Market Directions Sunday, December 2, 2007

• A classic New York Friday
• Was that a Fed promise?
• The ECB and the BOE next at bat

The Chicago Purchasers Index, general euro fatigue, the need to book profits, the end of the week or end of the year, take your pick of the reasons, but the dollar rocketed higher against all competitors in violent Friday trading. Two stop runs bracketed the London close and provided the fireworks. The first began at 10:00 ET fifteen minutes after the surprisingly strong Chicago Purchasers Index was issued. This index, often seen as a predictor to the nationwide ISM, is one of the most prominent of the forward looking indicators and has a good correlation to the wider ISM data. The Chicago index is amassed by the local office of same organization that gathers the ISM statistics, the Institute for Supply Management.

Economic recessionistas have been expecting a sub fifty reading for Monday’s ISM manufacturing report for some time. Fifty is normally taken as the dividing line between expansion and recession. The Chicago Purchasers Index, when combined with the slight rise in New Home Sales, albeit from a reduced base, may have spurred hope that the worst of the housing collapse is nearing an end, and that recession is not looming. However, dollar shorts had more than enough profits to be concerned about taking to have needed no special encouragement once the Euro started moving down.

The second move, more purely a stop run, triggered near two in the afternoon, and continued with less vehemence until the close of trading. The most recent euro surge against the dollar took off on November 20th in London with an upside stop run that commenced at the same level, 1.4685, where Friday’s slide began, The obverse relationship of resistance and support could not be better illustrated. There was no recovery for the euro which finished at its low for the day versus the US note. The united currency is now resting at the bottom of chart formations that go back to the beginning of August and the start of the credit market crisis.

There is potentially a positive combination of technical and fundamental factors for the dollar this week. This is particularly true if the two primary statistics, the ISM Index, (manufacturing and service), and the Non Farm Payrolls Report, are positive for the US economy.

The Week in Review November 26 - 30

United States

If the September 18th FOMC meeting was one of the most anticipated in recent financial history, the December 11th conclave is not far behind. The markets have long since decided that the Fed will cut rates another 25 basis points with the futures marking that near 100% for the third week in row. Much less certainty is available in the “Beige Book” that the Fed governors will have before them at that Tuesday meeting. As depicted in the last several surveys, “the national economy continued to expand” through Mid November, but at a reduced pace. Seven of the twelve reserve districts reported slower activity. Retails spending was soft, manufacturing mixed, services expansive with moderate inflation and restrained wage demands. This anecdotal survey does not provide statistics for comparison but relies on impressions from executives and others in the specific economic sectors. This survey is little different from recent occasions portraying a slowing economy but without measurements it is difficult to determine the amount of moderation from survey to survey.

Much less certainty is available in the “Beige Book” that the Fed governors will have before them at that Tuesday meeting. Just as depicted in the last several surveys, “the national economy continued to expand” through Mid November, but at a reduced pace. Seven of the twelve reserve districts reported slower activity. Retails spending was soft, manufacturing mixed, services expansive with moderate inflation and restrained wage demands. This anecdotal survey does not provide statistics for comparison but relies on impressions from executives and others in the specific economic sectors. This survey is little different from recent occasions portraying a slowing economy but without measurements it is difficult to determine the amount of moderation from survey to survey.

Donald Kohn, Vice Chairman of the Federal Reserve gave the US equities a huge boost on Wednesday in a speech before the Council on Foreign Relations; by the end of the day’s trading the Dow was 2.6% higher. He assured the audience that the Fed will “act as needed” to support the economy. Flexibility and pragmatism will be the central bank’s guides and not the fear of creating a “moral hazard” by cutting interest rates. Lowering the Fed target reduces funding costs for banks and other institutions while leaving their assets largely untouched, bolstering profitability. If the Fed lowers rates by 25 basis points it would put the Fed Funds target rate at the lowest point since late 2005.

Eurozone

The ECB has no incentive, other than the strong Euro, to take action at this coming Thursday’s meeting. Inflation was half again as much as the target rate in November, 3.0% against the 2.0% guideline. And while growth may be slowing, at 2.5% it borders on the robust by European standards. If ECB policy must choose between reigniting growth in the future or damping inflation, there is little doubt which the central bank will elect. To underscore the ECB point of view, many members of the governing council do not yet see the strong Euro as a problem. Nout Wellink council member and head of the Dutch central bank suggested the Euro level is not an “immediate concern” for European exports but that a further rise in the Euro would be “worrying”. For any central bank credibility is the key to influence and rhetorical credibility is determined by past actions. No ECB comments about Euro levels will have any effect on the market unless they are seen as a precursor to action.

Lorenzo Bini Smaghi, ECB executive board member took a different tack but played the favorite central bank card, currency rates should reflect economic fundamentals. “ The US economy is undervalued [by what is] reflected in the exchange rate”. “The market must understand that these [exchange rate levels] do not reflect fundamentals”. No doubt it would make all bankers lives infinitely easier if the currency markets were logical creatures. They are not. There is almost something wistful in the constant parental chiding of the foreign exchange markets by the world’s central bankers.

Economic Releases November 26 - 30

United States

Tuesday: Consumer Board Consumer Confidence for November sank to 87.5 well below the median prediction of 92.0. October had been 95.6. Confidence numbers are generally related to consumption two months post, putting the Christmas shopping performance in some doubt. Surprisingly enough, given the unrelenting negative economic media coverage, present conditions are still rated relatively strong. It is the expectations of a recession that have taken a recent jump higher. The Case Shiller Home Price Index of twenty comparative US markets in September tumbled to 195.62, a 0.9% drop from August. It is now down 4.9% on year ago prices and at a two year low. Durable Goods Orders fell in October for the third consecutive month coming in at -0.4% on forecasts for a rise of 0.8%. September’s reading was -1.7%, Augusts’ -5.3%. Soft civilian aircraft orders and slow auto sales were blamed for the decline. Boeing added 56 new orders in the month against 132 in September. The last three consecutive monthly negative readings were in the winter of 2003-2004. Existing Home Sales slipped 1.2% in October to 4.97 million units slightly under the 5.00 million expected. September was revised lower by 10,000 to 5.03 million. It is the lowest monthly statistic since the series began in 1999. However, the overall concealed initial stability in the sale of single family homes, which were unchanged from September at 4.37 million units. The entire October drop was in condos and co ops. The market supply of unsold homes rose to 10.8 months. Single family hose prices are now off 6.3% this year, the worst performance since this data began in 1969.

Thursday: the preliminary GDP (1st revision, second release) added 1.0% to register 4.9% growth in the third quarter. The adjustment was widely expected and had no effect on the Dollar. It is, nevertheless the best quarterly expansion for the American economy since the 3rd quarter of 2003. New Home Sales rose 1.7% to 728,000 in October but the gain was only because the September number was revised down to 716,000. It had been 770,000. Sales are off 24% from a year ago with the median price lower by 13%, to $217,800 from $250,000.

Friday: Personal Income rose 0.2% in October, half the forecast. Over the past three months real disposable income has risen at a 2.1% annual rate, down from 2.7% earlier in the year. Personal Expenditure gained 0.2% also below the expected +0.3%. Core PCE inflation was up 1.9% year on year. The Chicago Purchasers Index was much stronger than expected at 52.9 in November, 50.5 had been anticipated; October was 49.7.

Eurozone

Tuesday: EMU money supply (M3) growth resumed its upward spiral in October adding 12.3% over a year ago after dipping to 11.3% in September; 11.5% had been forecast. The three months moving average moved up to a record 11.7%. It was the tenth straight month of double digit money supply growth.

