Uro rallied versuspound

The euro may have fallen against the greenback, but the currency rallied versus the rest of the majors, particularly against the British pound. European data was surprisingly strong and indicated that the region may have one of the strongest economies around. According to the IFO survey, German business confidence rose to a 13-month high of 91.9 in October from 91.3, adding to indications that growth is improving in Europe’s largest economy. The news comes a week after the German government raised forecasts for GDP, as they predict the economy will grow by 1.2 percent in 2010 after contracting 5 percent in 2009. Furthermore, the purchasing managers' index (PMI) for the manufacturing sector rose above 50 in October - signaling an expansion in activity - for the first time since May 2008. Meanwhile, PMI for the services sector signaled expansion for the second straight month by rising to match the February 2008 high of 52.3 from 50.9. Ultimately, this pushed composite PMI up to a nearly 2-year high of 53.0 from 51.1, suggesting the Euro-zone is closer to recovery than many other places.

Rate hikes by RBA

The Australian dollar was one of the weakest majors on Friday as broad US dollar strength and declines in equities weighed on the carry trade currency. The Aussie will face high event risk next Tuesday, when data is forecasted to show that Australia's headline consumer price index rose 0.9 percent during Q3, bringing the annual rate down to a 10-year low of 1.2 percent from 1.5 percent. However, the Reserve Bank of Australia’s core measures are projected to hold at more robust levels on an annual basis, with the trimmed mean anticipated to slip to 3.2 percent from 3.6 percent and the weighted median forecasted to slip to 3.7 percent from 4.2 percent. Such moves would tell us that prices for volatile items like energy are responsible for the steep drop in headline consumer prices, and unless the core measures plunge, the markets are likely to remain in favor of additional rate hikes by the Reserve Bank of Australia. In fact, Credit Suisse overnight index swaps are full pricing in a 25 basis point increase by the RBA during their next meeting on November 2, and stronger-than-expected consumer prices could further this sentiment and send the Australian dollar higher.

About British pound

By Friday’s close, the British pound fell more than 1 percent against the Japanese yen and nearly 2 percent versus the US dollar and euro after the release of a deeply disappointing Q3 report. Contrary to expectations, the UK did not emerge from recession, and instead, the economy contracted for the sixth straight quarter, this time by -0.4 percent. Though this is marginally better than the reading of -0.6 percent we saw in Q2, the index missed forecasts for a 0.2 percent increase. Likewise, the annual rate of growth edged up to -5.2 percent from -5.5 percent, but fell short of expectations for a move to -4.6 percent. A breakdown of the report shows that nearly every UK business sector remained in recession, as the services industry component fell by 0.2 percent while the production industry component tumbled 0.7 percent. The release of GDP led to a sharp reaction from the British pound as Credit Suisse overnight index swaps shifted to price in a 10 percent chance of a 25 basis point cut by the BOE during their next meeting, while expectations for rate increases over the next 12 months have fallen to 88.1 basis points from 93.4 basis points.

All told, the news will put much more pressure on the BOE when they meet again in November. In the minutes from the central bank’s last policy meeting, we learned that their quantitative easing (QE) program would take another month to complete. We also learned that the "forecast round ahead of the November Inflation Report would provide an opportunity to assess more fully how the medium-term outlook for activity and inflation had evolved since August," and if the latest economic data has any bearing on the MPC’s bias, they may have the justification to expand their target level of asset purchases

US consumer sntiment

Consumer sentiment in the U.S. unexpectedly weakened in September, with the Conference Board’s index slipping to 53.1 from a revised reading of 54.5 in August, and households may turn increasingly pessimistic towards the economy over the coming months as they continue to face a weakening labor market paired with tightening credit conditions. The breakdown of the report showed households held a weakened outlook for employment, with the index measuring present conditions slipping to 227 from 25.4 in the previous month, while the gauge for future expectations fell back to 73.3 from 73.8. The data reinforces a feeble outlook for personal spending as households ramp up their temperament to save, and the slump in domestic demands may raise the risks for a protracted recovery as private-sector consumption accounts for more than two-thirds of the economy.

