My Rant - Politics, The Fiscal Cliff, and Trading FX

By Michael Weissman

Since the US Congress returned to work, and I use the term "work" very loosely, on Monday the markets have experienced some serious whipsaws as predictably one after another politician offers their particular take on how confident or not they feel about reaching a deal to avoid going over the US  fiscal cliff. They all "understand the devastating effects of not reaching an agreement" or so they say. Personally, I think the only thing our irresponsible representatives are concerned about is which party gets blamed for letting it happen.

Tuesday  saw the US dollar strengthen and the equity markets decline as soon as Senate Majority Leader Harry Reid  said  there has been “little progress” made in talks about resolving the fiscal cliff of tax increases and spending cuts. That sentiment carried over into Wednesday trading until House Majority Leader John Boehner said he was “optimistic that we can continue to work together to avert this crisis, and sooner rather than later". Then President Obama followed later saying “Our ultimate goal is an agreement that gets our long-term deficit under control in a way that is fair and balanced, and I believe that both parties can agree on a framework that does that in the coming weeks.”  Right after Boehner's comments market sentiment reversed again and coupled with Obama's comments that followed lasted throughout the US session and then accelerated into early European sessions on Thursday. 

For reasons I will explain shortly I do not believe our leaders are close to a deal and remain pessimistic that anything meaningful can be achieved over the next few weeks so I expect to see many more instances of high volatility and quick market swings as emotions and sentiment swing back and forth as political posturing continues while the clock ticks and the days left to resolve the issues dwindle away.

The issue at this time is really very simple. The US spends too much money and current commitments to entitlement programs are unsustainable. The democrats are fixated on 1 thing only and that's raising tax rates on individuals who earn over $200,000 per year or families who earn more than $250,000 despite the fact that the additional money doesn't come close to addressing our budget deficit and have shown no serious interest in tackling the real problems that threaten the longer term future of our country. 

With Obama in the white house and Democrats controlling the Senate the Republicans who control the House have 1 and only 1 piece of leverage and it would be irresponsible and a slap in the face to their constituency to give it away and my take on Obama's comments yesterday that helped fuel a risk on rally suggest to me that the sides are as far apart as ever. The ace in the hole for the Republicans is that all of the so called "Bush Tax Cuts" will expire at the end of this year.  Boehner's comments turned the market around because he made it clear that the Republicans were willing to put higher taxes on the table. What has been under reported and extremely relevant is the fact that tax increases were on the table but only as long as they were accompanied by spending cuts. That's relevant because Obama was also clear later in the day that he wants to only address the tax cuts now and leave the spending cuts to be worked out next year. By agreeing to tax increases now for the promise of spending cuts next year the Republicans give away their only bargaining chip. In my opinion It's NOT going to happen.

Raising taxes in this environment on anyone is foolish. It would wreck the economy. I see no possibility of the Democrats seriously discussing spending and entitlements in the next few weeks. The Republicans will not agree to extend the Bush tax cuts unless they either include all taxpayers or the democrats come to the table with entitlement reform. The best we can hope for, which is also the responsible and prudent way to resolve the fiscal cliff issue IMO is to extend the Bush tax cuts for everyone for 1 more year and give the new Congress and the President time to come up with a comprehensive plan to reform the entitlement programs and the tax code in a truly bipartisan basis. What worries me is that the terms responsible and prudent have been absent from our political system for far too long.   

So how do you trade in a market environment that is so unpredictable in the short term? First and foremost recognize that we are in a very skittish market environment and understand sentiment can and will change quickly. Keep your leverage low and use smaller position sizes. You need either very tight stop losses to avoid whiplash or believe it or not larger than normal stop losses so sudden swings don't stop you out of your trade. Remember it's not the amount of pips you risk that's important-it's the amount of your trading capital you risk that counts.  I never risk more than 2% of my trading account on any 1 trade so when I decide to use large stop losses which I am currently doing, I just use smaller positions than normal. As an example, suppose you have $10,000 in your trading account. I would risk no more than 2% or $200 on a trade. Now depending on the setup I might use a 20 pip stop on a eurusd trade. This means I can lose $10 per pip. A eurusd pip is worth 1$ for every $10,000 of the currency pair held so this means I can put on a $100,000 position. So if my $100,000 position goes down 20 pips and each pip is $10 then my max loss is $200. Now suppose I choose to use a 100 pip stop loss. I still want to risk a maximum of $200 which means I can now risk only $2 per pip. So now instead of a $100,000 position I reduce the size to $20,000. So now if the position goes against me and I lose 100 pips I lose the same $200.  So please remember the golden rule. It's not pips risked in a trade it is capital risked. As I expect a very volatile market throughout the fiscal cliff negotiations I have adjusted my stop losses to allow for this volatility and have reduced my position sizes accordingly. 

