FX Weekly 07.18-07.25.08 - Has The Dollar Finally Stabilized?

July 19, 2008

bkpicsmall FX Market Outlook
Dollar: Away From the Precipice Once Again
Euro: Anti Dollar Benefit Remains
Yen: Bear Market Rally?
Pound: 2.00 is Taken Out
Commdollars: Parity, Parity, Parity?

Top 5 Stories in FX This Week

China’s Economic Growth Cools to Slowest Since 2005
Dour Headlines From The Wall Street Journal
Does Inflation Mean More Unemployment?
How To Avoid The Mother of All Bailouts
Deconstructing May Investment Flows

—————–Trading Thoughts-Always Be Fading—————-
I had a deja vu experience this week when a thread on Elite Trader bulletin board appeared with the title of “always be fading”. The thread was actually started from an article I wrote more than 3 years ago for SFO magazine which continues to resonate with many retail traders who inevitably like to “stand apart” from the crowd and take the opposite side of price action.

————–FX Market Outlook————–

We hit record highs in EURUSD this week only to swiftly turn away from the 1.6000 level and drop right back into 1.5800s. The trade in FX continues to be driven by the “macro merry go round” dynamic as every wiggle in equities and oil exerts an influence on currencies.

As the week came to a close the dollar appeared to have stabilized. Crude dropped below the key $130/bbl level with the rally in oil finding a temporary top as demand destruction becomed more evident by the day. My friend Andy Busch wrote about a week ago that Chinese authorities have stopped inventorying oil for their Olympic needs and the drop off in that demand may have finally broken the speculative spiral. In short, lower crude should prove supportive for the greenback, providing much needed relief to the beleaguered US consumer and at very least can act as a backstop to any further dollar slide.

One other factor that can help the buck is an array of possibly weaker EZ economic data of which the IFO report is likely to be the most noteworthy. If the index slips below the psychologically important 100 level EURUSD could find itself right back in the 1.5500 zone. The systemic risks in the US have not gone away, but for time being the crisis may have been averted and the buck may find some relief next week.

Cable meanwhile blew through the 2.0000 handle on anti-dollar sentiment and continued to hover around that level for the rest of the week. The data from UK showed further deterioration in economic conditions with jobless claims spiking to 15.5K from 10.0K forecast, but inflation gauges remained super hot with PPI and CPI both exceeding expectations and the net takeaway to the market was that UK rates will remain at 5% for the foreseeable future. Next week the BoE minutes should reinforce that notion, but pound trade is likely to be determined by dollar dynamics rather than the smattering of UK data on the calendar.

USDJPY found resistance at the 107.00 level after a few days of vicious bear market rallies in stocks, but the upmove could still be a bull trap so we are cautious. US calendar has Durable Goods and Beige Book next week and both pieces of data could weigh on the pair if they miss to the downside.

Meanwhile its parity, parity, parity on the commdollar front as Caddie once again breached the key 1.000 level while Aussie’s advance seemed inexorably destined to reach that figure. Canadian Retail Sales should prove supportive for the loonie, but Caddie always marches to its own tune and may trade on oil market dynamics as much as anything else. Aussie will have inflation data in front of it and if price pressures remain hot, yields will likely keep the unit propped up next week.

————–Top 5 Stories in FX This Week—————-

China’s Economic Growth Cools to Slowest Since 2005
Dour Headlines From The Wall Street Journal
Does Inflation Mean More Unemployment?
" onclick="javascript:urchinTracker('/outbound/www.rgemonitor.com/roubini-monitor/252974/insolvency_of_the_fannie_and_freddie_predicted_here_two_years_ago_what_happens_next_or_how_to_avoid_the_mother_of_all_bailouts_br_/');">How To Avoid The Mother of All Bailouts
Deconstructing May Investment Flows

The irony of course is that these days I am much more of a trend trader. Especially for the kind of 12-24 hour trades that we put on for BKT subscribers. K and I have seen repeatedly that trading with the trend works. When we stick to our model we win 8 out 10 times at one time racking up more than 30 winners in a row- a phenomenal testament to the value of trading with the trend.

But is there a way to fade price action intelligently? I think so. I just finished another article for SFO which will be coming out in a few months that describes a strategy that I believe works well. It is still in a development stage. but I have started to trade it live in the last two weeks with consistent success. It rests on the foundation that highest probability of success in the markets occurs when everyone is leaning one way while the news comes out the other forcing a violent adjustment in price that generates profits for the trader on the opposite side of the position.

Therefore this week, instead of rehashing our weekly trades, I thought I would share with you my early thoughts on the development of this strategy. As you will see in the video it needs some polishing at the end, so I welcome any thoughts you have on the subject. Just email us at bktrader@gmail.com. In the meantime enjoy the show.