionated, and isn't afraid to speak his mind which is in stark contrast to Bernanke who appears timid, unassured, weak, and mostly incompetent.

It's for those reasons that the market responds to Trichet more so than it does to Bernanke. So, back to the margin issue... if you've unwisely got yourself overleveraged, you better have a game plan for tomorrow or else the market could hold you hostage or worse... Be smart please.

Easy Credit Repair

2008-08-06T07:01:00.000-07:00

In this present day, no one cannot live without a credit card. It’s become very much a part with modern lifestyle, one advantage of having a credit card is you can easily buy things that you want through offline or online store without bring your cash. But if you do not use it wisely, bad credit will make you have a terrible stomached.

Most people with bad credit score would love to repair credit, but they are not sure how to do this, the easiest way to do credit repair or even bad credit repair is to enlist the services of a credit repair company, many of credit repair company are available online and you can start working with them quickly after you find the credit repair services that best suits your needs.

Using a credit repair service is a very good idea, because it is a difficult task to repair your bad credit on your own, and it can take a long time doing it yourself than if you work with a credit repair services.

Key Levels

2008-08-05T22:42:00.000-07:00

Prices are moving up but there's not much momentum behind the move. I'm expecting a test of the 1.5500 level and if it breaks and runs out of steam, I'm shorting it.

Key upside levels:

1.5498
1.5518
1.5533
1.5548
1.5562

Key downside levels:

1.5448
1.5429
1.5401
1.5378
1.5354

Be advised we have two big event today: German Factory Orders, which should suck. I'm expecting a print below expectations in addition to a 45% probability of it printing negative. Then later we get crude inventories. With crude being in the limelight this week I can be sure that report will cause the market to jump and the euro to follow which ever direction that jump is in.

Trade Team Update

2008-08-05T14:02:00.000-07:00

Leading up to this afternoon’s FOMC rate decision and policy statement the euro continued to sell-off in addition to commodities selling off as markets were preparing for strong hawkish FOMC statement.

The fact that our market is still waiting for Trichet’s performance on Thursday means that we’re not going to get a whole of information out of the EUR/USD, but I’m getting plenty of information from equities and commodities right now in addition to Fed Funds Futures and the USD Index.

First thing I want to do today is dissect the FOMC statement and tell you what I believe the Fed’s message to the markets is. Then I’m going to tell you what I’m reading within the other markets and how this can potentially impact moves in the EUR/USD in the short-term. Basically you’re going to read my thought process in the best of my ability to put it all on paper.

As far as the FOMC statement is concerned, I’m sure the big question being debated is whether the rhetoric was hawkish or dovish. Well, it was both. What else do you expect from the Fed? They hire brilliant copy writers to craft these kinds of messages that are vague and aloof. That means I need to read between the lines to decipher what the Fed is trying to tell the markets.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports.

That’s a hawkish USD+ comment. But, we know why GDP saw gains and the consumer sector was supported… because the Treasury fired up the printing presses and mailed billions of dollars worth of “free money” to taxpayers, and those taxpayers did exactly as we knew they would – spend, not save, but spend. Overall, this comment is a wash because it’s good news, but we know why the news is good.

Labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.

Those are dovish USD- comments. We know how ugly the financial markets are, how tight credit is, how nasty housing is, and how the price of energy is. Plus, as I mentioned above we know why growth expanded in the second quarter and why it won’t expand as much in the proceeding quarters. Although these comments are USD-, the markets already know this stuff and there’s no strong new rhetoric to describe how dire those sectors are.

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

I like this comment. It’s not hawkish USD+. It was this comment that sent equities up and kept the euro from taking another beating (for now). Reading between the lies, this is where the Fed is telling the markets they have no intentions of raising rates anytime soon. In fact, they have no real timeframe on when they’re going to raise rates. They are telling the markets that the 325bps worth of rate cuts still need time to cycle through the economy and through the financial markets.

But, this comment isn’t really going to help the euro much because we know the next bank that is likely to cut is the ECB and that the next bank to raise rates is the Fed. This comment also took down Fed Funds Futures and pushed back probabilities of a Fed hike over the next two meetings. So overall this comment is not going to help the euro much but it certainly doesn’t hurt it.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

These two comments are double-speak and flip-flopping at its finest. First, they tell the markets we have an inflation problem, then they say they expect inflation to ease, and then they finish off by saying they really have no idea what inflation is going to do in the near-term.

This kind of flip-flopping is a wash for the USD. Inflation is real, it’s happening, and it’s not going away as long as the Fed keeps interest rates artificially low and keeps pumping up the M3 money supply. The more inflation we keep importing from China, the more this will weigh on things like the Import Price Index and CPI.

Wall Street really liked those comments. The was the Fed’s way of signaling to Wall Street that they know there’s an inflation problem but they aren’t going to fight that inflation problem with rate hikes any time soon. Wall Street also liked the fact that there was only one dissenting vote, but that was from the biggest hawk on the FOMC, so there’s no real surprise there.

Bottom line is, the Fed’s not freaking about inflation and when you read between the lines you see they are telling the markets their overall main concern is the smooth functioning of financial markets and that inflation is still just a secondary concern but not enough of an issue yet to go into a rate hike cycle.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

And that’s the last of it there… that’s the Fed’s way of telling the markets they are still in control and will stand ready to protect the interests of the U.S. economy and U.S. financial market. This is more of an endearing attempt at the Fed trying to gain back some credibility. Nice try, I still think they suck.

