Market Directions Sunday, September 30, 2007

The Week in Review September 24 - September 28

• The US Dollar sinks, is there a lifeline?
• Oil prices remain at historic highs, the world is unimpressed
• The BOJ looks for inflation and finds deflation

The Dollar fell to a series of record lows against the Euro this week as markets remained focused on the Federal Reserve rate cut and worries that the US economy will slip into recession. Unmarked but on the horizon are the next rate decisions of the European Central Bank (EC and the Bank of England (BOE). Neither bank will raise rates this coming Thursday, with the BOE reporting its decision first. But the possibility that one or both central banks might cut rates has been ignored by all. The economic and interest rate situation in the Eurozone and the United Kingdom is similar to that of the United States, though perhaps less advanced. Ben Bernanke did not drop the Fed Funds rate 0.5% because the American economy was in a tailspin but because the Federal Reserve Governors feared what the recent financial and housing market turbulence might exact from the economy in the future. The economic situation is the same on the continent and in England with the added drag that very expensive currencies inflict on a nation's export trade. A reduction in European rates or moderation in the ECB economic risk outlook is almost wholly unpriced for the currency markets.

Oil prices have also cast a pall over economic growth prospects in the industrial world but the effect is different on either side of the Atlantic. The European Monetary Union (EMU) exports more goods and services to the Middle Eastern oil producers that does the United States. Higher oil revenues in the Gulf States and Iran translate into more purchases by Middle Eastern consumers and governments and higher export earning by the EMU economies. Such exports help to offset the already evident declines in EMU domestic consumption. The US economy, because it exports less to the Middle East, has less income returned as payment for US products and less support for domestic production.

Another factor in the oil price effect in Europe is the ECB definition of inflation. The EMU wide HICP statistic, which the ECB has targeted at 2.0%, includes energy prices. A rise in oil and gasoline prices is a direct contribution to inflation accounting. This effect is somewhat mitigated by the overall value of the currency which lowers the prices of imports and reduces the pricing power of domestic firms. In the US the Fed watches core inflation, without the monthly changes in food and energy prices. A sustained rise in oil prices will still contribute to inflation but in a more diffuse fashion as a basic industrial product rather than a first line consumer price increase.

For both reasons rising oil prices tend to keep greater upward pressure on European interest rates than they do in the United States and to support the Euro more than the Dollar.

United States

A raft of secondary statistics pointed to an American economy more resilient than otherwise depicted, despite the ongoing housing collapse. Personal Income, Personal Expenditures, Construction Spending and the Chicago Purchasers Index all met or surpassed forecasts. Only the two consumer confidence numbers, easily the most emotionally laden of the forward looking statistics, were weaker than forecasts. Personal Income and Expenditures seemed to belay worries of a pending consumer spending collapse. Despite concerns of falling consumer spending, constrained by the decline in the housing market and worries about pending job losses due to credit market contractions, the American consumer appears to have, at least temporarily, resumed normal spending habits in August. Expenditures rose half again as much as predicted and doubled the rise in personal income. Core PCE Prices further moderated in August and have now been at or within the Fed range of 1-2% for four months. Core PCE Prices peaked at 2.5% in February.

Weekly Jobless claims unexpectedly fell for the second week in a row chopping the four week moving average to 311,500 from 321,000 and easing concerns about job creation. Estimates for this Friday's September Non Farm Payrolls number remain at +115,000. The unemployment rate is predicted to rise to 4.7%.

Eurozone

Last week Jean Claude Trichet, the ECB President, said that the central bank has been successful in "very solidly" anchoring price stability in the EMU. This week, in an interview on Dutch television, he said that the ECB will do what is needed to anchor inflation around 2.0%. Last week inflation was anchored, this week the anchor has slipped. At the risk of a parse too far the significant difference is the phrase 'around 2.0%', instead of 'at or below 2.0%' . The ECB has long forecast that inflation would rise above 2.0% despite its year long sojourn below that level. This projection has been the prime rationale for increasing interest rates and in August the flash HICP rate finally climbed to 2.1%. A target of 'around 2.0%' is considerably more expansive than one 'at 2.0%'. Is the ECB introducing the notion of a rate cut despite an inflation rate higher than 2.0%?

Admittedly this is a heavy burden for one small phrase. But central bankers do not free associate during interviews and the interpretative leeway between the two phrases gives the ECB much more room to maneuver than it currently has.

Another question for the ECB is does the 8% money supply target matter anymore? Would the M3 number, by itself, prevent the ECB from cutting rates? The answer is already evident. M3 did not prevent the bankers from halting their series of rate hikes last month; it will make no difference should the governors decide to cut rates.

The EMU economies are showing fatigue. Not dramatic but noticeable. As we noted last week, GDP peaked in the fourth quarter of 2006. Business sentiment and consumer confidence are falling in the EMU as a whole and specifically in its largest economy, Germany. What is to prevent the ECB governors from taking the same much applauded precautionary view as the FOMC? The ECB may now be learning one of the drawbacks of a public target for inflation.

Germany

All German statistics this week indicated a slowing economy, falling consumer spending and decreasing business confidence in the immediate future.

The IFO Survey came in with its lowest reading in more than 18 months, undercutting hopes for a sustained expansion in the EMU's largest economy. Chief Economist of the IFO Survey Gernot Nerb said that domestic demand in Germany was sluggish. At the beginning of almost every European economic expansion government and private officials express hope and sometimes confidence that 'this expansion' will be borne to a greater degree by domestic consumption and so be less susceptible to external factors. The results almost always disappoint.

