FOREX TRADING

Bollinger bands will help you to predict big trending moves, act on big trend reversals and finally, time trading positions with greater accuracy for bigger profits.

Here we have related Bollinger bands to the currency markets (as it is here that they are most useful) – but they are useful in all financial markets.

What are Bollinger Bands?

Developed by John Bollinger, Bollinger bands are volatility bands drawn around a simple moving average.

You calculate Bollinger bands using the standard deviation of price over the same period as moving averages and plotted as lines above and below the moving average.

As moving averages have been traditionally used to identify the underlying trend, Bollinger bands combine this with the volatility of the individual market (or the standard deviation) – to plot a trading envelope.

The distance between upper and lower Bollinger bands reflects the volatility of the market traded.

As prices force themselves away from the longer-term average, the standard deviation rises – and thus the bands will fluctuate in varying amounts, away from the average.

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Daily Technical Analysis

EURUSD Outlook

After the failure of the falling wedge bullish pattern, the EURUSD continued its bearish momentum yesterday, bottomed at 1.3504, closed at 1.3525 and keep moving lower around 1.3480 at the time I wrote this comment. This fact should continue the major bearish scenario targeting 1.3400 this week. Clear break below that area should trigger further weakness for the Euro towards 1.3100 area in longer term point of view. Immediate resistance at 1.3535 area. Break above that area should lead us into no trading zone in nearest term but I prefer a bearish scenario with sell on rallies strategy at this phase.

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USD Mixed, PPI Jumps and Jobless Claims Rise

• USD: Lower, jobless claims rise, PPI higher than expected, Philly Fed improves, LEI rose less than expected
• JPY: Higher, BOJ holds monetary policy steady, no expansion of QE, Yuan revaluation speculation
• EUR: Lower, rumors of SNB intervention in EUR/CHF cross, stocks higher, Italian debt troubles
• GBP: Lower, worse than expected public-sector borrowing in January, mortgage approvals decline
• CAD and AUD: AUD & CAD higher, IMF gold sales, Canadian CPI nears BOC target, CRB rebounds

Overview

USD opened near a nine-month high Thursday supported by a number of factors which include Wednesday’s report that the FOMC had considered a 25bps discount rate hike in January, in reaction to stronger than expected US economic data, and by fresh sovereign debt concern with the focus shifting to Italian debt troubles. Wednesday the US reported strong housing and industrial production data. These reports encourage speculation that the US recovery is gaining momentum and fuel speculation of an earlier Fed rate hike. The EUR was pressured by a Dow Jones report that says derivative contracts used by Italian municipalities could magnify debt imbalances over time. European sovereign debt concern continues to pressure the EUR and GBP. GBP traded lower pressured by report that the UK posted its first January budget deficit on record. The commodity currencies opened lower pressured by report that the IMF looks to sell 191.3 tons of gold. News of the IMF gold sales sparked selling of commodities. The AUD downside was limited by hawkish comments from the RBA’s Lowe and rising Australian consumer confidence. CAD turned higher in reaction to report that Canada’s CPI rose sharply in January with the annual inflation rate approaching the BOC’s 2% target. JPY traded higher supported by a drop in risk appetite and in reaction to the BOJ’s decision to hold monetary policy steady and not expand quantitative ease. The BOJ has been under pressure from the Japanese government to take additional measures to combat deflation. JPY was also supported by speculation that China may allow the Yuan to appreciate by as much as 5% next month. Yuan appreciation could help China slow the pace of its recovery. Today’s US economic data was mixed with initial jobless claims posting an unexpected rise. PPI came in higher than expected. The PPI report suggests that inflationary pressures are rising in the US. Rising inflation could encourage more Fed rate hike speculation. The Philly Fed survey came in slightly higher than expected and leading indicators came in below expectation. The employment component of the Philly Fed showed improvement and stocks edged higher. USD turned lower after the release of today’s US economic reports as US equity markets trade higher. (more…)

FOMC Indicate A Sooner Than Expected Asset Sale In A Move To Drain Liquidity From The System!