In my view the net bottom line on this FOMC is that the statement is slightly more on the dovish side, but intended to send a message to all markets. The message to equities was that they’re not raising rates, so keep buying with cheap money. The message to commodities is that they’re watching them closely and will keep manipulating to bring their prices down. The message to currencies is that monetary policy is on hold and they’re still not too concerned about the weak dollar, so keep having your way with it, up or down.

Reading markets:

Another reason I don’t spend anytime looking at candle charts and colored lines crossing is because I’d rather focus my eyes and my mind on the global markets as they are tremendously valuable indicators for our market because each of those markets are directly tied into each other.

After the FOMC statement was released the Dow went up and bond yields went up. There was a strong message within the price action of those markets… the message was that money flows were coming out of securities and into equities because the Fed would maintain a dovish stance on rates, would keep money and credit cheap, and would keep Wall Street supported.

That type of message is not very supportive of the USD, however. The problem is the message the Fed sent to commodities. Gold is train wreck right now and is weighing heavily on the euro. The sell-off in gold has been dramatic and has sucked the euro down with it. I’m no gold expert, but that thing is a mess and I’m not sure if the bleeding will stop in the short term.

The issues with oil are very much the same. The latest “excuse” for oil’s sell-off is that demand is down. I’m not exactly buying that reason but how can demand drop so dramatically that in just three weeks time that it would send crude down almost $30?

Regardless of what the reasons are, it is what it is. Crude is weak, it’s selling off and if it keeps selling off the euro will keep selling off. Pretty simple.

So for at least the rest of this week I’m going to keep an extremely close watch on the markets and the market correlated variables to see how their price action is responding to not only the FOMC but especially to how they respond to Trichet.

EUR/USD:

As I’ve said all week, I’m not buying the euro. I don’t care if the angel Gabriel came down with a trade call from God to buy the euro, I’m not buying the euro. I’m selling every rise and I will keep selling every rise.

The only way I’m going to buy the euro again is when I see the momentum to stop sliding goes away and I see commodities turn around and I see the euro’s price action show the potential of gaining some traction to make a move up without getting smacked down by the dollar.

I believe we have more room to fall. Especially if gold and crude continue to sell-off and equities continue to gain. If those two factors work hand-in-hand, there’s not much hope for the euro to rise because fundamentally, the euro is up against the ropes vs. the dollar right now.

I don’t expect any monumental moves because we still have the ECB and Trichet on Thursday. I believe Trichet is going to carry more weight than this FOMC statement. He’s more credible than Bernanke and I believe he holds more power to cause a reaction in our market.

So, until I see what happens on Thursday and listen to what Trichet has to say, I have little commentary on the euro. I’m still bearish and I’m selling any rises.

Be smart with your trades and please do not over leverage.

Trade Team Update

2008-08-04T19:31:00.000-07:00

Today's market action was so crazy and disjointed I had to step away from my computers early this afternoon, clear my head, take my mind off the market, and focus on more pleasant things...

But now we must focus on the FOMC as it's potential puts both the euro and the dollar at risk tomorrow for very distinct reasons.

First, lets re-cap today's events... all USD data printed to the upside today, which capped any euro gains. You may recall the euro made a quick spike up this morning, but what I was seeing within that price action was short contracts being taken, which drove the price up "artificially". And I believe these short contracts were being taken in preperation for this week's Fed and ECB events.

That spike up hit my 1.5632 key level to the pip and totally ran out of steam to push any higher... and those that have been following my updates should have easily known I was shorting at those levels and I'll be holding those fresh shorts into tomorrow's FOMC.

I have to mention commodities as well. With the Personal Spending data printing lower than last month's reading, this sparked a sell-off in the crude pits which in turn brought gold down, which in turn brought the euro back under the 1.5580 level.

Enough history, lets talk about the future now...

FOMC:

To be honest, I don't see tomorrow's FOMC rocking the markets in Biblical proportions... yes, the market will move, the market will react, we will see price swings, we will see volatility.

But, the Fed is not going to move on rates and it's my opinion that Bernanke is going to temper his words and not say anything to cause any major upheaval.

Bernanke cannot possibly be anything but dovish on growth, employment, housing, the consumer, and overall economic conditions. Economic conditions have further erroded since the last FOMC meeting. But, what has changed is the price of a barrel of crude.

The Fed's market manipulation between the last FOMC meeting and this one has worked to beat crude down, drop gold, and push the USD up to manageable levels.

The Fed and the economy is in no position right now to handle a skyrocketing, rapidly appreciating dollar. The Trade Balance and Current Account cannot deal with a fast strengthening of the dollar.

Wall St. is in no position to handle rate hikes... the housing market would completely implode if the Fed upped rates. Unemployment is at a 4-year high and the economy has been bleeding jobs all of 2008.

I do expect to hear hawkish tones on inflation, but they will use the phrase "inflation expectations" and we won't hear any reference to actual, physical, real life, day-to-day, hit-you-in-your-wallet inflation that the American consumer is suffering from.

Here's where the EUR is at risk: what can the Fed possibly tell the markets that they don't already know? Can the Fed paint a picture any uglier than it already is? I think you can see where I'm going with this...

My opinion is that no matter what the Fed says, the USD is going to keep strengthening and keep beating up on the euro. Of course anything is possible in this market, but I think the only way the USD can give up any significant gains against the EUR is if the Fed reveals new and damaging information on the U.S. financial system and on U.S. banks.