GfK Consumer confidence fell for the second month in a row. "As was already evident in August the positive consumer mood has been affected…of late…[by]... the entire credit crisis in the USA and rising food prices are responsible for the somewhat less than euphoric consumer attitudes", said GfK in a written statement.

Retail Sales in August, as collected by the Federal Statistical Office, fell 1.4%, the worst result since May's 3.2% collapse. As business investment turns uncertain, shown in the IFO report above and by last week's ZEW Survey, the German consumer has, once again, been sought as a source of spending and continued growth. Once again it does not seem that the German consumer is willing to oblige.

Japan

Yasuo Fukuda was elected president of the Liberal Democratic Party (LDP) by a vote of 330 to 197 over Taro Aso and thereby becomes the next Prime Minister of Japan. Mr. Fukuda is 71 years old, was first elected the Diet in 1990 and has served in various leadership roles in the LDP since 1997. He is considered a moderate on foreign policy. His first task will be to extend a law that permits the Japanese military to assist American naval operations in the Indian Ocean as part of the war in Afghanistan. This was the issue that forced Shinzo Abe to resign. The opposition Democratic Party of Japan (DJP) controls the upper house of the Diet and blocked passage of the extension legislation. The head of the Democratic Party of Japan, Ichiro Ozawa, has promised to end LDP control of Japanese politics. Except for one brief period in the mid 1990s the LDP has ruled Japan since its formation in 1955.

It is in domestic and economic policy the Mr. Fukuda will face his greatest challenges. Under the stewardship of Shinzo Abe the LDP lost much of the public approval and popularity it had enjoyed with the previous Prime Minister Junichiro Koizumi. If Mr. Fukuda does not improve his and the LDP's standing with the electorate his party could very well lose the next election for the lower house of the Diet. The majority party in the lower house of the Diet elects the Prime Minister. The DJP would like to hold an election for the lower house as soon as possible before Mr. Fukuda can effect any positive change in the LDP's popularity. Mr. Fukuda has said he will not call an election until the spring at the earliest. The LDP simply cannot afford to add a faltering economy to its roster of problems.

National CPI in August fell for the seventh month in a row keeping deflation fears current. GDP in the second quarter declined 1.2%, surprising everyone.  Though Retail Sales rose in August one half of one percent, it was the first gain in three months.  Japanese industry and finance faces serious constraints in the years ahead. Its population is aging and falling, shivering the economic backbone of domestic consumption. Its main competitor across the Sea of Japan will soon be following the Japanese economic model, building high value-added industries and exporting cars and electronics that have long been a Japanese specialty. The Korean auto and steel industries have already accomplished this transformation.

China is not only an economic giant; the Beijing government has been busily creating a military that can project power into the seas surrounding the mainland. The Japanese central government will soon have the twin financial burdens of a growing military and a growing pensioner roll. It cannot meet these obligations with a static or falling GDP.

The Bank of Japan is more deferential to the desires of the Tokyo politicians than any other major central bank is to its own political establishment. The BOJ has tried hard over the past year to keep inflation and future rate hikes in the political mix. Miyako Suda, BOJ board Member said, the "Japanese economy is growing in line with our forecast…risk[ing]…an inflationary rate rise faster than our forecast". The BOJ wants to keep its field of action as wide as possible. But with falling consumer prices, a 2nd quarter GDP decline, the Fed cutting rates and the Europeans perhaps soon to follow, and an unpopular and tired LDP in charge in Tokyo there will be no rate increase this year. In reality, Japan may be in for a prolonged stay at the 50 basis point mark.

United Kingdom

The Bank of England September policy statement and the minutes of that meeting suggest that the members of the Monetary Policy Committee (MPC) felt that more time was needed before they reached a conclusion about the impact of the credit market problems on the real economy and inflation. The subsequent Northern Rock rescue by the BOE, which has ballooned to over eight billion Pounds, may have concentrated minds on the MPC as to the real economic risks ahead. Andrew Sentence, an external member of the MPC and normally considered a rate hawk, hinted at such a recognition. "Global forces can…inject volatility into the real economy…recent changes in global financial market conditions could weaken demand conditions". This is logic that would play very well on Capitol Hill in Washington. As with the Euro, any change in rate policy by the BOE is not priced into the value of Sterling.

Economic Releases September 24 – September 28

United States

Tuesday: the Case Shiller Home Price Index for July fell to 215.94, 0.6% lower than June and the steepest decline in 16 years. The index is now 4.5% lower than last year. The Conference Board Consumer Confidence Index sank to 99.8 in September, well below the median forecast of 104.0 and below the August reading of 105.00. Existing Home Sales in August slid to their lowest level in five years at 5.5 million units, a 4.5% monthly drop. It was the second largest fall in over a year; the biggest fall was the 7.93% drop from February to March this year. The market supply of unsold homes at current prices rose to 10.0 months from 9.5 months in July.

Wednesday: Durable Goods Orders declined 4.9% in August; a drop of 3.1% had been anticipated. The July statistic was revised up to +6.1% from +5.9%.