Wall Street Journal: Banks Feel Currency Pinch

By Matthew Walter and Alexandra Fletcher


Banks are seeing a steep decline in profits from currency trading, as once-lucrative businesses are eroded by the rise of electronic trading and the proliferation of new platforms.

The pain is being felt across the industry. Banks reported sharp drops in currency-trading revenue last quarter, in many cases deepening a slump that began early this year. Even Deutsche Bank AG, the world's biggest foreign-exchange bank, reported revenue "significantly lower than the prior year" even as the volume of transactions it handled hit a record high in the third quarter.

Banks are struggling on two fronts. A calm in currency markets relative to the swings of the last few years has reduced overall trading activity. And the explosive growth of electronic trading has brought transparency to a roughly $4 trillion-a-day market, making buyers and sellers less reliant on big banks to pair them up.

As the easy profits from handling trades for clients vanish, banks are being forced into an arms race, analysts and traders say. That means offering better terms to customers and spending heavily to develop electronic-trading platforms of their own.

"The FX market has gone through a transition to being much more automated, and an obvious conclusion of automation is it becomes much more competitive," said Fabian Eliasson, head of currency sales at Mizuho Corp. Bank in New York. "It's the same thing that happened with stocks 20 years ago," when trading moved to electronic exchanges, eroding profits for traditional brokerages.

Starting in the late 1990s, stock trading became mostly electronic and largely automated, leading to a surge in trading volume but with smaller profits to be had on each trade. Banks reduced their number of traditional stock traders and sales executives, who courted clients with tickets to sporting events and expensive dinners,and revamped their businesses to center on services such as devising trading strategies for clients.

The transition in foreign exchange may take more time, because the market is less heavily regulated and more decentralized, but the change is inevitable, said Richard Repetto, a principal at Sandler O'Neill + Partners.

"With everything getting more transparent, it's going to be tough for foreign exchange to stay in the 1930s," he said.

The rise of electronic trading comes at a time when overall volumes are leveling off, as central banks intervene to limit currency movements and, by extension, traders' opportunities to profit. Policy makers also are keeping interest rates at rock-bottom levels, reducing the appeal of "carry" trades, where investors borrow a low-yielding currency and buy one that offers better returns.

BarclaysPLC partly blamed a slump in foreign-exchange trading for a 19.8% drop in revenue at its fixed-income, commodities and currencies division in the third quarter. Smaller players fared even worse. Commerzbank AG CBK.XE -1.90% reported a 45% drop in fixed income and currencies income in the first nine months of 2012, while Royal Bank of Scotland Group RBS.LN -1.36% PLC said its foreign-exchange income declined 44% in the same period.

The biggest hit to profits comes from the narrowing gap between bid and offer prices in the foreign-exchange marketplace. Banks quote two prices for currencies: the rate at which they are offering to buy, and another, typically higher, rate at which they will sell. But with increased competition and prices from multiple sources streaming across clients' computer screens, banks have been forced to reduce that bid-offer margin.

"It seems as if the industry is grabbing onto as much volumes as possible to the detriment of margin," said Jim Iorio, the New York-based global head of foreign-exchange distribution at Barclays BARC.LN -1.29% .

Major independent trading platforms, including ICAP IAP.LN -1.17% PLC's EBS and Thomson Reuters, have reported declining volumes in 2012. Central banks report that this year, global currency-trading volumes have fallen slightly from the peak of $3.8 trillion a day for 2011. The total is up from $2 trillion in 2006.

To be sure, most foreign-exchange desks are still making money, and international corporations continue to rely on their banks to exchange large amounts of currency. Hedge funds, which have pulled back from currency trading this year, may jump back in if markets become more volatile.

At the same time, though, even for banks that have been able to increase their overall trading volumes, the size and profitability of those operations is declining.

"The e-trading business is one of economies of scale. Initially it can be tough, but there is a tipping point of volume where you begin to make money," said Simon Jones,Citigroup Inc.'s C -1.51% London-based global head of electronic foreign-exchange. "We have to constantly innovate and spend money on technology."

Citigroup's "Velocity" online platform and the "Barx" online trading system at Barclays both feature foreign-exchange trading. In July, Deutsche Bank rolled out its next-generation currency-trading platform through its Autobahn system.