As I said yesterday, I cannot predict nor will I speculate on what the FOMC statement is going to say, but my feeling is that when it's all said and done, the USD wins and the EUR loses... sure, it might not be an instant move, it may take a few days or a week, but my view is that all risk is on the EUR with this FOMC.

For tomorrow it's all going to boil down to what Bernanke says in the statement... and the key is how Fed Funds Futures responds to the rhetoric in the statement... Fed Funds Futures is a great indicator post-rate meeting to get an idea for what the market intends to do with the EUR/USD.

Needless to say, I'm pumped and I'm ready for any FOMC madness. I'm tired of these dumb ranges and I'm ready for either the USD or the EUR to get a proper beating... I don't even really care which one gets it, I'll make money either way.

EUR/USD:

It shouldn't be too hard to figure out my gameplan... I've been bearish on the euro for a better part of two months, this has been no secret to you, and I will be shorting the crap out of the euro on any rises we get...

So far on this drop the 1.5520 level remains strong. It was tested last week and held and right now it appears to be holding again. And when we bounce back up off these levels I'm shorting again, and shorting again, and shorting again...

I'm shorting any rise the market will give me because those are silver platter trades that will pay off even if they go into drawdown.

Right now I don't have much to say about the EUR/USD because it all hinges on what the FOMC tells the markets tomorrow. Clearly we're seeing market players position themselves short but this doesn't necessarily mean much to me.

There are too many idiots that trade this market and they are always losing, so I don't really care what the market sentiment is, my number concern is the fundamental aspect of the market, namely the FOMC.

Believe me, Ben Bernanke doesn't have a candle chart open with Fib lines and moving averages while he's crafting his speech and preparing the FOMC statement... he's not taking into consideration where the trend lines are and correlating that to what he's going to say in order to respect tech indicators... sorry, but that's not how things work in this market.

This is why the underlying fundamentals of the market are so critical and why price action is king and will always be king.

I can't expect the FOMC to make things any clearer to the markets tomorrow, but I will be watching and dissecting nonetheless, and of course depending upon the price action to lead the way.

You know what's at stake tomorrow, so prepare... Be smart...

EUR/USD Weekly Outlook - - 8/3 thru 8/8 2008

2008-08-03T13:10:00.000-07:00

For the most part you can basically forget about all the events that have occurred in the market the past two weeks because this week the circus comes to town...

Arriving in the clown car is the FOMC with their interest rate decision and monetary policy statement while in the circus sideshow tent we have ringleader Mademoiselle Trichet running the ECB’s interest rate decision followed with a bonus freak show that’s not recommended for children, pregnant women, and those with heart conditions.

This I do know – neither central bank is going to move on rates this week. This I do not know – how hawkish or how dovish the Fed and ECB intend to come across to the markets. Inflation in Europe is running over 200bps higher than the ECB’s target inflation rate. In June the Fed started talking tough on inflation as they finally realized they can no longer lie to the markets about the U.S. inflation issue.

Political pressure forced the Fed to step up their hawkish rhetoric on inflation. In Europe the ECB is facing political pressure to tone their hawkish rhetoric on rates and to soothe the Eurozone with signs and signals of rate cuts to divert the coming economic recession and sharp downturn in growth.

Both banks have painted themselves into a corner and both have few options. The Fed has exhausted it’s arsenal of dovish monetary policy. The ECB’s hands are tied behind their backs now and can no longer raise rates. Bernanke has been abundantly clear about one thing: his first objective is to bring about the smooth functioning of financial markets. Trichet has also been clear on his first mandate: ensuring price stability in the Eurozone.

We’re coming to a crossroads where the Fed and ECB are going to have to change their top priorities. While the ECB was focused on inflation, they will now have to focus on growth, their financial markets, employment, and overall economic stability. As the financial markets do find stability, Bernanke will have to shift his focus on a future cycle of rate hikes to not only cool inflation but to bring down commodities and boost the value of the USD.

Are we there yet? No, not exactly. It’s only August and it’s a bit early for this shift to begin to physically take place, but the time is drawing very near. That being said, we’ve already seen the underlying fundamentals of the market begin to shift in the second half of this year, just as we forecasted they would back in January.

Now one of the main reasons the markets have been behaving wildly the past few weeks is mostly due to the complete lack of liquidity and heightened uncertainties. But, the other issue is simply due to the fact that the markets have not heard much from the Fed and ECB the past 30-days.

The markets are like children. When children are neglected and have no authority figures to keep order in their lives, they are left up to their own devices and the results are often not pretty. This is exactly how it works in our market. The central bankers have neglected the markets and the markets have been left up to their whims and I believe this has a lot to do with the craziness we’ve seen in currencies, commodities, and equities the past few weeks.

The markets need guidance from the central banks… they need to hear the rhetoric, they need to look for the signs and clues about future monetary policy… when this is lacking, the markets run wild… but, this should change as we get to hear from both the Fed and ECB this week, with each bank speaking on the number one key driver of the currency market: interest rates and interest rate policy.

EUR/USD:

The euro’s had the crap kicked out of it after making its last all-time high at 1.6038. In my view I see the risk is clearly on the euro this week. Not only do we get a ton of Eurozone data, which could easily print unexpectedly to the downside, we have the unpredictable factor of Trichet and what he may tell the markets on Thursday.

That being said, the dollar has seen some decent gains the past few weeks but if the FOMC fails to hit the markets with a hawkish stance on inflation, any dollar gains will likely be capped. The Fed is still printing money for the financial markets which tells me credit conditions are tight and not getting any better.