Friday: flash HICP for November was 3.0% year on year , 0.2% higher than forecast and sure to keep the ECB on the inflation defense. This is the third month in a row inflation has been above the 2.0% target.

Germany

Tuesday: IFO Survey of business sentiment exhibited an unexpected small rise to 104.2 in November, 103.3 had been forecast. October was 103.9. The measure for current assessment was 110.4, median expectation had been 109.1; October was 109.6. Business expectations remain muted at 98.3, better than the forecast of 97.8 but below the October 98.6 reading. The Harmonized Index of Consumer prices (HICP) preliminary number for November were much higher than predicted, +0.5% for the month, +3.3% for the elapsed year, +0.1% and +2.9% had been forecast; October was +0.2% and +2.7%. The more than doubling of the monthly rate of inflation seems to justify ECB concerns. CPI was also four times prediction, +0.4% against +0.1%, and twice the October result +0.2%. The year on year results were: November +3.0%, forecast + 2.6%, October +2.4%.

Thursday: the nationwide unemployment rate dropped one tenth of a percent to 8.6%. in November; the October rate was revised to 8.6% from 8.7% as well.

United Kingdom

Monday: house prices as recorded by the Hometrack Survey dropped in November by 0.2%, edging the yearly rate down to 3.6% from 4.4% in October. Nationwide house prices fell as well in November by 0.8%, leaving the year on year rate at 6.4%. It was the steepest drop in this survey since June of 1995. October’s results were +1.1% m/m and +9.7% y/y.

Japan

Monday: Retails Sales in October were 0.8% higher than the same month in 2006, that was double the September result of +0.4%.

The Week Ahead December 3 - 7

United States

Monday: ISM Index for November at 10:00 ET; expected 49.8; October 50.9, new orders 52.5, prices paid 63.0, employment 52.0, export index 57.0, import index 47.5.

Wednesday: ADP National Employment Report for November at 8:15 ET; October 106,000. Non Farm productivity (revised) for Q3 at 8:30 ET; preliminary +4.9%. Unit Labor Costs (revised) for Q3 at 8:30 ET; preliminary -0.2% ISM Non Manufacturing Index for November at 8:30 ET; October 55.8, new orders 55.7, prices paid 63.5, employment 51.8, export orders 56.0. Factory Orders for October at 10:00 ET; September +0.2%.

Thursday: Jobless Claims for the week ending December 1st; prior week +23,000 to 352,000.

Friday: Non Farm payrolls for November at 8:30 ET; expected +70,000, October166,000. Manufacturing payrolls for November at 8:30 ET; October -21,000. Unemployment Rate for November at 8:30 Et; expected 4.8%, October 4.7%. Average Hourly Earnings for November at 8:30 ET; October +3.8% y/y. University of Michigan Consumer Sentiment for November at 10:00 ET; October 76.1.

Eurozone

Monday: Manufacturing PMI for November at 9:00 GMT; preliminary 52.6. Unemployment rate for October at 10:00 GMT; September 7.3%.

Tuesday: Industrial PPI for October at 10:00 GMT; September +0.4% m/m, +2.7% y/y.

Wednesday: Services PMI for November at 9:00 GMT: preliminary 53.7. Retail Trade (Sales) for October at 10:00 GMT; September +0.3% m/m, +1.6% y/y.

Thursday: ECB rate announcement, current rate 4.0%

Germany

Wednesday: Total manufacturing Orders for October at 11:00 GMT; September -2.5% m/m, +4.5% y/y.

Friday: Labor Costs for the third quarter at 7:00 GMT; Second quarter +0.7% q/q, +0.9% y/y. Industrial output for October at 11:00 GMT +0.3% m/m, +6.1% y/y. Manufacturing sector output for October at 11:00 GMT; September +0.1% m/m, +6.9% y/y.

United Kingdom

Monday: CIPS Manufacturing PMI for November at 9:30 GMT; October 52.9.

Tuesday: British Retail Consortium (BRC) Retail Sales for November at 00:01 GMT; October +1.0%. CIPS Construction PMI for November at 9:30 GMT; October 57.4.

Wednesday: Nationwide Consumer Confidence for November at 00:01 GMT; October 98. CIPS Services PMI for November at 9:30 GMT; October 53.1

Thursday: Manufacturing Output for October at 9:30 GMT; September -0.6% m/m, -0.1% y/y. Industrial Production for October at 9:30 GMT; September -0.4% m/m, -0.2% y/y.

Bank of England rate announcement at 12:00 GMT; current rate 5.75%.

Japan

Thursday: Preliminary leading Index for October at 5:00 GMT; September 0.0. coincident Index for October at 5:00 GMT; September 60.0

Friday: July-September revised GDP at 23:50 GMT (prior day); preliminary +0.6%.

China

No statistical releases.

Joseph Trevisani
FX Solutions
Chief Market Analyst

Market Directions Sunday, November 18, 2007

• The timing of bad news
• Commodity currencies lose their shine
• Federal Reserve transparency and currency volatility

Consolidation in the Euro this week gave no comfort to advocates for the return of the Dollar. Weak economic statistics from the US and a partial return to US investing by foreign purchasers kept traders from capitalizing on the relatively strong position of the Dollar early in the week. The best level for the US currency against the Euro came on Monday, a day when US markets were closed. European statistics point to a slipping industrial base coupled with rising inflation, a central banker’s nightmare. But future consumer spending on the continent is not thought to be hostage to a collapsing housing market and thus less likely to damage future economic growth. Nor has the European Central Bank (EC been forced to lower interest rates to ward off serious economic problems. Estimates for American economic growth in the last quarter of this year and the first of next are now between 1 and 2%, a long way from the projected 5% growth in the third quarter. It is not that the future does not look troubled in Europe, it does. But the view in Europe is mostly of worry; in the US worry is starting to become reality.

Sterling depreciated sharply pressured by concerns over financial sector weakness, an inflation report from the Bank of England that seemed to predict two 25 basis point rate cuts in 2008 and poor retail sales and housing numbers. The financial sector in the city of London is the largest single creator of jobs in the British economy. Contraction there will have a disproportionate on unemployment in the country.

After this week the case is strong that the economic bad news for the Sterling and Dollar is priced into the market; the vulnerability for the Euro is that it is not. European statistics have only started to report what US and British figures have already revealed. Due to both the later reporting of many EMU statistics -- for instance October retail sales for the Euro area will not be released until December 5th, (US retail sales for October were out November 14th), EMU industrial production for October is not issued until December 12th (US industrial production for October was released on November 16th) and Euro area consumer confidence for November is reported November 30th (University of Michigan consumer confidence for November was reported on November 9th) -- and because the number of Euro area statistics is far less and so less frequent, the Euro can benefit from this relative economic opacity when the news is poor. Because any decline in EMU statistics is reported later, bad news from the US for the same month affects the Dollar first and is not counterbalanced from Europe until weeks after. Because there are fewer statistics for the EMU as a whole than for the US, there is simply less bad news to report. The psychological impact on the market of the continual update of poor US statistics against the relative sparsity of EMU statistics should not be underestimated.

The commodity currencies, the Australian, New Zealand and Canadian Dollars all recovered from their precipitous declines which began on November 7th, but with economic growth estimates shrinking worldwide the immediate future for them remains downcast. The Yen crosses augmented the change in fundamental outlook for these currencies adding their highly speculative liquidity to the cascade of positions looking for an exit.

