Contributed by: DailyFx
US Dollar, Risk Appetite Likely to Return to Trend On FOMC Decision
Fundamental Outlook for US Dollar: Neutral
* An in-line 3Q GDP reading doesn’t stir enough speculation to redefine stimulus expectations and risk appetite
* The Federal Reserve asks its Primary Dealers what they think the size and maturity of QE2 will be
* Congestion is the state before breakout – but what direction is EURUSD heading from here?
Before delving into the fundamental possibilities for the dollar over the coming week; we should first reflect on the ‘neutral’ forecast I have levied against the currency. In fact, the currency is highly likely to catch a trend next week on the long-awaited announcement of the Federal Reserve’s monetary policy plans. However, the bearings that the dollar takes and the pace with which it is imbued can be highly variable depending on what policy officials agree to. If we were to have ‘activity level’ as an assessment, I would have set it to ‘extremely high’ and established the scenarios for direction from there. That said, if given a two-to-three week horizon and told to determine the most likely course for the dollar, my inclinations would lean more towards a significant recovery effort for the severely weakened currency.
In assessing the dollar’s future, there is little doubt that one event dominates the currency’s dance card. The Federal Open Market Committee (FOMC) is expected to deliberate on the economic and financial health of the US economy and announce what actions it will take come November 3rd at 18:15 GMT. Economists and the speculative market are already heavily favoring an increase in stimulus. ‘If’ is no longer the concern on this point. This facet has already been priced in. And, that said, if there is in fact no change to policy; the greenback will immediately reverse course as positioning to this point was made in the effort to price just such a scenario in. Following the lines of probability though, the more pivotal and debatable aspect of this event is the size and maturity (how long it scheduled to last) of a second asset purchasing program. Given the musings of a few policy officials, the consensus is for a more flexible program that comes in intervals of $100 billion injections over five or six months. That is our unofficial benchmark.
An interesting angle to this event was added just this past week when it was reported that the Federal Reserve Bank of New York polled its Primary Dealers (those banks that have to engage in open operations and bid on Treasuries) to see what they expected the size and maturity of a second stimulus plan would be. This is likely an effort to see what the market is expecting so as to understand what scenarios would disappoint, appease or somehow surprise the masses. With some dealers throwing in forecasts of $1 trillion, we have to wonder whether this is an effort to match the market’s expectations so as not to generate unwanted volatility. Only time will tell.
Now that we laid out the scenarios and background information, what will be the reaction? Considering the Fed does opt for an additional stimulus program, matching expectations may ultimately offer little for risk appetite and leave the greenback at fair value. Besting the $500-$600 billion consensus could very well weigh the dollar as it devalues the currency; but feeding risk appetite is another thing. The first program clearly did not work; and many believe the marginal utility of further support will diminish quickly. If that is the case, risk appetite is still highly likely to collapse in the not so distant future; and the dollar will in turn find a foothold to rally.
Contributed by: DailyFx
New Zealand Dollar Awaits Guidance of Risk Trends, Yield Speculation
Fundamental Forecast for New Zealand Dollar: Neutral
* RBNZ holds its benchmark rate, says recovery slower than expected but hikes still in the future
* NZDUSD puts in for a tell-tale double top and evening star, is this a precursor to reversal?
The New Zealand dollar was exceptionally strong into the end of this past week. This was quite the feat considering there was nothing on New Zealand’s economic docket and the risk appetite trends were sedate through the final 24 hours of trade. Is this burst of life a signal of performance heading into the coming week? As it stands, the commodity currency was in or on the verge of significant price developments when liquidity was drained. Perhaps the most remarkable sign of tension was NZDUSD’s retest of a two-plus-year double top at 0.7650. Yet that isn’t the only kiwi-pair ready for action. AUDNZD has plunged more than 400 points this past week; EURNZD dropped to a five-week low; and NZDJPY has pushed back against the remarkably strong Japanese yen. This is exceptionally remarkable when we consider the New Zealand benchmark is lower than its Australian counterpart, growth forecasts have waned and demand for yield has leaned more towards emerging markets than it has sovereign debt (even high-yield sovereign debt).
