World Currency Watch: FOREX Market, FOREX Trading BLOG

The Latest in Swiss Intervention

As you may know, I’ve been following the Swiss central bank intervention story for the past couple of months now. In fact, I predicted the first intervention. (You can read the full story on that here.)

This is huge folks. The Swiss National Bank hasn’t intervened like since 1992. The Swiss central bankers are jumping in the markets because they’re concerned about one currency pair…

Coincidentally, it’s the cross-rate pair I’ve been watching like a hawk: the euro/Swiss franc or EUR/CHF.

Oh sure, the central bank is concerned about other exchange rates too. But this one is the one that really makes or breaks their exporters.

As I explained in June, the bulk of Switzerland’s exports go out to the rest of Europe (even more so than to the U.S). So if the Swiss franc suddenly becomes expensive in euro terms, that can seriously hurt Switzerland’s manufacturing sector.

Focused on “Selling Francs & Buying Euros”

The Swiss National Bank hasn’t been exactly quiet about their intervention plans.

In fact, you can go right to the Swiss central bank’s website and find out that the bank has been both selling Swiss francs and buying euros.

According to the Swiss central bank’s website, they’ve bought about $6 billion U.S. dollars and only about $40 million British pounds. But the Swiss National Bank has bought a whopping 11 billion euros! So we can clearly see where the focus is (when they’ve bought about twice as much in euros as dollars).

Swiss Central Bankers Care More About the Euro than the Dollar

Some ask, “Could this government manipulation” ultimately hurt the Swiss franc?” My response? Absolutely not.

Here’s why… When Switzerland’s currency drops in value and the Swiss central bankers force an uptrend in the EUR/CHF (as they’ve been trying to do), then the Swiss manufacturers can sell more exports to the rest of Europe and the Swiss economy flourishes.

The Swiss National Bank has intervened in the currency markets before to help the local economy. The only difference is before they were doing the exact opposite. The Swiss National Bank was selling Swiss francs and buying euros while the EUR/CHF pair was still in a downtrend.

However, once this cross-rate (read: “non-dollar currency pair”) pushed its way into an uptrend, the Swiss central bankers started closely watching this pair’s price.

As a currency trader, I started watching this pair too. You can see the uptrend on the chart below…

The Swiss Franc Makes a Break for It…

The Trend is Finally the Central Bank’s Friend!

Many times when central banks are intervening, they have a tough time beating the trend that they are trying to correct.

We constantly see this in Japanese yen’s price when the Japanese central bank intervenes. They usually lose in the short term because they can’t seem to break the downtrend in the USD/JPY as the dollar falls against the stronger Japanese yen.

However, in the end, the Bank of Japan eventually wins and pushes the USD/JPY price back up…but not until months pass minimally.

Well, we’re finally at that point with EUR/CHF. In fact, I was the first one to bring it to you when the downtrend actually broke on EUR/CHF.

You see, any technical Forex trader could have called this coming uptrend. It passes any “technical metric” that you want to throw at it.

This pair is trading above its blue 50-day SMA (simple moving average) line on its daily chart. It’s above its purple 200-day SMA line. It’s also above its red downtrend line too. So any way you slice it…it’s in an uptrend.

The Ultimate Swiss Weapon in Fighting Deflation: EUR/CHF

This uptrend in EUR/CHF will do more than just improve Swiss exports.

A strong euro and weak franc will also help to finally pull Switzerland out of its deflationary CPI numbers in time. Right now the Consumer Price Index on a year over year basis is at -1.2%.

So that means that they still have deflation that must break into a positive number before inflation will creep back into the economy.

In other words, the Swiss National Bank is trying to slay the beast of deflation and so far it’s working.

Now that the trend for the EUR/CHF is on the way up, they’ll have hedge funds, pension funds and big banks come in and help them. In other words, the big money is about to start buying the EUR/CHF pair as their “trend following” systems notice this newly formed uptrend. This will help the central bank in the long run.

So they are probably “out of the woods” and so is EUR/CHF. Therefore, you should be a “buyer” of the pair if you want to take the higher probability trade.

Happy Trading!
Sean Hyman, Professor FX

P.S. If you listened when I first warned you of an intervention here in FX University you could have grabbed a quick 300-pip profit. This is exactly the type of quick profit opportunities that we unveil to our Money Traders every single week in our Money Trader alerts. Learn more about how we pick our winners here.

What’s Holding the Euro Together?

By Jack Crooks

Do we have a dollar breakout or fake-out in the making? It depends on the euro here.