• Yesterday’s trading saw a stronger USD across the board following the FOMC release of its January meeting. To summarize, the report communicated to the market that the Fed should start selling its assets soon so as to drain liquidity from the market. Philly Fed President Plosser said that he prefers the Feds balance sheet to return to pre crisis levels which is aligned with the views of Kansas City Fed President Hoeing’s position. On the data front we saw a rise in US industrial production by 0.9% indicating good strength in the manufacturing sector and housing starts also climbed by 2.8% showing a strong recovery in the housing sector as well. US 2 year yields rose to 0.88% following the FOMC minutes and USDJPY price action was between 90.15 – 91.38.
• In Europe we had a weaker than expected trade balance report coming in at EUR4.4bln. On the topic of Greece a spokesman in Brussels commented that Greece has not made any requests for financial help and also said that the monetary bloc was able to maintain financial stability. However it must be noted that Goldman Sachs took part in helping Greece issue certain off balance sheet derivatives so as to hide the magnitude of Greece’s deficit. EURUSD price action yesterday saw a rally up to 1.3787 and subsequently got hammered all the way back to 1.3556.
• In Japan we had the BoJ 2 day policy meeting take place; the result was to keep rates unchanged at 0.1%. BoJ Governor Shirakawa said in an earlier statement that the BoJ will maintain its easy monetary conditions so as to help the recovery.
• In the UK the BoE minutes showed the unanimous agreement to pause QE however the minutes showed that a few members are cautious about the nation’s economic outlook. The minutes also showed that the MPC ”would provide further monetary stimulus should the inflation outlook warrant such measures.
• Today the financial calendar will show CBI trends for the UK expected to come in at -36 and the public sector net borrowing figures (PSNB) expected to have dropped by GBP2.8bln. In the US we will have jobless claims initial and continuous. Producer prices and Phily Fed business index are also expected out of the US calendar today.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD failed to continue its bullish momentum yesterday. On h4 chart below we can see that price is now back inside my falling wedge formation indicating bullish correction scenario failure. This fact should turn the direction back to its major bearish trend targeting 1.3490 – 1.3400 area. Immediate resistance at 1.3650 area. Break above that area should lead us into no trading zone as direction would become unclear, but I prefer a bearish scenario with sell on rallies strategy.

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According to a Treasury Department report released Tuesday China sold a record amount of US debt in December. The Treasury said that China sold $34bln of US Treasuries in December. China owns $755.5bln of US government debt. After the December sale of US Treasuries China slipped to number two behind Japan as the largest holder of US treasuries. Japan’s holdings of US debt rose 1.5% in December to $768.8bln. Japan is now the largest US creditor. China’s sale of US debt reflects concern about the USD. The US announced a record 1trln budget deficit for 2010 and deficits in the US are expected to remain in excess of $1trln for a number of years to come Chinese officials are becoming wary of holding US long-term debt as a weaker USD would reduce the value of Chinas US debt. China’s PBOC Deputy Governor Min said that USD will decline because of concern about rising US debt. China’s December sales of US Treasuries may also reflect the fact that China and US are in disputes over the value of the Yuan, trade imbalances and human rights violations in China.

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EUR/USD closed higher on Wednesday and the low-range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI are turning bullish hinting that a short-term low might be in or is near. Closes above the 20-day moving average crossing are needed to confirm that a short-term low has been posted. If it resumes this winter’s decline, the 62% retracement level of the 2008-2009-rally crossing is the next downside target.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD had a significant bullish correction movement yesterday, topped at 1.3778 and closed at 1.3765. On h4 chart below we can see that my falling wedge formation has been violated to the upside confirming further bullish correction targeting 1.3850 before testing 1.4030 area. However, note that the major bearish scenario should remains intact as long as price is moving inside the bearish channel and the current bullish momentum should be seen just as corrective movement. Immediate support at 1.3675. Break below that area could be a potential threat to the bullish correction scenario testing 1.3585 area

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News and Events:

The fx markets main focus continues to be the Greek sovereign debt issue and the potential of something concrete materializing from the ECOFIN meeting today. However, we are doubtful we will hear anything new. The Eurozone members are expected to pressure Greece into endorsing further austerity measures and will be given until mid March to prove it will be able to reach its forecasted deficit targets (we are not sure what an extra few weeks will do but…). As of yet, there has been no official bailout plan reported, only a softly worded statement on EU ‘solidarity’ and we don’t think a detail strategy is coming any time soon. So, now FX traders can look forward to 30 days of nervousness and in our mind EUR weakness. Overnight, there has been some harshly worded comments that suggest that members might not be a cohesive as last weeks statement advocated. Finland ‘s Finance Minister stated that EU rules were ‘against a bailout’ and any aid would have to be a bilateral agreement between Greece and members. He also suggested that Finland would not help and ‘Greece must get the money it needs from the market,’ and that Finland has already help enough by supporting Latvia and Iceland . The Austrian Finance Minister said that the fuzzy economic data produced by Greek should not be allowed to undermine the credibility of the EUR. Worryingly, Eurostat, which is already bringing Greece to court for statistical irregularities, today issued a statement that they were unaware that Greece used currency swaps to disguise gaps in there balance sheet. The statistical agency of the European commission has now set an end of February deadline for disclosure on these transactions. Because of the EUs own disclosure and accounting rules, members were not required to report these deals, so markets are completely in the dark to the size and scope of these swaps. And given the familiar names and structures being mentioned, it has eerier similarity to past crisis in the US at the state and country level. Separately, The RBA minutes of Feb 2nd policy meeting provided no real insight into the timing of the next hike.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD didn’t make significant movement yesterday. The bias remains neutral in nearest term and the major bearish scenario remains intact but we still have potential bullish correction indicated by the falling wedge formation. Immediate resistance at 1.3675 area. Break above that area and a consistent move above the falling wedge should confirm further bullish correction scenario targeting 1.3750 – 1.3850 area. Initial support at 1.3585/31 area. Break below that area should cancel the bullish correction scenario and continue the bearish momentum targeting 1.3400.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push lower on Friday, bottomed at 1.3531 but closed higher at 1.3617, formed a hammer candlestick pattern on daily chart as I showed you in my weekly report on Saturday. On my h4 chart below we have another potential bullish correction pattern, a falling wedge. The bias is neutral in nearest term. Although overall the bearish scenario should remains intact and I still prefer sell on rallies strategy, we may have some upside pullback. Immediate resistance at 1.3700 – 1.3750. Break above that area and consistent move above the falling wedge could trigger further bullish correction testing 1.3850 area. On the downside, only a break below 1.3531 could be seen as bullish correction scenario failure and continue the bearish scenario targeting 1.3400 area. CCI just cross the -100 line up on h4 chart suggesting potential upside pullback.

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U.S. Review

So Much Growth, Yet So Few Jobs

• Seldom have the interdependencies of markets been so obvious to practitioners and yet so opaque to policymakers. Struggles in the labor market have been evolving for years, in both expansions and recessions, and yet policymakers romanticize about the past and leave the American worker ill prepared for the future.
• Meanwhile, the gains in business investment are accumulating, suggesting both a change in the way we produce goods and services as well as the continued pressures for global competitiveness.

Triangulation Does not Work in Economics

Sequential attempts to deal with particular problems in our economy have not solved any problems since the recession began. Instead, we have simply pushed the economic pressures in the economy, as if it were a child’s balloon, to another part of the balloon. Almost four years ago we published an article on the domestic implications of a global labor market (Business Economics, July 2006). Three themes were paramount and we can see them repeated today. First, prior labor market benchmarks are outmoded by the emergence of a global labor market. Second, the U.S. labor market has become an increasingly dual labor market where service and goods workers face increasingly different economic forces and that the workers in each sector find it increasingly difficult to move between sectors. This has given rise to significantly different unemployment rates for workers across sectors and with varied educational backgrounds. Finally, participation rates for all workers and especially for teenagers are heavily influenced by changing household preferences as well as regulations such as the minimum wage.