In the world of trading, where everything is based on probabilities and the potential for return, ‘unusual’ and ‘remarkable’ should trigger caution. The New Zealand dollar is not the Japanese yen or US dollar. We need some material reason to believe that the kiwi can break meaningful resistance and carry an aggressive rally through. On its own, there is little to do that. The primary appeal of this particular currency is high yields and the possibility of higher yields down the line. RBNZ Governor Alan Bollard modestly stepped up his hawkish commentary; but his remarkable transparency wouldn’t hint at anything resembling a near-term hike. We could get around this fact if there were likely to be a surge in general risk appetite in the near future. There is a scenario for that in an expansion of stimulus efforts by the FOMC, Bank of Japan and perhaps Bank of England. However, that is perhaps over-reaching a speculative forecast. It would be too easy to disappoint. Besides, an expansive taste for risk would theoretically benefit the Aussie dollar more as it has the higher yields and greater probability of further hikes.
Given the New Zealand dollar’s standout strength and incredible performance against the star performer Aussie dollar, it is most likely the case that speculators are solely responsible for driving it higher. Speculative interest holds powerful sway over the markets; but it is also highly unstable without a meaningful fundamental handle for the masses to hold onto. For that reason, we should watch out for a sharp reversal from the kiwi if a broader risk appetite bid doesn’t develop out of the Fed’s rate decision. In the meantime, we should also take in the 3Q employment data scheduled for release as a long-term assessment of growth and rate expectations, as well as the short-term implications for volatility.
Contributed by: DailyFx
U.S. Session Key Developments
* GDP Grew at Annual Rate of 2 percent
* Reuters/University of Michigan Confidence Report Fails to Meet Expectations
Stocks Flat Despite GDP and Consumer Sentiment Data
U.S. Markets fluctuated between gains and losses throughout much of the day, but ended the session closing slightly higher. The DJIA experienced the best October since 2006, gaining 3 percent throughout the month. The S&P 500 was up 3.7% for October, the best performance since October 2003. The October rally in the markets was sparked by investors’ speculation that the US Federal Reserve will pursue further quantitative easing in order to stimulate the economy. Data released Friday indicated that the economy expanded in the third quarter at a slightly faster pace compared to the previous quarter, but growth remains too weak to cut unemployment any time soon. GDP, the value of all final goods and services produced in an economy, rose at an annual rate of 2 percent after climbing 1.7 percent in the previous quarter. Economists had expected a 2 percent growth. Also, consumer sentiment data from Reuters/University of Michigan showed the consumer mood darkened at the end of October, while the Chicago Business Barometer edged up from September and topped expectations.
DJIA 30 / 11,118.49 / +4.54 / +0.04%
The DJIA held onto a strong gain at the end of the trading session on Friday. Chevron fell 2.9 percent after the oil major’s third quarter earnings and revenue significantly missed analysts’ expectations. Merck dropped 2.2 percent as the company’s earnings excluding items topped estimates, but revenue fell short of forecasts. Microsoft was among the Dow’s best performers, with a 1.7 percent rise. The company’s first quarter profit rose 51 percent, benefiting from strong demand for Windows 7. Microsoft is also the Dow’s best performer this month, up 9.1 percent over the period.
S&P 500 / 1,183.26 / -0.52 / -0.04%
The S&P 500 closed flat at the end of the day. Among stocks in focus, Genworth Financial tumpled 9 percent. The life insurer’s operating earnings unexpectedly fell as stronger international operations could not offset weakness in life and mortgage insurance. S&P Equity Research cut its target price on Genworth’s shares following the report. Monster Worldwide surged 25 percent. The employment website operator reported stronger than expected forecast in its third quarter. The company has experienced growth in revenue, bookings, and deferred revenue since early 2008.