The Week in Review November 12 – November 16

United States

Ben Bernanke the Federal Reserve Chairman has promised greater transparency for the Fed’s deliberations and economic projections. The central bank under his leadership has already greatly altered its relations with the press and the market. And though his predecessor Alan Greenspan is best remembered for his cryptic comments and witty asides, rare in public economists, he had also done much to open the Fed to outside scrutiny. It is only in retrospect that Mr. Greenspan appears close with his communication. The question for market participants is will this new transparency add or detract from volatility. Many factors have worked to lower volatility in currency markets in the past fifteen years but one of the most effective has the spread of information. Volatility thrives in the absence of knowledge. The more the Fed reveals of its information gathering and analysis the more traders will be able to discern correctly its future policies. The more traders know the less room there will be for speculation. The unexpected development will never disappear, witness the almost overnight eruption of the credit crisis in August, but the speculative charge given to the market as it anticipates Fed policy will continue to diminish.

The immediate response to CPI and Core CPI at +3.5% and +2.2% was the thought that such levels would limit the Fed’s ability to reduce rates if further reductions become necessary. However, as Mr. Bernanke has clearly proven, in such a case the Fed would probably lower rates anyway, even if immediate inflation prospects would argue restrain in a normal economy. In a perverse way the higher inflation represented by the CPI numbers confirms the basic Fed scenario, faster growth in quarters two and three may have spurred inflation, slower growth should keep inflation in check.

Industrial production and capacity utilizations fell unexpectedly in October, reinforcing the market pricing of a Fed 0.25% rate cut at the December 11th meeting. Part of the fall in industrial production was due to weather related declines in electric and natural gas production from warmer temperatures, much like a similar drop in industrial production in January. All categories of production fell, manufacturing, autos and housing and related industries.

Eurozone

Nicholas Sarkozy, the French president, pushed for more public participation in debates on monetary policy, including with the ECB. “Europe has chosen democracy and in a democracy one must be able to debate everything: monetary policy, budget policy, trade policy industrial policy, fiscal policy, all policies whatever they may be”. In the past the ECB has always responded vigorously to attempts by European politicians to pressure its decisions. This time there was no response. The EU is seen by many European voters as bureaucratic and without much popular legitimacy or loyalty. Voter loyalty in even the long established members of the EU lies with the national government and not with Brussels. Officials of EMU institutions, including the ECB have consequently felt a need to vehemently defend any threats to their independence from national politicians.

Barclays Bank will write down £1.3 billion, $2.66 billion in losses associated with credit products. UBS was reported in the Wall Street Journal to face more than $7 billion in similar write downs but neither story swayed market conviction that the risk center of the credit crisis is in the United States.

United Kingdom

The inflation report of the Monetary Policy Committee of the Bank of England predicted that CPI would be well below the 2.0% target if rates are kept at the current 5.75% level and that it would be at 2.0% two and three years out at market rate assumptions. Since market pricing assumptions have rates at 5.5% by the first quarter of 2008 and 5.2% in the first quarter of 2009, the report’s implication of at least two 0.25% rate cuts was more of an admission than expected and contributed to the Sterling sell off.

Japan

In November the yen has traded in almost a 6 % range against the Dollar, rising almost 4.5% on the week to Fridays close. Normally this type of volatility brings Japanese officials leaping to the microphones to decry ‘excessive currency volatility’ or some other such complaint. In the context of this rising Yen the comments from Chief Cabinet Secretary Machinura are most striking. “From the long term perspective…a rising Yen should not be rejected, but I emphasize, long term”. “I think that Yen appreciation is desirable for the economy”. The yen has not yet improved so much that it is a drag on Japanese exports and a strong Yen does serve as a backstop against inflation, should it arise. 110.00 Yen per Usd is probably near the center of the range that Japanese manufacturers and economic planners find comfortable. Since by several measures the Yen is as undervalued or more so than the Chinese Yuan and Japanese competitiveness benefits as the Yuan rises, and the Chinese government has faced increasing criticism from other industrialized nations for the value of the Yuan, now does not appear to be a politic time for Japanese officials to complain about currency movements or the appreciating Yen.

Central Banks

The Bank of Japan voted 8-1 to leave rates at 0.5% at its regular policy meeting on Monday. The last rate change by the BOJ was the 25 basis point increase in February.

Economic Releases November 12 - 16

United States

Tuesday: National Association of Realtors (NAR) pending Home Sales gained 0.2% in September to 85.7, a much better performance than the 2.5% decline that had been predicted. But the index remains off 21% since last September.

Wednesday: Retail Sales rose 0.2% in September as expected; the September result added 0.1% on revision to +0.7%. Sales minus food and automobiles added 0.3% also as expected. The increases in both numbers were due to the gasoline and food components which reflected higher prices not higher volumes. The Produce Price Index was benign in headline and core numbers in October. The core rose only 0.1%, less than the +0.2% predicted and the headline number gained 0.1%, a quarter of the 0.4% gain anticipated. The yearly rate was +1.1%.

Thursday: CPI rose 0.3% in October. The 3.5% yearly rate was the highest since last August. The core rate added 0.2% in the month, 2.2% on the year. Both CPI statistics were exactly as expected.

Friday: Industrial Production contracted 0.5% in October against an expected 0.1% rise. All categories of production fell, led by utilities, which suffered from unusually warm weather, but seconded by auto, housing and manufacturing. The September figure was revised 0.1% higher to +0.2%. Capacity Utilization dropped to 81.7%, undercutting the 82.0% forecast and the 82.0% figure in June. Net US capital flows failed to meet the current account deficit for the third month in a row. The Treasury International Capital System (TICS) accounted a net loss in totals flows of $14.7 billion; the September figure was revised up to -$150.7 billion from -$163.0. Net long term securities transactions were positive at $26.4 billion; in August the flow was reversed at -$70.3 billion. The current account deficit, commonly called the ‘trade gap’ has averaged a little more than $59 billion per month this year. Long term securities flows have collapsed in the third quarter averaging -$24.7 billion per month; in the first half of the year they measured +$85.9 on average per month. Since mid June the Dollar has depreciated 10.6% against the Euro. Europeans are the largest overseas investors in the United States economy.

Eurozone

Monday: Industrial Production contracted 0.7% in September, more than three times as much as the predicted -0.2%. In August production had expanded 1.2%. Industrial Production was 3.5% ahead of the level last year but that was much less than the 4.7% gain predicted. The August year on year rate was revised 0.2% higher to 4.5%.

Wednesday: third quarter GDP rose 0.7% as expected, a 2.6% annual rate. Though the monthly addition to GDP was more than twice that of the second quarter (+0.3%, +2.5%) the recovery is forecast to be short lived as the predicted US slowdown and remaining credit market problems exact their toll on EMU growth. .

Thursday: the harmonized inflation index (HICP) for October was unchanged from its flash estimate at +0.5% for the month and +2.6% for the year. These are the highest reading since September 2005. Prices were largely driven by increases in oil products and seconded by rising food prices. Though some analysts see inflation reaching 3.0% annually by the end of the year the ECB is not likely to hike rates, worried by signs of slipping economic growth and repercussions of the credit market contractions.

Germany

Monday: the ZEW survey of financial experts for November turned in some of its lowest reading in a decade. The headline ‘economic expectations’ category registered -32.5, well below October’s -18.1 and the lowest reading since February 1993. It was also the fifth decline in six months and the largest drop since the sub prime and credit problems surfaced in early August. The long term average is 31.8. Wolfgang Franz, ZEW President, blamed the decline on the “financial crisis” and “the depreciation of the US Dollar. ‘Current conditions’ fell slightly in November to 70.0 from 70.2 in October. It was the weakest reading since March.

Wednesday: GDP added 0.7% in the third quarter as anticipated, a 2.4% yearly rate according to the Federal Statistical Office (FSO). It was the fastest quarterly growth this year, (Q1 +0.5%, Q2 +0.3%).