Investments such as those have allowed some banks to bolster their volumes, at the expense of banks with smaller trading operations. According to Euromoney, the top three—Deutsche Bank, Citigroup and Barclays—controlled 39.5% of volumes in 2011. It was the first time the three biggest players increased their collective share since 2007.

"Different banks are taking different approaches," said Firas Askari, head of foreign exchange at BMO Capital Markets in Toronto. "Some of the larger, more global banks are trying to get into a volume game. Some of the smaller banks like ourselves are really focused on building strategic partnerships with key customers, and becoming more of a trusted advisor over the longer term."

Article Link: http://online.wsj.com/article_email/SB10001424127887324784404578145330498718030-lMyQjAxMTAyMDIwODEyNDgyWj.html

Forex Trading Update: EUR/USD

Market Wrap-Up

The Euro began falling against the greenback as the European Stock Market opened and remained under pressure throughout the day. The reason? Investors realized that the deal which just "saved" Greece didn't actually fix any of the fundamental problems. Greece was granted another tranche of aid, which it will waste away while it is busy not fixing any of the underlying problems with its economy.

The Euro may have fallen further against the dollar if not for currency flows from Euro cross pairs as worries over the fiscal cliff caused investors to sell the high(er) yielding commodity currencies across the board.

Bullish Factors

We are in an uptrend on the 1 hour and 4 hour charts. We are in an uptrend. Repeat after me: WE ARE IN AN UPTREND. Trust me, I realize how intensely attractive it is to short the Euro because I know the market fundamentals in the Eurozone are absolute garbage. The problem with randomly shorting the Euro is that it can always go higher. Throw a Spanish Bailout and Draghi saying the Euro is irreversible into the mix and the Euro can skyrocket towards 1.3500. Heaven forbid there is legitimate compromise on the fiscal cliff and we could see the U.S. Dollar weaken substantially. 

The chart below clearly depicts the current uptrend. The key to trading the Euro in this situation is to respect the trend. The trend is your friend until you trade against it. If you fight the trend, more often then not it will put you in a choke hold and apply pressure until you black out. GG.

Bearish Factors

That said, I'm currently short. The trick to swing trading in a counter trend situation is to play the important levels. We are in a clear downtrend on the monthly, weekly, and daily charts (if you scroll out.) This latest "deal" concerning Greece is problematic because a close examination of the details reveals that little was accomplished and there are all sorts of things that can still go wrong with the deal (i.e. conditionality clauses.) Sentiment over the current situation in Europe seems negative, and I don't see any potential catalysts for positive sentiment in the next couple of days.

It's also worth noting that if elections were held today, polls are showing that Syriza would get the most votes. From Zerohedge: "Support for anti-bailout Syriza at 23%; New Democracy 20.8%; Golden Dawn 9.8%."  Forget about future tranches of aid. Once Syriza gains more control of parliament, Greece will probably vote itself out of the Eurozone.

So when I'm trading counter trend, I believe how price action responds to levels is crucial. I can't simply "let the trade run." I need to protect my profits. To do so requires that I take profit at key levels and wait to see whether price is repelled from the level or ultimately breaks underneath it.

Key Levels

1.2950 - We broke this level. I think a test of 1.2900 is likely with a possible bounce off of support at 1.2875. We will need to see a break below 1.2875 to open up further movement to the downside.

1.2825 - This should be the next decent level of support below 1.2875. 

EUR/USD Update

EUR/USD broke 1.3000 and pushed up to 1.3010 on news of a deal that the next tranche of aid will be released to Greece. EUR/USD is currently trading at 1.2980 - consolidating within a range of 1.2950 - 1.3000.

Levels are key here, as they should give very clear indication of whether or not the move up from 1.2660 has run out of steam. Although market fundamentals in Europe continue to decay, it's important to be careful shorting the Euro because there is no reason it can't continue to grind higher. EUR/USD is clearly in an uptrend on the 60 & 240 minute charts. We could currently be in a "buy the rumor, sell the news" situation (the deal on Greece), or it could be a buy the rumor, buy the news, buy Euros despite reality type of situation. If U.S. and European equity markets don't come under pressure and risk remains well bid then the Euro could very well continue its ascent.

Alternatively, I think at least a short term correction back down to 1.2900 is the more likely scenario. EUR/USD has come straight up from 1.2740 and I think this move may be exhausted on a short term basis.

