By FX Insights Moderator
Another boring day in the market with little volatility to speak of. We do, however, have some important things to cover in today's update... a few different topics we need to talk about...
I'd first like to talk about the signal that was triggered this morning and why we had to "cancel" it... very early this morning we triggered a buy signal and decided to make our first buy level at 4600. The signal triggered exactly at the price of 4608. Based on the time of day and based on market conditions, we felt as if the market would come down to at least the 4600 level and determined this to be a good place to take our first entry.
The market, unfortunetly had some other ideas and decided not to come down, but to take off from the exact point where we triggered the signal. When the market reached 4635, we decided to "cancel" the signal because our first buy level was never reached. This is only the second time in the history of our signal that we had to cancel it for this reason.
Why do we cancel a signal if the market takes off before our first buy level is touched? It's all in the name of risk managment... you see, we knew the market would go up at least 20 pips from the place where the signal was triggered, however, we also knew that if it first went up only to come back down, it may continue down and or stay down today. So, in managing risk, we simply let the market do its thing... the market did go up to 4672 today, so even if you bought in at the trigger price of 4608 when you got your SMS, you still would have made some great profits even though we had to cancel out the signal.
I just wanted to clarify why we did this in case there was any confusion. I don't want anyone to think we are playing games or manipulating things, but rather this is something we had to do to ensure proper risk management during these odd market conditions. If you have any more questions about this, please let us know. Thanks.
Now, let take a look at the market...
As we talked about this week, I see continued aversion to risk happening in the market, which I believe is a big contributing factor in why the euro is under the gun against the dollar... so, lets break this down:
Equities -- overnight the Nikkei closed down over 600 points, signaling continued fear of risk in Asia. Today, the Dow closed down 65 points, closing at 12,200 on the dot. Now I'm hardly an expert on the Dow, but I have to believe that a break below the 12,000 level would put renewed selling pressure on the Dow and Dow futures. For the euro, these declines in the equity markets will only get it pressured against the dollar, and will keep the EUR/USD at the bottom of the range.
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.
EUR/USD trading...
With the EUR/USD meandering in the low 4600's, this pair is in what I consider to be a very precarious spot... with the euro falling under the 4740 level, this leaves the door wide open for more downside testing... staying below that level removes much upside momentum and potential. That being said, staying above the 4550 level also leaves some room for buyers to emerge to push the pair back up towards the top of the range... so, this is why I say we're in a weird spot at the moment.
As far as trading goes, there's no clear direction to trade with any fair degree of certainty unless we can sustain a break above 4740 or sustain a break below 4550... based on current market conditions and what's happening with the global indicies, I can't really be biased one way or the other -- my personal risk management rules will not allow me to go heavy long or short at the moment... this means I'm tightening up my accounts, not trying to catch a big move, but playing the intraday, taking a few pips per trade and getting out. They key is that I do not want to get caught going the wrong way should the market decide to go nuts and make another 200+ pip move...
Playing the intraday for me has meant shorting the rises... I've felt more comfortable shorting the rises the past 48 hours, and this bias is based on what I see with price action, what I see with gold, oil, the Dow, and the 10-year... speaking of the 10-year, yields have made a strong comeback in recent days which has put even further downside pressure on the EUR/USD.
Tomorrow...
Tomorrow is the big day -- ECB interest rate policy at 0745 EST, followed by Trichet's press conference at 0830 EST. Trichet will hold rates at 4.00%. With Eurozone inflation running at 3.2%, there's really no way he can cut rates while remaining so vigilent on price stability. Of course, the market will be watching closely to what he says about the near-term future...
The past two press conferences Trichet has been somewhat dovish on growth. He's not made a single reference to possible rate cuts, in fact, he's said a rate cut option was not on the table.
Now there's no way I can predict what the man will say tomorrow, but I'm warning you now, if he ups the rhetoric on Europe's slowing growth, and if he says Eurozone inflation will subside later this year, the euro will stay under pressure. In addition, if he says all of those things and even slightly hints at possible ECB rate cuts happening this year, I fully expect the market to hammer the euro.
I will be tightening things up as we draw close to the rate decision and following press conference. As Yeno says, expect the unexpected...
I don't believe we'll see any mega moves before tomorrow morning as the market should fall into a wait-and-see mode. Should we dip below the 4600 level, some buyers may emerge to push the euro back up, so keep that in mind over the next 12 hours or so...
You'd be well served watching Trichet's press conference tomorrow. You can view it here.