Unemployment is at a 4-year high and we’ve had seven straight months of job losses in the economy. Housing has not bottomed and there’s no real bottom in sight as far as I can see. The equities market is a mess. So, how hawkish can the Fed possibly be when any significant amount of light has yet to be seen at the end of the tunnel?

Another point to consider is this: since the FOMC meeting we’ve seen crude come down from a high at the $148 level to the mid to low $120’s. Gold has dropped significantly. The price of gas at the pump has dropped dramatically in many regions in the U.S. Here in Nashville at my local gas station the price for a gallon of gas has dropped 36 cents in the past two weeks.

So, in my view it’s quite possible the FOMC looks at some of those bright spots with commodities which will diminish their need to manipulate the markets with strong hawkish rhetoric on inflation and keep singing the same tune about ensuring the orderly functioning of financial markets.

My opinion is that the euro bleeding should come to an end at least until we hear what the Fed and ECB have to say. The 1.5500 level has held strong in the face of some serious profit-taking, euro selling, and abysmal fundamental data out of Europe.

Should the euro sell-offs continue, there are a few overall downside levels I’m looking at according to my own numbers:

1.5504
1.5482
1.5464
1.5442
1.5418

The euro will likely continue to struggle to make any significant upside gains. As soon as we hit 1.5700 last week that price level was resoundingly rejected. In order to gain any traction and momentum to climb out of these low levels the market correlated variables will need to work hand-in-hand to give the euro a boost. This is imperative.

Bear in mind the market is not even open yet, but I do have a few key upside levels you will want to be mindful of as we get started this week:

1.5588
1.5614
1.5632
1.5658
1.5684

I’m expecting liquidity to remain terribly low at least until Tuesday’s FOMC events. But keep in mind we have a ton of mega fundamental data on the books all week long in addition to the monetary policy events.

As far as trading goes, I’m not about to make any big moves at this point. I have euro longs that are sitting in drawdown but I’m not overly concerned right now because there’s really no fundamental reason for another extended move down. I believe we do need to see some upside retracement, so I’ll be holding open all longs until market conditions and price action patterns dictate otherwise.

Any move up we do get you can be sure I will take fresh shorts. As I’ve said many times, I will keep shorting every rise we get… I’ll short it all the way to 1.6400 if I have to, I don’t care. I’m shorting everything I can get my hands on.

This could be quite a monumental week because the fundamentals and central bank monetary policy steps to the forefront. The fact that we’re still in the summer session diminishes the probability we break out of this range between 1.5900 and 1.5400, at least that’s my opinion. But once we get back to normal in September, it’s game on…

You know the drill – be smart with your trades, be smart with your open entries, and be a strict risk and money manager this week. Be smart about your entries and be wise with your entry sizes. This means taking 0.5% used margin entries and not allowing your usable margin to get below the 90% level at the most.

If you’re new here or you’re a tech trader, this week will offer you many lessons on what really moves this market and why this market moves… the underlying fundamentals, moves within the market correlated variables, and most of all, all things interest rate related.

EUR/USD Weekly Outlook 7/27 thru 8/1 2008

2008-07-27T13:20:00.000-07:00

This week's fundamental calendar will prove to further complicate things for the EUR/USD as we'll be trading in very ill-liquid conditions with the addition of monumental economic data for both the euro and dollar.

In my view I see the USD at risk this week as there's more overall growth, manufacturing, inflation, employment, and consumer data coming out of the U.S. compared to Europe.

Last week's market conditions and real-time price action showed the first real effects of what it's like to trade during the summer session. I expect the same exact summer session conditions to persist this week.

Money flows are not at the volume that creates orderly market conditions and liquidity is extremely low which adds a level of uncertainty to overall price direction. The underlying fundamentals of the market will rule the day.

Last week we saw a dramatic sell-off in commodities. Oil has come down from high's at the $147 level to test lows at the $120 level. Gold is off significantly from highs at the $975 level all the way down to the $920 level. I believe oil and gold are due for some upside retracement, but this will largely depend upon how the market's decide to react and respond to this week's fundamentals.

Despite the massive sell-off in oil, U.S. equities struggled last week and the euro was unable to sustain a break of the 1.5650 level and showed no signs of even being able to test the key 1.5600 level. This is to be noted.

In my view the market is telling us they are not ready to move into an extended dollar long bias and they are ready to keep buying the euro as long as the dollar fundamentals remain to the downside.

Should the USD fundamentals shock to the upside this will certainly serve to ease the market's mind and give them greater comfort to buy dollars and sell euros.

The continued turmoil in the U.S. financial sector is going to weigh heavy on the dollar. Over the weekend the FDIC had to take over two more institutions that went bankrupt. First National of Nevada and First Heritage N.A. were shut down and taken over by the federal government in a move that was mostly to prevent another scene of angry customers standing in line waiting to pull out every penny they have.

Those are not the kind of images the government wants to be broadcast on the evening news. There will be more bank failures, this you can be assured of. And just wait until the banks in Europe start to fail... when those lines of angry customers form outside of European banks you better be short the EUR/USD...

NFP:

So, we have low liquidty, sporadic money flows, choppy price action, and our favorite fundamental event: Non Farm Payrolls. NFP weeks are always different than the other weeks and you can expect the advent of Friday's NFP to only make things even wackier.

Economists are forecasting anywhere from a net job loss of -45K to as much as -82K. All of the banks do their own independent NFP forecasting which can make it difficult to gauge how the market will respond.