Thursday: In August New Home Sales sank to 795,000 units, an 8.3% fall in one month and well under the 835,000 units that had been expected. The July return was adjusted down to 867,000 from 870,000. The unsold market supply climbed to 8.2 months from 7.5 in July. The median sale price fell 8.3% to $225,700, off 7.5% on the elapsed year. In its third and final release second quarter GDP lost 0.2% to 3.8%; the initial or 'advanced' release was 3.4%; the second or 'preliminary' was 4.0%. Weekly Jobless Claims for the week ending September 22nd fell by 15,000 to 298,000; a rise of 9,000 to 320,000 had been forecast. It was the second week in a row that claims dropped rather than rising as anticipated.

Friday: Personal Income rose 0.3% in August as expected but Personal Consumption Expenditures (PCE) outstripped predictions climbing 0.6%, +0.4 had been forecast. It was the best performance for this gauge of consumer spending since July 2005. Core PCE Prices moved ahead 0.1% in August as expected, dropping the year on year increase to 1.8%. It was the lowest yearly rate since February of 2004 and below the preferred Fed target of 2.0%. The September Chicago Purchasers Index surprised at 54.2, bettering both the median prediction of 52.9 and the August result of 53.9. 'New Orders' fell to 56.2 from 58.4 in August and 'Prices Paid' diminished to 59.0 from 71.8. Construction Spending in August was substantially better than expected at +0.2% on a predicted decline of 0.5%. Non-residential construction moved up 2.3% but was partially negated by the 1.5% drop in residential building. The August result was revised higher to -0.4% from -0.5%. The final return of the University of Michigan Consumer Confidence for September dropped four tenths to 83.4; the preliminary issue had been 83.8.

Eurozone

Monday: Industrial New Orders for July dropped 4.0% from June, greater than the predicted 3.0% decrease. The June result was revised up 0.1% to +4.5%. Orders for July 2007 were 10.9% ahead of the prior year, this was a better result than the +10.2% predicted. The June year on year figure was adjusted 0.2% higher to 14.0%.

Thursday: the European Monetary Union Money Supply (M3) rose 11.6% in August as expected, a slight but welcome decrease from July's 11.7% reading. The three months moving average was +11.4% as predicted; in July it had been +11.1%. The August 11.6% increase in M3 was the first decline in the rate of increase in four months.

Friday: the European Commission Economic Sentiment Indicator for September came in at 107.1 well below the expectation of 109.0. The August result was revised lower to 109.9 from 110.0. It was the sharpest one month fall since October 2001 and the lowest reading of the past year. Even so it remains well above the long term average of 100.0 The Business Climate Indicator for September was 1.09 a precipitous drop from the August reading of 1.37, which was itself a revision from 1.41. It is the lowest reading since May of 2006. Consumer Confidence dropped to -5 in September from -4 in August but it is still well above the long term mean of -11.0. The 'flash' Harmonized Index of Consumer Prices (HICP) result for September arrived at +2.1% as expected, much higher than the 1.7% rate in August. It is the first time in a year that the headline HICP number has topped the 2.0% ECB target.

Germany

Tuesday: the IFO Survey of Financial Experts one of the most followed German business indicators fell across all categories in September: 'Business Sentiment was 104.2 on expectation of 105 and July's reading of 105.8; 'Current Assessment' was 109.9 on expectations of 111.0 and the August issue of 111.5; 'Business Expectations' were 98.7, on a prediction of 99.6 and an August result of 100.4. GfK Consumer Confidence fell in October to 6.8, well under the median prediction of 7.1. The September statistic was revised lower to 7.4 from 7.6. It was the 2nd monthly drop in a row.

Thursday: the 'flash' or first issue of the September (HICP) showed a 0.2% gain for the month and a 2.7% year over year rate. Both results were higher than the median forecasts, for a flat month and a 2.5% increase for the year. The Consumer Price Index also beat expectations in September coming in at +0.2% for the month and +2.5% yearly; 0.0% and +2.3% had been anticipated. This was the first national CPI number over 2.0% since July 2006 when it registered +2.1% and the highest since September 2005 when it was also 2.5%.

Friday: Retail Sales in August fell 1.4%, an unusually large distance from the predicted rise of 0.3%. The drop was greater than all polled forecasts. It was the largest fall in consumer purchases since the 3.2% drop this past May. The July result was also adjusted lower to +0.6% from +0.7%. The year on year rate for Retail Sales was 2.2% less than the previous August, shrinkage of 1.6% had been expected; the decrease from last July to this July was 1.9%.

United Kingdom

Tuesday: Total Business Investment in the second quarter was revised down to +0.4% from +0.8%, and the yearly figure was adjusted up to +7.8% from +7.4%. Manufacturing investment fell 6.0% in the quarter, leaving it 1.3% higher for the elapsed year. Investment in the services sector climbed 0.8% in the quarter and 7.9% yearly.

Thursday: the Nationwide House Price Survey rose 0.7% in September over August, a 9.0% yearly rate. In August the increases were +0.7% monthly and +9.6% yearly.

Japan

Friday: Retail Sales gained 0.5% in August, it was the first rise in three months; in July they had fallen 2.3%. Industrial Production gained 3.4% in August a major improvement on July's 0.4% contraction. The unemployment rate rose 0.2% to 3.8% as expected and left behind the 3.6% rate which had been the lowest since 1998. Core National CPI fell for the seventh month in a row, dropping 0.1%, deflation fears are uncomfortably alive. Household spending rose 1.6% year on year; in July it sank 0.1%.

The Week Ahead October 1 – October 5

United States

Monday: ISM Manufacturing Index for September at 10:00 ET; expected 52.9, August 52.9.