NASDAQ / 2,507.41 / +0.04 / +0.00%
The Nasdaq Composite Index closed in positive territory, as basic materials lead the advance with a 1.36 percent gain. 8 out of the 10 sectors rose at the end of the trading session. Health Care and Oil & Gas were the two sectors that declined, with a 0.34 percent and -1.18 percent fall respectively.
Contributed by: DailyFx
I remain short EURUSD from 1.39 and 1.3950 against the high at 1.4080, as I expect the pair may have made an important reversal. Thus far the position has not really gone very far as price moves sideways and that makes me a bit nervous. But I'll give this time to play out (as long as my stop isn't triggered). A big week of event risk ahead warns of major USD moves, and it's tricky to predict how the USD might react to the packed calendar.
Contributed by: DailyFx
Following up with the short EUR/USD trade from earlier this week, I am looking to maintain the position going into November as the pair continues to carve out a top, and the exchange rate is likely to face increased volatility over the following given the slew of market-moving event risks. I am still looking for a test of the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, and will maintain the stop at 1.4001, the 10/13 high. For now, I am keeping a close eye on the GBP/USD to see if we will get a close above 1.6000 as the exchange rate rallies to a fresh weekly high of 1.6014, and I may look to buy into the recent strength behind the British Pound as investors expect the Bank of England to maintain its current policy in November.
Contributed by: DailyFx
Europe Session Key Developments
* Investors Still Uncertain About Quantitative Easing
* US GDP Meets Expectations
European Stocks Closed Mixed as Investors Question Potential QE Success
European Markets closed mixed at the end of the trading week as the Stoxx Europe 600 experienced its first October rally in three years. The benchmark gauge added 0.1 percent at the end of the day, but closed down 0.2 percent for the week. However, the index has risen 2.5 percent this month amid speculation of further quantitative easing by the Federal Reserve. Many investors feel that potential QE success has already been priced into the market and that there are still some question marks as to whether it will work. Also, the US economy grew at a 2 percent annual rate in the third quarter as consumer spending climbed the most in almost four years. The increase in GDP was in line with analysts’ expectations. Overall, national benchmark indexes fell in 11 of the 18 western European markets.
FTSE 100 / 5,675.16 / -2.73 / -0.02%
The FTSE 100 declined at the end of the trading session on Friday. The benchmark index fluctuated between gains and losses for much of the day as investors speculated whether the US Federal Reserve will next week announce sufficient measures to keep the recovery on track. Scottish & Southern Electricity Plc climbed 3 percent as the company announced it will increase natural gas prices. British Airways fell 3.1 percent even as the company reported earnings that topped analysts’ estimates.
CAC 40 / 3,833.50 / -1.34 / -0.03%
The French benchmark gauge fluctuated between gains and losses throughout the day. BNP Paribas SA ended two days of gains, losing 1 percent as banking stocks were among the worst performers in Europe today. Greece’s Piraeus Bank SA sank 6.4 percent after the company announced plans to raise 800 million Euros in a sale of new shares to boost its capital. Bollore advanced for a second day, rising 1.6 percent as the company posted a 27 percent increase in third quarter sales. Eutelsat Communications sank 4 percent after it reported the loss of a satellite because of “an anomaly” detected on the propulsion subsystem.
DAX / 6,601.37/ +6.09 / +0.09%
The German index experienced the biggest monthly gain since March, as investors attempted to gauge the impact of further stimulus by the Federal Reserve. Metro, Germany’s largest retailer, tumbled 1.5 percent as HSBC Holdings Plc cut its recommendation on the stock to “neutral” from “overweight.” Porsche preferred shares fell 1 percent after the carmaker had its rating reduced to “neutral” from “buy” at UBS AG. MorphoSys slumped 2.3 percent. The biotechnology company reported a decline in third quarter net income to 1.4 million Euros, from 2.6 million Euros in the year earlier. Bilfinger Berger SE slid 3.2 percent as the company appointed former Hesse state premier Roland Koch as CEO.