Levels
1.3020
1.3075
1.3100 - once we hit 1.3100 it immediately puts the swing highs at 1.3140 and 1.3170 in sight

1.2950 - a break of this is likely imo, and should lead to a test of 1.2900
1.2900 - I think price is likely to either bounce off this level or at least consolidate here before a move lower.
1.2825-1.2835 - should we break 1.2900 then this should be the next area of decent support.

The Best Trading Advice You Ever Received

Guest Post: By Darkstar

I've found so many good pieces of advice over the years, its hard to select one BEST piece... but if I had to pick one, I'd go with:

Maintaining discipline isn't so much a matter of will as it is finding the right system for YOU.

For example, are you over trading your system? Your system is probably too slow for your needs. Not able to take all the trades your system calls for? Maybe you would be more comfortable a longer timeframe system that doesn't have you trading so often. Constantly moving your stops? Maybe you need a system that has you place your stops by a resistance.. or another form of resistance that you have more faith in. I could go on with examples forever.

The point is, think of your discipline issues as your subconscious mind telling you that you're trading the wrong system for you. It will open you up to a whole new perspective on how to become a better trader.

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Moody's downgrades France to Aa1 from Aaa -- negative outlook

From Citi's Steven Englander:


Moody’s cited deteriorating economic prospects, loss of competitiveness, structural issues and uncertain resilience to negative shocks. They also cite France’s funding costs (even though borrowing rates are close to record lows.) On the negative outlook, Moody’s says “Moody's would downgrade France's government debt rating further in the event of additional material deterioration in the country's economic prospects or difficulties in implementing reform. Substantial economic and financial shocks stemming from the euro area debt crisis would also exert further downward pressure on France's rating.” The comments are fairly general, as with the US downgrade last year. If anything the emphasis on the deteriorating growth picture may add some pressure for the ECB to ease but with france 2yr yields at 11bps, its growth prospects would probably benefit more from an easing of sovereign concerns in the peripherals than from a cut in ECB policy rates.

Moody’s alsdo reminds that “Moody's currently also holds negative outlooks on those Aaa-rated euro area sovereigns whose balance sheets are expected to bear the main financial burden of support via the operations of the EFSF, the ESM and the ECB. Apart from France, these countries comprise Germany, the Netherlands and Austria." So the French downgrade may presage others to come.

As with the US downgrade last year, little of what they cite is new and the downgrade reflects a reality that has probably long applied to France and applies to a number of the remaining Aaa countries as well. At today’s 90, France’s CDS was trading a little higher than Poland and Estonia and a little below Qatar, Abu Dhabi and Belgium. The 10yr spread versus Germany is in the range of the last three months, and close to where it was in August 2011 before Spain became a major issue.

With EUR now at 1.2773 versus 1.2816 just before the announcement there is probably more downside till the kneejerk reaction is out of the way. But on the whole it seems likely that this more reflects an already existing reality than new information for the market so the downside should be relatively limited, and nothing that could not be cured by an aggressive Fed indication on balance sheet expansion.

Forex Trading - Market Update

USD/JPY
Speculation that the BOJ will stimulate until it causes the desired level of inflation began propelling USD/JPY higher near the end of the Asian session. I'm not playing USD/JPY to the long side for two reasons. First, I suspect the real rate of return on JGBs will decrease in future; but the fact of the matter is that it hasn't happened yet. I'll have to see USD/JPY continually moving higher during periods of risk aversion over the next couple of weeks before I become convinced. I favor playing Yen strength until then.


Commodity Currencies
The Kiwi and the Aussie started coming down as risk aversion came into the market during the European session. Obama held a press conference around 1:30 P.M. and caused the markets to sell off on his insistence that an increase in taxes on the wealthy must be a part of any compromise with the Republicans. The Canadian dollar exhibited unusual strength today give the circumstances. It may be due to cross flows from higher yielding currencies or higher oil prices.

I have a short AUD/USD position with a cost average of 1.0400 and plan on holding it until the fiscal cliff is resolved (or significant speculation thereof.)


EUR/USD
Of the majors, the Euro was the strongest currency on the board today. It ripped up against commodity currencies and even went up 30+ pips against the USD on the day. I believe it was due for a slight reprieve, as it was temporarily oversold. Some comments from European political and financial leaders managed to temporarily shift market sentiment; but we believe that as long as the markets continue to sell off over concerns of the fiscal cliff, EUR/USD will decline as well.

I'm short EUR/USD at 1.2725 with a target of 1.2615 and will add more if we get above 1.2800.


