Good Morning, Friends. Apparently, unrest in the Middle East and tensions in Eastern Europe aren’t good for either business confidence or production in Western Europe. German June factory orders fell 3.2% from last month; a rise of 0.9% was expected. Italy slipped back into recession as second quarter GDP shrank by 0.2%, and European retail PMI (Purchasing Managers Index) fell to 47.6 in June from a previous 50.0, with Germany, France and Italy all seeing declines. Since FX traders react quickly to all data surprises, EUR/USD dropped and the Dollar Index ($DXY) hit a high for the year. Normally well-informed friends working on desks in London report that some of their largest institutional customers have been periodically taking profits in short EUR/USD, reloading into any strength. That may provide it with more downside momentum than I have been giving it credit for. While I continue to be bearish on the pair – the chart seems pretty unambiguous – I had suspected that a more significant rebound would be needed to bring in new sellers. If large players are taking money off the table periodically, however, it may take an actual change in fundamentals to get a sizable pullback.
GBP/USD continues in a downtrend, although it hasn’t been making much progress in recent days. There is some concern that the Bank of England’s Monetary Policy Committee may be leaning toward tightening interest rates in order to subdue a rise in housing prices (which appears largely to be a central London phenomenon). Higher interest rates in the UK should be positive for GBP/USD, making traders nervous about being too short, but if the meeting that ends on Thursday concludes with no rattling of sabers, market participants may feel more relaxed about pushing the pair lower.
I look at correlations fairly regularly, just to see which asset classes are moving more or less in tandem. At the moment, the few major currency pairs that I looked at on the daily charts have very weak correlations with Treasury notes and bonds, which surprised me slightly, since the Dollar is normally fairly sensitive to changes in domestic interest rates. A risingÂ Dollar in times of global stress tends to be related to demand for Treasuries. At the moment, the stronger numbers are versus equity futures; for example, EUR/USD is 0.7% correlated with the E-mini futures. They aren’t moving in lockstep, but as futures prices move lower, the Euro is tending to move lower against the Dollar, as well. The correlation of the Dollar Index ($DXY) to the E-mini is even stronger at a negative 0.83%; when the index goes up, stocks go down. Since uncertainty around Russia’s intentions appear to be having an impact on both the Euro and on U.S. equity prices, these relationshipsÂ make sense at present.
If you have positions that are working, I’d suggest not being too eager to dispose of them. It’s the surprises, of course, that can create reversals, and by definition those are tough to predict. Keeping protective stops in place that will permit you to retain the bulk of your profits if things begin to unwind, as Todd Mitchell teaches in his courses, continues to be a sound approach. As always, best of luck!
Good Morning (EST), Friends. I’m not accustomed to waking up and seeing the E-mini futures down significantly (1952.50 as I type, down 12.50), but movement is always welcome. I haven’t seen a real explanation for the decline; no one should be surprised that Argentina has defaulted, and Charles Plosser of the Philadelphia Fed has been as predictable as the outcome of a Red Sox game. Our favorite Portuguese bank isn’t doing that well, and Eastern Europe and the Middle East remain dangerous places. I don’t see much that is new here.
What is always new is how the fundamental backdrop interacts with the positions held by traders and investors, all of whom are constantly balancing greed and fear. At some point, prices become sufficiently high that new buyers are reluctant to step in, and the first suggestion of profit taking is enough to prompt a rush to the exits. We could be seeing one of those “last one to take profits won’t have any” days today. The non-farm payrolls report is due at 8:30 AM EST tomorrow. This number has become the most important monthly data release, since changes in Fed policy are believed to be heavily dependent on its view of the employment situation.
The yield on the U.S. ten year note (TNX) has been moving up; higher rates at some point will make buying bonds attractive relative to owning stocks. Are we there yet? I don’t think so, but I’ve been known to be wrong from time to time. The prospect of higher short term yields in the U.S., which the Fed directly controls, is positive for the Dollar. Under the circumstances, it isn’t surprising that EUR/USD continues to be under pressure. I’m agnostic as to how far it goes, and since short positions are reportedly very large, a bounce is always possible. My bias is to sell those bounces.
