World Currency Watch: FOREX Market, FOREX Trading BLOG

FX Trader’s Tip: Keep an Eye on the Stock Market

Even though you’re trading currencies, it helps to keep an eye on the stock markets. In fact, just by watching the stock markets, you can gain an additional edge in the currency markets. 

First, if you’re a short-term trader (you trade several times a week or even a day), look to see how the overnight markets performed in both Europe and Asia. Also, check the financial news (Wall Street Journal, Bloomberg etc) to see how stock futures are doing. For example, are they predicting stock futures will be higher or lower opening for stocks?

Let's say the overnight markets performed well. The financial press predicts that U.S. stock futures will be a higher opening and stock earnings are supposed to  "beating expectations." In that situation, you can earn some nice short-term gains by buying the euro against the Japanese yen (EUR/JPY) because this currency pair is so highly correlated to the Dow and the Nikkei.

The opposite is also true. Say stocks overseas performed poorly last night. You see that many stocks are missing earnings that morning before the open. If stock futures are positioning for a lower open on Wall Street, then look to sell short the euro vs. the Japanese yen EUR/JPY right before the stock exchanges open.

This is just one of many tips that can give you what we call the “trader’s edge.” We’ll be back here periodically to give you some tricks for successfully navigating this US$3.2 TRILLION foreign-exchange market that most mainstream investors never touch. 

Two of the Most Influential Central Banks Say: "Leave Well Enough Alone!"

What Happened:

Today, the European Central Bank (ECB) and the Bank of England (BOE) announced that they’re leaving well enough alone. The two major leaders of European finance have decided to leave their rates unchanged – at 4% and 5%.

What We Say:

These decisions didn’t really surprise anyone. Everyone and their brother in the currency markets expected the ECB to hold rates steady today. That’s because the ECB’s Jean-Claude Trichet has chattered almost non-stop about how they’re fighting inflation, at the expense of the slowing economy.

And the BOE has had good fortune in the past when they follow their little brother euro’s lead. So the BOE also decided to hold rates steady. Also, according to The Wall Street Journal, the BOE is still trying to balance the pressure of rising costs and economic growth.

So the euro and pound continue to enjoy a nice interest rate differential to the dollar, but at what cost in slower growth for the Eurozone? This points to a stronger U.S. dollar in the short run. The euro is getting battered for their stubborn stance. And the pound has already taken a beating. These days the dollar tends to react in the exact opposite direction of the euro, so a weak euro is some good news for the dollar.

However, as Chuck Butler said above, the long-term fundamentals for the dollar are less than appealing. So if you see the dollar rising in the next couple weeks, don’t sweat it. It’s just a small blip on the dollar radar screen. Nothing more.

(To find out more about how you can get involved in the the eternal bull market of currencies, click here.)

Your Easy Two-Step Plan to Start Trading FX This Week

Interested in trading currencies on the US$3.2 TRILLION foreign-exchange market? 

The first thing you need to do is set up and fund a Forex or futures trading account. You must first decide between two options:

Use a full-service broker that can set-up your account, give you specific advice concerning your account and offer as much assistance as you may need with our recommendations …

Or, you can sign-up with a retail Forex or futures broker to establish an online trading account.

This decision is entirely up to you and should depend on your experience trading in these markets. If you don't already have a broker that can efficiently execute Forex or futures trades, you may want to contact one of the brokers we have listed here. Most futures brokers will allow you to trade currency options on the CME.

Once you have your broker and you’ve funded your account, you’re ready to start trading.

The Yen is At the Mercy of the Carry-Trade…For Now

From Our Friends at EverBank…

The FOMC wasn't the only central bank meeting yesterday, the Bank of Japan announced they would leave rates unchanged. This was again largely expected by the markets, but some of the accompanying language showed their concern with inflation.

The BOJ predicted inflation would accelerate but also cut its economic growth forecast. The report tried to downplay any predictions of interest rate moves, and the markets seem to think the BOJ will leave rates unchanged through the end of the year.

The yen didn’t really react to the news, as markets had already predicted the outcome.

The Japanese yen will continue to be at the mercy of the carry trade for now. As you know, carry trades only work in low-risk markets. Once risk returns to the markets, traders have to reverse their carry trades and money rushes back to the Japanese yen. When that happens, the yen rallies.