The risk during an NFP week, especially when liquidity is low, is when the banks decide to position themselves for Friday's NFP and Unemployment data. The moves you see on the run-up to NFP are almost meaningless to how Friday will playout.

The point is, expect the unexpected this week because of the NFP factor and as we draw closer to Friday minimize your risk exposure, and please, do not try to trade NFP.

EUR/USD:

I still have some euro longs open that I took last Thursday and I intend on keeping those open for now. Obviously the market's not even opened yet but in my view I believe we need to make another run at the 1.5800-1.5850 level again.

This week's fundamentals certainly can provide all the fire power the market needs to push the euro back up to test the top of the range. As far as trading goes, I will continue to short the euro rises and I will continue to buy the dips. This gameplan has worked beautifully all summer long and I see no reason to change things up at this point, but I will be more cautious and likely on the more conservative side this week because of the liquidity situation and NFP.

To be honest, I really have nothing groundbreaking or brilliant to say about the euro right now. For me, I'm mostly going to depend on what the real-time price action is telling me, what the market corrrelated variables are telling me, and what the outcome of each day's fundamentals are telling me.

The market will tell me what it wants to do, so I will be patiently waiting for the message. If I don't like what I see or the price action is not behaving properly, I'll sit on the sidelines and wait until I see my price. I can go days without taking a trade if I have to.

Trading:

I'm involved on another trading site where people can watch one of my live trade stations 24/6. They can see every trade that's opened and every trade that's closed on that particular account. That account's usable marging has never fallen below 96% and the average weekly ROI is over 2%. Since June the account has gone from $57K to $70K while maintaining a usable margin of 96% or better.

That account has euro shorts in the 1.5300's and euro longs from above the level we're at now. That account banks daily profits, it can easily withstand anything the market throws my way, it can safely hold trades in drawdown while waiting for the market to come back, and at the rate it's going, the annualized ROI will be over 100% which is seven times better ROI than anything Wall St. can produce.

Why am I telling you all this? That particular account is a live, viewable lesson in patience, timing, and strict risk and money management disciplines. 2% weekly ROI is modest but the key is that it's consistent and that account is unexposed to the risks of the FX market and is not at any risk of a margin call and never will be. The market can't beat me, the broker can't chase me, and there's no negative emotional connection to that account, to the market, and to trading it.

I'm not doing anything special with that account and none of that makes me a great trader but the point is I firmly believe traders can achieve those kinds of modest results and keep themselves from a margin call situation if they would only learn to be patient, learn to be strict risk managers, and learn to time the market to their advantage.

So, let me close by saying to practice strict risk and money management disciplines this week and to be smart.

Trade Team Update

2008-07-24T20:35:00.000-07:00

Today's market action can be summed up in one word: weird... all markets were off kilter as we got nasty data out of both Europe and the U.S.

The euro was kept under pressure by the abysmal growth data and the dollar was kept under pressure by weak fundamentals and by commodities finding support and making a move back up.

The Dow was used and abused today as the housing data showed it's worst readings in 10 years. Gold and oil stopped their downward slide and managed to claw their way back up.

The key downside price levels were between 1.5650 and 1.5620. We stopped seven pips short of breaking the 1.5620 level, so the only way to go was back up... funny how that works, huh?

Basically, the EUR/USD was rather out of sync with the market correlated variables and the market correlated variables were out of sync with each other and that just makes for a some weird price action... but, the range trading today was fantastic.

Tomorrow:

Tomororw is a make or break day for the USD. If the USD fundamentals print at or below expected I see no reason the EUR can't win the day. I've been so busy this week I haven't had any time to do my normal research for tomorrow's fundamental events but lets just say I'm not bullish on the data.

EUR/USD:

I'll call myself a euro bull for tomorrow's trading. I was buying the euro at the 1.5660 level and all price points lower. I'm also holding euro longs from above these levels

We made attempt after attempt after attempt to sustain a break of the 1.5650 level and failed each time. The closer we got to the 1.5620 level, the faster we bounced and moved back up. Those price patterns should be noted headed into tomorrow's trading session.

I'm not ruling out another test of the 1.5650 - 1.5620 level after London opens, but should we bounced up again I see no reason we can't move on to 1.5700+.

Of course tomorrow's fundamentals and the market correlated variables will be key in the EUR/USD's direction. Should we get weak USD data this will likely set the market correlated variables in motion to work hand-in-hand to give the euro a boost.

No matter what I'm shorting the rises. I will keep shorting all the way up to 1.6000 if I have to. I don't care. No drawdown on any euro shorts will even make me blink an eye. I'm strongly bearish on the euro. It can go as high as it wants to and I will keep adding shorts.

Once the market masses all get on the same page and realize there's an economic armageddon within the Eurozone and once the Fed and ECB physically begin their respective shifts in monetary policy the euro will take a whipping unlike the markets have seen in recent memory.

The ECB is not raising rates. I don't care what kind of crap comes out of Trichet's mouth, his hands are tied on future rate hikes. Of course, the Fed can't raise either but the Fed has the much high probability of rate hikes and the ECB has the much higher probability of rate cuts in the near-term. Do the math on that one...

Look at today's euro Current Account data: ugly as sin. Look at today's Manufacturing PMI data: beat up from the feet up...

I'm patiently waiting for the wheels to be put into motion to push the euro over the side of the cliff. Until then I'll remain strongly bearish on the euro and almost nothing will cause me to flip flop on this overall view.