It’s always tempting to let our approach to the market on a given day be influenced by headlines and by the talking heads. Our money is a lot more important to us than it is to them, and we’re responsible for protecting it and making it grow. We can have a sense for which fundamentals other traders and investors are watching at any given point in time, since that can help us understand what the charts are telling us. Todd Mitchell in his courses helps us to understand how to recognize promising setups, where to enter, and how to manage trades after a position is established. That’s what we can do, and the tools are available to us as never before.
As I was cleaning some stuff out of the basement, I came across the class notes from a course I took in, I think, 1994. It was given at the CME by Sheldon Natenberg, a very popular author on options strategies. I was leafing through the materials, and realized just how much technology has changed all trading, not just options. We have information rapidly available to us, we have more charting choices at hand than we can possibly use, and we are inundated with more information than we can process. All the more reason, it seems to me, to concentrate on what is timeless in trading, and thus critically important. Todd Mitchell does, in my view, a great job of pointing us in the right direction, and then giving us a map.
Best of luck today!
Gregory (Scotland Yard detective): “Is there any other point to which you would wish to draw my attention?”
Holmes: “To the curious incident of the dog in the night-time.”
Gregory: “The dog did nothing in the night-time.”
Holmes: “That was the curious incident.” (Sir Arthur Conan Doyle, “Silver Blaze” via Wikipedia.org)
Today seemed likelyÂ Â to be a day when EUR/USD would, perhaps should, be lower. Thus far, that hasn’t transpired, a somewhat “curious incident”. Sharper rhetoric from GermanÂ finance minister Schaeuble suggests that the Eurozone’s foreign ministers will place additional sanctions on Russia tomorrow. German business confidence has declined for three months in a row (July’s number, released on Friday,Â was 108, down from 109.7 in June), and while Russia isn’t a huge trading partner (it ranks 11th, according to Reuters), geopolitical stress in Eastern Europe tends to make European markets nervous.
Anticipation of further tension, combined with the prospect of a slowing German economy would normally be expected to bring the Euro, and EUR/USD in particular, lower. While there has been nothing resembling a reversal, the lack of movement suggests that the market is already about as short as it’s inclined to be. That raises the possibility of a “buy the news” reaction, and a bounce. Those who have been holding short positions on the long, slow slog down might wish to put tighter stops in place.
Todd Mitchell covers Fibonacci confluence in his courses; it’s something that I have found to offer generally reliable resistance or support. On the EUR/USD daily chart confluence comes in around 1.3555, offering a short entry on a rebound that offers a reasonable ratio of risk to reward. Another tactic would be to place a sell stop under the 1.3420 low; given the oversold stochastics and the low level of historical (realized) volatility, I wouldn’t be inclined to do that here, since a failure to follow through seems likely to generate a sharp short covering rally. As the saying goes, the last one to take profits won’t have nearly as many.
We’ll see what the Eurozone foreign ministers do tomorrow, and how the market reacts. I’m far from being bullish on the Euro, but a bounce now seems as likely to me as another leg down, and selling a bounce to open a position is a lot more fun than isÂ using it to improve the average of a position that’s under water.
As always, best of luck!
Hi, Friends, As those who read the Blog regularly are aware, I’ve been waiting impatiently for EUR/USD to break below 1.35. The loss of an airliner isn’t the catalyst I would have hoped for, but it appears now that there are too many differencesÂ among the European Union’s governmentsÂ to generate much pressure on Russia. That probably limits the downside momentum; on the daily chart, the historical (realized) volatility remains mired well below 4% on an annualized basis. The Average True Range has been 44 pips over the last 8 sessions, and since the FX market almost never sleeps, that’s less than 50 pipsÂ in a 24 hour period. Since not all of us catch every pip on a given day, why trade EUR/USD? Implied vol on Facebook “at the money” calls for Friday expiry is around 98%; that’s something we can get our teeth into. Currency volatility has been substantially lower than hasÂ that for equities for the entirety of my career (going back to 1985, I’m afraid), but this is as subdued as I can recall. As my last head trader frequently remarked in the afternoon “This used to be such a great business.”
