FOREX TRADING

Daily Technical Analysis

EURUSD Outlook

The EURUSD didn’t make significant movement yesterday. Overall price still consolidation in range area of 1.3450/35 – 1.3735/50. The bias remains neutral both in nearest and medium term but the long term outlook remains bearish. For me, there are two technical events that must take place in this situation to give us clearer direction, a break above the major bearish channel confirming bullish reversal scenario towards 1.4025/50 or a break below the triple bottom around 1.3450/30 area to confirm bullish failure and continue the major bearish scenario towards 1.3100. Immediate support at 1.3530. Break below that area could trigger further bearish pressure re-testing 1.3450/35 area. On the other hand, break above 1.3735/50 area should be seen as a serious threat to the major bearish scenario at least targeting 1.3850 region.

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USD Lower, JPY Pressured by BOJ Ease Speculation

• USD: Lower, inventories drop more than expected, stocks rally
• JPY: Lower, BOJ ease speculation, weak machinery orders
• EUR: Higher, German exports drop sharply, industrial production rises in Italy and France
• GBP: Lower, industrial production posted an unexpected decline, concern about UK debt rating
• CAD and AUD: AUD & CAD higher, strong Chinese trade data, stocks and crude rally

Overview

USD traded in a narrow range gaining versus JPY and GBP, and drifting lower versus the EUR and commodity currencies. JPY was pressured by BOJ ease speculation. Reuters reports that the BOJ may ease monetary policy next week. GBP traded lower in reaction to report of an unexpected decline in UK industrial production. EUR erased early loses sparked by report of a sharp drop in German exports. EUR rebounded in reaction to report of stronger industrial production data from Italy and France and gains versus the JPY. The commodity currencies continue to outperform trading higher in reaction to strong trade data from China. China’s exports rose 45.7% in February. The Chinese trade data generates optimism about the strength of the global recovery. Dovish comments from the Fed’s Evans had limited impact on the trade. Evans said the weak labor market will make the Fed keep accommodative policy for some time. The Bloomberg Professional Global Confidence Index finds that optimism about the USD is an 18 month high as the US economy shows signs of recovery. According to the survey, investors expect the US economy to grow faster than Japan and Europe and the Fed is expected to hike rates before the ECB and BOJ. Growth and yield differentials are moving in favor of the USD. The Bloomberg survey also states that investors have turned negative the EUR because of fallout from the Greek debt crisis. Jeremy Siegel a finance professor at University of Pennsylvania Wharton school of business says the US recovery is certain but the EU may splinter. A fresh sign that the US economy is recovering is a report that US job openings are at an 11 month high. This report suggests that US employers may be ready to start hiring new workers. US economic data was mixed with wholesale sales coming in higher than expected and wholesale inventories lower than expected. USD traded to the days lows pressured by a surge in the price of crude sparked by report of lower crude inventories. Focus turns to Thursday’s release of US jobless claims and retail sales and Friday’s release of Michigan consumer sentiment.

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In all the good trading books, it always mentions that you should make detailed records, mainly for yourself, but also for tax purposes. What they never seem to do is go into any detail regarding analysis.

The goal and aim of a profitable trader is to constantly improve himself and make him the best he can possibly be. To do this, you need to analyse your trading results and then take action to constantly improve them!

One of the most misunderstood and not very useful statistics is the ratio of winning trades to losing ones. This is what most people who are not traders, will ask you, thinking that if you win more than 50% of your trades, you must be doing well.

The reason it is not a true reflection of your trading capability is that on average, you may lose eight out of ten trades, but still make money. If your risk and money management are good, and you do do this, you could be losing around 10 pips on each losing trade, but making around 100 pips on each winning trade. Now you can see that an ‘eight out of ten loser’ may actually be considered a good trader!

A better gauge would be to calculate your ‘average winning trade’ (The number of pips / number of winning trades) and conversely, your ‘average losing trade’ (The number of pips / number of losing trades). If you now subtract the losers result from the winners result, you will see the difference. If this is negative, you are not making money and need to revise your strategy! – This is the most useful and general guide to your trading profitability.