Thursday: HICP inflation reached a six year high in October at +0.2%, +2.7% for the year, confirming the flash estimate. It was the second 2.7% month in a row. As in the EMU, prices were led by increases in oil and food. October oil prices were counted against the much lower price base for oil which existed last October when crude oil was around $60 a barrel.

United Kingdom

Monday: Department of Communities and Local Government (DCLG) House Price Index rose 10.8% in September, a 0.5% drop from the August rate. The Royal Institute of Chartered Surveyors (RICS) saw a 22.2% fall in October prices reported by its members in the prior three months. It was the most negative balance since June 2005. New buyer inquiries fell for the 11th straight month.

Tuesday: CPI added 0.5% in October, breeching the 2.0% BOE target in October by pushing the yearly rate to 2.1%; +0.3% and +1.9% had been predicted. The core rate rose 0.3% for the month and 1.5% for the year, the same as in September; +1.7% had been predicted. Gas and food prices led the way to the highest monthly rate since June.

Wednesday: the ILO unemployment rate was stable in September at 5.4%. Average earnings advanced 4.1% in September over a year prior, greater than the 4.0% predicted and the highest reading since March. Earnings gained 3.7% in August. Private sector earning rose 4.7%.

Thursday: Retail Sales sank 0.1% in October well under the +0.1% median prediction. The 4.4% yearly growth was 0.2% below predictions. Septembers’ results had been +0.6% and +6.3% respectively. Sterling fell on the release.

Japan

Tuesday: 3rd quarter GDP added 0.6% and 2.6% in the yearly accounting; +0.4 and +1.8% had been forecast. 2nd quarter GDP was lowered 0.1% to -0.4%

China

Tuesday: the Consumer Price Index (CPI) was 6.5% higher in October than in the same period a year ago. It was the fastest rate of inflation on the mainland in more than a decade and above the 6.2% rate in September. Food price inflation was the strongest driver with non food CPI gaining only 1.1% for the month.

Wednesday: Retail Sales in October rose 18.1% over a year ago, it was the largest increase this year; in September the year on year rise was 17.0%

Thursday: the yearly gain in Industrial Productions fell slightly in October to 17.9%; 18.5% had been expected; in September the gain was 18.9% over the prior year.

Joseph Trevisani
FX Solutions
Chief Market Analyst

Market Directions Sunday, November 18, 2007

• The timing of bad news
• Commodity currencies lose their shine
• Federal Reserve transparency and currency volatility

Consolidation in the Euro this week gave no comfort to advocates for the return of the Dollar. Weak economic statistics from the US and a partial return to US investing by foreign purchasers kept traders from capitalizing on the relatively strong position of the Dollar early in the week. The best level for the US currency against the Euro came on Monday, a day when US markets were closed. European statistics point to a slipping industrial base coupled with rising inflation, a central banker’s nightmare. But future consumer spending on the continent is not thought to be hostage to a collapsing housing market and thus less likely to damage future economic growth. Nor has the European Central Bank (EC been forced to lower interest rates to ward off serious economic problems. Estimates for American economic growth in the last quarter of this year and the first of next are now between 1 and 2%, a long way from the projected 5% growth in the third quarter. It is not that the future does not look troubled in Europe, it does. But the view in Europe is mostly of worry; in the US worry is starting to become reality.

Sterling depreciated sharply pressured by concerns over financial sector weakness, an inflation report from the Bank of England that seemed to predict two 25 basis point rate cuts in 2008 and poor retail sales and housing numbers. The financial sector in the city of London is the largest single creator of jobs in the British economy. Contraction there will have a disproportionate on unemployment in the country.

After this week the case is strong that the economic bad news for the Sterling and Dollar is priced into the market; the vulnerability for the Euro is that it is not. European statistics have only started to report what US and British figures have already revealed. Due to both the later reporting of many EMU statistics -- for instance October retail sales for the Euro area will not be released until December 5th, (US retail sales for October were out November 14th), EMU industrial production for October is not issued until December 12th (US industrial production for October was released on November 16th) and Euro area consumer confidence for November is reported November 30th (University of Michigan consumer confidence for November was reported on November 9th) -- and because the number of Euro area statistics is far less and so less frequent, the Euro can benefit from this relative economic opacity when the news is poor. Because any decline in EMU statistics is reported later, bad news from the US for the same month affects the Dollar first and is not counterbalanced from Europe until weeks after. Because there are fewer statistics for the EMU as a whole than for the US, there is simply less bad news to report. The psychological impact on the market of the continual update of poor US statistics against the relative sparsity of EMU statistics should not be underestimated.

The commodity currencies, the Australian, New Zealand and Canadian Dollars all recovered from their precipitous declines which began on November 7th, but with economic growth estimates shrinking worldwide the immediate future for them remains downcast. The Yen crosses augmented the change in fundamental outlook for these currencies adding their highly speculative liquidity to the cascade of positions looking for an exit.

The Week in Review November 12 – November 16

United States

Ben Bernanke the Federal Reserve Chairman has promised greater transparency for the Fed’s deliberations and economic projections. The central bank under his leadership has already greatly altered its relations with the press and the market. And though his predecessor Alan Greenspan is best remembered for his cryptic comments and witty asides, rare in public economists, he had also done much to open the Fed to outside scrutiny. It is only in retrospect that Mr. Greenspan appears close with his communication. The question for market participants is will this new transparency add or detract from volatility. Many factors have worked to lower volatility in currency markets in the past fifteen years but one of the most effective has the spread of information. Volatility thrives in the absence of knowledge. The more the Fed reveals of its information gathering and analysis the more traders will be able to discern correctly its future policies. The more traders know the less room there will be for speculation. The unexpected development will never disappear, witness the almost overnight eruption of the credit crisis in August, but the speculative charge given to the market as it anticipates Fed policy will continue to diminish.

The immediate response to CPI and Core CPI at +3.5% and +2.2% was the thought that such levels would limit the Fed’s ability to reduce rates if further reductions become necessary. However, as Mr. Bernanke has clearly proven, in such a case the Fed would probably lower rates anyway, even if immediate inflation prospects would argue restrain in a normal economy. In a perverse way the higher inflation represented by the CPI numbers confirms the basic Fed scenario, faster growth in quarters two and three may have spurred inflation, slower growth should keep inflation in check.

Industrial production and capacity utilizations fell unexpectedly in October, reinforcing the market pricing of a Fed 0.25% rate cut at the December 11th meeting. Part of the fall in industrial production was due to weather related declines in electric and natural gas production from warmer temperatures, much like a similar drop in industrial production in January. All categories of production fell, manufacturing, autos and housing and related industries.

Eurozone

Nicholas Sarkozy, the French president, pushed for more public participation in debates on monetary policy, including with the ECB. “Europe has chosen democracy and in a democracy one must be able to debate everything: monetary policy, budget policy, trade policy industrial policy, fiscal policy, all policies whatever they may be”. In the past the ECB has always responded vigorously to attempts by European politicians to pressure its decisions. This time there was no response. The EU is seen by many European voters as bureaucratic and without much popular legitimacy or loyalty. Voter loyalty in even the long established members of the EU lies with the national government and not with Brussels. Officials of EMU institutions, including the ECB have consequently felt a need to vehemently defend any threats to their independence from national politicians.

Barclays Bank will write down £1.3 billion, $2.66 billion in losses associated with credit products. UBS was reported in the Wall Street Journal to face more than $7 billion in similar write downs but neither story swayed market conviction that the risk center of the credit crisis is in the United States.