Tuesday: NAR Pending Home Sales for August at 10:00 ET; July 89.9.

Wednesday: ADP National Employment Report for September at 8:15 ET; August +38,000. ISM Non Manufacturing Index for September at 10:00 ET; expected 54.5, August 55.8.

Thursday: Jobless Claims for the week ending September 29 at 8:30 am ET; expected +12,000 to 310,000, prior week -15,000 to 298,000. Factory Orders for August at 10:00 ET; July +3.7%.

Friday: Non Farm Payrolls for September at 8:30 ET; expected +115,000, August -4,000. Unemployment Rate for September at 8:30 ET; expected 4.7%, August 4.7%.

Eurozone

Monday: Manufacturing Purchasing Managers Index (PMI) for September at 8:00 GMT: August 54.3.

Tuesday: EMU Unemployment for August at 9:00 GMT; expected 6.9%, July 6.9%. Industrial PPI for August at 9:00 GMT; expected +0.1% m/m, +1.8% y/y, July +0.3% m/m, +1.8% y/y.

Wednesday: Services PMI for September at 9:00 GMT; August 58.0. Retail Trade for August at 9:00 GMT; expected +0.4% m/m, +0.5% y/y, July +0.1% m/m, +0.5% y/y.

Thursday: ECB rate announcement and press conference.

Germany

No important statistical releases

United Kingdom

Monday: CIPS Manufacturing PMI for September at 9:30 GMT; expected 55.7, August 56.3.

Wednesday: Nationwide Consumer Confidence for September at 23:01 GMT; August 94. CIPS Services PMI for September at 9:30 GMT; expected 56.8, August 57.6.

Thursday: BOE rate announcement at 12:00 GMT.

China

No statistical releases

Japan

No statistical releases

Joseph Trevisani
FX Solutions
Chief Market Analyst

To lose $1200.00 or make $225.00, that is the stop loss dilemma.

The other evening I mentioned that I took the usd/nzd on a rather "blahhh" Monday evening. Last night I finally took a profit of 21 pips plus the swap after being down $1200.00 at one point. I could have made more if I was not in bed when the pair jumped back into profit.

So there are 2 issues here. How the Forecasts work, and when to place stop losses.

The Forecasts hit the vast majority of times within the first 24 hours. However, on the days that they don't hit, they have a remarkable track record of hitting within 24 -72 hours. It is during those times that you must be patient and determine whether a catastrophic event is happening. That is not to say you won't hold onto a position longer. (I have a gbp/jpy position open since September 8)

I explained the use of my daily chart set-up yesterday, and I used this set-up in conjunction with the forecast to monitor the situation. If the "magic" lines (rsi/ma) had started to go strong parallel against me, and the forecast looked bleak I might have changed my conviction. But I felt fairly comfortable that I did not have to hit the panic button. I had plenty of money in the account, only 1 trade and plenty of room to stick to my guns.

Now the stop loss. Had I put a stop in, I would have lost $1200.00 the first night, no ifs, ands, buts or maybes! Was it worth risking $1,200 to make $225.00. To be honest, that could be debated and i would probably lose. But I am a firm believer that the risk reward ratio in the Forex is unlike any other market. And fear of the loss, along with over trading and insufficient capital is the achilles heal of the new trader.

In the past, I have made 2 grave errors with stops.

In riding trades into deep profit you would think," How can I lose?". Inevitably you see your account spike up to a desired level, quickly retrace, and in your mind you feel if you sell now, you have lost that extra profit. Before you know it, you can be wiped out and then some.

Thus, I now swear by the trailing stop. Once I am into profit, I let my stop move from my original profit level and push further into profit. I let the stop trail by 15 -25 pips depending on the currency pair, and if it backs up on me, so be it. I take the profit at that point and run.

The other error I used to make is the panic stop. Jumping into a trade, putting a stop on in case it backs up on me right away, and then losing 10, 20, 30 pips. This practice will slowly bleed the life out of you.

Was I lucky the other day with the nzd/usd? I would take the position that luck is the residue of hard work. And this Forex stuff is hard work!

Have a great weekend. We survived another month. I think October should break us out of this choppy market. Until then trade with a tight profit margin in place, and don't be afraid if your trade does not hit in the first 5 minutes. This is a game of mental endurance.

to view account:

http://stockandforexcenter.com/images/nzd_usd_results.jpg

I have the opportunity to correspond with many of you. A common attribute I see is this feeling of being overwhelmed with the amount of information that is out there, and how to apply this information to your trading.

Once you achieve a certain level of knowledge, you will soon trust your instincts and make trades based on education and not "gut". Not that "gut" or instinct is bad, but sometimes it can force you into bad trades, keep you in those trades longer, and prevent you from winning.

The Forecasts are a tool that are designed to aid you in your trading strategy. If you have followed the blog I have demonstrated many ways to trade the Forecasts. I want to add another level to your trading decisions by showing you how to use my Daily Chart set-up to get a "visual" of your options, and eliminate this overwhelming feeling you may have when you trade.

I use these charts every time I read the forecasts and make a trading decision. Although the forecast are designed to guide you into trades without charts, graphs etc, why not use a tool that can give you a great visual of what is going on with your pair.

You don't need to know anything to read these charts except have the ability to see lines crossing. Crossings indicate change and indecision, and when the lines are moving parallel to each other that is when the cash register is clanging.

So before your trade, check the chart to get a visual, and you might see something that prevents a loss. Below are simple instructions for setting up a chart to work in concert with the forecasts.

