Forexs Trading EUR/USD Snaps Rally on Good US GDP

EUR/USD dropped today after it was rallying for more than a week. The US economic growth, while a little slower than was anticipated, is still good and consumer sentiment gradually improves. The currency pair rose at the beginning of the trading session, but later was mostly falling. EUR/USD trades now at 1.3657.
US GDP, according to the advance estimate, increased at an annual rate of 3.2% in the fourth quarter of 2010. While the increase was bigger than 2.6% in the third quarter, forecasts promised even faster growth at a rate of 3.5%. (Event A on the chart.)
University of Michigan Sentiment Index was 74.2 in January, below the 74.5 in December, but above the preliminary estimate of 72.7 and analysts’ expectations of 73.1. (Event B on the chart.)


If you have any comments on the recent EUR/USD action

Forexs Dollar Surging

The US dollar is higher across the board as better than expected economic data continues to come in, highlighting the fact that economic recovery in the US may be taking place. However, the market is sending mixed signals as commodities prices are lower again today, with falling demand being cited as the reason.

But wouldn’t an improving US economy increase demand? Well I guess that depends on your point of view. As I have been saying all week, the market correlations that so many have relied on in the past are beginning to break down a bit. However this morning appears to have started out as a classic risk aversion sort of day (with one notable exception), though that may be changing as better US economic data is released.

That notable exception is the Japanese yen, which seems to be weakening across the board regardless of sentiment or economic climate, despite no news this week out of Japan. Suspicious to say the least.

So far this morning, the ADP employment change figures showed a gain of almost 300K jobs, nearly 3 times the expectation of 100K. While this figure is not nearly as important as Friday’s NFP number, it could be a sign that the employment picture is improving.

Earlier across the pond, both the Euro and Pound weakened, as tepid economic data and lower equities and commodities helped encourage the slide.

In the forex market:

Aussie (AUD): The Aussie is mostly lower, trading in lock-step with commodities which have been lower all week. In addition, new home sales came in lower than expected as the effect of higher interest rates cools the economy.

Kiwi (NZD): The Kiwi is mostly weaker as well, also taking its cues from commodities.

Loonie (CAD): The Loonie is higher across the board despite lower oil prices as the raw materials price index and the industrial product price index came in much hotter than expected. This could be a sign that inflation is picking up in Canada which could mean an interest rate hike sooner than later. (Click chart to enlarge)

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Euro (EUR): The Euro is lower this morning as the anti-dollar sentiment has increased dramatically. Better than expected Euro zone PMI data was offset by lower than expected Industrial New Orders. In addition, the Bank of Switzerland has refused Irish government bonds as collateral, which could be a sign of things to come.

Pound (GBP): The Pound is mixed this morning as PMI construction data came in lower than expected, showing a 49.1 reading vs. an expectation of 51. The jury is still out on the effects of the austerity measures which won’t likely show true economic conditions until later this quarter.

Dollar (USD): The Dollar is surging, particularly against its safe-haven counterparts (JPY & CHF) as the market has blown off the potential effects of QE2 and last year’s trade of “economy up, Dollar down”. This breaks from the risk trades that we speak about often despite the fact that today could be viewed as a risk aversion day.

Yen (JPY): The Yen continues to weaken on no news or economic data and is seemingly trading “risk agnostic” as its safe haven status has not been utilized despite weaker commodities prices and the currencies that follow them. This could simply be “allocation trades”—which means that investors are rebalancing portfolios and taking directional bets to start the New Year. Keep an eye on this as a reversion to mean scenario could take place with any heightened risk in the market. (Click chart to enlarge)

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So far in 2011, it has been difficult to peg the type of trading day that is occurring. But that’s OK. As I mentioned yesterday, an understanding of the fundamentals can help you figure out who is strong and who is weak, but it really is the charts that tells us where the action is.

Old habits die hard on Wall St. so there is tremendous opportunity as the market comes to realize that paradigms may shift and that old plays may go away.
Are you comfortable in your understanding of how to read charts? In what moves the markets? If not, then contact us today!

Forexs Fundamentals In Focus

2011 has started out of the gate with a focus on the fundamentals and less on the risk themes that were so dominate in 2010. While this is not tacit approval of where prices may be, there is some semblance of individual data guiding the markets.Case in point—this morning has started out with stocks higher across the board, but commodities are lower. Under last year’s risk scenario, this would be more of an anomaly than anything. As a result, we are seeing a lot of mixed trading as the market is unsure how to proceed.

As commodity prices are lower, so are the commodity currencies. Yet there is individual strength in both the Euro and the Pound, as economic data has dictated strength today. In the Euro zone, CPI data came in higher than expected, showing signs that inflation may be rearing its ugly head. In the UK, better than expected PMI figures and mortgage approvals data has pushed the Pound higher across the board.

Later today, we will get the minutes from the Fed meeting as well as factory orders which will likely give support to the idea of a US economic recovery.

In the forex market:

Aussie (AUD): The Aussie is lower as manufacturing slowed for the 4th straight month, according to the performance of manufacturing index, which showed a decline to 46.3 from last month’s reading of 47.6. Higher borrowing costs due to rate hikes helped dampen consumer spending. Also, the flooding is affecting commodity production facilities, particularly steel and coal. (Click chart to enlarge)

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Kiwi (NZD): The Kiwi is following the Aussie lower, as it is apt to do. Lower commodity prices, particularly gold off nearly 2%, has reduced demand. In addition, Bloomberg reported that carry trade strategies made slightly negative returns last year, which may be fresh in the minds of investors.

Loonie (CAD): The Loonie is lower as oil prices have retreated to 91 as demand has seemingly lessened. It was reported this morning that Canadian bonds performed the best of all countries last year, which could help drive money flows to Canada.

Euro (EUR): The Euro is higher this morning as CPI data came in hotter than expected, posting a 2.2% increase vs. an expectation of 2%. Unemployment figures in Germany gained vs. an expected loss (jobs gains) and French consumer confidence came in worse than expected. With the ECB mandate to control inflation as its primary function, this could set up for some interesting action as the balance between Euro debt crises and inflation muddies the water. (Click chart to enlarge)

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Pound (GBP): The Pound is higher across the board as PMI figures came in better than expected, reporting a reading of 58.3 vs. an expectation of 57.2. In addition, mortgage approvals and net lending figures came in higher than expected as well showing signs that the UK may not be dead just yet.

Dollar (USD): The Dollar is mixed and showing some strength as economic data and conditions appear to be improving. The Fed minutes later will likely show no change in sentiment among policy-makers, who at this point are content to let QE2 play out. Yesterday’s manufacturing data rose to a 7-month high.

Yen (JPY): The Yen is weaker against all but the Pac Rim commodity currencies, as economic conditions in the US are driving Dollar strength. There is no news or data due out for Japan this week.

As you can see, it is possible for both the Dollar and the equity markets to strengthen at the same time. As I mentioned in my 2011 preview, this may be a recurrent theme that we see this year. If you take stocks out of the equation, then today looks like a risk aversion type day, with notable Pound and Euro strength.

However, I don’t think 2011 is going to be as easy as “risk on, risk off” types of trades. It is important now more than ever that you have a good understanding of the fundamentals that can drive forex markets.

Everyone wants to be a technician these days and read the charts; however to take your trading to the next level, a fundamental understanding of the big picture can help turbo-charge your results!