Thin Liquidity – Holiday Trading

The markets don’t really move much during the holdiay season.  They whipsaw up and down but they seldom make any headway.  This is part of the fundamental analysis that goes into trading.  Even if i get a trend following signal in December, I make sure that there is enough fundmantal  data flowing to back the move.  I odn’t mean employment numbers and the typical releases that traders follow.  I mean real fundamental changes in economies. 

A quick view of the World Markets section of the Wall Street Journal will give you a view into the drivers that make a currency change in value.  If you look today, you’ll see some news about the Euro hitting an all time low against the Swiss Franc, and that’s pretty much it for major currencies.  This is a hallmark of holiday trading.  The big money is on vacation and the trading is thin.  Price movements are unpredicatable and usually unsustained beyond the 15M charts. 

We will likely see explosive moves on the majors after the new year.  Once the big money gets back to the office and absorbs everything that’s happened in hte last month, new values will be determined, and accounts will be adjusted accordingly. 

Good luck!

Tim

Chinese Interest Rates Turn Dollar Sentiment

I don’t usually make trading decisions before the NY close. I’m a trend follower and focus on what IS rather than what I think or feel. However, my system rules are very specific and include a “score” from my daily fundamental analysis of world affairs. There are almost no single events that can change the sentiment of the “smart money.” But once in awhile, we do get a big surprise, and a prudent trader has to factor for those surprises in his system rules.

This morning the Chinese surprised the world markets by raising their interest rates for the first time since December 2007. This surprise move puts the global economic recovery in doubt and caused investors to move their money from energy, minerals and world currencies linked to those asets into the perceived safety of the USD.  Why does the Chinese interest rate move other currencies?  Well, let’s use the AUD and NZD as examples.  The AUD and NZD are tied closely to commodities.  The Chinese are major purchasers of these commodities.  When they increase interest rates, it’s a sign that they’re economic growth will slow.  As the Chinese economic growth slows, so will their appetite for commodities.  Everything is relative in markets.  big money traders have also likely priced in any Quantitative Easing efforts from the Fed. 

I’m not ready to say that we’ve seen the bottom for the USD, but I’m willing to sit on the sidelines and watch the retracement unfold and get back in on the next confirmed trading signal. 

Good luck out there!

Tim

USD Dropping Due To Possible Quantitative Easing

The USD keeps dropping! How far can it go? Well, it can go as low as it goes. Trend Following Forex traders will continue to profit from this slide. As a long term trend following forex trader, I am only really interested in what price is doing, not what it MIGHT do. However, I think it is very important to understand why it is moving up, down or sideways. Having this knowledge helps me to identify tops and bottoms by simply reading. As of this morning, our two open trades are up by 1,421 pips.  We didn’t get there by bucking the reality of the market.  We got there because I blend economic fundamentals with my Helix trend following system.   

With interest rates near zero and jobs data still not improving the Fed may resort to a second round of Quantitative Easing (QE), which in the long term CAN help the USD, but in the short term will reduce the relative value of the Dollar vs other currencies, energy, minerals and other assets.

What is Quantitative Easing? It may sound like some magical system but it’s pretty simple, actually. Central banks, such as the Federal Reserve (Fed) use Quantitative Easing to stimulate a troubled economy when traditional methods have failed. Traditional methods include reduction of various interest rates. Basically when a central bank implements QE, they just print money. That’s right. They just “create” money that didn’t exist before. (how cool would that be?)They use this money to buy various assets such as governmnt bonds, corporate bonds, mortgage backed securities, etc. When they buy these assets, they deposit this newly created money into the banks from which they purchased the assets. The banks in turn have this new cash available in their capital reserves to create new loans. The hope is that these loans will provide money to companies to for job creation, and individuals for purchasing new products and services from those same companies. Since the process of QE increases the supply of USD without changing the demand, it also reduces its value.

A weakened Dollar increases the cost of purchasing imports while decreasing the cost of our exports. This, in turn, makes it less profitable for domestic businesses to outsource, which in turn could (should) bring jobs back to the US.

This all sounds great. There are, however, several risks associated with QE.

1. First, by creating more money without it being backed up by new assets or new production, it reduces the value of the dollar and can cause hyperinflation. Imagine spending $15.00 for a gallon of gasoline or $10.00 for a loaf of bread. These are extreme examples, but you get my point. If hte banks distribute too many Dollars, their relative value drops.

2. Second, and most likely in my opinion, it just won’t work. the banks will simply allow this new money to sit in their capital reserves, and not distribute it in the way of new loans. In times like we face today, with increasing default rates, it is likely that banks will simply take the new money and sit on it.

What does all of this mean to trend following traders? It means that we continue to sell USD! We can’t worry ourselves about whether or not the monetary policies will work. We can profit from being short USD until QE starts to work, then get long USD. It’s really that simple. Either way, trend following traders will profit.