Ways to reduce event risk

Consumer sentiment in the U.S. is anticipated to rebound in October, with economists forecasting the Conference Board’s index to rise to 54.0 after unexpectedly falling in the previous month, and the data is likely to spark volatility in the greenback as investors weigh the outlook for future growth. However, the University of Michigan confidence index foreshadowed a weakening outlook for household confidence as the index slipped more-than-expected to 69.4 from 75.5 in September, and the ongoing weakness in the labor market paired with the slump in wage growth may drag on the economic outlook as businesses continue to scale back on production and employment. A report by the Labor Department showed non-farm payrolls fell 263K in September amid expectations for a 175K decline, with the annual rate of unemployment rising to a 26-year high of 9.8%, and conditions are likely to get worse as policy makers see a risk for the jobless rate to reach 10% going into the following year. At the same time, consumer credit plummeted another 5.8% in August to mark the seventh consecutive monthly decline, with retail sales falling 1.5% in September, and households may scale back their willing to spending over the coming months as the Federal Reserve continues to see a risk for a protracted recovery. Nevertheless, the Fed’s Beige Book said that “gains in economic activity generally outnumbered declines,” with policy makers seeing “stabilization or modest improvements” in most districts, but went onto say that “virtually every reference to improvement was qualified as either small or scattered.” Moreover, the central bank said that employment remained “weak or mixed” in most regions as job losses intensified in 23 of the 50 states, and the FOMC is likely to maintain the benchmark interest rate at the record-low throughout the second-half of the year in an effort to foster a sustainable recovery. As a result, a dismal confidence report is likely to drag on the exchange rate as policy makers hold a cautious outlook for the economy, and the greenback may continue to underperform over the coming months as investors scale back long-term expectations for higher borrowing costs in the U.S.

Trading the given event risk favors a bullish forecast for the reserve currency as market participants anticipate household spending to improve in October, and price action following the release could set the stage for a short euro-dollar trade as policy makers see the economy emerging from the worst recession since the Great Depression. Therefore, if the index rises to 54.0 or higher, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing high or a reasonable distance, and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven if the first trade reaches its target in order to preserve our profits.

On the other hand, fears of a slower recovery paired with the rise in unemployment may lead consumers to hold a weakened outlook for the economy, and the unexpected decline during the previous month has left the door open for a dismal confidence report. As a result, if the index falls back to 51.0 or lower, we will favor a bearish outlook for the greenback, and will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

Gold price colds

Spot Gold - $1055.40 // $2.00 // 0.19%

Gold may have closed its fourth consecutive weekly advance; but the pace on the rally to record highs has certainly cooled. The commodity has yet to significantly retrace its surge over the past two weeks and yet neither have we seen a new record high after the $1,070.80 benchmark was set back on the 14th. A steady, rising trend channel calls up congestion at the end of a very prominent bull run. This is the same general chart pattern that can be seen in the Dow Jones Industrial Average and (the inverse of) the US dollar. From this, it is clear that all three are responding to the same driver: sentiment. Should optimism give way, the lack of any yield income to offset the potential capital losses will mean a sharp correction through profit taking. At these levels, demand is largely speculative. According to the COT figures, commercial positioning is 383,718 short contracts to 86,225 long. In contrast, non-commercial long positions have hit a record high of 286,864 contracts.

Crude oil rate

Crude Oil (WTI) - $80.50 // -$0.69 // -0.85%

Week-over-week, oil has offered another strong performance. The key commodity has closed its fourth consecutive bullish week, extending the initial surge sparked last week, pushing to new 12-month highs. Taking a more granular approach to the market’s health however, doubts and suspicions have started to bear down on the steady rally. We can see the hesitation in carry prices to new highs with the past two days worth of price action where congestion below the recent high of $82 and the trend low $80. A break is inevitable; but direction is up in the air.