Still, the 1.35024 low from June 5 has been broken. I ran a Fibonacci extension from the subsequent (now a pivot) high at 1.36997 on July 1 to the 1.35024 level; the 127.2 extension is 1.34487, which has basically been attained, since the low for the move has been 1.3454. The next extension, the 161.8%, is at 1.3380. The Fib extensions are, it seems to me, reference points rather than real targets, but what might be considered a minimum target for the move has more or less been attained. There are plenty of institutions that trade at leasr a portion of their FX portfolios using technical models, but the patterns in the charts are established by institutions responding to changes in fundamentals. The chart indicated, or so it seemed to me, that a downside break would come, but it didn’t know that an airliner was going to be shot down over the Ukraine. FX tradersÂ are very quick to incorporate new information into prices, so a surprise is required almost by definitionÂ to alter an existing range.
Given the exceedingly low volatility environment for most currency pairs, carry trades, where investors borrow in a low yielding currency (like JPY) and invest in a higher yielding currency (such as AUD) remain popular. I continue to like long AUD/JPY, although it is subject to risks on both sides of the trade. AUD is highly sensitive to Chinese economic data, and there are no guarantees that any given report will be stronger than expected. Japan’s government is attempting to generate a degree of inflation and weaken the Yen, but in periods of geopolitical stress, JPY generally serves as a safe haven. Those capital flows strengthen the Yen. In addition, institutional investors are heavily underweight the currency according to my former colleagues at a large custodial bank. These factors are reflected in the pair’s historical volatility, which is 6.3%, no great shakes, but substantially higher than EUR/USD. The uptrend was almost broken, but the pair is now recovering, and the interest rate differential in AUD’s favor (roughly 2.5% annually)Â should, on balance, continue to pull it higher.
Still, as you can tell from looking at the Blog entries of both Todd Mitchell and Doc Severson, there may be much more interesting trades out there than areÂ available in most currency pairs at present. The day of the major currencies may come again; in the meantime, while there are still trades that can work,Â they may doÂ so painfullyÂ slowly.
As always, best of luck!
Good Morning (EST), Friends. Japanese investors are even more desperate than are most of their global counterparts for yield; interest rates have been at, or close to zero, for years. “Mrs. Watanabe” is the archetype of the Japanese housewife who invests her family’s savings in her spare time. As my late, great friend Rudi Dornbusch of MIT frequently commented, Japanese investors continue to buy Japanese Government Bonds (JGBs) because “that’s the only thing in which they haven’t lost their shirts.” Nonetheless, Mrs. Watanabe and her friends do venture abroad, and at present, AUD/JPY is back in vogue. While interest rates in Australia have moved lower, they remain substantially higher than their Japanese equivalents; a Japanese buyer of AUD can pick up roughly 2.7% annually. The trick, of course, is not to give back more than 2.7% in AUD/JPY.
The chart at the top of the page is a daily view; the one just above is a weekly. The weekly shows a move back to the 50% retracement following a long decline from the 105.40 area more than a year ago area down to 86.40 in August. The daily is more interesting; there was a textbook pullback from the 96.50 high to 93.03. The current level doesn’t represent an ideal buy point; I would be inclined to wait now to see if the previous high gives way. At that point, a starter position can be taken, with the intention of adding to it on the first pullback. If the current move ends in a lower high, a more pronounced pullback would be expected, and I’d be less enthused about building a long position. Sentiment favors long AUD/JPY, but that means that a fair number of people are already long.
The Euro came as low as 1.3502 versus the Dollar following the ECB’s decision to place negative interest rates on deposits held on its books by the region’s banks. It had a decent rebound from that level, but has sagged off again, and is trading close to the low of the day at present, in the 1.3590 neighborhood. While it’s a little disconcerting that almost everyone is looking for a move lower, that still seems to me to be correct. The rebound high was 1.3676, and I wouldn’t be happy about a short were that level to be taken out. Still, the weight appears to be to the downside, with rallies likely to be sold into until a retest of the 1.35 area occurs.
Here’s hoping that all is going well; please give me a shout with any questions or comments. I’m one of the lucky people whose vocation is also their hobby, and I can talk (or type) about markets all day long, or until at least my wife complains.