United Kingdom

The inflation report of the Monetary Policy Committee of the Bank of England predicted that CPI would be well below the 2.0% target if rates are kept at the current 5.75% level and that it would be at 2.0% two and three years out at market rate assumptions. Since market pricing assumptions have rates at 5.5% by the first quarter of 2008 and 5.2% in the first quarter of 2009, the report’s implication of at least two 0.25% rate cuts was more of an admission than expected and contributed to the Sterling sell off.

Japan

In November the yen has traded in almost a 6 % range against the Dollar, rising almost 4.5% on the week to Fridays close. Normally this type of volatility brings Japanese officials leaping to the microphones to decry ‘excessive currency volatility’ or some other such complaint. In the context of this rising Yen the comments from Chief Cabinet Secretary Machinura are most striking. “From the long term perspective…a rising Yen should not be rejected, but I emphasize, long term”. “I think that Yen appreciation is desirable for the economy”. The yen has not yet improved so much that it is a drag on Japanese exports and a strong Yen does serve as a backstop against inflation, should it arise. 110.00 Yen per Usd is probably near the center of the range that Japanese manufacturers and economic planners find comfortable. Since by several measures the Yen is as undervalued or more so than the Chinese Yuan and Japanese competitiveness benefits as the Yuan rises, and the Chinese government has faced increasing criticism from other industrialized nations for the value of the Yuan, now does not appear to be a politic time for Japanese officials to complain about currency movements or the appreciating Yen.

Central Banks

The Bank of Japan voted 8-1 to leave rates at 0.5% at its regular policy meeting on Monday. The last rate change by the BOJ was the 25 basis point increase in February.

Economic Releases November 12 - 16

United States

Tuesday: National Association of Realtors (NAR) pending Home Sales gained 0.2% in September to 85.7, a much better performance than the 2.5% decline that had been predicted. But the index remains off 21% since last September.

Wednesday: Retail Sales rose 0.2% in September as expected; the September result added 0.1% on revision to +0.7%. Sales minus food and automobiles added 0.3% also as expected. The increases in both numbers were due to the gasoline and food components which reflected higher prices not higher volumes. The Produce Price Index was benign in headline and core numbers in October. The core rose only 0.1%, less than the +0.2% predicted and the headline number gained 0.1%, a quarter of the 0.4% gain anticipated. The yearly rate was +1.1%.

Thursday: CPI rose 0.3% in October. The 3.5% yearly rate was the highest since last August. The core rate added 0.2% in the month, 2.2% on the year. Both CPI statistics were exactly as expected.

Friday: Industrial Production contracted 0.5% in October against an expected 0.1% rise. All categories of production fell, led by utilities, which suffered from unusually warm weather, but seconded by auto, housing and manufacturing. The September figure was revised 0.1% higher to +0.2%. Capacity Utilization dropped to 81.7%, undercutting the 82.0% forecast and the 82.0% figure in June. Net US capital flows failed to meet the current account deficit for the third month in a row. The Treasury International Capital System (TICS) accounted a net loss in totals flows of $14.7 billion; the September figure was revised up to -$150.7 billion from -$163.0. Net long term securities transactions were positive at $26.4 billion; in August the flow was reversed at -$70.3 billion. The current account deficit, commonly called the ‘trade gap’ has averaged a little more than $59 billion per month this year. Long term securities flows have collapsed in the third quarter averaging -$24.7 billion per month; in the first half of the year they measured +$85.9 on average per month. Since mid June the Dollar has depreciated 10.6% against the Euro. Europeans are the largest overseas investors in the United States economy.

Eurozone

Monday: Industrial Production contracted 0.7% in September, more than three times as much as the predicted -0.2%. In August production had expanded 1.2%. Industrial Production was 3.5% ahead of the level last year but that was much less than the 4.7% gain predicted. The August year on year rate was revised 0.2% higher to 4.5%.

Wednesday: third quarter GDP rose 0.7% as expected, a 2.6% annual rate. Though the monthly addition to GDP was more than twice that of the second quarter (+0.3%, +2.5%) the recovery is forecast to be short lived as the predicted US slowdown and remaining credit market problems exact their toll on EMU growth. .

Thursday: the harmonized inflation index (HICP) for October was unchanged from its flash estimate at +0.5% for the month and +2.6% for the year. These are the highest reading since September 2005. Prices were largely driven by increases in oil products and seconded by rising food prices. Though some analysts see inflation reaching 3.0% annually by the end of the year the ECB is not likely to hike rates, worried by signs of slipping economic growth and repercussions of the credit market contractions.

Germany

Monday: the ZEW survey of financial experts for November turned in some of its lowest reading in a decade. The headline ‘economic expectations’ category registered -32.5, well below October’s -18.1 and the lowest reading since February 1993. It was also the fifth decline in six months and the largest drop since the sub prime and credit problems surfaced in early August. The long term average is 31.8. Wolfgang Franz, ZEW President, blamed the decline on the “financial crisis” and “the depreciation of the US Dollar. ‘Current conditions’ fell slightly in November to 70.0 from 70.2 in October. It was the weakest reading since March.

Wednesday: GDP added 0.7% in the third quarter as anticipated, a 2.4% yearly rate according to the Federal Statistical Office (FSO). It was the fastest quarterly growth this year, (Q1 +0.5%, Q2 +0.3%).

Thursday: HICP inflation reached a six year high in October at +0.2%, +2.7% for the year, confirming the flash estimate. It was the second 2.7% month in a row. As in the EMU, prices were led by increases in oil and food. October oil prices were counted against the much lower price base for oil which existed last October when crude oil was around $60 a barrel.

United Kingdom

Monday: Department of Communities and Local Government (DCLG) House Price Index rose 10.8% in September, a 0.5% drop from the August rate. The Royal Institute of Chartered Surveyors (RICS) saw a 22.2% fall in October prices reported by its members in the prior three months. It was the most negative balance since June 2005. New buyer inquiries fell for the 11th straight month.

Tuesday: CPI added 0.5% in October, breeching the 2.0% BOE target in October by pushing the yearly rate to 2.1%; +0.3% and +1.9% had been predicted. The core rate rose 0.3% for the month and 1.5% for the year, the same as in September; +1.7% had been predicted. Gas and food prices led the way to the highest monthly rate since June.

Wednesday: the ILO unemployment rate was stable in September at 5.4%. Average earnings advanced 4.1% in September over a year prior, greater than the 4.0% predicted and the highest reading since March. Earnings gained 3.7% in August. Private sector earning rose 4.7%.

Thursday: Retail Sales sank 0.1% in October well under the +0.1% median prediction. The 4.4% yearly growth was 0.2% below predictions. Septembers’ results had been +0.6% and +6.3% respectively. Sterling fell on the release.

Japan

Tuesday: 3rd quarter GDP added 0.6% and 2.6% in the yearly accounting; +0.4 and +1.8% had been forecast. 2nd quarter GDP was lowered 0.1% to -0.4%

China

Tuesday: the Consumer Price Index (CPI) was 6.5% higher in October than in the same period a year ago. It was the fastest rate of inflation on the mainland in more than a decade and above the 6.2% rate in September. Food price inflation was the strongest driver with non food CPI gaining only 1.1% for the month.

Wednesday: Retail Sales in October rose 18.1% over a year ago, it was the largest increase this year; in September the year on year rise was 17.0%

Thursday: the yearly gain in Industrial Productions fell slightly in October to 17.9%; 18.5% had been expected; in September the gain was 18.9% over the prior year.

Joseph Trevisani
FX Solutions
Chief Market Analyst

I have said many times before "just when you start to think you have a handle on what is going on in the markets, you are forced to rethink your position."