The fundamental bearing on the oil has not been very clear lately. If underlying supply and demand were the only facet of price determination, crude would likely have collapse these past two weeks rather than rally to new highs. This past week’s US Energy Department inventory figures reveal the glut of supply that has refiners reducing imports. Through the week ending October 16th, crude stockpiles rose 1.31 million barrel to 339.1 million – 9.4 percent above the average levels for this period over the past five years. Further down the refinement line, gasoline supplies unexpectedly contracted 2.3 million barrels to 8.95 million; yet supplies are still significantly higher than the five year average. If demand were robust enough to absorb excess inventories while production levels continued unchanged, there would be a reasonable argument to be made for further appreciation. However, demand for fuel actually dropped 1.4 percent last week and consumption has largely struggled to recover despite the consensus that an economic recovery is underway.

So, while supply and demand imbalances will be a background concern, the true catalyst for price action will almost certainly be investors’ taste for risk and the pace of the US dollar. With the broader market recovery, confidence has led funds not only to yield bearing assets but also to those that can only provide capital gains. An optimistic outlook for steadily advancing markets is the foundation to stability. Should risk appetite falter, profit taking and a fundamental equilibrium set well below current price would act to accelerate crude’s plunge.

RBNZ Dollar decision

The Reserve Bank of New Zealand (RBNZ) is still anticipated to leave the Official Cash Rate target unchanged for the fourth straight meeting at 2.50 percent. In RBNZ Governor Alan Bollard's last policy statement on September 10, he sounded extremely cautious on the outlook for the economy, especially because the strength of the New Zealand dollar had created additional risks. Where the New Zealand dollar ends the trading day will likely have to do with the status of one statement though: the final portion. We also saw in the last policy statement that the RBNZ maintained that it was “appropriate to continue to provide substantial monetary policy stimulus to the economy” and that they “continue to expect to keep the OCR at or below the current level through until the latter part of 2010.” However, the RBNZ announced on October 14 that it would begin "removing and consolidating some of the temporary emergency liquidity facilities put in place during the financial crisis in 2008" as conditions had improved significantly, suggesting potential for a more hawkish tone. Overall, if the RBNZ eliminates the phrase noting that they could still lower rates, the New Zealand dollar is likely to surge in anticipation of rate hikes down the line. On the other hand, if the RBNZ maintains their dovish-neutral tone, the currency could dive as interest rate expectations would take a hit.

Sentiment overall

Sentiment was strongly posstive mainly driven by optimism fueled by the better than expected US Retail sales but mainly due to better than expected corporate earnings reports which continue to stream in and surprise largely for the better. The Dow was at the centre edging above the 10,000 milestone thus marking a 10 Years flat trend for the index gaining virtually zero for the decade. The Dow ended the day with a 1.47% gain trading at 10,015, The S&P was up 1.75% and in Europe the FTSE advanced 1.98% in response to the positive sentiment and the UK unemployment figure which is steady at 7.9%.In Frankfurt the DAX was higher by 2.45% and the Paris the CAC40 rose 2.14%.In the FX arena the broad Dollar selloff continued amid strong risk appetite with the Euro rising to 1.495$ just shy of the 1.5 mark and the CAD at the 1.2 zone with rising bets it is heading for parity versus the Greenback. The FOMC minuets released later in the day revealed some Fed members were in favor of additional or an expansion of the Mortgage related Quantitative Easing pointing more Dollar printing from the Fed is not yet out of the horizon and a rate hike is even more unlikely. Markets in reaction to the news pushed the Dollar lower as inventors start to asses Dollar depreciation as deeper than anticipated. In the commodities arena Gold continued to hover slightly under the record high trading at the 1060$ zone, Silver continued to confidently move to settle above the 18$ and oil pushed close to 76$ with the 80$ at its ai

High Rated pound

The British pound gained versus its main rivals the euro and the U.S. dollar, after a day of decisions in the Bank of England in which the asset-purchase program was voted to be held unanimously, together with statements published in newspapers that added attractiveness for the Great Britain currency.