I will depend strongly on the EUR/USD real time price action once London opens to get a clear picture of how to trade today's market action. Be smart and do not take any knee-jerk trades you'll get stuck in over the weekend. Do not overleverage and pay close attention to what the market is telling you between now and closing.

Trade Team Update

2008-07-23T21:43:00.000-07:00

I'm sorry for the delay with today's update and for what will be a very light and brief update...

Just a quick re-cap on today's events... the euro was again pushed lowered thanks to gold and oil... gold lost another $30+ today and oil lost another $3+. This week gold has dropped from $975 down to a low of $918. In the past few weeks oil has dropped from a high of almost $150 to under $125. There's no way the euro can make any gains with commodities so weak to the downside.

But what is to be noted is the fact that the euro is presently sitting above the 1.5700 level even though commodities have taken their worst beating to date. To me this shows the euro still has some fire power to make another run towards 1.5850+.

The fundamental situation for Thursday is insane and the EUR is at heavy risk. Most if not all EUR data should print at or below expected with the USD data printing USD+.

All eyes will be on Fed Geithner who is a known hawk. I fully expect to hear hawkish rhetoric and I fully expect to hear Geithner call for rate hikes in the near-term.

Fundamentally the EUR is going to need positive news to gain any upward momentum because right now there's very little by way of upward momentum. As far as the price action goes, my downside targets have all been hit and we've backed away from testing the key 1.5650 level.

As I indicated all week a break of the 1.5750 level would take us to 1.5680 and points lower. Now, we need to work our way back up and over 1.5750 in order to get anywhere on the topside. Should we fail to even sustain a break of the 1.5720 level I see more downside and I see an easy break of 1.5650 and then a test of 1.5620-1.5600.

Price action is weak to the upside right now but we'll know more once London enters the market. You will want to be alert when all the EUR data hits the markets as it could get ugly between 0300 EST and 0730 EST. That time holds good potential for heightened volatility.

Yes, I'm still bearish on the euro, will short any rise I can get my hands on, and will hold my best euro shorts at this point.

Be smart as things should get even crazier the rest of the week...

Key Levels

2008-07-22T22:10:00.000-07:00

Key upside levels:

1.5823
1.5834
1.5862
1.5881
1.5904

Key downside levels:

1.5754
1.5739
1.5718
1.5703
1.5683

Beware of today's euro data which is forecasted weak to the downside... keep a watch on oil and gold

I will be looking to short any rises I can get my hands on. In order for the euro to gain any upward traction we'll at least have to sustain a break above the 1.5810 level.

On the downside, a clean break of the 1.5750 level opens the door to run down to test 1.5700 and then points lower.

Be smart. I expect we see some more shaninigans over the next 14 or so hours.

Trade Team Update

2008-07-22T19:07:00.000-07:00

As physically and mentally demanding as the Forex market can be, and as stressful as it can be, sometimes you just have to step back and laugh at the interesting cast of characters that make up the retail side of FX...

Approximately 1 minute and 36 seconds after Philly Fed Plosser uttered a few choice words I posted his comments in the chat knowing they would move the market...

Let me cut to the chase because what happened today is completely inexcusable for anybody trading live money in this market -- the inexcusable part is not knowing a powerful central banker is speaking and what this powerful central banker is telling the markets.

I know it was mostly tech traders who were lost in the dark and wondering why the euro was tanking, but being a clueless tech trader is still no excuse because we gave 12-hours advanced warning of what could happen today:

In my view the key event we need to watch is Plosser's speech. He'll be speaking about the U.S. economic situation and I surely expect Plosser to talk about inflation.

If you read yesterday's update you saw what some of the Fed's have been recently saying on inflation. Now, what the market needs to see and needs to hear is all of the Fed's key players singing the same song and reading from the same script, which is hawkish rhetoric on inflation, talk of raising rates, and general optimism for the U.S.'s economic future.

That's an excerpt from yesterday's Team update... can we possibly spell it out any clearer? The other point is, even though we give advanced warning on these events and the possibilities it's still up to each trader to do their homework and to stay at the top of their game at all times.

If you want to gamble with techs, fantastic, more power to you, but please at least know when a central banker is speaking. Trust me when I say this... it's highly unlikely that the Fed and ECB are looking at candlecharts and all the fancy colored lines before they get in front of the mic to make either hawkish or dovish comments...

Do yourself a favor and learn what really moves markets. If you do, I promise you'll get out of the herd that loses 95% of their trades and you can join our little group here that wins 95% of the time.

EUR/USD:

A quick re-cap of today:

Plosser said he wants to hike rates no matter how bad the employment and financial markets are and he wants to hike them sooner rather than later. That's all he really said and that's all he really had to say.

Those few comments dropped the euro 200 points, dropped gold $35+, and dropped oil $4+. This isn't rocket science, it's pretty simple stuff.

Is the end of the euro as we know it? No, I don't think so. Plosser is a well-known hawk and his rhetoric's effect has already worn off.

Now, what could further beat up the euro is tomorrow's fundamental data. All signs are pointing to the downside for tomorrow's data. The market is expecting the worst and will probably get the worst if the truth is to be told because economic conditions in Europe are abysmal.

Should the key data surprise to the upside, obviously this would be EUR supportive and will help breathe some life back into gold and oil. I'm expecting and forecasting the worst.

That being said, I did buy the euro on this drop and will hold those positions for a potential move up and over 1.5800 between now and 0200 EST. And then if we get a good rise, I'll add a new short or two or three... price action will dictate my next moves.