But right now, risk is coming back in style in the markets. Traders are placing more carry trades, so the yen has been sold.

But we believe there will be another Bear Stearns-type event which will remind the markets that everything is not ok right now. When that happens, these carry trades will again be reversed and the current 104 levels on the yen will look cheap.

Click here for more on why Bernanke may actually help this process along this year.

Little Refresher: What’s a Pip?

Today is a particularly quiet day in the markets – traders and investors the globe over are waiting anxiously for the Fed’s decision coming later this afternoon.

So we thought we’d take just a second to review one of the great mysteries of the foreign exchange market – the “pip.”

It is the smallest price change that an exchange rate can make. Since most major currency pairs are priced out to four places past the decimal point, when the last digit to the right moves up or down by one increment, that's a one pip move.

If you were trading the euro vs. the U.S. dollar (EUR/USD) and that exchange rate moves from 1.5540 up to 1.5541, then it increased one pip. If it fell from 1.5541 to 1.5540 then it decreased one pip.

Think of a stock. If a stock increases a penny - and moves from US$50.00 up to US$50.01 - then that stock just made the smallest incremental movement possible.

For the EUR/USD, one pip is the smallest incremental move possible. So it moves up one pip by moving from 1.5540 to 1.5541.

The EUR/USD is breaking down just as I thought it would in the near term!

Well, on the last post I shared with you how skeptical I was on that last EUR/USD rally and why. The reason: The USD/CHF didn't correspondingly break below support as EUR/USD broke above resistance.

On top of that, central bankers have been reiterating their thoughts on the latest G-7 meeting which brought out the point that they weren't happy with the recent volatility (interpretation: They don't really want the EUR/USD up here at these lofty levels).

Yesterday we got a bit of a retracement of the EUR/USD but today we got even more of a push lower and without the first stitch of fundamental data being dollar pullish or a euro negative.

Now the question is....will that U.S. Dollar Index double bottom? If so, that really could change the long term trend direction of the EUR/USD.

Anyway...back to the EUR/USD presently...it's broken down on the hourly charts. Check out the chart below. Click on the chart to enlarge it.

The dollar takes the euro "behind the woodshed" today.

The technicals are turning downward quickly on this pair. If these low levels can hold by the close of the today...that would be another bearish sign for the pair.

In the mean time, continue to watch the oil chart...since it and EUR/USD have really tracked each other as "anti-dollar" trades.

Also watch to make sure than USD/CHF continues higher as EUR/USD heads lower. These two will be great "confirming" tools as we watch this unfold.

Because the euro bulls won't give up easily....so there will be rallies upward even if the "highs" start to get lower overall.

With the worst of the U.S. sub-prime/credit crunch/economic slowdown behind us, the buck could get a sustainable break overall for quite a while.

Tons of foreign capital is starting to flow into the U.S. once again (as shown by the TICS flow numbers this past week).

So if foreigners think we're at or near a bottom in stocks...they'll have to buy into dollars before buying stocks, bonds, real estate, etc....since all of our stuff is denominated in dollars.

It's been nice sharing my thoughts with you over these past months.

My buddy Jack Crooks will be taking over for me shortly.

Happy Trading!

Sean Hyman
Currency Analyst
The Sovereign Society

Is the breakout of EUR/USD towards 1.60 genuine?

Let's take a closer look at this recent breakout of the EUR/USD. (Click on the image below to enlarge it.)

The chart on the right shows the EUR/USD's breakout higher towards 1.60. In fact, it got within 20 pips or so from that round figure. So tomorrow, the media will probably go ahead and call it 1.60.

Of course when currency pairs get that close to a major round number, many times they are drawn towards it like a magnet. So it could hit it overnight. But is it sustainable?

The chart on the left shows the USD/CHF which trades inversely to the EUR/USD. When the EUR/USD took out its upward resistance...at some point in the day, typically, the USD/CHF would have taken out its support level. However, as of this writing, that hasn't happened yet.

So watch USD/CHF to see if there will be "follow through" on the EUR/USD. If it can actually break lower, then the rally upward on EUR/USD may actually have some "legs".

If USD/CHF fails to close below its support, then I remain suspect of the EUR/USD rally being genuine.