-FX Insights
Another boring day in the market with little volatility to speak of. We do, however, have some important things to cover in today's update... a few different topics we need to talk about...
I'd first like to talk about the signal that was triggered this morning and why we had to "cancel" it... very early this morning we triggered a buy signal and decided to make our first buy level at 4600. The signal triggered exactly at the price of 4608. Based on the time of day and based on market conditions, we felt as if the market would come down to at least the 4600 level and determined this to be a good place to take our first entry.
The market, unfortunetly had some other ideas and decided not to come down, but to take off from the exact point where we triggered the signal. When the market reached 4635, we decided to "cancel" the signal because our first buy level was never reached. This is only the second time in the history of our signal that we had to cancel it for this reason.
Why do we cancel a signal if the market takes off before our first buy level is touched? It's all in the name of risk managment... you see, we knew the market would go up at least 20 pips from the place where the signal was triggered, however, we also knew that if it first went up only to come back down, it may continue down and or stay down today. So, in managing risk, we simply let the market do its thing... the market did go up to 4672 today, so even if you bought in at the trigger price of 4608 when you got your SMS, you still would have made some great profits even though we had to cancel out the signal.
I just wanted to clarify why we did this in case there was any confusion. I don't want anyone to think we are playing games or manipulating things, but rather this is something we had to do to ensure proper risk management during these odd market conditions. If you have any more questions about this, please let us know. Thanks.
Now, let take a look at the market...
As we talked about this week, I see continued aversion to risk happening in the market, which I believe is a big contributing factor in why the euro is under the gun against the dollar... so, lets break this down:
Equities -- overnight the Nikkei closed down over 600 points, signaling continued fear of risk in Asia. Today, the Dow closed down 65 points, closing at 12,200 on the dot. Now I'm hardly an expert on the Dow, but I have to believe that a break below the 12,000 level would put renewed selling pressure on the Dow and Dow futures. For the euro, these declines in the equity markets will only get it pressured against the dollar, and will keep the EUR/USD at the bottom of the range.
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.
EUR/USD trading...
With the EUR/USD meandering in the low 4600's, this pair is in what I consider to be a very precarious spot... with the euro falling under the 4740 level, this leaves the door wide open for more downside testing... staying below that level removes much upside momentum and potential. That being said, staying above the 4550 level also leaves some room for buyers to emerge to push the pair back up towards the top of the range... so, this is why I say we're in a weird spot at the moment.
As far as trading goes, there's no clear direction to trade with any fair degree of certainty unless we can sustain a break above 4740 or sustain a break below 4550... based on current market conditions and what's happening with the global indicies, I can't really be biased one way or the other -- my personal risk management rules will not allow me to go heavy long or short at the moment... this means I'm tightening up my accounts, not trying to catch a big move, but playing the intraday, taking a few pips per trade and getting out. They key is that I do not want to get caught going the wrong way should the market decide to go nuts and make another 200+ pip move...
Playing the intraday for me has meant shorting the rises... I've felt more comfortable shorting the rises the past 48 hours, and this bias is based on what I see with price action, what I see with gold, oil, the Dow, and the 10-year... speaking of the 10-year, yields have made a strong comeback in recent days which has put even further downside pressure on the EUR/USD.
Tomorrow...
Tomorrow is the big day -- ECB interest rate policy at 0745 EST, followed by Trichet's press conference at 0830 EST. Trichet will hold rates at 4.00%. With Eurozone inflation running at 3.2%, there's really no way he can cut rates while remaining so vigilent on price stability. Of course, the market will be watching closely to what he says about the near-term future...
The past two press conferences Trichet has been somewhat dovish on growth. He's not made a single reference to possible rate cuts, in fact, he's said a rate cut option was not on the table.
Now there's no way I can predict what the man will say tomorrow, but I'm warning you now, if he ups the rhetoric on Europe's slowing growth, and if he says Eurozone inflation will subside later this year, the euro will stay under pressure. In addition, if he says all of those things and even slightly hints at possible ECB rate cuts happening this year, I fully expect the market to hammer the euro.
I will be tightening things up as we draw close to the rate decision and following press conference. As Yeno says, expect the unexpected...
I don't believe we'll see any mega moves before tomorrow morning as the market should fall into a wait-and-see mode. Should we dip below the 4600 level, some buyers may emerge to push the euro back up, so keep that in mind over the next 12 hours or so...
You'd be well served watching Trichet's press conference tomorrow. You can view it here.
-FX Insights
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