The fact that the euro didn't sustain a break of the key 1.5750 level keeps the EUR poised to move back up. Now, should we have another break down and we sustain a break of the 1.5750 level we should be clear to make a move to the 1.5680-1.5650 level. If bad EUR data is the catalyst for another leg down you can expect to see the high to mid 1.5600's.

I'm still overall bearish on the euro, just as I've been for months and I will continue to be bearish, nothing will change this bias at all.

That's all I've really got to say at this point... I'll post my key levels later this evening when things become more clear

Key Levels

2008-07-21T21:47:00.000-07:00

Key upside levels:

1.5934
1.5958
1.5974
1.5999
1.6024

Key downside levels:

1.5902
1.5883
1.5862
1.5847
1.5823

Trade Team Update

2008-07-21T17:44:00.000-07:00

With a total lack of fundamental data, lack of central bank speeches, and severly ill-liquid conditions acrossed the board we had a rather quiet day...

The markets were looking for anything and everything they could react to... today's flavor was tropical storm Dolly churning in the gulf and headed for Texas... this news stopped oil's slide around the $128 level and we saw crude push back up dragging the euro with it.

While the euro was trading around the 1.5850 level we saw the 10-year yield trading at very USD supportive levels, but did an about face after the euro broke above the 1.5880 key resistance level.

In addition, gold has been strong since Sunday's market open and this has served to keep the euro propped up against the dollar...

Tomorrow:

Once again we have a very light day as far as the fundamentals are concerned, which keeps the doors open for more USD weakness. It also doesn't help the Chief Liar Hank Paulson speaks first thing in the morning.

In my view the key event we need to watch is Plosser's speech. He'll be speaking about the U.S. economic situation and I surely expect Plosser to talk about inflation.

If you read yesterday's update you saw what some of the Fed's have been recently saying on inflation. Now, what the market needs to see and needs to hear is all of the Fed's key players singing the same song and reading from the same script, which is hawkish rhetoric on inflation, talk of raising rates, and general optimism for the U.S.'s economic future.

Should Plosser fail to deliver any USD supportive commentary, there's really nothing else that could hold the EUR back unless we get some surprise geo-political event.

EUR/USD:

As I mentioned in yesterday's update, I see no reason we can't and won't test the all-time high and then some. I still hold to this view as price action has been clear to the upside basically since the market opened yesterday.

In order to cool the euro down, the fundamental data we get between Wednesday and Friday must print EUR-, the Fed must support the USD, equities must stop sliding, all hurricanes or potential hurricanes must stay away from the central and north coast of Texas and Louisiana of course, and it wouldn't hurt to see gold sell-off.

Tall order, isn't it? I see the market correlated variables working in favor of the EUR right now and don't see anyway the USD can make substantial gains unless the wheels get put into motion to weaken the EUR.

That being said, yes, I'm still a euro bear because the Eurozone is on the brink of economic collapse just like the U.S. has suffered through for the past two years. Germany won't offer enough economic fire power to save Spain, Portugal, Italy, France, Greece, Ireland, etc.

I'm not ruling out a test of the 1.5900 level over the next few hours and will hold my shorts from 1.5930, 1.5927, and 1.5925 for this move. Should the 1.5900 level sustain a break, it will move on to test that key 1.5880 level.

On the upside, stops at the 1.5930 level were already knocked out earlier which means there will be more stops sitting between 1.5950-1.5980.

I may be looking to add some new euro longs should we correct down off these highs, but price action and the market correlated variables will dictate my next moves.

At this point I can't change my bias that we can see more upside over the next 24-hours of trading. The first test will be when London enters the market.

Later this evening I will post my key levels. So far we've stopped one pip shy of my 1.5934 key level and it's holding for now. Be smart with your trades... if you can't get a clear view on the market, wait it out. Do not overleverage and wait for the trade to come to you...

EUR/USD Weekly Outlook 7/20 thru 7/25 2008

2008-07-20T13:12:00.000-07:00

We have an interesting week ahead as the European economic situation will come under closer scrutiny and analysis on the back of Eurozone manufacturing, production, growth, and economic sentiment data.

On Friday the euro closed down 200 points off the all-time high which has renewed some of the sentiment and talk that the euro’s ready to fall off the cliff. I don’t exactly hold those views at this point because this week’s data could provide the euro enough fuel to make another run at the all-time high and then some.

Last Thursday we did make one attempt at sustaining a break of the 1.5800 level and that was resoundingly rejected as stops were triggered and long contracts were picked up sub 1.5800.

As far as this week’s Eurozone data is concerned, the market is forecasting mostly downside weakness with exception to some of the German data. I do think some of the German data should hold up well for the most part. The real risk to the euro comes with the IFO data and the PMI data.

It’s imperative you understand that there are other factors at play this week that have tremendous market moving potentials. Lets take a look at some of these issues and how they will potentially effect the EUR/USD between now and Friday…

Fed:

I’m not sure why this hasn’t received much attention but at the end of last week we had a few Feds running their mouth about rates and monetary policy. I suppose the dismal news out of Wall St. rained on the Fed’s parade, but listen to this…

Minneapolis Fed Stern: The Federal Reserve shouldn't wait for housing and financial markets to stabilize before it begins raising interest rates. We're pretty well-positioned for the downside risks we might encounter from here, I worry a little bit more about the prospects for inflation. We're going to want to, in my opinion, reverse some of those interest-rate reductions. I don't think there's any question about that. But exactly when depends on how things evolve from here.