Brazilian Real Rebounds

The Brazilian real posted sharp gains today after several negative sessions on speculations that the country’s economic strength will induce central bankers to raise interest rates in the country, attracting more foreign investors.

Strategy of Carry trade

Carry Trade As A strategy
For many years, money managers and banks have utilized the inflow and outflow of yield to collect consistent income in times of low volatility and high risk appetite. Holding only one or two currency pairs would invite considerable idiosyncratic risk (or risk related to those few pairs held); so traders create portfolios of various carry trade pairs to diversify risk from any single pair and isolate exposure to demand for yield. However, even with risk diversified away from any one pair, a carry basket is still exposed to those conditions that render this yield seeking strategy undesirable, such as: high volatility, small interest rate differentials or a general aversion to risk. Therefore, the carry trade will consistently collect an interest income, but there are still situation when the carry trade can face large drawdowns in certain market conditions. As such, a trader needs to decide when it is time to underweight or overweight their carry trade exposure.

Carry Trade

What is a Carry Trade
All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Each currency has a different interest rate attached to it determined partly by policy authorities and partly by market demand. When taking a foreign exchange position a trader holds long position one currency and short position in another. Each day, the trader will collect the interest on the long side of their trade and pay the interest on the short side. If the interest rate on the purchased currency is higher than that of the sold currency, the result is a net inflow of interest. If the sold currency’s interest rate is greater than the purchased currency’s rate, the trader must pay the net interest.

Australian dollar

How are Rate Expectations calculated: Forecasting rate decisions is notoriously speculative, yet the market is typically very efficient at predicting rate movements (and many economists and analysts even believe market prices influence policy decisions). To take advantage of the collective wisdom of the market in forecasting rate decisions, we will use a combination of long and short-term, risk-free interest rate assets to determine the cumulative movement the Reserve Bank of Australia (RBA) will make over the coming 12 months. We have chosen the RBA as the Australian dollar is one of few currencies, still considered a high yielders. To read this chart, any positive number represents an expected firming in the Australian benchmark lending rate over the coming year with each point representing one basis point change. When rate expectations rise, the carry differential is expected to increase and carry trades return improves.

US and Japanese benchmark

What are Risk Reversals:

Risk reversals are the difference in volatility between similar (in expiration and relative strike levels) FX calls and put options. The measurement is calculated by finding the difference between the implied volatility of a call with a 25 Delta and a put with a 25 Delta. When Risk Reversals are skewed to the downside, it suggests volatility and therefore demand is greater for puts than for calls and traders are expecting the pair to fall; and visa versa.

We use risk reversals on USDJPY as global interest are bottoming after having fallen substantially over the past year or more. Both the US and Japanese benchmark lending rates are near zero and expected to remain there until at least the middle of 2010. This attributes level of stability to this pairs options that better allows it to follow investment trends. When Risk Reversals move to a negative extreme, it typically reflects a demand for safety of funds - an unfavorable condition for carry

DailyFX Volatility Index

What is the DailyFX Volatility Index: The DailyFX Volatility Index measures the general level of volatility in the currency market. The index is a composite of the implied volatility in options underlying a basket of currencies. Our basket is equally weighed and composed of some of the most liquid currency pairs in the Foreign exchange market. In reading this graph, whenever the DailyFX Volatility Index rises, it suggests traders expect the currency market to be more active in the coming days and weeks. Since carry trades underperform when volatility is high (due to the threat of capital losses that may overwhelm carry income), a rise in volatility is unfavorable for the strategy.