IBEX 35 / 10,812.90 / +59.40 / +0.55%
The Madrid benchmark index experienced the largest gain among the 5 major benchmark indexes. Banco Popular Esponol SA climbed 1.6 percent after the Spanish lender announced third quarter profit fell. Ferrovial SA gained 3.3 percent as the manager of airports and highways posted a nin-month profit of 315 million Euros. Gamesa Corporacion Tecnologica SA rose for a seond day, gaining 2.2 percent. Gestevision Telecinco SA rose for a second day as Iberdrola SA further increased its stake in the company.
S&P/MIB / 22,048.43/ -39.29 / -0.18%
The Italian index declined for the fourth straight day this week. Amplifon SpA managed to climb 0.5 percent as the Cheuvreux trimmed its price estimate on the world’s largest hearing-aid distributor to 4.7 Euros from 4.8 Euros. It reiterated an “outperform” rating. Intesa Sanpaolo SpA dropped 2.3 percent ast he company is a likely candidate to buy the assets of Polbank, the Polish unit of Greece’s EFG Eurobank. Credit Suisse Group AG trimmed its estimates on Italian banks before quarterly resorts, causing further decline in the banking sector of the Italian economy.
Contributed by: DailyFx
If you knew of two traders and Trader 1 consistently won 40% of their trades while Trader 2 consistently won 80% of their trades...who would be more profitable?
In reality, you cannot tell which trader is more profitable or even if either trader was indeed profitable. If Trader 1 consistently won 200 pips on each win and limited their loss to 100 pips on each losing trade, after a series of 10 trades they would be up about 200 pips. If Trader 2 won 25 pips on each win but lost 100 pips on each loss, they would be a breakeven trader after a series of 10 trades.
But many new traders are misled by win percentage. Winning most of your trades is exciting, but not if it does not lead to consistent profits. So keep this in mind when you hear about a strategy that wins 90% of the time. That does sound appealing, but the key is profitability. One does not always lead to the other. If your goal is to be consistently profitable, win percentage is not as important how much you win when you are right compared to how much you lose when your are wrong.
Contributed by: DailyFx
Next week will be critical for the EURUSD as the pair stands at the crossroads as of late. Indeed, price action is capped by 1.40, and after the break below the rising channel, which remained intact for approximately a month, my bias remains to the downside. Taking a look at the weekly chart, the EURUSD looks poised to close above the 200-day moving average for the third street week, and if price action holds above this level next week, this could spell trouble for the greenback in November. Not to overlook, the pair has stalled at the 50-day SMA on the monthly chart. All in all, downside risks remain so long as price action does not close above 1.40. The FOMC rate decision and the Nonfarm payrolls release from the world’s largest economy next week may serve to be the catalyst needed for the buck. At the same time, I am still short the EURGBP and my position is currently in the money. Going forward I will look to target 0.8650 as technical indicators continue to point to further losses in the pair; stop at 0.8830. GBP traders will shift their focus to the U.K. interest rate decision and asset purchase target.
Going forward, I will look to enter a long GBPUSD position on a break and close above 1.600. The BoE rate decision is on tap and may serve as the next push for British pound as the pair bounced off key support at 1.5600. Meanwhile, a long USDCHF position is on the horizon as the price action has worked its way into an ascending channel, and now looks poised to test parity next week. With reference to the AUDCAD, I closed out my position slightly out of the money as the pair will close below the 20-day moving average. Taking a short position at today's close, with a target of 0.9860 may suffice. Good luck trading!!!
Contributed by: DailyFx
The GBPUSD remains range bound. The specter of the recent double top with RSI divergence brings to the forefront the potential for a test of 15294 in the coming weeks. Trading above 16110 would shift focus to the trendline (triangle line?), which is at 16340 next week.
Contributed By: DailyFx
Crude continues to find support near the 200 day SMA and potential remains for strength in a small 5th wave to 8570 in order to complete the entire corrective advance from 7150. However, the channel support that has held for over a week is giving way today. Coming under 7975 would suggest that the larger decline is underway.