Now that we finally have the FOMC behind us and we got our forecasted 25bps cut, it's time to look forward to the possibilities in the near-term...
Lets first break this down by looking at the interest rate gap:
Obviously we have an even wider interest rate differential between the EUR and USD -- a full 200bps in favor of the EUR. Will this be a factor? Yes, of course, but not to a dramatic degree in my opinion.
If the ECB was not firmly in a rate hold cycle and possibly headed towards a rate cut cycle I think the interest rate differential would factor in to a greater degree, but with Eurozone fundamentals weakening and the ECB shifting monetary policy around I do not see the wider differential putting the USD under an intense amount of pressure vs. the EUR.
FOMC statement:
It's amazing... the Fed spends two days meeting and that statement is the best they can possibly come up with? It literally said nothing about anything -- it was vague, ambiguous, mindless, and basically void of any verbage the markets can take and run with.
No matter, this is what we got and what we have to work with... so, lets dissect this piece of garbage...
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
No crap? We hadn't noticed...
Here's one of my favorite parts:
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months.
Not too long ago we didn't have an inflation issue according to Fed data, but now we have indicators of inflation pressures?
And then the statement goes on to say:
The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.
Well that's fantastic but what about the inflation and price pressures that have been persistant the past 12+ months as oil and soft commodities have gone through the roof? Does the Fed really think those costs have just been absorbed or have evaporated into thin air?
They cap-off the inflation rhetoric with this gem:
Still, uncertainty about the inflation outlook remains high.
Now, a few lines before that one the Fed told us they expect inflation to level-off. And there they tell us the inflation outlook remains high. So, which is it? Do they see it moderating or is there an elevated outlook on inflation?
Are you seeing a pattern here? Are you seeing how the Fed talks out of both sides of their mouth and yet says nothing?
This kind of inflation rhetoric would be like me telling you it's not hot outside, but I think the warm weather will cool off soon... where is the sense in this kind of rhetoric? Bernanke and the Fed should be institutionalized in a psych ward for even thinking to put out this kind of worthless trash.
Their parting words:
The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
So, what are they saying about rates? I believe they are saying another cut is on the table and the door is open. Do I think they cut again at the next meeting? No, I'm not convinced this will happen. I'm not expecting any more cuts at this point.
There were two dissenting votes this go around. Two FOMC members wanted to hold rates steady. Last time there was only one dissenting vote... I like the fact there are two dissenters now as that means there could be even more next time.
EUR/USD:
Although the decision and statement have only been out a few hours I'm hearing all kinds of different theories and predictions for what the EUR/USD will do next. Some are saying we go back to 1.6000++ and some are saying we move below the 1.5000 level.
I'm not making any predictions or calls at this point. Tokyo isn't even opened yet for goodness sakes...
My EUR/USD bias remains neutral. What does a neutral bias mean and how does it reflect in my trading? It means I am not adding new trades on a swing basis. It means I can freely take euro longs and euro shorts purely on an intraday basis. It means I will play the ranges looking for 20-50 pips per trade, taking my profits, and getting out.
I have to allow the markets and the banks to digest this rate cut and the FOMC statement. And for sure I at least have to see how Frankfurt and London initially react to this.
For me it's all about staying patient and methodical right now. I'm not trying to hit a grandslam with my trades but rather depending on price action and simply allowing the market to show me where they want to take things next.
If you were expecting some monumental update that tells you to either "go long" or "go short" sorry, that's not what you're getting today... it's not that easy or cut-and-dry... the market doesn't work like that.
I'm still more inclinded to short the euro rises at this point and will be slightly more cautious to add new euro longs at least until I get a better idea and feel for how the market wants to be played post-FOMC.
When will I get a better idea? I need to see how NFP plays out as that's our next piece of critical data. Based on what I'm hearing from the Fed, NFP should not be too pretty but that doesn't mean the USD gets pounded...
I do not expect us to see a breakout in either direction before Friday's NFP. There's now a higher probability to move back up towards the 1.5700 level based on the Fed's actions, but again, lets at least wait to see how London handles this Fed business...