To manually set up these charts in your chart program of choice, do the following:

1. Set up a daily Chart with Candle Sticks
2. Attach an RSI to the chart with the following Parameters
   period =8
   apply to close
   fixed min - 0
   fixed max 100
   levels 30 and 70
3. Attach a Moving Average Exponential
   period = 8
   apply to First Indicators Data

You will notice on these charts at the bottom there is a relative strength index and a moving average. Every evening after you have made your pick, check the chart and take notice of the relationship between these two lines. If they are about to cross, this indicates a trend change. If they are moving apart the trend is intact.

As these are daily charts use the next day candle to confirm the direction of the trend.

So remember, whenever the rsi and ma cross look at the candle to determine the direction of the trend. Click on Picture Below to see a blow up of the chart.

Last night pretty much went the way I thought it would..I did not trust the gbp/usd and I was proven right. I decided to take the nzd/usd and it put me in the hole for over 100 pips. I have told many of you that I don't like stops except to stop catastrophic events, so at that point I put my psychological stop into place (will explain in a moment). As I am writing this I am now only in the hole 20 pips. I will now wait to see what the forecast brings and decide whether or not to bail.

So what is this psychological stop I am referring to. For me, it is what level of pain I am prepared to endure. I have my own philosophy on risk reward. If you have followed along this blog, you will know that it does not follow conventional wisdom. Forex conspiracy theorists are convinced that brokers stack the playing field against you. They surmise that during major news events they widen the spread, delay your order etc. They surmise that they are slow to update the ticker. (I have actually had a difference of nearly 20 pips between 2 brokers at the same time during a news event). They surmise that they hunt stops. How often have you had a stop spiked out only to see a dead trade quickly move back to profit?

So who am I to buck these theorists. I decided to understand the rules of engagement. I try not to trade during news events, and I refuse to tip my hand with a stop. Now I am not advocating flying by the seat of your pants, that would be just stupid trading and a recipe for disaster. But what I do is avoid the herd. The herd contributes to a self fulfilled prophecy. The herd place their stops all clustered around the same targets, be it Fibonacci levels, trend lines, double zeros etc. what a perfect place to hunt for stops.

So how do you protect yourself. Well, even before we talk stops we must start at the beginning. First of all, don't trade with money you can not afford to lose. Do not beg, borrow, steal, credit card, credit line money, money manage friends etc. If you have to play with demo money for a year and give up Starbucks everyday to save your seed money , then do it. Treat demo money like real money (very tough to do) and learn your trade and hone your strategy.

Next I divide my money by 10 losing trades. I have such confidence in the forecasts, that I feel, with a disciplined strategy I will take some losses, but over a level of time (1 month, 3 months, 6 months, 1 year) I will come out ahead.

I enter trades using anywhere from 3 to 8 % and try not to over trade. I do not use the same account for different trading strategies. For instance, I use the Forecasts primarily for day trading (although I will hold on to a trade if it has not broken my psychological stop). And will not enter another trade in that account until there is some resolution.

I would use a separate account for different strategies. If I feel there is an opportunity for a long term trend trade, I will use the range of the Forecasts and move my psychological stop accordingly. (I like to take interest paying directions for long term trades so I am getting daily interest while building equity).

And I try and be a positive thinker when I am trading. (sounds silly!) I am a golfer for instance. And if I am playing a course that I have never played before I hate when my playing partners identify all the trouble for me before I shoot. All I care about is where I want to be. If they tell me where the trouble is I will find it. Its the old "...Tree? what tree?" as your ball is sitting at the trunk! I feel the same way about improperly placed stops. I really feel if you place a stop, it will get hit.

So if you made it this far you are wondering what is this "Psychological Stop". Well, I enter each trade with a set goal in mind of how much I am going to profit, and what level of pain I am prepared to take if things go south. Trouble lurking is a given, and when I place my stops it is outside the normal day range of that given pair. Yen pairs are much wider ranges than the swissy for instance. And I am only using stops for insurance to prevent getting rolled over by an unforeseen event. If I should lose, then I stand back and wait until the next day forecast, and make a very tight trade for profit (15 - 20 pips) to get that winning feeling again.

Using this strategy, it has been quite a while since I strung a series of losers together.

Market Directions Sunday, September 23, 2007

The Week in Review September 17 - September 21

• The Fed, the Fed, the Fed and the 0.5% cut
• The ECB pulls its rate punches
• The worldwide rate reduction cycle begins?

United States

It would be hard to overstate the effect that the Federal Reserve decision to cut the base American interest rate, the Fed Funds, had on market perceptions this week. The Fed move instantly shifted the economic focus from inflation to growth and from confidence to concern. No central bank in the industrial world can afford to discount Fed policy and by the end of the week recognition of that fact was heard in statements from the European Central Bank (EC and the Bank of England (BOE). In the aftermath of the Fed the Dollar reached a new low against the Euro, surpassing even the nadir of its trading against the old German Deutsche Mark and the Yen crosses returned to popularity. The speculative Dollar Index also sank to a record level.

In his appearance before Congress on Thursday, Ben Bernanke offered no elaboration on the terse policy statement issued by the Fed on Tuesday accompanying the rate announcement. He did, however, warn Congress against the 'moral hazard' of legislating a bail out for parties in the sub-prime debacle. That warning must hold as well for Fed policy. Inflation readings have helped give the Fed the leeway to cut rates, though it is likely Mr. Bernanke would have cut at least 0.25% even if inflation was considerably higher. But commodity prices are rising and gold traded at a 27 year high during the week.