Good Morning (EST), Friends. Earlier today, May’s inflation reading for the Eurozone was released. It came in at 0.5%, year over year,Â versus expectations of 0.7%. The central bank’s official target is 2%. I can almost hear you saying “Great, thanks for the info, and I care because …?” Well, this one may matter for anyone trading the Euro, or bonds, and because bonds are in a constant tug of war with stocksÂ for investor dollars, it may ultimately matter to those of us who spend most of our time trading our favorite derivative, the E-mini. The European Central Bank’s (ECB) Governing Council meets on Thursday, with the policy announcement expected at 7:45 AM EST; the press conference will begin at 8:30 AM EST.
Expectations, which should be more or less baked into the current price of EUR/USD, is for a small additional cut in theÂ benchmark interest rate, currently at 0.25%. The consensus appears to be for a cut of 10 basis points, to 0.15%. There are a couple of other, less scrutinized rates that could also be cut. I think that what will have the most impact, potentially, is a decision to slap negative interest rates on bank balances (presumably above a threshold amount) held on deposit with the ECB. That would constitute a pretty aggressive maneuver, and one that could see a reaction by market participants.
EUR/USD has been trending higher since reaching a nadir of 1.2041 in July 2012, as shown on the weekly chart. It is currently around 1.3635, down from 1.3992 in early May of this year. One of the catalysts for the decline was the previous ECB meeting on May 8. At that meeting, ECB President Draghi indicated the the Governing Council would be open to additional measures to spur a mild degree of inflation, and more robust growth. Looking at the the daily EUR/USD chart at the top of this post, you’ll observe that May 8, not coincidentally,Â saw the recent high (1.3992) in EUR/USD. That was prior to the ECB announcement and Dr. Draghi’s comments; since then, the pair has largely traded lower.
So, the longer term (weekly) trend is up, the shorter (daily) trend is down, and we have a potential catalyst for volatility on Thursday that may, to some extent, already be priced in. So, how to trade it? A downside break looks easier, since on the daily chart, 1.3585 has held repeatedly. The more aggressive play would be a sell stop (with a limit) set just underneath that level; otherwise, once a new low is established, traders can look to sell the retracement in accordance with the principles described in Todd Mitchell’s courses.
An upside move will, it seems to me, be trickier. If the ECB doesn’t alter the current deposit ratesÂ (which I think is the key variable), I would expect a quick short covering rally. The problem is that 45 minutes later, Dr. Draghi could mention that this remains a possiblility, and that the Governing Council simply wants to look at additional data. That could bring a rally to a screeching (and possibly expensive) halt. I don’t have an upside level in mind; the area around 1.3750 currently looks like a place to begin thinking about shorting EUR/USD, but that could change, depending on what is or isn’t said on Thursday morning.
This is something to be aware of; if negative deposit rates are imposed, my sense is that it will be pretty positive for the USD and for U.S. fixed income (since bank deposits will be looking for a home, and will presumably prefer higher yields to lower). Friday is what I have come to think of as pay day, in the form of non-farm payrolls. I’ve been pressing harder than I should to make something happen in the E-mini futures, and have consequently been prone to overtrading, and to losing money. The non-farm payrolls report has in recent months been a nice money maker, which I’ve played by employing the techniques taught by Todd as the “First Half Hour Breakout”. Nothing works all the time, but I’ll keep going back to that well for as long as I continue to find water.
We’ll see what our friends in Frankurt do (or don’t do) on Thursday, and then what the U.S. report does on Friday. As always, be lucky!
Good Morning, Friends,
Implied volatility of 6% doesn’t seem like much, but that’s a higher level than EUR/USD has seen for a while. Elections to the European Parliament are taking place over the weekend, and there is speculation that a strong showing by Euroskeptic parties of the right and left will lead to a softer Euro. In addition, the European Central Bank’s governing council meets in early June, and is widely expected to lower headine rates, and possibly even slap negative interest rates on large deposits. Anticipation of the latter move may help to keep U.S. interest rates lower than they otherwise would be; if European rates are declining along with the currency, higher yielding Treasuries denominated in a rising Dollar may look appealing to cross-border investors.
