FX Weekly 08.02.-08.07.08 The Benefit of Doubt To The Dollar

August 2, 2008

bkpicsmall FX Market Outlook
Dollar: Rise?
Euro: Mixed Bag of Data
Yen: Stubbornly at 107
Pound: Will BoE Cut?
Commdollars: Bye Bye Strength?

Top 5 Stories in FX This Week

5 Cents on the Dollar
Economic Free Fall?
Finance Has Become the Business of America
R.I.P., Capitalism
Why Does Gas Cost $4 or More a Gallon?

—————–Trading Thoughts-Send Yourself A Signal—————
Before I start this week’s column let me just address the many questions we received regarding our move from Dailyfx to GFT Forex. We start with GFT on August 18th and look forward to creating a brand new revolutionary FX portal that you will hopefully love and enjoy. In the meantime, we continue to monitor markets for BKT and will send out 2-3 signals a week, host live trading chats, and will provide you with event risk calendar without any interruptions. So no worries, we are still here and look to do better and bigger analysis in the future.

————–FX Market Outlook————–

Things are not that bad in the US and a lot worse than expected in the EZ. That in nutshell is the theme that has been driving trade all week long as EURUSD once again turned lower and tested support at 1.5500. Once the worries over systemic US risk dissipated, the market went to back to trading on micro rather than macro factors and what most traders saw was that the EZ data has taken a dramatic turn for the worse while US economy showed some signs of stabilization.

For one, US Non Farm payrolls did not miss massively to the downside as some traders had feared. The report still showed 7th consecutive month of contraction but the loss of jobs was mild relative to expectations and far less than -100K that some bears had expected. Whether the worst is behind us in the labor markets remains to be seen.The last 4 weeks of jobless claims have shown a disturbing upward tilt and it may be just a matter of time before US labor markets contract in earnest but for now the benefit of doubt goes to the Dollar.

Next week macro and micro concerns give way to monetary policy as most of the G-8 central banks hold their meetings. The latest rhetoric from the Fed has taken on a hawkish tone but with oil prices lower and US economy on the brink of a recession will they really hike rates before the year end? We doubt it. It is far more likely that the Fed will be stuck in the Japanese model of waiting fro consumer demand to stabilize before raising rates.

Cable finally cracked as well, as economic data continued to suggest that the contraction was only turning worse. Despite the stiff upper lip rhetoric of the BoE, Mr. King and company will have to consider lowering rates sometime this year as the slowdown in UK shows no signs of stabilizing. Note also that as a “hedge fund” economy, UK is the most vulnerable amongst the G-4to the decline in global equity markets and therefore ripe for a rate cut as stocks grind lower.

For the yen the 108.00-106.00 range remains a very sticky area, but with equities under stress we continue to believe that 108.00 is a cement ceiling for now and the bias remains to the downside.

Finally the deluge to the downside continued in the commdollars with both Aussie and Kiwi weakening further. Ironically enough the Caddie actually showed some relative power as the North American currency strengthened on better US economic news. The time has come therefore to consider the reversal of the AUDCAD trade as the relative strength in the loonie may continue into the end of the year

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

" onclick="javascript:urchinTracker('/outbound/www.bloomberg.com/apps/news?pid=20601087_038_sid=aQRdW28lniUw_038_refer=home_br_/');">5 Cents on the Dollar
Economic Free Fall?
Finance Has Become the Business of America
R.I.P., Capitalism
Why Does Gas Cost $4 or More a Gallon?

Now let me turn to the topic at hand. As many of you know I have been testing my reactive trades with K for the past two months. ( I know you are eager for the new service, but please don’t ask us when we will release it. We are still in testing phase and still trying to figure out what we want to do with these trade ideas. We may just simply incorporate them into BKT)

The testing has been going extremely well and is in fact improving a time goes by giving me confidence that the reactive model can generate consistent profits. However, today I am not really interested in discussing the model but rather one aspect of the test process. Every time I decide to make a trade I email the idea to K. We do this for record keeping and accountability purposes and you have no idea at how powerful this little exercise can be.

Once I’ve hit the send button, I have no place to hide. I am accountable for the trade right or wrong. This in turn has forced me to be a lot more selective both in trade ideas and timing and has greatly reduced the single biggest problem of all traders - the mindless, impulsive “I-am-bored-let-me-give-it-a-shot” trade. By making myself write out the reason as well the the entry, stop and limit on each trade, I have actually become a much better trader.

Many trading coaches recommend that you keep a diary when you trade - a good but not a great idea. The diary only records what you have already done, not what you are about to do. A much better trick, in my opinion, is to send yourself a trade signal. Before you do a trade, simply email yourself what why and how you plan to do it. It only takes one sentence. For example, here was my latest ” Short EURCAD 1.5990 stop 1.6015 target 1.5968 on better than expected NFPs”. You’d be amazed at how sending yourself a signal can improve your overall trading.