By surprising the markets with a large reduction Mr. Bernanke has purchased time for the financial system to return to normal. The next Fed policy meeting is not until October 31st and by then many of the unknowns in the asset backed market should have been vetted and refunded. Inflation has not vanished from the American or the world economy. The US economy is growing as is the EMU, and the financial picture may well look very different in six weeks. The Fed has not changed its opinion that the financial turmoil of the last weeks is not an economic collapse, it has simply given the market time to discover that fact for itself.

Eurozone

The European Central Bank began the post Fed week on Wednesday with brave words about inflation and price stability. Klaus Liebscher, head of the Austrian National Bank and governing council member, said that the ECB "must do what is necessary "to preserve price stability. He implied that the Federal Reserve rate cut did not prevent the ECB from hiking again.

The next ECB policy meeting is October 4th in Vienna. By then the board members will have the August money supply and credit supply figures. Noting that worldwide energy and commodity prices have risen sharply, Mr. Liebscher said "I would not be surprised if in the next few months we see higher inflation rates than we have seen in the past". He was repeating the standard ECB analysis on inflation. It is not necessarily wrong, even though the HICP inflation rate in the EMU zone has now been at or below the 2.0% target for 12 straight months. During the same period the money supply figures have been between 9% and 11%, well beyond the ostensible ECB target of 8.0%. His view on the market turbulence of the past six weeks echoes the original reaction of Ben Bernanke, the Federal Reserve Chairman. The financial market problems are for the banks themselves to settle. "I don't see now that you can solve the problem if the banks and the financial intermediaries do not react immediately…we can only give advice to the industry". Mr. Liebscher also predicted that the market turmoil" will continue for a certain period of time", and that "surprises should not be excluded". That was on Wednesday, one day after the Fed surprise.

On Thursday French President Nicholas Sarkozy called for the ECB to lower rates. "When the US central bank lowers its rates, everything picks up; when we don't lower rates we go down. I'm telling Mr. Trichet look what others are doing". This is not a new position for the French President. He made the same criticism during the election campaign and his ministers have voiced similar sentiments since they came to power.

On Friday, Lorenzo Smaghi, ECB Executive Board member, spoke in approving tones of the long time United States "strong Dollar policy'. He characheterized the oft repeated US Treasury official mantra not as an attempt to manipulate the exchange rate but as a recognition of a basic economic fact, that a strong American currency is good for the United States and the US economy. Among other uses of a strong currency is the check it provides on domestic inflation.

And lastly, also on Friday, Jean Claude Trichet the ECB President said that the bank has been successful in "very solidly" anchoring price stability in the EMU. If inflationary expectations are 'anchored', then why does the bank need to continue to raise rates? This question will be asked across Europe and in all public forums as the next ECB meeting approaches. If the Euro is "a currency that inspires confidence" surely it no longer requires the support of an aggressive monetary policy.

European economic growth appears to have peaked in the 4th quarter of last year. The EMU Purchasing Managers Index (PMI) for September fell in all categories. The manufacturing index slid to 53.2, much less than the median forecast of 53.9 and more than a full point below the August figure of 54.3. The services sector scored only 54.0, well behind the 57.5 prediction and the August return of 58.0. It was the lowest result for the services measure in two years and the largest monthly drop in the history of the series which began in 1998.

If the Fed and then the Bank of England are cutting rates, if EMU economic growth is slowing and inflation is under control and if EMU exports are suffering from the pains of an expensive currency, can the ECB remain stationary for long? The real question is when will the currency markets begin pricing the almost inevitable ECB rate cut?

Japan

The Bank of Japan (BOJ) declined to raise the overnight call rate beyond its current 0.5%. The vote was 8 to 1. Board member Atsushi Mizuno voted against leaving rates unchanged as he had at the previous two policy meetings. The BOJ last increased its base rate in February when it hiked 0.25%. The bank launched its "flexible and gradual" series of rate hikes in July 2006, when it boosted rates for the first time in six years. BOJ Governor Toshihiko Fukui has made public his desire to 'normalize' the Japanese rate structure but he has been thwarted by political opposition from the ruling Liberal Democratic Party (LDP). The BOJ is worried that low interest rates could encourage artificial additions to Japan's manufacturing capacity which would add to the potential for price deflation. Governor Fukui has also stated that inflation expectations are "the biggest enemy" for a central bank. However, inflation in Japan is very tame. The July national core CPI was actually 0.1% lower than a year earlier and down for the sixth month in a row. Second quarter GDP was revised lower to -1.2% from the initial +0.5% reading. Industrial Output and Household spending were both negative in July as well, though the Japanese government has said that they expect a substantial rise in output in August. Despite BOJ intentions and inflation concerns the chance for further rate increases this cycle is vanishing.

The LDP will choose it new leader on Sunday to replace Shinzo Abe, the former prime minister who resigned earlier this month. In Japans' parliamentary system the leader of the party with control of the lower house of the Diet, the legislature automatically becomes Prime Minister. The two leading candidates are former chief cabinet secretary Yasuo Fukuda and the LDP's current secretary-general, Taro Aso. Fukuda is ahead in opinion polls and among LDP members. Both are long time LDP politicians and will offer few new ideas or initiatives. The Japanese public is already tired of the economic reforms of Junichiro Koizumi and concerned about the widening rift between the wealthy and the rest of the populace.