And it is for this reason you have to be an ostrich with your head in the sand.

My good friend/mentor has always said to me "news, what news?" and says everything you are looking for is in the charts.

Unfortunately for the masses, reading charts is akin to deciphering the Da Vinci Code. (shameless self promotion here, the Forecasts do all the chart reading for you). Anyways, I digress.
So where does this head burying activity apply to the markets? Lets take a look at the loonie.

Less than 10 biz days ago it hit an all time high $1.10 then rapidly dropped 900 pips. Two of the drops (300 plus pips, 200 plus pips) were the deepest drops in decades. Yet only 2 weeks ago it was a shoe in to hit $1.15. Which side has the momentum? What has happened?

Well, there are those that say a high loonie will be a disaster for the Canadian economy. Canadian manufacturing stats came in under expectations (our dollar makes it difficult to compete) so fear comes into the market place which coincides with drops in oil, global doom and gloom, blah, blah, blah.

How do you stay on top of all of this? If you are like my friend, he looks at the BIG picture in the charts over years, months, days, not 5 minute/1 minute/ticks. Applies bollinger bands, stochastics, fibos etc etc. and his gift has allowed him to be very successful not only with his money, but other peoples money as well.

As a Forecast Day Trader we use news and market sentiment to give us the heads-up, not the "inside" trade. Our energy is better spent logging the Forecasts and becoming familiar with the day to day ranges of moves within the currency pairs we desire to trade, and how the Forecasts react after the market moving news events.

Pattern identification is not new in trading. Many have written books on the study, and many chart readers depend on chart formations and patterns to anticipate trades. I use my logs every day when "deciphering" the particular trades I am looking for. I will look for different obvious pieces of information based on my logs.

You may have noticed my conservative trades are based on making a quick 25 to 30 pips. Did I pull this number out of the air? No. Actually I do a regular painstaking process of picking a section of my logs/Forecast printouts to get a handle on what currency pair is giving the highest probable trade over recent history. I discovered early on that if I did not go for the actual full pip potential (which hits 75 -80% in 2 to 3 days) 30 pips could be hit on a favoured pair (strength, good pip profit) within 24 hours. Wow, what a discovery!

Does this mean you will never take a loss? No, but you will have a chance to protect yourself from a catastrophic loss. It is much easier to get 30 pips than 300 as you don't have to spend us much time exposed in the market.

So instead of trying to figure out what the markets are doing, I spend my time trying to figure out what the Forecasts are doing. The Forecast has spit out a summary of some very intense/complex data which would be very difficult for a single chart reader to come up with. I trust the Forecast for my trading and try to demonstrate this with my ongoing "Public" trades.

Why try and figure out the markets and the herd? There are better things to do with your time. Once you think you have it figured out you will once again be left scratching your head.

We wait for times like this. They come once or so a quarter. That time when the currencies melt down and allow us currency traders the opportunity to take a ride on some profit.
I trade in 2 distinct ways.
1) I use the Forecast first and foremost to make trades on a daily basis. Take 30 to 50 pips at a time, go deeper into profit when the opportunity presents itself. Do not over trade or regret what you might have missed. Do not get killed with pre-mature stops.

2) Wait for market meltdowns. Be capitalized to take advantage, and use the Forecasts to find bottom. Use a separate account from your day trades. Be able to sustain a significant drop as it is impossible to find bottom. Pick a currency that pays interest as you want to hold for a month or longer. The more volatile the pair the more capital you should have.

As lately as last week I was saying I am waiting for the gbp/jpy to hit in the 220's. Well it did just that today. Dropped almost 1500 pips in 2 weeks.

I took the loonie last week to go down, and it quickly shot to an all time high. Held on, and it cashed in for me. Down 500 pips in a week.

Same thing with other high flying currencies.If you feel there is a World Wide meltdown under way, these highs will not be seen again. But I don't believe that. I am going to use the Forecast to pick away everyday, 30 plus pips a night as per strategy 1. And I will look at Strategy 2 now that we have had a huge correction.

Risk aversion is in the markets and the US Dollar has no reason to be strong right now.Is oil going to drop? I doubt it. Gold? Doubt it.
There are 2 things you can count on with the currency herd. They have short memories and are greedy. When there is opportunity after a correction, it is always taken, but fear sometimes makes the retail trader miss the boat.

Lets see what we can do to make some money!

sitting here at the airport ......just checking a trade I made the other night on impulse...and as I can tell it hit profit...For some reason, and I did not list it as a pick, I took the usd/jpy short.(Wed night trades est) So on that night I had 3 trades going, 2 of which hit within the hour,(my recommendations) and the usd/jpy which as I can tell lingered for a day or 2.

These are the types of trades that get you into trouble. I am as much a victim of stupidity as the next guy. And there are ways to avoid this. But I have identified that in my trading, sometimes the worst thing that can happen to me is hitting target in the first few hours of trading.

I try never to compare the Forex to gambling. I hate it and am insulted when someone makes that comment.

But I would like to make an analogy. As it does have some merit if you have ever been to a Casino before. Say you go to Vegas, or on a cruise, or someplace where you have to take the time to actually gamble. Have you ever experienced winning your goals in the first hour of say a planned 4 or more hour casino journey? What are you then supposed to do. Watch your friends/husband/wife play? Go sit at the bar and wait? How hard is that. What usually happens is you jump right back in and probably lose your winnings and stake money!

My achilles heal is trading right after a trade turns profitable in a blink of an eye. I think, hey, that was easy. BIG MISTAKE.

I have identified in my trading that I trade best when I stick to my plan and be clinical. My plan consists of picking 1 or 2 trades a Forecast cycle. Set my profit target, milk out what I can , and then get out and stay out until either I cash out, or get stopped out. Then I regroup and wait for the next day's Forecast.

I am not telling you that you should trade this way. This is my way. But what you need to do is identify your weakness (mine is impulse trading outside of my plan). identifying your weakness is probably the single most important thing you can do when developing your trading plan.

I used to over trade, pyramid trade (piling into a position to try and offset a loss), impulse trade (see something happening in a chart that is really just a blip etc).
And for me, now that I am manning this blog and doing the Forecasts my face is in front of charts for many hours every day. What I normally do is just take a peak at my open trades, and not try and seek out new trades. This is how I avoid my "weakness".

Tough to do, and sometimes I fall off the wagon and make an impulse trade. I was lucky this time. I have found that with impulse trades I hang onto them longer than I should if they go south, and they get me into trouble most times.

Knowing your weakness can be your strength in the Forex.

I was looking at my trading journal to see how far currencies have come in the past year. It is actually quite fascinating. A year ago the gbp/usd was 1.8709, euro/usd 1.2549, usd/chf 1.2679 and usd/jpy 118.88. It takes alot of guts to hold a position wide open for a year. I don't have the patience for it.

I used to use a hedging system that I have turned some of you onto. The Freedom Rocks system hedges currency pairs against each other to give you a daily positive interest payment. In essence you are "investing" in the currency markets, not trading. It works well in an upward trending market, but there is the temptation to over trade your account which can kill you if every currency tanks at the same time. Happened 'BIG TIME" in February and again in August. But looking at the above figures, if you could ride out the turmoil times you would have reaped some great rewards and had fabulous interest payments.

I found though that my Day Trading mentality worked against me. You can do both, but better have 2 accounts and be disciplined in both accounts. (Too hard for me to do).

So where will the next year go? Will we see the same movements? Boy, I wish I had that crystal ball. Make 1000 pips on the gbp/usd, 2000 pips on the euro!. That would be great. But we are about bite sized chunks with our Forecast system. We are about chipping way when a currency goes up and down.