Kansas City Fed Hoenig: I'm on record as being concerned about inflation.

Obviously only Bernanke can really get the markets worked up over inflation and rates but we can clearly see a shift in rhetoric in regards to interest rates and the future of Fed monetary policy. This week we get speeches by Plosser and Geithner and I’m expecting to hear both to take a more hawkish stance on inflation and we could potentially hear more talk of rate hikes in the near-term.

The Fed’s stepped up inflation rhetoric is now translating into the futures markets showing higher probabilities of Fed rate hikes in the near-term. Fed Funds Futures is showing a 76% chance of at least a 25bps rate hike before 2008 is over. I’ve been watching Fed Funds probabilities rise over the past few days and this has helped translate(among other reasons) into euro weakness after the all-time high.

Keep a close on eye on the Fed this week as the markets are watching and waiting for any signs or signals they can jump on and react to.

Europe:

In January we told you the second half of 2008 would be a rough one for the Eurozone. Back in January I was certainly not expecting a June rate hike like we got. I would have laughed if anybody had told me the ECB was going to hike this year.

But I’m glad they did hike because that only gives me more reason to stay overall bearish on the euro. Not only is the ECB going to have to take that hike back, they are likely going to have to take back last year’s hike.

Oh wait, that last hike was supposed to already be priced in yet somehow we managed to move up a couple hundred points and somehow we managed to make a new all-time high two weeks after the rate hike… hmm… I guess somebody forget to tell the market about the myth of “priced in”.

Regardless, I’m a euro bear and I will keep shorting the euro rises because I still see weakness and downsides on the horizon for the Eurozone. Economic sentiment in Europe is running at historical lows. There is recession talk in Europe now, especially in countries like Spain, Portugal, Ireland, and it’s starting to creep into Italy and France.

Germany is resilient and should remain mostly immune to the coming downsides, but should Germany succumb to the type of weakness being seen in Spain and some of the other Eurozone nations, this will do substantial damage to the euro.

The rate hike did throw a wrench in the works, but as I said, I’m thrilled they hiked and I’ll be even more thrilled if they hike again because this will only serve to make the economic downturn in Europe more pronounced and more exaggerated, and you know how our market likes to respond to these types of things… the FX market is the perfect oasis for exaggeration and over-extension…

This week’s economic data out of Europe should give us all some great clues as to how things are progressing in Europe. Last week’s ZEW data was abysmal and I believe it gives an honest echo of what I’m thinking and what I’ve been saying for the past seven months.

It’s very difficult placing an exact data and time on when things happen, especially in this beast of a market, but I believe my views will be realized soon enough and I’m happy to keep positioning myself for the turn.

Market Correlated Variables:

As I mentioned earlier, there’s many more factors at play than just the underlying fundamentals of the market. Last week oil took the biggest hit ever in one single week of trading. Oil’s massive sell-off gave Wall St. a boost, it gave the dollar a boost, and it’s kept the markets guessing and probably even more confused.

I’m not an oil trader and I’m not about to give any analysis on oil. But, the formula is simple, should oil find support and continue its bullish trend this will only serve to put downward pressure on Wall St. and the USD. Thinking logically it would seem that after last week’s tremendous sell-off crude would find some support and buyers and would make an attempt to get up and over the $132 level. Should the sell-off continue look for Wall St. and the USD to find support and make some bullish gains.

Same is true with gold. Gold closed down off its highs but I see no reason to take an overall bearish view on gold. We have some major U.S. fundamental data this week and more earnings data out of Wall St. Should the news continue to be bad this will be very supportive of gold.

The USD Index is also another piece of the component. The same support and resistance levels I’ve given you the past few weeks are the ones you still want to watch. On the downside, 70 is a major key level. A break of 70 could send it to 68 and we’d be well into “heads will roll” territory. There’s quite a bit of resistance above the 73 level but should we be able to make a clean break, the next areas of resistance will be around 74.50/75.

So far any time we’ve approached that major key level of 70 the EUR has reversed against the USD and we’ve dropped several hundred points. Keep an eye on the Index this week…

EUR/USD:

Again, I’m not ruling out another run to the 1.6000 level but in order to get there, we’re going to have to sustain a break of some key resistance levels. The first of which is the 1.5880 level.as long as we trade below the 1.5880 level, we’re not moving up, it’s really that simple.

The 1.5780 is the first that has some decent support. There will be some big stops sitting below the 1.5750 level, all the way down to the 1.5700 level. I have no idea what the “trader sentiment” is in the retail market, I have no idea what the other forums, blogs, and traders are saying.

I could careless what are saying. I need to see certain price levels get hit, tested, and see if they break or bounce and this is how I will decide to trade in addition to following the underlying fundamentals of the market and whatever the market correlated variables are doing.

I’m still short at 1.6019 and 1.5925 and will hold for now. Price action will dictate how I trade and where I decide to get in and get out. I am on alert for any bank failure news that may hit the markets. I know I must sound like a broken record but I find it hard to believe we’ve still yet to hear about any significant bank failures in Europe. Surely this news must come out at some point…

Don’t make any dumb trades before London because the whole ball game can change once London enters the market. Be smart with your risk and money management.

Key Levels

2008-07-17T21:36:00.000-07:00

Key upside levels:

1.5854
1.5872
1.5897
1.5908
1.5926

Key downside levels:

1.5802
1.5780
1.5763
1.5751
1.5739