Economic Releases September 17 – September 21

United States

Tuesday: the Producer Price Index (PPI) for August was much lower than forecasts at -1.4%, with the core reading as predicted at +0.2%. The year on year rate for both measures is now 2.2%. Falling energy prices in the month lowered the overall number without affecting the core result. The National Association of Home Builders Housing Market Index fell to 20 in September down two from August, its seventh monthly fall in a row since it scored 39 in February of this year. The September reading equaled the record low from January 1991; the series has been kept since 1985. Net Long Term Securities transactions as reported by the Treasury International Capital system of the Treasury Department listed a very modest inflow of $19.2 billion in July. A total of $24.7 billion were purchased by overseas buyers, $20.3 billion from private sources and $4.4 billon by official sources. American bought $5.5 billion of foreign securities.

Tuesday: the Producer Price Index (PPI) for August was much lower than forecasts at -1.4%, with the core reading as predicted at +0.2%. The year on year rate for both measures is now 2.2%. Falling energy prices in the month lowered the overall number without affecting the core result. The National Association of Home Builders Housing Market Index fell to 20 in September down two from August, its seventh monthly fall in a row since it scored 39 in February of this year. The September reading equaled the record low from January 1991; the series has been kept since 1985. Net Long Term Securities transactions as reported by the Treasury International Capital system of the Treasury Department listed a very modest inflow of $19.2 billion in July. A total of $24.7 billion were purchased by overseas buyers, $20.3 billion from private sources and $4.4 billon by official sources. American bought $5.5 billion of foreign securities.

Wednesday: the Consumer Price Index (CPI) fell slightly in August 0.1%, bringing the year on year rate to 2.0%.; a flat number had been predicted. The core rate rose 0.2%, a year early rate of 2.1%. The core annualized rate for July and August based on the unrounded monthly results is now 2.32%, the three month rate is 2.48%. Energy prices fell 3.2% in the month, mostly on gasoline and natural gas price declines which made the overall rate less than the core. But with crude oil at more than $80 a barrel and commodity prices rising, the string of lower core results going back to January are probably at an end. Housing Starts in August shrank 2.6% from July to 1.331 million units, a twelve year low. The July figure was adjusted down to 1.367 million from 1.381 million. Single family house starts skidded 7.1%, but multi-family starts jumped 12.8%. Building Permits plunged 5.9% to 1.307 million with single family permits falling 8.1% to their lowest level since June 1995.

Eurozone

Thursday: European Monetary Union (EMU) construction Output in July was flat, the elapsed yearly rate was at +1.7%. The June number was revised down to +0.5% from +0.6%, the yearly to +2.6% from +2.7%.

Germany

Tuesday: the ZEW Survey of financial experts for September's 'economic expectations' dropped for the fourth month in a row coming in at -18.1 below the expected16.0. The August reading was -6.9. The 'current conditions' number was short of the median prediction of 75.0, reaching only 74.0. August had registered 80.2. It is the third monthly drop in succession. "The second considerable decline of business expectations since the beginning of the sub-prime crisis makes clear that the financial experts do not rule out the possibility that the crisis could spill over to the German economy", the ZEW statement said.

United Kingdom

Tuesday: the Consumer Price Index (CPI) for August was up 0.4% and elevated by 1.8% for the year, the same as the monthly estimate and very close to the prediction for the yearly number of +1.6%. July's results were was -0.6% and +1.9%.

Thursday: Retail Sales in August performed better than expected rising 0.6% for the month, 4.9% better than a year ago. A flat monthly had been the median prediction with +4.0% for the year. In July sales rose 0.7% and 4.4% on the year. Confederation of British Industry (CBI) monthly Industrial Trends Survey reported a 0.6% gain in 'total orders' for September; in August it rose 0.9%.

The Week Ahead September 24 – September 28

United States

Tuesday: Case-Shiller Home Price Index for July at 9:00 ET; June 217.07. Conference board Consumer Confidence for September at 10:00 ET; August 105.0. National Association of Realtors (NAR) Existing Home Sales for August at 10:00 ET; July 5.75 million.

Wednesday: Durable Goods Orders for August at 8:30 ET; July +5.9%, 'excluding defense' +4.9%, 'excluding transport' +3.7%.

Thursday: final GDP for the second quarter at 8:30 ET; preliminary +4.0%. New Home Sales for August at 10:00 ET; July 870,000.

Friday: Personal Income for August at 8:30 ET; July +0.5%. Personal Expenditures for August at 8:30 ET; +0.4%. Chicago Purchasers Index for September at 9:45 ET; August 53.8. Final University of Michigan Consumer Sentiment for September at 10:00 ET; preliminary 83.8. Construction Spending for August at 10:00 ET; July -0.4%.

Eurozone

Monday: Industrial New Orders for July at 9:00 GMT; June +4.4% m/m, +13.8% y/y.

Thursday: Money Supply (M3) for August at 8:00 GMT; July +11.7% y/y, +11.1% three month moving average y/y.

Friday: Initial 'Flash' Harmonized Index of Consumer Prices (HICP) for September at 9:00 GMT; August +1.8% y/y. EMU Economic Sentiment Index for September at 9:00 GMT; August 'Economic Sentiment' +110.0, 'Industry Confidence' +5, 'Consumer Confidence' -3, 'Business Climate Indicator' 1.41.

