Trade Team Update

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.