Tomorrow:
Tomorrow is May day in Europe, so some market players will be out and we'll have some thinner market conditions. We do get critical manufacturing, consumer and inflation data in the form of PCE, Personal Spending, and ISM.
PCE is very key as the Fed looks closely at this data to determine rate policy. PCE should print USD+ if we get some truth. Personal Spending should be USD- and ISM could surprise to the upside I believe.
All of tomorrow's data is critical for future rate policy, in fact. So I think we'll get some better indicators as to the Fed's next moves based on how tomorrow's data prints.
And don't forget, next Thursday we get the ECB rate decision and Trichet press conference...
My best advice is to do your own research and analysis of the market... read the FOMC statement for yourself and come up with your own gameplan. I'm in a more neutral, wait-and-see mode and will trade accordingly. You need to trade according to your own risk management plan and to how you are projecting the market.
If you don't see a trade, don't take it. Don't force trades. Wait for your price and for your entry. And if you have to, sit on the sidelines for another 24-hours until you get more clarity. Being flat or close to flat during a time of shifting fundamentals and interest rate policies is always a good thing...
Wednesday, April 30, 2008
Trade Team Update
Tuesday, April 29, 2008
With today being the last full trade day before FOMC, we saw more book squaring and positioning early this morning ahead of tomorrow's rate announcement and FOMC statement.
Not only do I think we saw some book squaring/profit-taking, I believe we're continuing to see euro weakness since last Tuesday's high. This correction from the 1.6000 level is not about the dollar getting strong or rallying, but it's very much about the euro showing signs of weakness in addition to a fundamental shift in the Eurozone, plus the changing tide of rhetoric coming out of the ECB.
In yesterday's update I commented about how the tide is changing with the Fed and ECB. If you missed it, you can read it here to catch up...
Fundamentally, the dollar is not gaining much ground. The news continues to be abysmal, especially in the housing and consumer sectors. But, we're seeing two key areas converge with each other -- the Fed nearing the end of the rate cut cycle and the ECB firmly in a rate hold cycle and moving towards a rate cut cycle, thus bringing a fundamental shift between the EUR and USD.
FOMC:
Tomorrow's FOMC will be watched, analyzed, dissected, and of course reacted-to by every global market, every bank, every hedge fund, and every trader (except for some techies who don't even know what FOMC stands for).
Although the reaction in our market may not be instanteous, how the Fed decides to handle rate policy this go around will likely put the market in a near-term trend at least until the next ECB rate meeting.
The rate cut cycle started about 8 months ago. According to the Fed, rates were being cut to ease pressures in the money markets, to bring down things like rising Libor rates, to stimulate growth through credit and lending, and... to save the housing market!
So far, mission failed. The housing market has yet to find a bottom, as we forecasted, and there's no light at the end of the tunnel for dropping home prices and rising home inventories and off-the-charts foreclosures. Banks are still not lending nearly to the degree they were prior to last August. Unemployment has shot up and layoffs are rampant.
The effects from the rate cuts should have already started being felt in the broader economy, but this is not the case at all. There's not nearly the turmoil in the financial and credit markets as there was last August, but I think so far the biggest benefactor to the rate cuts has been inflation, which has gone up.
My opinion is that the Fed is either at the end of the rate cut cycle as of tomorrow or is just one more FOMC away from the end. I can't call any rate hikes this year quite yet, but I do not believe Bernanke can take things much lower than 1.75% at this point.
Based on my own research and forecasting of tomorrow's FOMC, here are my probabilties:
50bps to 75bps cut: -- The probability of the FOMC cutting by 50bps is quite low. The probability of the Fed cutting by 75bps is almost non-existant, I absolutely do not see a cut of this size happening tomorrow. If the FOMC were to cut by 75bps, this would be a shock to our market and would put the dollar back under pressure and we could easily see the EUR/USD return to the 1.5900++ level. There's a decent probability we get a 50bps cut, but the likelihood of this happening is on the low end. Should the Fed deliver a 50bps cut, this too would put the dollar under some pressure, but I don't believe it would be enough to give us a topside breakout.
