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Foreign Exchange Markets: Around the World in 80 Pips

Posted By Bill Jenkins On April 8, 2010 @ 1:09 pm In Featured,International,Investing Strategies,Options | No Comments

There’s nothing like the foreign exchange market. At $3.2 trillion in daily trading, the 24-hour forex market is the largest in the world. And it’s a primary driver of everything from stocks to commodity prices. But in order to make the most of your forex opportunities, you need to make sure that you’re on top of what’s going on in the world’s economies. Today, we’re doing just that.

Here’s a quick look at what’s going on in the world from a forex standpoint…

Australia Points to Recovery

As I predicted to my Master FX Options Trader readers earlier this week, the Reserve Bank of Australia (RBA) did indeed raise interest rates again, up a quarter point to a major market-leading figure of 4.25%.

If you’re keeping count, that’s the fifth increase in six meetings.

With housing prices climbing, unemployment believed to have peaked and housing credit expanding at a firm pace, the Bank stated it wants to move toward more “average rates.” In other words, the RBA believes recovery is under way.

The response to the rate hike was predictable, but muted. The currency climbed 100 pips in seven hours, creating a double top around .9250 (with the previous peak occurring on March 7) before pulling back to .9230. Is this the pinnacle before the foundation crumbles, or is it the start of another bull leg?

Don’t Trust U.S. Equity Rebounds

Economic news out of the United States is stellar: Jobs are being created. Pending home sales are up on a massive scale. The Institute for Supply Management’s service index jumped more than double what was expected. Fed-heads are “reviewing” the discount rate. (While not the same as the Fed Funds rate, an increase in the discount rate would still be a very bullish measure for the buck.)

But, as always, all that good news raises more questions than it answers.

For instance, the month of March saw weekly new unemployment claims above 1.5 million. So the creation of 160,000 jobs does very little to offset that. Pending home sales are an interesting forward-looking figure — but show me the completed sales and the comparative prices from where we were at the beginning of this whole debacle.

I can’t say that there is no good news coming out of the United States. But if anyone thinks that this is a recovery based on real private sector jobs because of real private sector hiring, and that real private sector spending is creating real private sector demand… think again.

EU: Greece Just Won’t Go Away…

A bloodbath.

That’s how one of my friends described the activity in Greek bonds to start the week. When I last checked, the spread on the Greek 3–6-month bonds was almost 250 basis points. What is that and what does it mean?

When you compare rates between two different maturities on bonds, it gives you an idea of what investors are charging governments for different amounts of holding time. As a rule, the longer you hold, the more risk you are taking, and the more you want to be compensated. But a 3–6-month period is barely any comparison at all. There would generally be very small differences in the rate. The difference is called the spread. For comparison purposes, the spread on the U.S. 3-6-month bonds is only 9 basis points. Investors are giving very much credence to the success of Greece even just six months out!

This has been the main news out of the European Union and will continue to be. It does have an interest rate announcement later in the week on Thursday. The European Central Bank is expected to stand pat. What else could it do? Maybe throw the PIIGS a bone and cut rates… but I wouldn’t count on it.

The UK Swells for a Pullback

The pound had seen a nice little retracement from the third week of March. But an intermediate-term double top precipitated a small pullback. GDP had been revised upward, and a jump in manufacturing provided some real release for pent-up bulls in the sterling. But slumping mortgage approvals continued to press down to a 15-month low. Like other Western economies, houses and their accompanying equity provided spending money in the United Kingdom during the last big bubble. The hope is to return housing-related spending to its previous levels. Such bad news on the mortgage credit front is a frontal attack on the Bank of England’s (BOE) efforts to keep the fledgling recovery going.

To that end, the BoE has not shut down it asset purchase program, although it has placed it on hold for the time being. The purchasing manager index (PMI) for the service sector was released today, showing a much larger drop than was expected. Thursday will also bring its interest rate announcement. Like the ECB, the bank is expected to stand pat. Should this resistance hold at 1.5330, we may be preparing for the next leg down.

Is the Yen Oversold Right Now?

In a significant correction, the yen has moved 9 cents from the end of November. This drop took it out of the trading range it had been following and may offer us a good opportunity. While the Bank of Japan decided to keep interest rates steady, there has been good news coming from the economy. Japan’s leading indicator exceeded expectations by more than a point. This on the heels of the best retail sales growth in four years, in addition to increasing factory orders.

In short, there is no good reason for the yen to continue to weaken, and we may see a nice move back up. Also, the 200-day moving average continues to fall, even while the 50-day moving average is bumping up against it. From a technical viewpoint, this could produce a bullish relationship with the dollar and see a run at the recent high around 117.

Until next time,
Bill Jenkins [1]
Penny Sleuth [2]

April 8, 2010


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URLs in this post:

[1] Bill Jenkins: http://pennysleuth.com/author/billjenkinspss/

[2] Penny Sleuth: http://pennysleuth.com/

[3] The Truth About Forex Trading: http://pennysleuth.com/the-truth-about-forex-trading/

[4] Understanding Dubai’s Debt Problem: http://pennysleuth.com/understanding-dubais-debt-problem/

[5] Forex Facts and the Profit Potential of Currency Trading: http://pennysleuth.com/forex-facts-and-the-profit-potential-of-currency-trading/

[6] A New Tactic for Currency Traders: http://pennysleuth.com/a-new-tactic-for-currency-traders/

[7] Big Surprise Behind Big Binary Profits: http://pennysleuth.com/big-surprise-behind-big-binary-profits/

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