Globe finance

Emboldened by new highs and early signs of rising yields, risk appetite has pushed to a new high for the year. However, the progress made week-over-week was very limited. Once again, investors and traders have reached the point where caution and skepticism has stalled the steady appreciation that the markets have otherwise carried on with since February. Perhaps we have come to the next tipping point in speculative interests where stable fundamentals are needed to draw in the next wave of funds to feed the capital gains of those that have already taken the plunge. And if there were ever a single piece of event risk that could confirm or rebuff forecasts for a stable, bullish market and a revival of yields; it would be the quarterly growth data. Heading into this heavy round of economic data, we can see the hesitation in price action. For the currency market, the dollar may still be on its bearish path; but its pace of descent has clearly cooled. EURUSD is arguably the benchmark for the pace and direction of the top funding currency candidate; but AUDUSD is better for measuring market sentiment. Despite being spurred on by the RBA’s aggressively hawkish monetary policy stance, the pair has stalled this past week at 0.93. This is unusual considering the fundamental contrast seen between the US and Australian dollars. Even the more accessible and popular equities market is showing indecision. The benchmark Dow Jones Industrial Average has loosely been confined to a 10,100 to 9,900 range since last Wednesday. It seems, regardless of what direction sentiment eventually takes, we will soon find some resolution on direction.

In the past weeks and months, we have seen multiple instances of congestion after a leg of bullish price action; and inevitably, optimism picks up where it left off. The is the nature of any market. A trend will eventually grow exhausted; and that offers the opportunity for continuation or a reversal. The speculative rally that the markets have been able to run for most of the year is still running well beyond the reasonable limits of the fundamental backdrop; but a few developments may have actually furthered confidence and ensured the next round of sidelined capital finds its way into the speculative arena. The outlook for yield has taken a notable turn for the better over the past week. The RBA took another broad step into hawkish territory recently when Governor Glenn Stevens said that he would tolerate further appreciation in the Aussie dollar in his efforts to rein in monetary policy. And, though this was the most unabashedly hike-oriented language to come out of the central bank circles; we have seen a subtle shift amongst many authorities. The BoE is expected to announce its intentions to take a break from its quantitative easing efforts at its next rate decision in November and the Fed is testing reverse repos in the money markets as a way to remove liquidity from the market without collapsing bank balance sheets. The next fundamental milestone is the third quarter GDP numbers. China has already confirmed an impressive pace for the period; but the United Kingdom’s reading will be the first for an industrialized country. What’s more, since the UK is considered the underperformer of the G-20, it could define the lowball estimate for global growth. Next week, the stakes are raised with the activity report for the US.

Dollar Ratings

The U.S. dollar rose after extending once again its record high for 2009 after China missed slightly its quarterly growth forecasts, and economic stimulus in the country will continue for a certain amount of time, suggesting the country is not so recovered as previous expected.

Brazilian news

The Brazilian real posted sharp gains today after several negative sessions on speculations that the country’s economic strength will induce central bankers to raise interest rates in the country, attracting more foreign investors.

Forex News Trader

How do the majority of profitable Forex traders truly profit in the FX market? One way… they trade the news!

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Each and every month there are a tremendous number of news releases for the Off Exchange Retail Foreign Currency Market (FOREX). Many of these events and announcements move the markets considerably. But how do you properly capitalize on these moves? Get it wrong and you could be wiped out. Get it right and you can be in a small group of trading elite, consistently pulling pips out of the market each and every week.

One-sided market

A Closer Look at Market Conditions

The bullish trend behind the market’s most high profile benchmarks is still intact; but the progress these securities are making is growing strained. The Dow Jones Industrial Average produced a new high today at 10,119.47; but the session would actually end the day in the red and maintain congestion that has been building for a week. It seems the 3Q earnings session is finding a more skeptical crowd this time around as the realities of medium-term growth set in. A moderate recovery also has its tempering effects on commodities. Crude set a new 14 months high today; but supplies are ballooning and demand is shrinking with limited expansion on the horizon.

