FX Weekly 08.15-08.22.08 Dollar Dominates As Russian Tanks Roll

August 15, 2008

bkpicsmall FX Market Outlook
Dollar: Domination Nation
Euro: Effective Recession?
Yen: 110 Still Resistance?
Pound: Pounded Into the Ground
Commdollars: Gold Slips Below 800

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

Quadrupling The Inflation Tax
Whoops,There Goes Our Profit
Squeezed From Both Sides
Guns of August Give Dollar a Boost
The Dark Side of Debt

—————–Trading Thoughts- The Big If—————
If only we entered the trade 10 points higher!
If only we were right on the data!
If only this pair would follow the broader dollar trend!

————–FX Market Outlook————–

Suddenly dollar is the safe haven bid. With Russian tanks rumbling through half of Georgia and inflation hitting multi-year highs it seems its like 1980’s all over again. Currency markets have stopped worrying about the economic woes plaguing the US and have started to focus on the broader risks threatening global political stability.

We originally thought that 1.4800 would represent near term support for the EURUSD but the expanding conflict in the Caucasus has stoked fears of wider problems in the region pushing speculative flows into the dollar as investors in Europe grow increasingly wary. Now it appears that the pair may push down to to 1.4500 before pausing.

The economic docket next week is particularly unimpressive with very little key data on the calendar. In EZ traders will look at the Trade balance figures and the latest ZEW survey while in US PPI, housing data and Philly Fed numbers are the only events of note. With summer vacation season in full swing perhaps the volatility will die down, but if macro risks reassert themselves the downward slide could continue.

The slide certainly continued in cable which came within a whisker of the 1.8500 figure - a level it has not seen in 22 months. With BoE acknowledging the slowdown in the UK economy it is now just a matter of time before the MPC cuts rates. The markets are factoring in 75bps of rate cuts in the next year and the unit has already adjusted to the new reality. With sterling so grossly oversold a bounce may be due but traders will need to see some signs of stabilization in the UK economy and to that end the Retail Sales and housing data releases will be key.

The news out of Japan was dour as well with GDP contracting for the first time in a year in the April-June quarter, confirming fears that the world’s second-largest economy has entered a slump at the same time as other G-3 countries. Meanwhile US CPI numbers printed hotter than expected pushing rate expectations up and as a result USDJPY rallied right back to the 110 level after shedding 200 points at the start of the week.

We continue to believe that USDJPY remains overvalued at these levels. Inflation levels notwithstanding chances of Fed rate hikes next year are practically nil, especially as the labor situation will continue to deteriorate. The Fed rate hike scenario therefore is wishful thinking and as those expectations decline so will USDJPY

Gold below $800. That’s all you need to understand when looking at the commdollars which continued to collapse this week with Aussie dropping to 8600 and Caddie breaking above 107.00 Nevertheless, the move appears to have run out of steam. Most notably the kiwi which we like to view as the first mover has found solid support at the 6900 level boosted by better than forecast Retail Sales. If next week’s data from the commdollar block shows any sign of resilience a short covering rally maybe due.

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

Quadrupling The Inflation Tax
Whoops,There Goes Our Profit
Squeezed From Both Sides
Guns of August Give Dollar a Boost
The Dark Side of Debt

These were the thoughts that were running through my head as I was nursing our short NZDUSD trade in the early hours of Friday night. Dollar was rallying across the board pulling cable below 1.8600 handle and pushing euro towards 1.4700 but kiwi remained stubbornly bid staying 20-25 points in the money for us but not quite reaching our first profit target level.

The big IF game goes on constantly in the traders mind. We inevitably question our decisions, double, triple and sometimes even quadruple guess ourselves until we’ve twisted our original position into unrecognizable pretzel of a trade. While its easy to preach that playing what if is wrong it also utterly unrealistic to expect traders not to do it. We are human and questioning our decisions is as natural as breathing to most of us.

You can play the big IF game all you want as long you do not succumb to it. That is why having a trading plan is so vital to your long term success. As traders we can never predict the future, we can only prepare for its possible outcomes. K and I have an inviolable rule that we do not adjust our first profit target - which is set at a very modest 30 points for most currency pairs. Even if the pair moves 29.9 points in our direction and then retraces all the way to our stop we do not change our plan. The reason is that we need a minimum amount of return to justify the risk that we are assuming in each trade. If we manually adjusted that return every time price action hesitated the profits would eventually whittle down to nothing and most likely sabotage our long term track record.

The important thing to remember is that our trading plan was developed through cold hard post-analysis of our past trades instead of being constructed in the heat of the battle where every tick on the screen can affects your judgment adversely. So while I played the big game of IF as kiwi taunted me in the wee hours of Friday night, I stuck to our plan, and eventually of course the pair tumbled to hit our first target and bank another profit for BKT.

Now on to this week’s video