25bps cut: -- If the Fed does cut, I believe they cut 25bps tomorrow, that's where my highest probabilities stand. A 25bps cut really shouldn't do any damage to the dollar, maybe a slight sting, but the market will not hammer the dollar as in times past. We'll probably even see the dollar continue to recover because a 25bps cut will likely be enough of a signal to the markets to make them believe the Fed is done cutting and that we've turned the corner on the rate cut cycle.
If we do get a 25bps cut and the euro moves back north, I will continue to short the rises and I will continue to swap out my euro swing longs for euro swing shorts. Very simple...
No cut: -- Yes, a rate hold is certainly possible and I'm ready for this type of a shock. It would truly be a shock to the markets and the reaction in our market would be instantaneous and violent I believe. Fed Funds Futures does show a small probability of a rate hold, but again, this would catch the markets off guard and likely send the EUR/USD to lows we have not seen in some time.
Tomorrow:
FOMC isn't the only thing we get tomorrow... we get mega data out of the Eurozone, namely CPI, which I think will print at or below market expectations. We also get ADP Non Farm (worthless) and then we get GDP and Chicago PMI.
Based on my research, if the truth were to be told, we'd get a negative GDP print tomorrow. Not only has the economy been unable to expand, evidence is there that it has shrunk. Now I doubt we'll get a negative print on GDP, but it should print USD- nonetheless.
Although FOMC will be the most watched and reacted piece of fundamental data, we could see some volatility ahead of the decision and statement release.
EUR/USD:
Overall, I believe the brunt of the effects from the rate cuts have already been felt, absorbed, and reacted to. As you know I've been shorting the euro from the 1.5850 level and above and will continue to do so should we return back up there.
Depending on the outcome of tomorrow's FOMC it will likely determine my near-term bias for the pair. Up until last week my bias was clearly euro long but has since shifted to neutral after we made our high at the 1.6000 level.
As always, the underlying fundamentals of the market will rule the day for the EUR/USD... they always have and always will... they are beginning to shift and evolve and I will be trading them accordingly.
Best advice I can give about tomorrow is... crack open a frosty beverage and watch the chaos from the sidelines.
Monday, April 28, 2008
Trade Team Update
Overall we had a rather choppy day in the market... during early Frankfurt session I took some euro shorts, but that was about it as far as trading went.
The euro didn't like being below the 1.5600 level and has creeped back up to the 1.5660 level. It seems for now we may be temporarily stuck in about a 120 pip range and we could see this persist through most of today's Asian session.
German CPI came in below market expectations and this is something to note... I'll talk more about that in my commentary below...
Tomorrow we get the S&P/Case-Shiller Home Price Index which should be pretty crappy, I don't see much relief or bottom to falling house prices. Consumer Confidence should print USD- as well. The consumer has continued to pullback and I've not found any credible evidence to prove otherwise.
I can't really be bullish on either currency at this point. As you'll read below, I make my case for why the euro can depreciate. Fundamentally, the dollar is still worthless and there's no complete signs of a full recovery.
There are two events this week that will give my trading more clarity -- FOMC and NFP. Until then, I'll play it tight and smart and minimize my risk exposure. I cannot stress risk management enough. Don't force trades... don't trade for the sake of being in a trade. Follow your gameplan and trade rules and be smart about how you trade the next 4 days...
EUR/USD, Fed, and ECB:
The farther we get away from 1.6018, I see the probabilities decreasing that we go back and break that level. As we’re correcting the past few days I see the rhetoric coming from Trichet and the ECB changing and shifting in a way that is more EUR-. I’m also seeing some of the Eurozone data showing patterns of weakness.
The ECB is no longer talking the euro back up like they used just a few weeks ago. They are not talking hawkish about inflation and are now saying that rates will not need to go up to fight price instability. I take all this as a signal we may see a shift in monetary policy soon.
