World Currency Watch: FOREX Market, FOREX Trading BLOG

The data "gangs up" on the Euro.

Currency traders thought they had it made. But just as they got used to making their "easy money" one way bets on the euro, the unkind markets stepped in and "spooked" them.

Let me explain.

Thursday morning, April 3rd, the European Retail Sales numbers unexpectedly dropped to -0.5 percent. Economists were only expecting a 0.2 percent drop — if that much.

No one was expecting the Eurozone to turn out a negative number. Euro traders were floored. They ran for cover, dumping the EUR/USD.

Germany, the biggest country in the EU, registered a drop of 1.6 percent. This is when traders started to realize the U.S. economic slowdown has finally reached them too.

The British pound also dropped right along with the euro when Goldman Sachs lowered its earnings outlook for U.K. banks.

Then the IMF released a statement that announced they had lowered their economic growth forecast to 1.3 percent from 1.6 percent previously.

Combine all of this information and you have the makings of a rate cut in the Eurozone (as I've been predicting for some time). The simple fact that we could see one sent the euro tumbling.

In America, on the same day, the ISM Non-Manufacturing Index (the Services Sector reading that accounts for 88 percent of the U.S. economy) numbers came out at 49.6. That's a little stronger than the 49.3 number last month. While this is still in the contraction level which is below 50, it shows that the contraction was slower than expected.

On top of this, the futures market in the U.S. now only predicts an 88 percent chance of a quarter point interest rate cut when the Fed meets for a two-day meeting on April 29 and 30, and only a 12 percent chance of a half percentage point cut.

The euro could remain in the stratosphere as long as the data were strong. But now that some dollar data are surprising to the upside and some European data are starting to surprise to the downside, that picture is changing.

In fact, even on "weak dollar data" such as last Friday's Non-Farm Payroll report, the euro couldn't sustain a respectable rally against the buck even though 80,000 more jobs were lost and the unemployment rose from 4.8 percent the previous month to 5.1 percent this month.

This means a change is coming for the EUR/USD exchange rate. The euro may not plummet tomorrow against the buck. We're still in a bit of a transition phase. However, it's definitely coming.

I believe the euro will sell off broadly against most currencies, not just the dollar (but certainly against the dollar).

Once the fall starts, the euro will finally work its way down to the 1.46-1.50 level in the upcoming months.

Translation: If you've been shorting the euro, you'll be rewarded in the coming months.

Sean Hyman
Currency Director
The Sovereign Society

The Euro "coils up" and prepares for a break....

The euro is coiling ever tighter all the time as some important data comes out this week such as ECB and BOE interest rate decisions, FOMC minutes fromt he U.S. Federal Reserve, the G-7 meeting this weekend, etc.

Any one of these events has the power to cause the breakout in either direction. In the mean time, euro and dollar bulls have a "tug of war" going on with each other. The data that comes out will probably determine the winner.

When the breakout occurs, it will likely be a sizable one. So this will either push the EUR/USD into higher highs than its ever had...or it will be the "real start" of a bonafide correction.

So keep a close watch on the Euro and Dollar data out there this week. It's going to be crucial.

Which one wins this tug of war? Euro or Dollar?

Sean Hyman
Currency Director
The Sovereign Society

EUR/USD gets ready to break its short term range!

With inflation in the Eurozone now at 3.5% and interest rates being higher in the Eurozone than that of the U.S. there's not much incentive to go into the U.S. but there's been a huge incentive to go into the euro lately.

If the pair breaks in its fundamental direction (which would be the most solid trade), then it will take out the red resistance line and head for 1.60 at least. Check out the chart below. Click on it to enlarge the image.

EUR/USD gets ready to bust out of its tame range!

If the pair breaks counter to all logic, then the dollar may get a short term break as the pair runs down to the green support level around 1.5350ish.

If it did this, it would more than likely be due to a huge correction in gold and oil.

Gold was down 15 bucks an ounce today and oil pulled back a bit as well. That's what held EUR/USD in check today.

However, we've got plenty of news announcements to "stir the pot" this week. We'll have the Institute ofr Supply Management (ISM) tell us about the manufacturing and services sector in the U.S. as well as the Non-Farm Payroll report on Friday.

So between all of these very important announcements, we'll likely see this one end the week very different (one way or the other) from where we see it sit right now.

So get ready for some support/resistance levels to get violated shortly (in the upcoming days minimally).

Sean Hyman
Currency Director
The Sovereign Society

The Euro wins the battle over the Aussie and New Zealand dollars!

Trichet spoke before Parliment early this morning and kept his "hawkish" tone up about fighting inflation, etc. He gave no indication of letting up or reducing interest rates.

This gave traders a license to buy up the euro once again. This lit a fire under it and it broke out of the recent sideways "tug of war" that it was having with both the Aussie dollar (EUR/AUD, left chart) and the New Zealand dollar (EUR/NZD right chart).

Click on the charts below to enlarge them.

