Forex Trading - Market Update

Commodity Currencies
The main commodity currencies (Aussie, Kiwi, and Cad) are still relatively near the highs of their respective moves against the U.S. Dollar. (View WSJ US Dollar Index) The recent moves in these commodity currencies seem to exhibit a strong degree of correlation with the equity markets. We think that if the U.S. equity markets begin to unwind and risk appetite decreases, then the commodity currencies will depreciate against the U.S. Dollar.

Negative Pressure on Equity Markets
So far this morning there has been significant pressure on European Equity Indexes (Track European Equity Indexes here)

These moves seem to be driven by economic data releases missing expectations this morning. Track economic data releases at Forex Factory

GBP: Manufacturing Production, m/m,   Actual: -1.3%,   Exp: -0.2%,   Previous: 0.0%

GBP: Industrial Production m/m,   Actual: -0.8%,   Exp: 0.9%,   Previous: -2.1%

EUR: German Industrial Production m/m,   Actual: -2.6%,    Exp:-0.4%,   Previous: -1.3%


In addition, Germany lowered their 2013 GDP forecast this morning, which immediately caused a 20+ pip drop in EUR/USD.

This downside pressure on European Equity Indexes has had a negative impact on US stock futures, and should contribute to downside pressure in the US stock indexes throughout the day. If the NFP number disappoints market participants, then the problem will be compounded and may lead to a sell off.

The Trade
If the market reaction to the NFP numbers is negative and equity markets fall, the AUD/USD currency pair should offer attractive shorting opportunities. I've sold at 1.0480, with a tight stop above 1.0515 which is yesterday's high. I like this trade because the risk/reward is excellent, as there appears to be plenty of room to the downside and I'm able to clearly define my risk.

Forex Trading - Market Update

The Wall Street Journal Dollar Index started dropping at 10:55 A.M. as Obama began talking to business leaders. He essentially said nothing new; but the wording that he used was apparently very well crafted by his advisers in an attempt to not tank the stock market. Risk popped to the upside and the S&P 500 went from being down 7 points to being up 1 point and the Dow Jones has climbed to +70.

After he finished speaking at 11:35 A.M., the WSJ dollar index immediately began climbing again (aided in part by a weak Yen) and retraced some of its losses. I think the key to trading the currencies markets from today will be to watch Equities. If the S&P 500 dips back into negative territory and starts heading towards 1400, then the Aussie and Kiwi may be attractive shorting opportunities. If the stock market continues to climb for the rest of the day, we may see a breakout to the upside of this consolidation on the NZD/USD

Royal Bank of Australia: Time for Intervention?

Early this morning the Royal Bank of Australia's Deputy Governor Lowe made a comment that was largely unnoticed by market participants. He mentioned the all-powerful " i " word. Specifically, he said that "they would not rule out intervention."

As members of the RBA watch governments around the world use rhetoric to cause their currencies to depreciate, it may be ready to do the same if economic conditions in Australia deteriorate. The RBA has repeatedly stated in their monetary policy statements that they consider the Aussie exchange rates to be higher then they should be.

If the RBA does decide to step up its rhetoric, the Aussie may fall at the same rate as the Yen has in recent history.

Royal Bank of Australia (RBA)'s Assistant Governor Debelle is scheduled to speak later today at 6:00 P.M. EST

Wall Street Journal: Aussie Bond Party Loses Its Mojo

Wall Street Journal
By Enda Curran


Is the Aussie bond party over?

That’s the question some investors down under are asking after new figures showed that foreign demand for Australia’s triple-A rated, high yielding bonds is starting to cool off, signaling that central banks and sovereign wealth funds have had their fill of the nation’s debt.

In a breakdown of third quarter balance of payments data J.P.Morgan JPM -0.66%strategist Sally Auld said net supply of Australian government bonds in the three months to Sept. 30 totaled 14.3 billion (US$15 billion), of which offshore buyers bought just 9% .

“Relative to recent outcomes, this is quite unusual,” said Ms. Auld. “While a couple of quarters may not be enough to define a trend, we would argue that this dynamic is broadly consistent with the idea that much of the new reserve allocation by offshore central banks and sovereign wealth funds into Australian dollar fixed income is now in the past,” the strategist said.

That means going forward, these buyers will be managing their existing allocations rather than looking to increase their exposure.

Foreigners now hold around 74.4% of Australia’s bonds on issue, down from a high of 79% in the first quarter of 2012, according to Ms. Auld.

J.P.Morgan says that Australia’s deteriorating fiscal position isn’t winning over many new buyers. The government in Canberra is pushing for a budget surplus this fiscal year by transforming a A$40 billion deficit into a small A$1 billion surplus but JPMorgan economists think the final outcome will be more like a A$15 billion deficit.

“This is probably a conservative estimate given downside risks to the growth outlook and lower commodity prices,” said Ms. Auld.

Still, it’s not all bad news for the sell side brokers who earn a crust by travelling the world and selling Aussie bonds to everyone from life insurers to reserve managers.

Ms. Auld notes a shrinking pool of triple-A rated sovereigns, the relatively high yields that Australia offers and ongoing buying by banks because of new prudential rules means that bonds from Down Under will remain sought after for some time, just not at record levels.

Forex Trading - Market Update

EUR/USD
The Euro has remain very well bid considering some of the bad news and economic data that has come out recently. Technically, we are at an inflection point where a move higher to 1.3100 suggest follow through with a stop run past the two swing highs and 1.3200. I think the next move is back to 1.3000, but I'm going to be very cautious playing moves to the downside because we are very clearly in an uptrend.

GBP/USD
I'm taking cues from EUR/GBP and EUR/USD. If the Euro continues to climb higher across the board (across the board being the key phrase - because it means EUR/GBP) then the GBP should climb as well; but not as quickly. On the same note, if the EUR depreciates across the board, it will drag the GBP down - but at a slower rate due to the fall in EUR/GBP. The latter scenario creates potential trades to the upside in GBP/AUD, GBP/NZD, GBP/CAD if the commodity currencies continue to slide.

USD/CAD
Theoritically, the CAD should depreciate the fastest based on concerns over the fiscal cliff. However, investors have been chasing yields in high yielding currencies (AUD, NZD) so as the Aussie and Kiwi come off those funds can go into the CAD, keeping downward pressure on USD/CAD. To try and gauge any movement in USD/CAD, I'm keeping a close eye on AUD/CAD and NZD/CAD.

NZD/USD, AUD/USD
These high yielding currencies should fall the fastest into the end of the year as long as the resolution of the fiscal cliff remains in question. The rate decisions tonight and on Wednesday will definitely have a strong impact on the currencies; but I favor playing a pop higher on a rate decision as a shorting opportunity after momentum has waned.

USD/JPY
Going long this pair is easily the most crowded trade of 2012. At this point, there has been so much market talk of hedge funds going long this pair in record numbers that I can't touch it. I won't play it to the downside because any comment out of a BOJ official can send it skyrocketing and I can't play it to the upside because it's overcrowded and worries over the fiscal cliff should send it down. I favor buying USD/JPY and perhaps CAD/JPY on a resolution of the fiscal cliff and holding for follow through. The only exception I would make to this is buying at the 0.50 fib retracement at 80.66 and using a tight stop.


Side Note: there's a Eurogroup meeting today and there may be comments out around 5:00 P.M. EST. This time has been chosen for announcements recently as there are no major markets open at this time.

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