EUR/USD isn’t at an ideal selling point; on the daily, 1.3760 would offer a nice ratio of prospective reward to risk, but it isn’t likely to reach those heights today. Friends in London speculate that while a Euro-negative result in the parliamentary elections is baked in as far as Eurozone traders are concerned, it may be more of a shock to Asian and North American players, who will then presumably want to get short, or shorter. I’m agnostic on that, but if I was playing it from my old seat on a bank desk, I would probably take some Dollar calls/Euro puts home for the weekend, just to have some exposure. The hourly chart shows Fibonacci confluence around 1.3640, and that might be a place to look to sell some Euros for what would be expected to be a fairly short term trade. It should be toughÂ for peopleÂ to buyÂ Euros for purposes other than short covering and profit taking ahead of the ECB meeting on June 5.Â Elections bring uncertainty with them, of course; that’s why they play the game. It’s entirely possible that Europe’s voters will refuse to do what we want them to do. It’s also conceivable that the market will respond in ways other than I expect, and so it’s important to keep a stop in place.
A long weekend approaches in the U.S. Wall Street etiquette dictates that most senior managers will take today off, as well as Monday. “Reports of absence” are e-mailed late on Thursday afternoon, giving the troops the good news. “I can be reached via e-mail in case of need” is always attached, but the unwritten sub-text is “And you’d better not need to”. That will reduce risk taking, and probably make for a dull afternoon unless there’s some sort of market-moving catalyst. If the latter does occur, things could get exciting, but late afternoon boredom is the expected outcome. On the daily chart, the E-minis made a new high, retraced in textbook style to a buyable level, and proceeded to move higher. The contract is now within striking distance of the 1898.50 high. We’ll see how it trades from here, but I find that I’m not spending too much time short these days.
Best of luck today, and have a great weekend.
Good Morning (EST), Friends. The European Central Bank’s Governing Council met today and did nothing. That’s technically incorrect; they no doubt did quite a few things, but none of them involved a policy change. There was a mild response in the currency market, as this outcome was certainly known to be a possibility. Dr. Draghi, in his subsequent press conference, created more of a stir by noting that a great many potential policy changes had been discussed, and while nothing was altered today, that might not always be the case. Â The response to the announcement, and the wider range during the press conference, can be easily identified on the 3-minute chart of EUR/USD, above.Â
This is fairly classic spin, taken directly from the central bankers’ playbook. Nonetheless, it created some moves in both directions in EUR/USD, and there was a response in EUR/GBP as well. The fact remains that interest rate differentials haven’t changed, although, as Dr. Draghi notes, they could do so at some future date. That being the case, those who were short EUR, fearing a move by the ECB, may already have done some covering, and there may be more to do if there is a sustained move higher. The low thus far today in EUR/USD, 1.3709, is just above the 1.3704 low from Friday. You’ll note that the pair has moved back into potential moving average support on the daily chart.Â
The FX market tends to discount all news very efficiently, and while I don’t see any need to take ECB promises of action seriously until its Governing Council actually does something, Mr. Draghi is persuasive. If the 1.3700 level is retested and holds, I wouldn’t be surprised to see a bounce back up toward the 1.3800 level; today’s intraday high has been 1.3805. Buying here – at 1.3712 as I type, with a tight stop just below 1.3700 – doesn’t strike me as offering a bad ratio of risk to possible reward, but there’s no doubt that the currency pair is under some downward pressure at the moment.
EUR/GBP continues to be more or less rangebound on the daily, but for Â a day trade, short EUR/GBP looks potentially easier than short EUR/USD. It’s a tough sale right here; I’d be inclined either Â to wait for a bounce back, or sell small on a Â break of the 0.8266 low, looking to add on the first bounce. Something in the 0.8285/90 looks about right in this very short time frame. The potential gain is small, 25 or 30 pips, in all likelihood, so stops need to be positioned accordingly. There’s little benefit in letting a short term trade turn into an “investment” because a loss becomes unacceptably large.Â
Analysts at every trading shop are currently parsing the ECB statement and Dr. Draghi’s press conference for clues as to future rate movements. As always, paying attention to the lessons taught by Todd Mitchell while reading charts, defining risk, and only taking appropriate entries, will keep us profitable, and in the game.
Best of luck!