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Weekly Economic and Financial Commentary

U.S. Review

The Fed Moves to End its Extraordinary Policy Ease

• Regional manufacturing surveys showed a stronger rebound in orders and production than had been expected. Industrial production also rose solidly.
• January’s inflation data were mixed, with import prices and pipeline inflation up sharply and the Consumer Price Index rising slightly less than expected.
• The Federal Reserve raised the discount rate by a quarter percentage point late Thursday afternoon.

When Ben Bernanke Talks, People Listen

Sometimes Ben Bernanke does not even have to speak. Just one week after the Fed Chairman released his testimony, in which he stated that “‘before long” the Fed would raise the discount rate and return it to the spread over the federal funds that existed before the crisis, the Fed acted. We now know the meaning of “before long,” at least as it relates to Fed policy.

Our initial read from the Fed’s move is that it intends to stay very close to the script Ben Bernanke laid out to reverse the extraordinary actions it put in place to fight the financial crisis. Those actions contributed to an enormous expansion of the Fed’s balance sheet and heightened concerns about whether the Fed could adequately contain or reverse this extraordinary stimulus without putting the recovery at risk or creating an environment, in which inflation might accelerate.

Bernanke noted that returning the discount rate back to its normal relationship to the federal funds rate should not be seen as a tightening move but rather a return to a more normal monetary policy. Maybe that is why the Fed chose to announce its move along with the regular weekly release of the monetary aggregates, whose influence the Fed has also traditionally downplayed. Specifically the Fed noted its policy actions were “not expected to lead to tighter financial conditions for households or businesses and do not signal any change in the outlook for the economy or monetary policy.” Monetary policy is still extremely easy, with the federal funds rate close to zero. All that has changed is that the era of extremely cheap money is beginning to end.

There was a pretty full set of economic reports released this week, including a number of reports on the manufacturing sector. Most of the regional manufacturing surveys, including the New York Fed’s Empire Manufacturing Survey and the Philadelphia Fed survey, came in stronger than expected. The Empire Survey rose nearly nine points to 24.9. The employment component rose for the second month in a row and is now solidly positive at 5.56. Manufacturers also seem to have a better handle on inventories.

Industrial production rose 0.9 percent in January, with solid gains across most categories. Output in the manufacturing sector rose 1.0 percent, with output of consumer goods and business equipment rising solidly. Production of IT equipment remains a notable bright spot, with production climbing 1.7 percent. Utility output, which surged in December, rose a much more moderate 0.7 percent in January. February’s cold temperatures should send output even higher in next month’s report.

The inflation data were clearly mixed. Import prices continue to rebound off last year’s sharp declines. The overall index jumped 1.4 percent in January, while prices excluding petroleum rose 0.6 percent. The Producer Price Index also registered a larger-than-expected gain, climbing 1.4 percent. The Consumer Price Index was much tamer, however, rising just 0.2 percent overall and falling 0.1 percent after excluding food and energy items. Sharply lower prices for hotels and lodging accounted for the smaller-than-expected overall rise and most of the drop in the core. (more…)

By D Bennett

A trading plan gives a day trader points of reference as market action unfolds quickly in real time. It enables them to always know what to do next, and how to do it. Specifically the plan should answer four key questions.

1. When should a trade by opened?

You must specify some trigger which will signal you to take a trade, for example: (i) Buy if price moves down to a key support level or penetrates a resistance level. (ii) Sell if a "fast" moving average crosses below a "slower" one. (iii) Buy if an expected news item meets some specific criterion. The trigger must be clear, unambiguous and easily determined in the heat of battle. When the trigger is detected, you act.

2. How large should the trade be?

A signal to buy or sell is not enough unless you also know what size investment to make. In futures trading, this means knowing how many contracts to buy or sell. There are various strategies you might choose. For example: (i) Always trade the same number of contracts. (ii) Identify where the initial stop loss order is placed, calculate the level of risk per contract, and divide this into the highest level of acceptable risk per trade to find the number of contracts to trade.