So one thing is for sure. Both of these pairs will likely head higher out of this sideways consolidation as they are doing already.

Also, this tells us that EUR/USD should be even stronger at the moment than AUD/USD or NZD/USD since the euro is winning the battle against these commodity currencies.

So look for these euro crosses and EUR/USD to head higher over the near term until either the European data starts to soften or Trichet changes his language in his speeches.

(Don't forget that the central bank of Australia meets on April 1st to announce interest rates.)

Sean Hyman
Currency Director
The Sovereign Society

The Euro gets ready to diverge away from the New Zealand and the Aussie dollars!

Lately the euro has been tracking the New Zealand and Aussie dollars. You can see this from the charts below. The EUR/NZD on the left and the EUR/AUD on the right have been range bound as none of these currencies seem to get a leg up on one another.

However, that's about to change. These currency pairs are coiling up into a symmetrical triangle pattern. In fact, the EUR/NZD has already broken to the downside. The EUR/AUD may head the same way but that remains to be seen yet.

As these pairs break out, there will be significant moves which means there's a significant room for a huge profit to be made.

This will also show you which currencies end up being the strongest when trading the "majors" related to these pairs (EUR/USD, AUD/USD and NZD/USD). The one that ends up being the strongest is the one that you'd want to be long against the dollar.

However, in the mean time, these crosses are going to produce some huge profits as traders hop on board. These pairs will move hundreds of pips in a relatively short amount of time. That could be in a matter of hours to a maximum of two or three days I'd think.

Someone is about to win this tug of war. Shortly you'll find out. It may be the "commodity crosses" that team up on the euro.

So get ready and watch for the break on EUR/AUD and get poised into the EUR/NZD which has already broken to the downside. EUR/NZD could target 1.8800. That would be huge...but that's where the triangle's targets are pointing to.

Sean Hyman
Editor/Trader
www.money-trader.com

As both oil and gold correct, it will help the dollar in the short term.

In the short term, oil and gold will continue to correct from an extremely overbought condition. As they do, the moves will be hard and fast.

Since these two commodities are priced in dollars it puts them on the opposite side of dollars. Meaning that as oil and gold go up, the buck plummets. And as oil and gold correct downward, the dollar benefits.

The whole world has gotten way too bearish on the buck in the short run and it will catch most of the world by surprise. As they are on the wrong side of the trade in the correction, it will "scare" many out of their positions. Some will be "forced" out due to margin calls. This will all bring both oil and gold into a healthy pull back within their larger uptrends.

As this happens the dollar will get a short term bounce within its longer term bearish downtrend.

Since oil's direction somewhat mirrors that of the EUR/USD, EUR/USD will pull back in the short term as oil does the same.

So the long term direction is probably not changing but boy are many going to get "forced out" of their positions in this volatile correction. That will only aid the dollar in the very near term.

Sean Hyman
Editor/Trader
www.money-trader.com

EUR/USD reverses quick and hard.....200 pips of gains evaporate within just a few hours!

Wow, what a morning!

The Fed announces a $200 billion dollar deal to help out the financial markets and the Dow bottoms (at least for now) and heads higher...the EUR/USD comes down from almost 1.55 to 1.5280 within just a few hours.

This goes to show you that traders are getting scared while trading this "ultra-high" euro. The reversal was hard and fast this morning. This is much like the reversal we had on Non-Farm Payroll Friday when the U.S. lost 63,000 jobs. The EUR/USD reversed hard then too.

This tells me that we're nearing (if we're not at) a top on the EUR/USD exchange rate for now. If I'm right...then we'll probably get a pull back in the EUR/USD over the upcoming weeks to months which equates to a dollar rally.

At this point, the world "needs" the dollar to be supported at these levels. So far, the U.S. is still the "world's customer". So while I think that the long term dollar problems haven't been solved....in the near term (next 6 months or so) I think we'll finally see that dollar rally that I've been calling for.

It will prpbably be temporal just like the dollar rally in 2005. It will probably be like a "bear market bounce" but I still think we'll have to get one simply because the euro exchange rate is unsustainable for their exporters in Euroland.

Check out the 15 minute chart below and you'll see the swift reversal that I referred to this morning. Click on the chart to enlarge it.

The Euro gets crushed upon the news that the Fed is trying to put a halt to the liquidity issues in the markets.

Sean Hyman
Editor/Trader
www.money-trader.com

Interest rate decisions are making this a volatile week in Currencyland!

This week Australia has been the one major economy to raise interest rates...this puts them in a class of their own right now.

The Bank of Canada surprisingly cut by 50 basis points when 25 basis points were expecgt. Boy, that new central banker there doesn't mess around. This was his first interest rate decision to make. Wow! What a way to start...

Tonight, New Zealand just kept rates on hold. However, they are the "highest rates in the land" when it comes to the major economies. So their rates are still at an "eye popping" 8.25% which is what was expected.

Then bright and early tomorrow morning we'll get the rate decisions from the U.K. and the Euro Zone. These will come out at 7am EST and 7:45am EST respectively. No changes are expected from either one...but be forewarned...the Bank of England doesn't mind surprising the market and they've had a history of it.