Based on patterns I’ve observed with Fed and ECB central bankers, it’s rarer to see central bank rhetoric and fundamental data totally contradict each other. While it’s true central bankers will either lie, sugarcoat, or gloss over certain fundamentals, in the end, monetary policy will almost always fall in line with rhetoric and with the data. Central bankers might be liars and thieves, but they still have some pride and will try to avoid looking like idiots as much as possible which is just normal human behavior.
When it comes to any statements made by the Fed and ECB I’m always reading between the lines. I need to cut through the crap and focus on the “signals” that the Fed and ECB give the markets. Dumb money will usually miss those signals. The Fed and ECB do not give signals to dumb money, they give signals to smart money because smart money will take those signals to respond the way the central bankers want the market to evolve. The Fed and ECB know the banks are at their bidding and vice versa. It’s a very profitable relationship for both parties.
If the ECB has had enough of the strong EUR, they will first signal this through rhetoric and commentary, which I believe they started doing about two weeks ago (which is why I was shorting above the 1.5850 level). Next, the action will come directly through monetary policy, specifically interest rate policy.
The Fed’s monetary policy over the past year is a prime example of how this process works. When the Fed disregarded the need for a strong dollar and shifted their focus on growth, credit, and housing, their tones on inflation first shifted through their rhetoric and then it physically shifted through their monetary policy over the past 8-months.
Could the Fed admit we have inflation yet go into a rate cut cycle? Of course not, it would be 100% contradictory to their rhetoric, their signals, and their focus. In this market often times perception is reality. You cannot have $120 oil and not have inflation. You can’t have off-the-charts PPI in China and not have inflation in the U.S. You can’t have soft commodities flying through the roof and not have inflation. As you know, Fed inflation data says there’s no price instability, which falls directly in-line with Fed rate policy as the focus is not on inflation but on credit and growth.
In the coming weeks and months it’s my opinion that we will see the Fed shift rhetoric to focus on inflation. It will take the economy about another 6-month’s before the effects of the rate cuts are felt in the broader economic system. Once those cuts finally cycle through the economy and the economic stimulus checks start boosting the consumer sector, I think we’ll see a more concerted effort by the Fed to change the tune they’ve had since last March.
These are just my opinions of how I see things in this market and how it makes sense to me… so, take all this for what it’s worth.
Anyway, fundamental data patterns and central bank patterns will often correlate closely. When the ECB was over-the-top hawkish on inflation, and rightfully so, they were in a rate hike cycle. Now we see Trichet backing away from those hawkish tones and the ECB is saying inflation will subside in the coming months. It’s true, if the USD finally bottoms out, finds support, and finds a way to rebound, it will actually fight back global inflation because commodities should weaken, which would be a very positive inflation fighter, especially against energy-induced inflation.
I believe Trichet is giving the markets signals of a coming rate cut later this year. I firmly believe we will see an ECB cut in the second half of this year, before the end of the year. Just this morning we saw German CPI come in below expectations… are we in the beginning stages of a EUR- data trend in the price stability department? Could be…
And then there’s the Fed. The FOMC will deliver their rate decision in less than two days. Will we get a cut? Yes, I believe we do. It’s almost a foregone conclusion that we’ll get a cut. The size of the cut is something I cannot try to predict, but the verdict will largely dictate the market’s reaction.
The accompanying statement from the FOMC will be absolutely critical. The market is looking for “signals” that Bernanke has either reached the end of the rate cut cycle or is just one more FOMC away from reaching the end.
The patterns in the interest rate cycles between the Fed and ECB allow me to believe the two central banks play a game of see-saw. Can the USD and EUR both be heavyweight champs? No, there is only one heavyweight champ. I’m not saying the dollar is about to rise from the ashes and totally resurrect itself, but if the Fed and ECB are truly playing a game of see-saw, we may be getting close to a period of dollar recovery against the euro.
If the ECB is orchestrating a period of EUR weakness and possibly more than one rate cut, the patterns within the Eurozone data will show weakness in these sectors:
CPI & PPI
GDP
Industrial and Manufacturing Production
ZEW & IFO
Retail Sales & Consumer Confidence
I don’t have a crystal ball that tells me the future of the market. The best thing I can get to a crystal ball is for me to dissect every little comment and speech by the Fed and ECB. They tell the markets what they want the markets to do and the smart money reacts accordingly.