Good Morning, Friends. Although we trade technically, there are still events and other fundamental inputs that we need to be aware of in order to take advantage of potential opportunities, while avoiding possible pitfalls. Meetings of major central banks are ones to keep on the calendar. Today’s it was the European Central Bank’s (ECB) turn. They were expected to do nothing, and did so, while slightly hiking the forecast for the region’s GDP in 2014 to 1.2% from 1.1%.
Although “nothing” was expected, foreign exchange traders are subject to paranoia, although the enemy is generally the market, rather than individuals. In this case, there was concern that the ECB might cut. Currencies normally quickly reflect expectations as to moves in short term rates, but a surprise can have an outsized impact, sometimes even altering the trading range. As the chart of EUR/USD Â above indicates, at least some shops were positioned for a large move in the event of a surprise ECB cut; when it didn’t occur, they covered, and as that played out, plenty of others were happy to jump on and give the move a push.
Tomorrow at 8:30 EST brings another important number, the monthly non-farm payrolls report. Almost anything can be explained away at the moment by the generally nasty winter, so we’ll get a sense of the market’s positioning and confidence when we see the reaction to the report. The consensus expectation is for a gain of around 143k Â jobs. I’ve had some success in the past few months going into these reports with a strategy based on Todd Mitchell’s first half hour breakout. It is not without risk, and I’m aware that I’m likely to get dinged at some point; it’s just part of the process. Given some decent volatility, however, it can work well. Here’s a picture of the response to last month’s report in the E-mini futures:
We’ll see how that plays out tomorrow; in the meantime, U.S. Â equity futures appear to be more or less unconcerned. The “Wall of Worry” seems a little lower today. Be lucky!
Good Evening (EST), Friends. As I hunt and peck on the keyboard, the E-mini futures are down roughly 17 points. This appears to be related to concerns that the situation in the Ukraine/Crimea will escalate into something that is more than regionally disruptive. This makes sense to me; the market reached a new high last week, there are profits to protect, and the last one to take them typically doesn’t have nearly as many. Given the uncertainty, longs would be expected to get closer to home.Â
The move lower in USD/JPY also makes sense. Japanese investors, like Americans, tend to reduce their cross-border exposure and head for home when risk raises its head. They sell whatever currency their stock and bond holdings are denominated in, and convert them to Yen, which tends to depress USD/JPY. Many traders are aware of this phenomenon, and they join in the fun, selling USD/JPY in anticipation of Japanese investors’ flows. This contributes to what is known generically as the “risk off” trade, which involves buying Dollars and Yen against most other currencies, buying bonds, and selling stocks.
So far, so good. What makes much less sense to me is the relative lack of movement in EUR/USD. That may come as we get into the London session, but the Ukraine is a lot closer to Germany than to Japan, and Russian trade with Europe – including natural resources needed in the west – is quite significant. I would have expected traders to be selling Euros with both hands, but thus far, that hasn’t really been the case. It’s just about bedtime in the eastern time zone, but I’ll be quite surprised if EUR/USD doesn’t come considerably lower as traders head back to their desks in London. In the interest of full disclosure, I should note that I am frequently surprised.Â
Parenthetically, it looks to me on the daily chart of USD/JPY that moves above 102.50 are likely to be sold. If some sort of agreement (or rumor of an agreement) is reached to limit additional violence in the Crimea, the futures are likely to reverse to the upside, possibly violently. I’d certainly suggest being even more careful than usual to have a stop in place when short; I find that the only thing more annoying than taking a loss is taking a loss on a position that was once profitable. USD/JPY is also likely to reverse to the upside should the headlines become less threatening. As Todd Mitchell frequently observes, losses are inevitable in trading, but avoiding serious losses is what enables us to keep trading.Â
Whatever the news proves to be, best of luck!
P.S. Friends in London suggest this morning that the relative stability in EUR/USD is due in large part to the activity of banks with operations in eastern Europe. Reportedly, they are hedging their exposures by selling local currency, and buying Euros (and CHF, and GBP); in short, acting much like Japanese investors. If this is the case – and these people are, as they say, “normally well-informed” – it may take a little longer to generate selling of EUR/USD, assuming that the unsettled situation in the Crimea continues to hold the market’s attention. The truth is in the price action; when the charts contradict my sense of what “should” be happening, I trade the charts.Â