FX Weekly 08.29-09.05.08 Which Way For The Dollar?

August 29, 2008

bkpicsmall

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

The Demise of GAAP
How Much Banking Does America Need?
Presidents and Market Performance
50 SPX Stocks Down > 50%
Bailing Out the Big Three?

—————–Trading Thoughts- Learning By Doing—————
When it came to the subject of trading I used to read everything under the sun, but a funny thing happened to me this week. I received a notice to renew my subscription to Futures magazine and for the first time in more than a decade I actually thought to myself - “Ah why bother? It’s a waste of time.” Don’t get me wrong - Futures is a fine publication but its usefulness died out for me a long time ago. Let’s face it - I could easily do without one more article on a glorified moving average cross over system or another fluff profile of a CTA. Furthermore, my opinion did not just pertain to Futures but extended even to those magazines that I write for such as SFO and Active Trader. I still read them cover to cover but my enthusiasm for them has curbed significantly the longer I trade.

————–FX Market Outlook————–

Pity the poor breakout traders, the volatility in the EURUSD compressed massively this week as chasing price became a very expensive proposition as every buy quickly turned into a sell and every sell turned into short covering rally. On the economic front the edge clearly went to the dollar as US GDP, Durable Goods and U of M sentiment all printed far better than forecast while IFO results were dreadful dropping to a 5 year low of 94 vs 97 projected. Still most of the ECB members resolutely hawkish with Weber and Bini Smaghi still sounding very “Bundesbanker” like warning that inflation risk is far from over.

While an argument can be made that the generals at ECB are be fighting the last war as economic conditions on the continent clearly deteriorate, they did find support in German unemployment data which showed surprising strength reducing rolls by -40K vs. -10K expected. Indeed we noted for a very long time now that until and unless labor conditions worsen the policy makers in Frankfurt will be quite content to remain stubbornly stationary.

Meanwhile upon closer inspection the news for the US was not nearly as sunny it first appeared.The GDP numbers received nearly all of their strength from exports as many analysts pointed our that the headline number which is always adjusted for inflation benefited from a ridiculously low GDP Deflator reading of just 1.2% at a time when any average US citizen saw minimum price increases of 10% on more on everything from a gallon of milk to the cost of the Wall Street Journal. In short, there is a good case to be made that the books of the US government are more cooked than an Enron balance sheet, suggesting that both US and the EZ are in fact in a recession.

The micro landscape did not matter much however as last week was all Gustav, all the time with crude controlled the fate of currencies nearly tick for tick. Indeed, we stated midweek that because US is the least energy efficient economy member amongst the G-3, it is therefore also the most leveraged to the price of crude. In fact the only real stimulative effect that could rescue the US economy in Q4 would be a sharp decline in the price of oil. A drop below $100/bbl could provide critical relief to the consumer just ahead of the Christmas shopping season and could in turn push the EURUSD to 1.4000 as result. That’s why this developments in the Gulf of Mexico over the weekend could make or break the dollar rally next week.

What can you say about the pound, except that its moniker seems more apropos than ever after last week’s thorough beating of the bulls. The unit actually managed to break 1.8200 to the downside before short covering brought it back up on the close. UK Distributive Trades report hit a woeful -46 against -32 expected and Blanchflower sounded the alarm by saying that by the time BoE realizes that inflation is not the problem 2 million Britons may be out of a job. Next week the BoE announces rates and don’t be surprised if it lowers them by 25bp given the dour data. Nevertheless, the unit is so grossly oversold that it may actually bounce on the classic “sell the rumor buy the news dynamic”. Still, unless economic news shows some signs of stabilization 1.8000 beckons and will likely be broken in the near future.

The least reported story of the week has been the surprising strength in yen. As we wrote on Friday, “With EZ economy in the midst of a clear slowdown that will necessitate an eventual cut in rates, the yen may become the stronger anti-dollar currency than the euro as the year progresses. After spending most this decade as the whipping boy to the carry trade and rising only when bouts of risk aversion hit the market, the yen may finally start to change this dynamic as global rates begin to compress and the carry loses its luster. ”

Finally the commdollars seem to hanging on by a thread with Aussie holding the 8500 handle while Kiwi struggles for support at 7000 and Caddie looking to retest the 1.0700 low after worse than expected GDP readings. Their fate will likely lie with the price of gold which in turn will pivot off the flows in the oil market, but the broader picture suggests that we are at the start of a global recession and the commdollars are only beginning their long journey down. Next week sees Aussie retail sales and the RBA rate statement. Unless the monetary authorities in Canberra surprise and hold rates steady the high yielders may see more liquidation.

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

The Demise of GAAP
How Much Banking Does America Need?
Presidents and Market Performance
50 SPX Stocks Down > 50%
Bailing Out the Big Three?

This is not an anti-intellectual rant. Quite the opposite. I continue to be a voracious reader of any news from Auckland to Zaire, but when it comes to financial literature I have simply become a lot more discriminate in my tastes. When you are first starting out in trading it is vital to read everything you can in order to build a foundation of knowledge. I once told Jack Schwager to his astonishment that I read Market Wizards 50 times, and I think I actually undercounted the number.

However, once you’ve build a solid base of knowledge true progress in trading only comes from doing. Many novice traders believe that all knowledge comes from doing and never bother to crack open a book or read an article. This is a huge mistake. Whatever trading proficiency they gain by simply staring at the screen will be minuscule and highly limited lacking depth and context. Imagine deciding to become a brain surgeon by slicing up hundreds of heads without any understanding of anatomy or neurology or biology. What a colossal waste of time and resources. Yet I’ve seen countless traders dive right in with predictably depressing results.

On the other hand I’ve never met a successful trader that did not continue to educate himself throughout his career. My point is simply this. Once you achieve a certain level of competency in this craft, additional knowledge tends to come more from work rather than academia. “You gotta be in it to win it” is an old trading adage that rings true to this day. Markets like all parts of human civilization continuously evolve and our mastery of them lies in our constant participation in the game. Ultimately you can’t learn from the sidelines. So on this Labor Day week-end here is to work and more work - its what makes better traders every day.

Now on to this week’s video