The European currencies are lower against the dollar this morning on news that Germany didn’t want to throw its hard-earned Treasury at central and eastern European problems.  Why should they? Oh yeah, I keep forgetting, it is a “Union” of European countries.

I’ve been wondering how this Union would fair during a real test of the system since the introduction of the euro. Frankly, I didn’t think it would fair very well. And I have not been disappointed.

Not to wish ill on Europe — I really don’t. And I hope the budding eastern and central European democracies can weather this, given all they have weathered after being abandoned by the “great leaders” of West to dwell in an Orwellian-hell-hole called the USSR.     

Is This Really a Dollar Break-Out or Not?

But I continue to believe a viable monetary system must have political cohesion, besides synchronized business cycles. I must say that neither seemed to be present to any lasting degree within the European Monetary System (ERM). And any modicum of political cohesion may have just left the station.

Though we could see the ERM muddle through, maybe due in part to the massive problems of its competitors, it is a dangerous time indeed for the ERM.

The Euro Continues to Sink – Just Landing at the 1.23 Level

I’m not the only one with doubts in the EU’s longevity. There has been concern in the market about the euro for many years. Below is an excerpt from an interview with Milton Friedman by Radio Australia back in July 1998, before the official introduction of said euro [our emphasis]:

RA: Thank you very much. Before we sign off, could I just take the opportunity to ask you what you think the prospects are for the attempts in Europe to create a common currency area? Are you optimistic about their success?

Professor Friedman: I think it's a big gamble and I'm not optimistic. Unfortunately, the Common Market does not have the features that are required for a common currency area.

A common currency area is a very good thing under some circumstances, but not necessarily under others. The United States is a common currency area. Australia is also a common currency area. The characteristics that make Australia and the United States favourable for a common currency are that the populations all speak the same language or some approximation to it; there's free movement of people from one part of the country to the other part, so there's considerable mobility; and there's a good deal of flexibility in prices and to some extent in wages. Finally, there's a central government which is large relative to the local state governments so that if some special circumstances affect one part of the country adversely, there will be flows of funds from the centre which will tend to offset that.

If you look at the situation in the Common Market, it has none of those features. You have countries with people all of whom speak different languages. There's very little mobility of people from one part of the Common Market to another. The local governments are very large compared to the central government in Brussels. Prices and wages are subject to all sorts of restrictions and control.
To sum it up: Danger Will Robinson! Danger!!

Best Regards,
Jack 

European Banks Are Leveraged 60-to-1?!

By Chuck Butler, editor
www.worldcurrencywatch.com

I have to apologize right here, right now, that I contradicted something I said and my friend John Mauldin said yesterday. (I didn’t mean to and it shows what happens when you write pre-5 a.m.)

I thought that the U.S. losses were larger than those in Europe (overall, both East and West)... But upon further review, I see that is NOT the case…

This all goes back to lending ratios, which people don't pay attention to in good times. But in bad times, they begin to be as self-evident as a hatchet in one's forehead. U.S. Banks have a loan ratio of around 26-to-1. And European Banks have one that is around 60-to-1... Uh-oh!

My long-time friend, Ed Bonawitz, sent me a note yesterday showing the rot on Europe’s vine. This stuff isn't for anyone under 13 to view, folks, it's nasty...

"Ireland's external debt, at US$1.8 trillion, equals 900% of the country's US$200 billion GDP. The United Kingdom's external debt of US$10.5 trillion equals 456% of its US$2.3 trillion GDP. Switzerland's external debt of US$1.3 trillion equals 433% of its US$300 billion GDP."

www.economist.com

Now that the credit markets are locked tight, renegotiating the terms of these loans is virtually impossible. The IMF will need to step in Big Time, and as badly as I don't want to even say this, but have to, the Bundesbank, Germany's Central Bank, will have to step in also.

There's news this morning that Germany will take over Hypo Real Estate Holding, Inc. thus paving the way for the first German Bank nationalization since the 1930's.

Here's the deal folks, the way I see it...

These European countries are dealing with their own problems, and soon they will move to protectionism measures to keep trade at home. This will happen all over the world, and for my money, it will be akin to pushing trade over the cliff. No way is trade able to recover from a blow like global protectionism, until it ends...

So, again, there's "uncertainty." And the uncertainty hedge is here to help! Yesterday, I watched gold move higher all day to the tune of US$28. That brought the price of gold up to US$970!