The Fed’s monetary policy since at least October of 2006 told the markets it was OK to sell-off dollars and the ECB’s monetary policy told the markets it was OK to buy up euros. I don’t see that those same signals are there anymore.
Just some food for thought… and again, these are just my opinions and how I see things in the market. You have to come to your own conclusions and trade accordingly. But this is why I’ve stopped taking euro longs and have been shorting the rises for the past few weeks. I prefer to stay ahead of the game and ahead of the curve and not get on the wrong side of the market.
Ultimately, the market will decide. It always does. I'm not ready to declare myself a EUR bear, but I'm certainly not going crazy with adding new euro longs up here at these levels.
Thursday, April 10, 2008
Trade Team Update
Quite an interesting day... we started things off by making a new all-time high at 1.5911 and then proceeded to drop almost 200 pips after Trichet's press conference...
First, lets dissect Trichet...
Overall, Trichet told the market's what the market's expected to hear... but, I have to say that he conducted today's interest rate press conference in a way and manner I've not observed him do before...
I study Bernanke and Trichet's body language, I study the way they say things, the way they respond to questions, they way their eyes and hands move when they speak, and the way they deliver their messages to the markets....
Trichet was very benign today. He just seemed to gloss over all they key points... like he was reading from a script void of any personal inputs, feelings, or emotions...
He wasn't over-the-top hawkish on inflation and wasn't over-the-top dovish on growth. Very middle of the road, so to speak... He did mention price stability concerns and growth concerns and credit risks, but it was all done in a very melancholy style.
I don't believe he gave the markets any real signs or signals and didn't tell the markets anything they didn't already know before the meeting... upside risks to price stability, but will moderate later in the year... credit tightening causing market turmoil... downside risks to growth... thinks Fed and Treasury believe in a strong USD policy... excess FX volatility undesireable... blah blah blah.
Overall, his sentiments can be viewed as EUR+.
All-time high:
Despite our special vistor in the chat last night who assured us, based on EMA's and pivot points, that the euro would not make an all-time high today, somehow we managed to make one... amazing... must have been a pure fluke...
Anyway, what's critical to note is the almost instaneous failure to sustain a break above the 1.5904 level. The euro has now made a pattern of failing at the 1.5900 level, and this is to be considered...
I believe there are big-money stops sitting at the 1.5920 level and big money pushed us back down. I believe the banks will want to run those stops at 1.5920+.
But I am taking strong note of the repeated failures at this level and with it grow more cautious taking new euro longs. Am I still biased euro long? Yes, I have to be. I still believe we have room at the top and cannot count the euro out yet.
Our correction today was largely fueled by: profit-taking, some stops getting triggered, and commodities getting hammered. But, I do not believe we've yet started our bigger, more sustained correction that is way, way, way overdue...
EUR/USD:
As of the writing of this post, we're sitting close to one of my key levels -- 1.5734... the market is totally thin and the price action is not giving any indicator either way... best thing we can do is keep an eye on the spreads to determine when we'll start moving again and in what direction.
As I said, I am biased to be euro long still. Same bias as I've had the past 2 months. But my caution is growing stronger and I am tightening things up on the longside and will not be making any euro long trades up at these levels unless I see a clear sign within the price action.
I will hold all of my best euro swing longs from 1.4595 on up at this point. I will also continue to short the euro on the rises. I took a euro short this morning at 1.5808 before we dropped and will hold it with a +1.
Tomorrow we have the Import Price Index which I believe should print USD+ as China has done well to import inflation to the U.S. the past few months. The Michigan Sentiment should print at or below market expectations.
The G7, starting tomorrow, will take center stage this weekend and the first part of next week. I may post on Saturday when I get more news and data from tomorrow's afternoon meetings, but please don't go into this weekend with any dumb trades, overleveraged accounts, or knee-jerk, last-minute trades taken on a Friday afternoon... you could be regretting it when the market opens on Sunday. Just a word of caution...