Forex and Financial Market Update

Crude breaks $60, sends high-yielding markets surging:

Once again crude led the charge in today’s trading to the benefit of higher-risk, higher-yielding markets. As forecasted last night in the update, today would be the day crude breaks the $60 level and we saw this play out as crude sliced through $60 and settled above $62, gaining almost 3.25% on the day. Consequently the dollar took a nasty beating across the board, especially to the higher-yielding pound sterling and euro. The dollar lost 1% today on the USD Index and put in it’s worst performance against the euro since this January.

But the real news of the day is the shocking and confusing messages sent by the Fed via the FOMC Meeting Minutes…

Fed shakes up markets with mixed messages:

I wasn’t expecting too much of a reaction to the FOMC minutes unless they said something unforeseen or shocking and sure enough, we got an unforeseen message that the markets were not expecting and which came as a shock… The first message the Fed gave to the markets was abundantly clear — keep selling the US dollar. And that’s exactly what the markets did as soon as the minutes were digested by participants, which only took about 90-seconds as the message was obvious. The Fed said they saw the potential need to monetize more government debt. In other words, the Fed said they may expand their forced currency devaluation through quantitative easing (buying US Treasuries).Why this came as such a shock is because the last time we heard from the Fed on this issue, they clearly told the markets that their $300 billion program to buy Treasuries would be enough to meet their objective and now the markets are hearing otherwise.

Confusing rhetoric from Fed–

That rhetoric about further monetizing debt hammered the dollar in the FX market but the Fed’s other rhetoric rocked the equities market, sending the S&P 500 futures back down to the 900 level and causing a sell-off on the S&P 500 cash market and on the Dow.

For at least the past month everything we’ve been hearing from the Fed about the US economy has been upbeat, positive, hopeful, and optimistic. Some of the FOMC members, including Bernanke, have even hinted the economy has bottomed and is in recovery mode with brighter days ahead. Well, the Fed completely contradicted all of their recent rhetoric in today’s FOMC report and that’s exactly why Wall St. freaked out into the close…

Here are some of the contradictory messages in the FOMC report:

  • Deeper recession in 2009; slowed rebound in 2010
  • GDP to decline 1.3-2% in 2009, grow 2-3% in 2010
  • Unemployment rate at 9% or higher through 2010
  • Raises Q4 2010 jobless rate forecast to 9%-9.5% from a prior forecast of 8%-8.3%
  • Raises Q4 2009 jobless forecast to 9.2%-9.6% from a prior forecast of 8.5%-8.8%
  • Fed agreed to hold decision on more securities buys to see how economy, financial conditions evolve

This is exactly opposite from what the Fed has been telling the markets in their recent speeches, especially the stuff about buying more bonds. It’s like some kind of bipolar Jekyll and Hyde Fed we’re dealing with now. So which Fed are we supposed to believe? The euphoric Fed that’s been smoking their green shoots in a waterbong or the Fed that’s painting a dismal picture of the US economy in order to justify future stimulus plans and forced devaluation of the dollar?

Which Fed do you believe?

I’m inclined to go with the latter. It’s obvious the Fed wants the dollar to die and this is one of the main reasons why I’ve been telling traders in these updates not to buy the dollar against the majors. I’m even further convinced the Fed wants to see the dollar brutalized in the near-term. A strong dollar does the Fed and US economy no good right now. If the Fed or Treasury truly believed in a strong dollar like they sometimes say they do, their actions don’t match their words at all, and it is their actions which carry more weight in my book.

Plus, by further monetizing debt it will help keep interest rates low and money cheap. That’s another thing the Fed wants right now because low rates and cheap money acts as a catalyst to re-inflate the bubble which burst last year. The Fed doesn’t want rates to rise because that could slow growth and recovery, especially in the housing market.

You have to keep in mind that the Fed are nothing more than price-fixers and price manipulators. The Fed doesn’t actually do anything useful or proactive, their policies are which cause booms and busts and busts and booms… the Fed is their own cause and effect machine… the Fed is both the arsonist and firefighter. Nobody can fight the Fed, so if they want to monetize more debt to drive down interest rates and devalue the dollar, that’s exactly what will happen. Bottom line, I think the Fed’s monetary policy should always be a part of any traders game plan, especially in the FX market.

Thursday trading:

Other than crude touching new 6-month highs and the FOMC rattling the markets, it was pretty much a status quo trading day… tomorrow is a huge fundamental day starting with French, German, and Eurozone manufacturing data which comes out between 0300 EST and 0400 EST. I don’t really have a forecast for all that PMI data because I’m not sure it even matters right now, the euro clearly remains tightly correlated to crude and the S&P 500, so I’ll continue taking my cue from those markets. I’ll repeat this yet again — crude is the center of the universe right now and so goes crude, so goes the markets…

Big US data includes Initial Claims, Philly Fed Index, and another Geithner testimony at 1000 EST. Here again, I’m not nearly as concerned about the fundamentals tomorrow as I am with following crude and Wall St. The dollar is really in a tough place right now and I can sense a growing tide of anti-dollar sentiment which is exactly what Bernanke and the Fed wants.

So as far as trading goes, I maintain my bias to buy the majors against the dollar and yen and to only short the majors against the dollar and yen when they show some exhaustion and a high probability trade opportunity. The euro and especially the pound sterling have come up a long way this week but I wouldn’t count either of them out, they still have plenty of more room to keep running as long as crude continues moving north, that is the key to it all.

I see crude hitting potential resistance between the $63 and $64 levels but should it sustain a break there, I see even higher gains to come in the short-term for crude and it’s correlated markets. Besides the consumer I can’t think of anybody else that would actually want or need crude lower. Market participants are starved for yields and forward looking returns, this is why they pour out of the dollar and yen and pile into the EUR, GBP, AUD, NZD, CAD, and CHF. While the current market sentiment and risk appetite prevails, I think the best trading strategy is to continue buying the dips and avoiding the USD.

It’s possible some of the majors see a bit of retracement after today’s strong upside gains, keep an eye on the market between the 1930 EST and 2030 EST time frames tonight and then again between 0000 EST and 0300 EST. Any dip that occurs between 2000 EST and 2230 EST tonight would probably be seen as a new buying opportunity by market participants.

Don’t forget there are bank holidays in Switzerland, Germany, and France tomorrow, so the markets will ill-liquid leading to a heightened chance for volatility. As always, practice smart risk and money management in your trading, stick to those 0.5% entries and keep your usable margin above 96% and you’ll be well positioned to avoid getting hurt during this chaotic and volatile times.

Key levels will be posted in the morning.

-David

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20- May 2009.

Posted by veritefx in veritefx, treasuries, stocks, sports, myblog, gold, gadgets, fx, forex trading, forex signals, forex signal, forex market, forex justice, forex education, forex calendar, forex blog, forex, fed, eurusd, eurodollar, euro, ecb, dollar

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