Imagine if you held the gbp/usd for a year. You would have seen a stair step climb that would scare the you know what out of you.There were times on its climb when it dropped 700 or 800 pips over a week or so. What would you have done if you saw profits eaten up and possibly your stake also. It is a tough game to be a trend trader over a year.

I like my Day Trading while waiting for a long ride opportunity. I am waiting to see if the gbp/jpy drops back down into the 220's to ride it back up and get some great daily interest. I will also do the same with the usd/can. Although I have it shorted right now in a "day/couple of day" trade the word on the street is it could hit 1.12 by early next year. I would like to see it drop down a couple of cents then get back on the band wagon.

That is what the Forex is all about. Picking your battles over time.

I was listening to an interesting program today where someone was explaining the currency markets. Very rare to hear that on normal radio! As I am in Canada, our soaring Loonie is all over the news. The speaker was saying that to understand currency markets you have to treat countries like corporations. How are their
products (economies) doing, who is heading up the corporation, do you have a stable economy or is there martial law etc...

So it reminded me on how I learned to understand currencies. And it has served me well.
1) Gold and the US dollar. When one goes up, the other goes down.
2) Gold and the Euro. They move together
3) Oil and the US dollar. When one goes up, the other goes down.
4) High Oil hurts Japan and weakens Yen
5) High Oil benefits the U.K and Canada. Strengthens the pound and loonie
6) Gold tips off a move in Forex

So, they are saying gold is charging for $1,000 an ounce, and oil could go very quickly through $100 then further.

Get your head around this stuff and it may take some of the mystery out of the Forex.

There is that old adage that says good luck is the residue of hard work (or words to that effect). But in the Forex , many, many, many times when you are learning the biz, luck comes before the hard work. I feel the curse of a new trader is to start in on the middle of a trend and start picking off winning trades like fish in a barrel. You think it is easy and figure it can never end. Then in the blink of an eye disaster strikes and you become a statistic.

For those of you who take the time to read the ramblings of this trader your probably saying.." Nope, not me , I am different!"
Or you might be saying "Yikes! do I need this grief?"

So how do you prevent being a statistic? You need to simplify and do away with the information overload. Once you do that, you can take the training wheels off and really ride the Forex.

So this simplification is easier said than done. If you trade the news, you had FOMC and NFP's last week, this week there will be BOE and Euro Zone statements etc, you have oil going up one day, US equities up followed by Asian markets down etc..How do you sift through all of this and make a trade that won't blow up on you.

The NFP's came out double the forecast on Friday. In the past, the euro and pound would have tanked, and the usd/jpy would have gone through the roof. Not Friday.

What do "they" know, that "we" don't. I have given up trying to figure out that one. And I have given up spending my time bleary eyed reading every piece of info out there.

This is how I have simplified my trading life both in lifestyle and strategy
1) My Strategy consists of looking at the currencies in the forecast focusing on my 2 preferred pairs first . I check the same info that you are given. I then look at my Daily Chart set-up to visualize (what is going on over time).I will give a thumbs up if the moving averages are moving well in tandem and not slapping each other. I make a quick mental note of how many times in a row the Forecast hit ( it hits if it took a significant chunk out of the pip potential).. I also make a mental note how many days in a row the pair has trended. (3 or 4 I get cautious)
If my preferred pairs are not the best picks for the evening I look for one that might be and apply the above.
I then look at any event risks, see what is happening on a 15 minute chart, and if it is not moving against me make my trade, set my profit and walk away and get on with life.

I am fortunate to be on or near a computer much of the time and will just glance every once and a while (although, many times I cash out while asleep for the evening) to see if i can put a trailing stop on a profitable position.

2) As for paying attention to the news, I listen to biz reports on the radio, might read a paper, glance at a few blogs, read my site, but only if it does not interfere with a normal life or activity.

That's it. Very simple, and for me it has cleared the clutter from my brain. Develop a strategy that is simple and easy to follow.

Remember we are "retail traders" and have forces always working against us so be disciplined and technical.

There is that old adage that says good luck is the residue of hard work (or words to that effect). But in the Forex , many, many, many times when you are learning the biz, luck comes before the hard work. I feel the curse of a new trader is to start in on the middle of a trend and start picking off winning trades like fish in a barrel. You think it is easy and figure it can never end. Then in the blink of an eye disaster strikes and you become a statistic.

For those of you who take the time to read the ramblings of this trader your probably saying.." Nope, not me , I am different!"
Or you might be saying "Yikes! do I need this grief?"

So how do you prevent being a statistic? You need to simplify and do away with the information overload. Once you do that, you can take the training wheels off and really ride the Forex.

So this simplification is easier said than done. If you trade the news, you had FOMC and NFP's last week, this week there will be BOE and Euro Zone statements etc, you have oil going up one day, US equities up followed by Asian markets down etc..How do you sift through all of this and make a trade that won't blow up on you.

The NFP's came out double the forecast on Friday. In the past, the euro and pound would have tanked, and the usd/jpy would have gone through the roof. Not Friday.

What do "they" know, that "we" don't. I have given up trying to figure out that one. And I have given up spending my time bleary eyed reading every piece of info out there.

This is how I have simplified my trading life both in lifestyle and strategy
1) My Strategy consists of looking at the currencies in the forecast focusing on my 2 preferred pairs first . I check the same info that you are given. I then look at my Daily Chart set-up to visualize (what is going on over time).I will give a thumbs up if the moving averages are moving well in tandem and not slapping each other. I make a quick mental note of how many times in a row the Forecast hit ( it hits if it took a significant chunk out of the pip potential).. I also make a mental note how many days in a row the pair has trended. (3 or 4 I get cautious)
If my preferred pairs are not the best picks for the evening I look for one that might be and apply the above.
I then look at any event risks, see what is happening on a 15 minute chart, and if it is not moving against me make my trade, set my profit and walk away and get on with life.

I am fortunate to be on or near a computer much of the time and will just glance every once and a while (although, many times I cash out while asleep for the evening) to see if i can put a trailing stop on a profitable position.

2) As for paying attention to the news, I listen to biz reports on the radio, might read a paper, glance at a few blogs, read my site, but only if it does not interfere with a normal life or activity.

That's it. Very simple, and for me it has cleared the clutter from my brain. Develop a strategy that is simple and easy to follow.

Remember we are "retail traders" and have forces always working against us so be disciplined and technical.

Market Directions Sunday, November 4, 2007

• On the strength of an idea, the Euro marches on
• The Mid Atlantic rift in GDP
• ECB and BOE ponder their rate future

Dollar worriers abound on both sides of the Atlantic. In the US they fret that the housing collapse and the credit market crisis will terrify consumers. Scared consumers stop spending; GDP growth and job creation falter, consumers have less money to spend and the end result is a US slowdown or even recession. Advantage to the Euro. In Europe they fear that the return of inflation, said to have been imminent for the past year, will so paralyze the ECB that it will not lower rates for growth. Again, advantage to the Euro.

The currency markets have interpreted both the economic and rates side of the Euro US Dollar equation to the detriment of the Dollar for more than a year. If the EMU is growing faster, that is good for the Euro. If inflation is rising on the continent, keeping ECB rates high, that is also good for the Euro. If the Fed reduces rates to protect the American economy that is bad for the Dollar; it means that the US economy is in even more trouble than publicly acknowledged, which is worse for the Dollar. Both interpretations cannot be true for ever. Lower interest rates normally spur economic activity; higher rates eventually suppress it. If the US economic and rate curve is, as it appears to be, six months to a year ahead of the European, then the US will return to higher growth first; central bank rate policy will follow in due course.