It is very easy to get this wrong and find yourself carrying too much risk, or missing opportunities by being in too small a position. Trading with the right position size is possible the factor which makes the greatest contribution to the ultimate success or failure of the trader.

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Euro 1.3890

Initial support at 1.3853 (Feb 1 low) followed by 1.3833 (Jun 8 low). Initial resistance is now located at 1.4053 (Jan 28 high) followed by 1.4097 (Jan 27 high)

Yen 90.95

Initial support is located at 89.59 (Jan 29 low) followed by 89.14 (Jan 27 low). Initial resistance is now at 91.88 (Jan 21 high) followed by 92.05 (Jan 14 high).

Pound 1.5905

Initial support at 1.5833 (Dec 30 low) followed by 1.5708 (Oct 13 low). Initial resistance is now at 1.6083 (0.236 of 1.6458-1.5851) followed by 1.6179 (Jan 29 high). (more…)

Waiting For The ECs Assessment Of Greeces Deficit Cutting Plan

News and Events:

Just a day after the RBA mentioned China shift in policy as a rational for holding rates, Fitch Rating warned that banks in China faced the greatest ‘bubble risk’ of any Asian country. This temporarily took the wind out of the risk-on tone, pushing the EURUSD down to 1.3946. However, markets were able to rally as Europe opened and traders prepared for an event and data filled day. Gold then broke its trend line resistance at $1122, pulling EUR along for the ride. Just a day after the RBA stunned the market by keeping rates unchanged, Australian trade deficit widened to A$2.25bn vs. -A$2.5bn exp in December from A$1.7bn in November, illustrating a strong recovery in both imports and exports. We still believe the RBA will hike in March and AUD should be well supported near term (AUDUSD powered to 0.8920, as commodities and risk also rallied). In Europe, the highlight will be the release of the EC assessment of Greece’s deficit-cutting plan. Part of today’s rebound in risk correlated trades might be from the easing concerns over Greece and just the fact that something is being done. As a testament, Greek sovereign 5y CDS spreads have tightened slightly. The press conference is expected to mention two items: 1. the analysis and endorsement of the Greek public finance cutting strategy and 2. explanation of the EC monitoring plan. In the long run, we believe the EC will eventually need to step in with some kind of funding program, but most probably it will not mention it in this report. For today, the risk is that the report and comments will not go far enough to ease the markets concern, causing the EUR to suffer. We prefer to play the short side of the EURUSD. The Norges Bank is expected to keep rates on hold at 1.75% at this meeting, after raising rates at the previous two consecutive meetings (the last on 16 Dec). After the surprise hike of 25bps the last time around that caught many analysts wrong-footed, there is certainly a possibility that the consensus may have underestimated the Norwegian economy once more. Recent retail sales figures have been strong at 1.1% MoM, and PMI data for January at 50.1 was also indicative of further improvement in the economy. Nevertheless, we would align ourselves with the majority in believing rates will be kept on hold this month; consistent with the prediction offered by the Norges Bank Deputy Governor in December that he expected rates to be at 1.75% in March, and also compatible with the rationale that the Executive Board will want to see the contents of the next Monetary Policy Report published on 24 March, before deciding on further tightening. In the US, ADP reports will help solidify expectations for Friday critical NFP. We have seen an adjustment lower in recent days, with the current consensus standing now at -30k. Should ADP fall in line and not repeat one of its spectacular deviations, this will put NFP around 25k which should be very USD positive (more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD continued its bullish correction yesterday, topped at 1.3974 and closed at 1.3960. This fact should open the door for further correction testing 1.4000/30 area. Break above that area should continue the bullish correction testing the upper line of the bearish channel and 1.4250 resistance area. However as long as the bearish channel hold, this pair is still in a bearish phase in longer term point of view. Immediate support at 1.3900. Break below that area could end the upside correction testing 1.3750 area, which is technically remains the nearest bearish target this week.

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