US Economy Updates

So this week was a very important week for the US economy. A lot of economic indicators came out - Trade Deficit, Beige Book, TIC, Unemployment Rate, PPI, and CPP. According to one of our head traders George, all numbers are pretty positive. Surprising huh - a week of good US economic data! Since mid-June, first bit of solid, good US economic data. Of course, elections are coming, all numbers will be revised, and the future is unknown. I personally think fears of a double-dip recession are too paranoid... HOWEVER, there is a risk of deflation...

The relationship between equities and bonds, (when equities are going up, yields are going down) is converse. So according to him, the USD/CAD should go down because CAD, a commodity currency, will benefit from a lower yield. It's currently trading between the .99 and 1.07 range, an 800 pip range.

Next week he's waiting for the US dollar to make a move. If the dollar index breaks below the 80, then the dollar should be expected to depreciate.

Quantitative Easing - this is a concept that many people have been talking about recently. I always thought QE is what the BOJ did a few days ago. Inflation is good for the currency, and so how will the US government respond to deflation fears? George thinks all monetary policy pretty much sucks.

So his big thing is the USD/CAD if it steps out of the range, it's going to be violent.

Now, the AUD/USD - since the middle of August, it's had a very good run from .8770 to .9450. He thinks it's a bit tired at .9350, it's showing exhaustion. There's this mystery gap, that hasn't been filled - happened in the beginning of last week. Why is George worried about this? He wants to see it be filled before he goes long on this currency. Of course, with the carry trade back, it is a very tempting offer.

According to Alvin, one of the better traders here, he thinks it will dip back towrads the .9200 line before heading back further.

For the Euro, George thinks, if we have a complete disintegration of the dollar, then the Euro will keep going up. Otherwise, he thinks it will only hit the 1.33 level, with little chance of going past it. On the longer term, from the 1.18 level, made its retracement to the 1.31 level it's at now. Only way it can continue its bullish is if the US Govt is forced to do QE on their currency due to deflation fears. However given the CPP recently up, it is unlikely to see this.

So it is definitely a yawn right now on the EUR/USD. But we'll keep watch on it.

Currently the market sentiment is definitely favoring the riskier assets. However, next month's figures will truly determine if our market can take on more risk appetite (and therefore breaking out of a feared double-dip) or retrace back down to mid-year levels.

George's recommendations is that Yen and Franc are both risky because intervention is very scary for all parties involved, and George does not want to be surprised. I happen to agree - when there's a 50-50% of something happening, it is too risky to trade (better to trade based on breakouts, where you put a stop buy or a stop sell rather than a market/limit order).

What is really interesting is how much monetary policy affects the FX markets. I always thought the economies of the individual countries are important - they are, of course - but the governments' decisions have much more of an immediate effect. Quantitative Easing - one of the CB's primary tools of increasing the money supply (i.e. printing money). This can be either sterilized - with the government choosing to put some money into treasury bonds and reserves, or unsterilized, where all the government does is print money. A lot of traders currently think that the BOJ will only print money unsterilized, to prove to the market that they are serious about depreciating their currency.

Why would this QE work for Japan, but not for the CHF a few months back, when the Swiss NB tried to depreciate their currency? This is probably because first, while both are unilateral moves by governments, Japan has very little inflation, which means they have a LOT of room if they want to depreciate their currency. Second, the Japanese Yen has been rising for a long period of time, and the market sentiment is that the Yen was already overbought. Therefore, by selling the Yen unilaterally in the market, the BOJ can show traders that they are serious.

According to Alvin, he would rather go with the BOJ, sell the Yen (meaning go long on the USD/JPY pair) for the short-term, because it is unlikely that we will see traders muster up a huge move in such a short period.

Moving to the cable (GBP/USD), all economic indicators for the GBP are down. However, movement on the pound was much more positive than the EUR/USD. For example, the GBP/USD retraced to the 38.2 Fibonacci level since their low, while the EUR/USD retraced to the 50 Fib. level since their low. This bullish sentiment is actually quite strange because the British Economy is having many problems.

But go Bullish on the pound? I would not recommend it. George does not say he would recommend it either. However, there is STILL risk appetite in the market, and it is supporting the EUR/USD and GBP/USD at their current levels. He predicts that they will both go up 300 points, form a double-top and then collapse. Sounds like a perfect situation?

While there are no true sell signals, the market sentiment is definitely in favor of these two currencies.