Let us look at the economic side first. In the four quarters from April 2006 until the end of March 2007, that is quarters two, three and four in 2006 and quarter one in 2007, the European Monetary Union (EMU) area averaged 3.05% GDP growth. During the same period the US averaged 1.41%. The Euro began rising against the Dollar in the first quarter of 2006 and has continued, accelerating after the September 18th Fed 50 basis point rate cut.

Since the end of the first quarter 2007 the picture has changed considerably. In the second and third quarters the US economy has averaged 3.85% GDP growth. The EMU area registered 2.5% in the second quarter and will not deliver third quarter data until November 14th, but 2.5% or less is expected. The potential gap favors the US by a minimum of 1.3%.

The Fed ceased raising rates in mid 2006, the ECB in mid 2007. The Fed response to the financial market crisis in August has been to cut rates 0.75%. The ECB has, so far, done nothing and is not expected to cut this coming Thursday. Central bank rate policy has a six to twelve month lead time to economic effect. The response in US GDP growth in 2007 to the Fed change in policy in 2006 fits the rate time lag. There is no reason to assume the European economic growth will not obey the same rules. Those rules suggest that even if the ECB is finished raising rates the slowdown in EMU growth from the increases of the past two years is still to come. The Eurozone is still on the top of the economic slope looking down into a valley that the US has already crossed.

Oil prices remain near record levels, even when adjusted for inflation. Oil is the world’s most basic commodity. Record crude oil prices must exert inflationary pressures on the world’s economies. These pressures are the same on both sides of the Atlantic. However, the reaction of each economic area, the US and the EMU, to higher oil prices might not be at all the same.

If record gasoline prices are beginning to affect demand in the developed world, automobile ownership and use is roaring ahead in India, China and the Middle East. The rise in oil prices has been largely demand driven. If amity and coexistence suddenly broke out in the Middle East oil prices would fall $20 or even $30 dollars a barrel. They would not return to where they were ten years ago. The economic fact of rising commodity prices is the same everywhere in the world. But how individual economies cope with these prices changes is not uniform. Economic flexibility, technological innovation, labor mobility, lower taxes and a certain willingness to endure social dislocation are rewarded, the opposites punished. The US has a greater share of all these qualities than its continental competitors.

Economic logic does not prescribe trading decisions and changes in economic logic can take a long time to make their way into the currency markets. One of the truest market clichés is “The market can remain irrational far longer than you can remain liquid”. That caveat applies to the market’s ruling economic assumptions as well at to an individual trader’s equity account. Because economic logic dictates that a currency should move in one direction does not mean it will do so at any given time. For any one economic argument there is always an opposite. For any argument that says the Dollar must necessarily strengthen there is another, often equally well argued if not currently as true, that the Dollar must remain weak. Markets are psychological creatures. Like an individual they tend to stick to the current story until forced to change, especially if that story has been very profitable. But stories age and go out of style and the facts that once supported them may not do so any longer. The signs are gathering that the Dollar story is due for a change.

The ECB and Bank of England (BOE) meet on Thursday for policy decisions. Neither central bank is expected to alter rates from their current 4.00% and 5.75%. Officials from both banks have emphasized the threats from inflation in recent statements and downplayed economic dislocation.

Central Bank Rate Actions

The United States Federal Reserve Bank cut the federal funds target rate 0.25% to 4.5% and the discount rate 0.25% to 5.0%; the vote was 9-1 in favor. The FOMC adopted either a neutral or hawkish ‘bias’ depending on one’s interpretation of the accompanying statement.

BOJ kept rates at 0.5%; the vote was 8-1 in favor.

The Week in Review October 29 – November 2

United States

The Federal Reserve 0.25% rate cut on Wednesday was universally expected and brought little new volatility to the currency markets. If the Fed’s equal balancing of risk between growth and inflation may have signaled a bottom in US rates, you would not know it from the market reaction which set several new lows for the US currency subsequent to the announcement. The crucial phrase in the revamped statement was, “The Committee judges that, after this action the upside risks to inflation roughly balance the downside risks to growth”. In the current economic situation both sides of the growth and inflation policy equation are heavy with risk. The 75 basis points in cuts seems to be as far as the Fed is willing to go without further negative evidence from the economy. Certainly 3.9% GDP growth in the third quarter, two months of which took place after the credit market debacle began in early August, and 166,000 jobs on the October payroll, all of which were created after, will not advise Mr. Bernanke that more rate stimulation is required. The housing market has been falling for 18 months if not more, that is not a new economic fact. It is also not a prescription for further rate cuts this year.

Eurozone

The ECB rate decision is on Thursday, no change in policy expected despite pronounced EMU and German weakness in Manufacturing PMI. The EMU October reading was the weakest in more than a year and the German the lowest in over two. The German PMI was the steepest one month decline in the history of the series. HICP inflation at 2.6% in the latest month will keep the ECB fixated on its inflation guardian role.

United Kingdom

BOE rate decision is on Thursday. Like its counterpart across the channel the central bank is expected to keep rates on hold. Recent inflation numbers and good retail sales are likely to weigh more heavily with the Monetary Policy Committee than economic spillover from housing and the credit market scare.

Economic Releases October 29 – November 2

United States

Tuesday: Case Shiller Home Price Index fell 8.7% in August to 197.16; it was the sharpest plunge since June 1991. This index of year over year price changes had fallen on average less than 1.0% per month since March.

The Conference Board Consumer Confidence slid to 95.6 in October from 99.8 in September. It was the weakest reading in more than a year.

Wednesday: the ‘advanced’ (first issue) for third quarter GDP at 3.9% was much stronger than the 3.0% forecast and on par with the second quarter result of 3.8%.

Wednesday: the Chicago Purchasing Manager Index (PMI), the regional version of the Institute for Supply Management (ISM) report came in at 49.7, the first reading below 50 since February. September had been 54.2. Weakness in auto manufacturing weighs more heavily Chicago than nationwide.

Thursday: Personal Income rose 0.4% in September a marginal improvement over the +0.3% reading in August. But personal spending was only 0.3% higher, half the 0.6% gain in August. The Core PCE price Index added 0.2% in September twice the hike in August; the yearly rate was unchanged at 1.8%.

The ISM Index for October registered 50.9, considerably less than the 52.5 predicted and lower than the September result of 52.0. New orders’ declined to 52.5 from 53.4; employment rose to 52.0 from 51.7; prices paid scored 63.0, September had been 59.0

Friday: Non Farm Payrolls more than doubled the median estimate for October at 166,000, economists had been expecting 80,000; September and August were revised for a combined loss of 10,000. The US unemployment rate was unchanged at 4.7%

Eurozone

Wednesday: Flash (1st release) for the October Harmonized Index of Consumer Prices (HICP) at 2.6% was much higher than the 2.3% increase expected and the highest since September 2005. The September reading was left unrevised at 2.1%. The unemployment rate for the EMU area dropped 0.1% to 7.3% in October.

Germany

Friday: Manufacturing PMI for October was very weak falling to 51.7, more than four points below the September result of 54.9, the lowest reading since September 2005 and the sharpest fall in the life of the series, (since 1997).

United Kingdom

Thursday: manufacturing PMI in October came in at 52.9, much lower than the expected 54.2 and a substantial drop from the September reading of 54.7. New orders fell to 53.6 from 55.2 in September the lowest since August of last year. Export orders dropped to 50.9 from 52.6, their lowest in more than a year, both statistics reflected the ascendancy of the Sterling.

Joseph Trevisani
FX Solutions
Chief Market Analyst