As a result, stronger real GDP growth has not translated into commensurate employment gains. Nonfarm employment fell during the fourth quarter and is expected to average 60,000 for the first half of this year. In its Economic Report of the President, the Obama Administration estimates job gains on average of 95,000 for this year with the unemployment rate at 9.8 percent at the end of this year. We find this employment outlook refreshingly realistic. Businesses are still concerned about the staying power of the recovery and are also uncertain as to what the outcome of the health care legislation will be. Cap and trade is also out there as well as the likelihood of higher income and wealth taxation. (more…)

USD Higher, Chinese Rate Hike Sparks Risk Aversion

• USD: Higher, China hikes reserve rates, stocks and commodities decline
• JPY: Lower, Nikkei closes higher before the China rate announcement
• EUR: Lower, doubt about the Greek rescue, EU growth slows
• GBP: Lower, downside limited by gains in cross to EUR
• CAD and AUD: AUD & CAD lower, pressured by spike in risk aversion, China rate hike

Overview

USD traded at a seven-month high Friday supported by a spike in risk aversion sparked by news that China’s central bank raised its reserve ratio by 0.5% and in reaction to doubt about a Greek rescue. The Chinese reserve ratio hike was a surprise and the second rate hike from China this year. Tightening of monetary policy in China sparked selling of equity and commodity markets and generates fear about the global recovery. There are conflicting reports from Europe about whether or not there will be a rescue package for Greece with the latest report that German Chancellor Merkel has rejected a call for Germany to fund the Greek rescue package. Other EU sources indicate that it is unlikely that the EU will add additional measures to support Greece at this time. The EUR was also pressured by report of slowing growth as EU industrial output falls more than expected and Q4 GDP posted a small rise. GBP traded lower but remains range bound with downside limited by gains in cross to the EUR. CHF traded lower pressured by rumors of SNB intervention. Commodity currencies traded lower pressured by a spike in risk aversion and concern that the Chinese rate hike will hurt the global recovery. US economic data was mixed with retail sales slightly stronger than expected and Michigan consume sentiment came in slightly lower than expected. Business inventories posted an unexpected drop. (more…)

A Roadmap for the Fed’s Exit

• The Fed is moving towards an exit of its very easy monetary policy, and the first steps to reduce liquidity have already been taken There are several more steps on the road to the first fed funds rate hike, but the Fed will prepare markets well in advance.
• The unwinding of alternative easing measures has so far been smooth and we see the biggest risk for a destructive market reaction from the termination of the MBS/Agency purchase programme by end March. A surge in mortgage yields could potentially delay the first rate hike.
• Fundamentals would call for an unchanged fed funds rate through 2011, but given its extremely low level, the first hike is expected to arrive late this year. That said, the Fed will be cautious not to tighten too aggressively and is likely to pause hiking close to the 1% level in 2011.

Exit already in progress

This week a testimony by Chairman Bernanke to the House revealed the Fed has progressed further in its move towards the exit. During the crisis the Federal Reserve System implemented several alternative policy measures to cope with the seizure of money market liquidity and to ease financial conditions for the real economy beyond what could be obtained by a zero interest rate policy. With signs of an economic recovery becoming increasingly convincing, the debate about how and when the Fed will tighten monetary conditions has intensified.

While the Fed will not fully complete its purchase programme for mortgage assets before 31 March, the unwinding has already begun. By 1 February, most short-term liquidity and some lending facilities were terminated. Further, the Fed has laid out a plan for the unwinding of the remaining liquidity and short-term lending programmes. According to this plan, all these measures will be terminated by end H1, as illustrated by the timeline below. (more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD touched 1.3595 level yesterday as Brussels summit failed to give a detail plan of the rescue package for Greek but closed significantly higher at 1.3692. Although market seemed disappointed with the absence of the detail, the fact that Euro bounced to the upside may indicate that traders still expect a convincing rescue plan. The situation can be very tricky at this phase. Unless EU come up with satisfying detail, Euro should keep under heavy pressure.

Technically speaking, as you can see on my h4 chart below, the bullish channel has been violated to the downside indicating potential end to the bullish correction but found a strong support around 1.3585 area (double bottom). The bias is neutral in nearest term but overall I still prefer a bearish scenario. Break below 1.3585 should trigger further bearish momentum towards 1.3490 – 1.3400 area. On the upside, immediate resistance is seen around 1.3750 – 1.3800 area.

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