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Forex Trading - Market Update

The commodity currencies weakened substantially overnight - even against the Euro and the Pound. There was significant weakness in EUR/USD overnight and this morning; but the pair pulled back on news that Greece would receive another bailout. This fixes nothing in the medium term; but it removes the risk of an immediate exit. Ultimately, we believe it's just a matter of time until Greece leaves the Eurozone. However, the big take-away from today that has had a big impact on market sentiment is the support that Germany has shown to Greece. This sentiment may not last longer than a couple days, or even past today. But while it lasts the Euro and Pound should continue to consolidate against safe haven currencies.

When the U.S. stock market opened this morning, risk was immediately bid up. The S&P futures were floating around -10.50 before the open, and as of right now, the S&P 500 has been bid up +7.80. The Aussie and Kiwi were the primary beneficiaries of the move up, as they are the currencies most sensitive to risk trends. The Canadian dollar remains weak due to worries over the U.S. fiscal cliff. We favor playing any positive developments in fiscal cliff negotiations by buying Canadian dollars and playing negative developments by selling the C$.

If we get to the point where the U.S. equity markets begin selling off quickly, we believe the best way to play that is by trading the Aussie & Kiwi to the downside. We've heard market talk that hedge funds have been chasing yield in Australian dollar denominated equities & bonds and we believe that a sustained move of risk aversion could cause a wave of short covering.

Forex Trading - Market Update

EUR/USD
The Euro has been weak since coming off of its recent swing high on the daily chart at 1.3140. Risk remains to the downside as Spanish bond yields begin to rise again and there seems to be little scope for positive developments in the near term. Rajoy seems unwilling to request a bailout until the markets force him too; which only makes the overall problem worse for Spain.


AUD/USD
The primary driver of the Aussie should be general risk trends and developments out of China this week as there is no big ticket items for the Aussie on the economic calendar. So far, China's better than expected trade balance (Actual: 32.0B, Exp: 27.1B, Previous 27.7B) released over the weekend has propelled the Aussie higher. On Thursday, we should find out who the new members of the Politburo Standing Committee will be. The committee is likely to consist of seven members, who will make major economic policy decisions over the next five years. The members who are elected could have a major impact on expectations about future economic stimulus in China which in turn could impact the Aussie.


USD/CAD & CAD/JPY
These are my preferred pairs for trading expectations about the fiscal cliff. The Canadian dollar is a commodity based currency that trades similarly to the Aussie and the Kiwi in terms of risk on/off sentiment. However, while the Aussie (and to a lesser extent the Kiwi) are impacted by the economic factors of China, the CAD is heavily affected by economic factors in the U.S. If you trade the CAD you should take a look at this table. You can see that Canada does the majority of it's exporting and importing with the United States. Looking at this table, you can see that a lot of the Canadian exports are intermediate products, or "inputs" into U.S. production processes.

This information tells us that if expectations about U.S. production processes change, then the demand for Canadian exports should change as well. For example, when a U.S. New Home Sales print comes in much lower than expected, the CAD should weaken significantly as a decrease in demand for materials from Canada is priced in. On the other hand, The University of Michigan confidence survey should not have a strong effect on the CAD because it's a sentiment indicator. The trick to trading the CAD is understanding expectations about U.S. demand for Canadian industrial and manufacturing materials. As the Fiscal Cliff will have a major impact on economic growth in the United States, the Canadian dollar should be the most sensitive to developments.


USD/JPY
The recent round of stimulus from the BOJ didn't cause a substantial change in the expected level of inflation (and thus the expected real rate of return.) This means that during periods of "risk off" we should still see a negative yield change on the 10 year U.S. treasury note and downward movement in USD/JPY. This dynamic may change in the future as we anticipate the BOJ trying to increase inflation; but for now we must trade the dynamics as they are.

Forex Trading - Market Update

Less than 12 hours after we learned the outcome of the presidential election, Mario Draghi uttered negative comments about the economic health of the Eurozone. Most people completely missed the real significance of what happened, because they focused on what he said, rather than on the timing of the remarks.

Let's recap. For months, Tim Geithner has been on the phone with European political & financial leaders doing everything within his power to keep the European debt crisis stabilized until after the U.S. presidential election. Why? If the crisis in Europe flared up, it would have undoubtedly had a negative impact on the U.S. stock market which would have affected Obama's reelection chances. Now that the election is over, the Obama administration has no incentive to keep pressuring European leaders. Recall Obama's remark to Russian President Dmitry Medvedev: "This is my last election. I'll have more flexibility after this election." Translated = our approach to dealing with international issues before the election will be different than dealing with them after the election.