For the most part, fear and volatility within the market continues to deflate. The standard measures of activity are at or near yearly lows and the steady influx of capital is padding the winning sense of capital returns. However, this complacency suggests the makings of trouble. With fear gauges steadily declining and positioning measures showing an increasingly one-sided market (behind bulls), the imbalance will eventually have to be corrected. When the profit taking starts, it will likely be relatively staid at first; but the sheer interest in assets that bear no interest, just the hope of capital return, could easily incite panic of evaporating profits. This reversal may be closer than many expect.

Capitalism

The Financial and Capital Markets

Optimism among the world’s investors continues to rise – well, the influx of capital from otherwise safe haven assets is keeping the markets buoyant at least. It is important to differentiate between a true measure of confidence and a natural adaptation of the market. The ICI’s Money Market Funds Assets index dropped to its lowest level in a year; but even after this steady, nine-month decline the gauge still shows $3.402 trillion on the sidelines. Much of this capital will eventually find its way back into the speculative space; but if it hasn’t been rediversified yet then those managing the funds are likely skeptical of the aggressive bull run we have experienced so far this year and are awaiting a true return of yield income. It is not a stretch to assume a high percentage of the capital that has migrated back to equities and other risky assets belongs to speculators and traders that are looking to take advantage of the impressive capital gains since February. If this is the case, then a correction could easily encourage a broad wave of profit-taking. A reversal is just a matter of time; but depending on when it takes place, the impact can be very different. Given enough time for dedicated capital to return to stabilize the market, the pullback could be mild. Alternatively, a turn when speculative funds define the market could trigger a plunge.

Financial Looks

A Closer Look at Financial and Consumer Conditions

Speculators and investors are still finding their way back into the financial markets; but there are still serious doubts as to the stability that exists for these eager market participants. The promise of capital gain is still the primary draw for most as the more stable sources of income in bond yields and equity dividends are still a long ways off. Nonetheless, the capital turnover has revived liquidity to the market and bolstered confidence – perhaps long enough for economic growth to encourage capital investment and more permanent investments. However, all it would take to bring the markets crashing down is a round of profit taking or an unfavorable reaction to warnings that the government is ready to remove the stimulus safety net.

Like the rest of the world, the United States economy is expected to report positive growth in the second half of this year and really see its recovery get underway in 2010 and beyond. However, as currency traders know all too well, this is a relative game; and the strength of the dollar depends on the pace of the US recovery compared to that of its major counterparts. We will receive a definitive update on the nation’s health next week with the advance reading of 3Q GDP. In the meantime, the outlook is certainly measured. The Fed’s Beige Book offered reason for concern. While the general consensus was that many areas saw “stabilization” and “modest improvement,” labor markets were still week, there was no wage growth and credit quality was eroding.

American Banking

The Economy and the Credit Market

Though the dollar continues to push to new 14-month lows, the pace of this descent has cooled. However, this should not be considered a sign that conditions are actually improving for the US economy or its currency; because that would ignore the underlying fundamental current behind this benchmark – risk appetite. It has been said ad nauseam in the past months that the dollar’s primary driver is general market sentiment; and that reality has not changed. In fact, the correlation between currency and investor opinion may have actually intensified over the past week as the US dollar is forced more surely into its role of top funding currency while risk appetite maintains its bullish trajectory. Over the past few weeks, we have seen a notable pickup in the hawkish bearing of some of the Fed’s more prominent peers, which in turn leaves the American authority in deeper relief with its steadfast outlook for a mid-2010 return to tightening. Among the most notable central banks ahead of the curve are the RBA, RBNZ, ECB and perhaps even the BoE. While the Bank of England is still a long ways away from the milestone hike, the market’s perception of a hawkish turn on QE has set the tone. If the dollar has any hope of recovery in the near-term, risk appetite will have to plunge or US market rates inflate.