This morning, there has to be a ton of profit taking, as gold has backed off by US$6. I'll say this again for anyone who missed class on two different occasions last week. It appears that the large investors are moving to hard assets, like gold and not to fiat currencies.

Oh, Woe Is the Euro – at Least For Now

By Chuck Butler, Editor
www.worldcurrencywatch.com

It looks like the euro is destined to suffer for the time being.

This time, you can blame the euro’s suffering on the rot on the vine in the Eastern European countries. These Eastern European countries are taking on water from bad loans, or loans gone bad. And of course, you know who the lender of last resort is on these loans don't you? Yes, Eurozone banks. This opens a whole new can of worms folks...

The euro has already taken hits from Spain, Italy and Italy in this round. Previously, the euro also took a major hit from France in 2005. Yet, the euro survived them all. And it will survive this round... But not until it sees more weakness vs. the dollar.

I would look for the euro to revisit its previous low of a few months ago in the 1.23 handle. This could get ugly, as this Eastern European bad loans scenario has just popped up, and we've got to work through all the rubble to get to a base, before the euro can come back even stronger.

This will obviously represent some cheaper levels to buy, and diversify into foreign currencies as the euro drops. (EDITOR’S NOTE: Click here for one all-encompassing investment strategy that gives you access to all the truly beaten down currencies.)

So, the Big Dog, euro getting taken to the woodshed for its indiscretions with Eastern European loans. But remember I’ve told you before that European bank losses are nothing compared to those in the United States. My friend, John Mauldin, said that they "Dwarf those in the U.S."

And, remember, the Eurozone began this meltdown in a position of strength. The U.S. was on its knees begging for foreign investment to finance their IOU's when this mess started.

Could Rate Cuts Actually Help a Currency?

By Chuck Butler

There are two camps screaming their theories about today’s rate cuts in the U.K. and Eurozone. In one camp we have the old stick in the mud, "a rate cut debases the currency" crowd. (By the way, I’m on board with that crowd about 90% of the time.)

In the other camp we have the risk-taking "a rate cut will allow the Eurozone to shorten the recession and will be good for the euro" crowd.

Hmmm… You know, I've seen this kind of perverse way of thinking about rate cuts before. I saw it back in 2000 and 2001. At the time, the world’s economies were recovering after the brief U.S. recession.

The recession itself was short-lived because the Fed-Heads at the time stuck their hands in the cookie jar and acted like they knew what they were doing. They slashed rates and provided enough liquidity to choke the proverbial horse!

You know, I don't think I can ever mention the last U.S. recession without going on that tirade about the Fed. But anyway, I was saying at the time the currency markets were rewarding any currency with a rate-cutting central bank. The Forex market was pricing in that these central banks were cutting to spur economic growth.

It was the first time I had ever seen that, and I remember my editor of the Review & Focus thought I had "lost it" when I wrote about cutting rates being good for a currency. Strange, but it does happen from time to time.

The euro isn't the only currency to get whacked by the trading theme yesterday. The Australian dollar was looking perky at 70-cents before falling back to .6750. The Canadian dollar was pushing the envelope on 87-cents only to see their fortunes fade to .8540.

And if you need more proof that this trading theme is still in play, just look at the only two currencies that gained yesterday: Dollars and Japanese yen!

Another Reason for Mr. Trichet to Hike Rates on Thursday

From Our Friend at EverBank, Chuck Butler:

What Happened:

In case you missed it, the euro pushed back higher overnight to 1.5775. And as luck would have it, the European Central Bank (ECB) meets on Thursday this week.

Yes, while most the markets' participants in the U.S. will be dreaming of barbequed ribs, fireworks, and a long weekend, the ECB will be hiking rates again.

What I Say:

The most important part of Thursday's decision will be ECB President Trichet's press conference following the rate hike. It will be important for Trichet to remain hawkish on the economy. Otherwise, profit takers will quickly swallow up all momentum from the rate hike. If that happens, the euro won't get to enjoy the higher rates and push higher.

Meanwhile, Trichet received an arrow for his rate hike quiver this morning. German unemployment for June fell to a 16-year low.

This tells me, and should tell you, the barber, and the guy down on the corner selling bakery pretzels that Germany is resisting the global slowdown so far.

Germany is the Eurozone's largest economy, so this report carries a lot of weight with Trichet and the other ECB ministers. Annual growth in Germany remains above that in the U.S. and the employment picture is healthier than the U.S.'s - but then again, that's not difficult these days.

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.)

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

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