Also, keep an eye on the oil chart. You can do this by going to www.stockcharts.com and putting in $WTIC as the ticker symbol. So that's the dollar sign plus WTIC.

Why? Because the EUR/USD chart and the oil chart have almost been identical to each other. They've both been running together for quite some time as an "anti-dollar" play. So if oil continues to set record highs tomorrow like it did today, then the EUR/USD rally may have some legs.

Oil has hit a high of $115.21 a barrel as of this writing. So if we see even "higher highs" in oil, we may very well see the same in the EUR/USD. However, if we don't see more "follow through" in oil, then we may see that the EUR/USD rally was a false break or a "fake out" to traders. If so, beware...the pros will try to scare the crap out of you as they take the pair lower.

So keep an eye on USD/CHF and the oil chart to see where EUR/USD's next move may be.

Sean Hyman
Currency Analyst
The Sovereign Society

Make sure you own these two currencies!

Two central banks recently "tipped their hand" and basically told you they were going to ensure their currencies appreciated so that it's rise would help "rein in" inflation.

What are these two currencies that are the surest bets (as sure as investing gets anyway) out there in all of currency land? Drum roll please.......

They are the Singapore dollar and the Chinese yuan. Make sure you own them both. You can actually own them through one product at Everbank: www.everbank.com/sovereignsociety

Check out their Asian CD. It has them both in there, along with the yen and Aussie dollars, etc. So you've got a strong bunch of currencies there.

There's hardly any "steady growing" investments out there right now. Believe me, you want to have something like this as a piece of your portfolio as, what I believe to be, a stabilizing force and the best bet out there of any market and any financial instrument within any market.

These central bankers aren't stupid. They're not tipping their hands to give you and I some money. No, they're doing it for their own selfish interests as they choke out inflation. However, you and I get to reap the benefits as they "fix" their countries.

Sean Hyman
Currency Director
The Sovereign Society

Carry trades get killed due to GE's earnings miss & Goldman's Short Sell recommendation of WAMU!

Wow! What a morning. First, General Electric's (GE) earnings came out before the bell and they MISSED earnings. Man, I don't know of the last time that I heard of GE missing earnings and by so much. The stock dropped almost 5 dollars a share.

Then Goldman Sachs did the "unheard of"....they gave a sell short recommendation to the public. Now in all of my years I've never heard of that one. They recommended selling short Washington Mutual (WM). Wow!

Rarely can you ever get a firm to say "sell" to an existing buy position (long). However, they went a further step and said "short it".

So these two things really sent the stock market plummeting upon the opening.

This "fall" in stocks killed the carry trades too, especially GBP/JPY. It just gave it more reason to continue its downtrend. Check out the daily chart below. Click on it to enlarge it.

The Carry Trades get killed as U.S. stocks sell off!

Remember that we've got the G-7 (Group of 7 largest industrialized countries) meeting today and tomorrow. So they could talk about the dollar or the yuan, etc.

So see what they have to say. Also note the horrible consumer confidence number that came out today. It just keeps getting worse and worse. These readings are now at recessionary levels for sure. The University of Michigan's Consumer Confidence reading came in at 63.2 vs. 69 expected and 69.5 from the previous month.

This "confidence trend" just continues to trend downward very steadily. That's horrible!

Stay tuned...

Sean Hyman
Currency Director
The Sovereign Society

The ECB's and BOE's rate decisions puts more wind to the back of EUR/GBP!

The Eurozone and the U.K. economies continue to diverge.

For years and years, these two economies followed each other up and down in "lock step". Then the credit/sub-prime crisis hit. This pushed the U.K. economy lower as they experienced the same things that America experienced: Hedge fund blow ups, banks struggling, housing prices falling, etc.

On the other hand, many other European banks didn't have as much exposure to "sub-prime" as did the "financial epicenter", the U.K.

So as these economies "de-linked" and continue to diverge, it's produced a heck of an uptrend in the EUR/GBP pair. Click on the chart to enlarge it below.

Houston, we have lift off! The divergence in these two economies is producing a tremendous trend!

This trend will likely continue since the Bank of England (BOE) cut rates today by 25 basis points while the ECB kept rates unchanged in the Eurozone.

So until the ECB actually cuts rates (which will probably come about later on this year), this trend will most likely remain intact.

Sean Hyman
Currency Director
The Sovereign Society