My guess is that they'll keep rates on hold this time...but honestly, with them...only they truly know.

Then on the 18th we'll get the interest rate decision from the U.S. Fed. Many are expecting as much as 75 basis points lopped off. Wow!

If so....when Bernanke takes it down....he takes it down. Of course, he doesn't have much of a choice. He's having to face a very difficult situation. Stagnating growth along with rising inflation (especially food and energy/commodity inflation).

One pair that I'm in right now is dodging all of those land mines...it's AUD/CAD. We already know that the Aussie has raised rates and will again sometime in the future IF inflation continues on its fast pace higher. The Bank of Canada cut more than expected and has already said they may have to cut rates further. (I like this new guy so far. So far he speaks plain English and not in "code" and tells you what he's thinking).

So therefore, over time, the rate differential will work in Australia's favor and away from Canada. It also doesn't hurt that gold is outpacing oil on its way up. Since Australia exports tons of gold and Canada exports "tons" of oil...this works in Aussie's edge over Canada as well....

But it doesn't stop there. Australia has a tighter labor market...more demand placed on it from China..wages are high...so things are good in "the land down under".

Sean Hyman
Editor/Trader
www.money-trader.com

European officials "voice" their concern over the "over-priced" euro.

This post will be a bit "raw" because I want you focus on some European officials commenting on the price of the euro over the last couple of days. Hear what they have said below:

Luxembourg Finance Minister Jean-Claude Juncker gave comments during a radio interview during which he said that the U.S. dollar was not reflecting fundamentals and was undervalued, along with the yen and the yuan.

Furthermore, Juncker added that the euro was overvalued in relation to other currencies.

 
European finance ministers said they are ``increasingly concerned'' the euro's advance to a record against the dollar risks deepening the economic slowdown in the region.

European officials need to be ``vigilant, concerned,'' on the euro exchange rate, Luxembourg Finance Minister Jean-Claude Juncker told reporters as he arrived for a meeting of his European counterparts in Brussels today. ``We're afraid to see the evolution of the exchange rate,'' Belgian Finance Minister Didier Reynders said.

ECB President Jean-Claude Trichet, who initially declined to comment yesterday, turned back to reporters to say that the

U.S.

government's ``strong dollar'' policy is ``very important.''

``Trichet was clearly responding to the currency overshooting,'' said Jacques Cailloux, chief euro-area economist at RBS.

``In the present circumstances we are concerned about excessive exchange-rate moves,'' Juncker told reporters late yesterday. ``I'm starting to be increasingly concerned and vigilant on the euro,'' he said, noting that finance ministers ``have never previously said that we were concerned on the basis of current circumstances.''

French Prime Minister Francois Fillon told

Europe

1 radio today that ``there is a problem of connection between the dollar and the euro.''

``We are going to continue monitoring closely evolutions of exchange rates,'' Juncker said.

Investors expect the ECB to cut rates at least once this year. The implied rate on the Euribor interest-rate futures maturing in December was at 3.51 percent today, down from 4.10 percent at the beginning of the year.

Also, companies like BMW are starting to "feel the heat" from the rising euro as they've remained "unhedged". They'll explain more on their March 18th conference call. But it seems as though they didn't expect such a strong rise since it should be valued around 1.20 according to them. See the comments below.

BMW's current policy is based on the euro's purchasing power parity of about $1.20, meaning the company has run up big losses on currencies by not hedging as the euro <EUR=> has continued to appreciate.

Expect more of this type of talk to continue as the level of pain starts to reach their threshold. This is the "prep work" that will lay the grounds for the ECB to cut rates later on this year.

Once Trichet finally talks about cutting rates, then you'll likely see "short sellers" start to ease into their positions against the euro. Until this "talk" steps up and gets more frequent, you'll likely see the euro remain at elevated levels against the buck.

Sean Hyman
Editor/Trader
www.money-trader.com

The Euro won the "Tug of War" against the Aussie dollar overnight!

The Euro won the long "tug of war" battle between it and the Aussie dollar overnight. The pair broke higher out of that ever tightening consolidation range. I told you it would be within the next few days. Well, there you have it. Both currencies have fared well, but the euro won this round in the EUR/AUD pair. Check out the chart below. Click on it to enlarge it.

The Euro "strong arms" the Aussie dollar.

Look to things like this to see if you should be long the EUR/USD or the AUD/USD for instance. This tells you that right now, you'd be better off trading the EUR/USD since its a bit stronger at the moment whereas when they were in the range, they were somewhat equal.

Always buy the strongest currency against the weakest (or weaker) currency.

The constant divergence in the MACD seemed to allude to an upside breakout. But you always want to get a close above the consolidated range before you trade it. Never assume. Get confirmation through the actual price action.

Happy 29th of February....not often we get one of these. Enjoy your "extra day".

Sean Hyman
Editor/Trader
www.money-trader.com