Now that the election is over, I believe we'll see a lot more negative media headlines about the European debt crisis. I don't think it's a coincidence that Draghi waited to make negative comments until the day after the election. At the ECB press conference today we expect Draghi to use language in an effort to maintain stability; but that market participants will mostly be disappointed.

Forex Trading - Market Update

The election is currently underway and it seems there are a multitude of different opinions on what may happen if either candidate is elected. Below is a simple synopsis of key issues listed by cause and effect (in order of importance.)

Obama Elected
- Bernanke will not be replaced.
   - Stocks up, dollar weakness

- Investors would be concerned about an increase of the capital gains tax in 2013.
   - Stocks down, dollar strength

- Difficulty handling the fiscal cliff
   - Stocks down, dollar strength

Romney Elected
- Bernanke would probably be replaced.
   - Stocks down, dollar strength

- Friendly to big business and Wall Street.
   - Stocks up, dollar weakness

- Should be able to handle the fiscal cliff easier than Obama.
   - Stocks up, dollar weakness


In my opinion, I think there's good arguments to be made for both a move higher or a move lower in equities regardless of who is elected. The only way a quick move higher could be ruled out is if the election results are undetermined after today and we have to wait for absentee ballots to be counted. Note: I believe Romney's stance towards China is a complete non-issue. His words on China were meant to gain support from ignorant voters. At the end of the day, Romney is a businessman and is not going to sabotage our trading business with China.


Regardless of whether Obama or Romney is elected, we see both scenarios resulting in dollar strength until the fiscal cliff is resolved. There may be an initial pop higher in equities this week; but we anticipate significant dollar strength to begin setting in by next week at the latest. As always, we will have to wait to play the move until we see it; but being ready and knowing what to look for is half the battle. Expectations of market participants should be a lot more apparent by Monday.

Forex Trading - Market Update

The Non-Farm Payroll (NFP) numbers came in better then expected today. Actual: 171, Est: 123, Previous: 114 (revised up to 148). The dollar initially strengthened on the news against the Euro and Pound; but slipped against the commodity currencies. However, as the day went on the dollar gained across the board. The Wall Street Journal Dollar Index closed up 0.654% on the day. The Canadian dollar was the strongest currency of the majors - even appreciating against the dollar on the day. (A post on trading the $C is coming soon.)

Strongest to Weakest
CAD
USD
NZD
AUD
GBP
EUR

The Aussie was the weakest of the 3 major commodity currencies in part due to the miss on PPI overnight (Actual: 0.6%, Est: 1.0%, Previous 0.5%). A lower than expected PPI number increases the chance of a future interest rate cut. This number is reported quarterly and I believe the miss was large enough to be significant - especially considering that one of the catalysts for the recent uptrend on the hourly chart was the CPI number beating expectations by 0.5% on 10/23.

Interestingly, the commodity currencies were holding up well through the day until AAPL snapped below it's 200 day moving average and dropped steadily after that (it closed down 3.31%.) The equity markets picked up downward momentum as soon as Apple broke the 200 MA, and we saw commodity currencies follow the equity markets down (20-25 pips across the board.) We heard a lot of speculation that the USD strength and the fall in equities today was attributed to the positive US employment data having a negative impact on expectations of future Quantitative Easing. I agree with that opinion, but I think the uncertainty over who the next president will be is also having a big impact. Once that is decided, there are a lot less possible scenarios that investors have to worry about. (i.e. if Obama wins, than Bernanke will most likely not be replaced.)

I think that we are largely in a "wait and see" mode until the results of the presidential election come in, but I favor playing into USD strength until then especially in the upcoming Asian and European sessions. Remember - the major move down today in US equity markets happened after Europe closed, so most traders in Europe and Asia haven't reacted to the moves yet.

Forex Trading - EUR/USD Update

We've heard market talk this morning of a large EUR/USD "double-no-touch" (DNT) option expiry today between 1.2880 and 1.3040. A "double-no-touch" expiry simply means that if price touches either point, then one party automatically loses.

As EUR/USD has been bouncing off 1.2885 on Friday, Monday, and Tuesday, we think there is a good chance that the level will be broken and stops will be run beneath it now that we've come down to this same level today after bouncing off the 1.30 area yesterday. If the 1.2885 support holds, which we think is unlikely, but if it holds then we think a move back up to 1.3250 is likely with Ashraf Laidi's 1.3500 call in sight.

Stops are meant to be run.