Germany

Tuesday: IFO Survey for September at 8:00 GMT; August 'Business Sentiment' 105.8, 'Current Assessment' 111.5, 'Business Expectations' 100.4.
Wednesday: GfK consumer Confidence for October at 6:00 GMT; September 7.6.

Thursday: Unemployment Rate for September at 7:55 GMT; August 9.0%. Preliminary CPI for September-release time unannounced; August -0.1% m/m, +1.9% y/y. Preliminary HICP for September-release time unannounced; August -0.1% m/m, +2.0% y/y.

Friday: Import Prices for July at 6:00 GMT; June +0.3% m/m, +0.4% y/y. Export Prices for July at 6:00 GMT; June 0.0% m/m, +1.6% y/y.

United Kingdom

Monday-Friday (date unannounced) Nationwide House Prices for September at 6:00 GMT; august +0.6% m/m, +9.6% y/y.

Wednesday: second quarter GDP 3rd release at 8:30 GMT; prior +0.8% q/q, +3.0% y/y.

Thursday: CBI distributive Trades survey for September at 10:00 GMT; August 17.

Friday: GfK Consumer Confidence for September at 9:30 GMT; August -4. Land Registry House Prices for August at 10:00 GMT; July +0.1% m/m, +8.8% y/y.

China

No significant releases

Japan

Monday: markets closed for Autumnal Equinox holiday.

Friday: National core CPI for August at 23:30 GMT (August 27); July -0.1% y/y. Central Tokyo CPI for September at 23:30 GMT (August 27); July 0.0% y/y. Unemployment Rate for August at 23:30 GMT (August 27); July 3.6%. Household Spending for August at 23:30 GMT (August 27); July -0.1%. Industrial Output for August at 23:30 GMT (August 27); July -0.4% m/m. Retail Sales for August at 23:30 GMT (August 27); July -2.2% y/y.

Joseph Trevisani
FX Solutions
Chief Market Analys

I am trading like the other shoe is about to drop. Right now, the markets are event driven. It is at these times that you have to stay on your toes and really pick your trades wisely. Just when you think everything is going along fine ...BAMMM, the you know what can hit the fan.

We will be heading into a whole flurry of economic data which will add to the mix. And these are the times when the forecasts can really shine. (although I must say, during these choppy trading days we have done pretty good.)

My strategy these days is to be mercenary and surgical. Get in and get out. Err on the side of the strong strength indicator.

Investors have a very short memory. There are those that believe the events that happened in August are over. Yet from what I gather, they could very well be the beginning of something far more painful.

I was reading an interesting article on hedge funds. It was saying that possibly 4,000 of America's 9,000 or so hedge funds could eventually go under. We should see what pans out after Sept 30 which is a key redemption date for money held in hedge funds.

In a previous post I mentioned that I use the gbp/jpy as a canary in a coal mine for me. If you look at the daily charts, since August it has been in a sideways pattern. That sucker normally is either screaming up or screaming down, and it is taking its cues from the equity markets now. Draw a line along the lowest low, and along the highest high since the beginning of this pattern, and until one of those lines break, the directions of the markets will remain anyone's guess.

As I mentioned before, our jobs as 4XMen is to preserve and cautiously build capital during these unsure times and be ready to pile on when a definitive direction is established.

Chip away, build your accounts, be safe and patient, and become intimate with your chosen currency pairs. Don't trade them all except to experiment. Be able to quote your pair on any given day and have a point of reference at least 6 months back to know what the lowest low and highest high was for that pair. And watch the strength indicator. Is it weakening staying the same etc. We are still in choppy trading seas.

Its tough to really get a read on what is going on...(Thus, trust the forecasts.) I always struggle giving my opinion or thoughts as I don't want to influence your trading decision. However many of you have given me the honour of guiding you through this journey and I really do appreciate the opportunity to help anyone who needs it. No hidden agenda here. Just my belief that if we are all sucessfull then life is good. What other venture can you throw away any competetive politics.

So, if you have made it this far, this is what I am thinking. The Canadian dollar (our friend the loonie), BTW I am Canadian (hope that does not bother anyone!) actually hit parity with the US dollar today. The Euro is trading above 1.4071 as we speak. Yet my canary in the cage (GBP/JPY) is stuck in a sideways trough. And I am really wondering why. I really feel that it should be down around 220.00, but the usd/jpy and gbp/usd are hanging on by the skin of their teeth.

This is what's obvious..the US is taking a kicking right now. Back in the late winter early spring the US could do no wrong, even with negative news coming out. Yet this time around , every opportunity to kick while they are down is happenning. The Saudis , who [peg their currency to the US) have basically said "hey, we are not going to lower interest rates" and are thinking of other ways to peg the currency.

So maybe we are in one of the "once in a lifetime" maybe twice, situations where we are in for a new world order. Something is telling me, (and I have subscribers from all corners of the earth) that a change is in the air. And what better place to be than in a "non-traditional" market place like the Forex. We can position ourselves to benefit from any thing the world has to throw at us.

So keep your senses active and lets make the best of this opportunity that lays at our feet. Feel free to let fellow subscriber know through the blog what the sentiment is in their country. For instance, in some forums that I visit they were pooh pooohing the Canadian dollar ever being at par with the US. However , as I live here, I know that we have a booming economy, are the leading provider of oil to the US , have a strong Real Estate Market, and low unemployment. If they only new!

So those are my thoughts for now. We are having a great run with the Forecasts. Don't get greedy and trade safe.

Take Care and Enjoy the Weekend