FX Island

Why do certain traders win consistently lose? Here are four reasons:

1. Not having a proven trading methodology.
   Those who consistently lose don’t know key numbers. They have no understanding of support and resistance. Chart patterns are foreign to them. Their definition of risk management is getting margin called. With no proven trading method or strategy, you are doomed to fail. You will end up quitting the game after a string of losses. But there is hope. With the right education, a workable method, psychological balance and persistence, it can be done.
2. Not understanding how the market works, key indicators, key numbers, and ideal times to trade.
   When you place a trade, you literally go toe-to-toe against some of the biggest nerds in the world. Many professional traders are not only super smart and Ivy League educated, they’re also rich. That doesn’t mean that you, the small guy or gal, can’t win.It just means that you simply must educate yourself and be prepared to do battle. David can beat Goliath, but only if he’s prepared. Some people might think the cost of a trading education is too high. But the cost of ignorance is way more expensive.
3. Risking too much per trade.
   The wannabe trader risks 10% or more of her trading account on a single trade. Real deal traders understand risk and manage it FIRST before thinking about profit. They don’t take trades if it forces them to risk too much. Pros keep their risk below 2% of their account balance. This gives them the staying power to survive multiple losing trades in a row without turning into a worry wart.
4. Not being mentally prepared.
   Psychology is a huge part of trading and most people are not mentally prepared. When money is on the line, fear, greed, and other emotions make trading very hard. Make sure you understand the emotional aspects of trading and be prepared to deal with them before you put your money on the line.

Source: Babypips.com

The Dow has rallied more than 500 points over the past 2 trading days, triggering a sharp rebound in all of the Japanese Yen crosses. Carry trades are back with a vengeance, but the question at the forefront of everyone’s minds is whether this trend will continue. Without a doubt the move in the Dow is impressive, but USD/JPY is struggling to sustain its gains above 110 which suggest that further gains in carry trades may be limited. This is especially true since the move in both the Dow and carry trades have been fueled by nothing other than risk appetite and the latest US releases validate the market’s belief that Federal Reserve needs to continue lowering interest rates. The curve is pricing in a 92 percent chance for a 25bp rate cut next month followed by the possibility of another quarter point cut in the first quarter of 2008. The first test of whether the gains in carry trades can be sustained will be when Tokyo opens for trading tonight. Japanese industrial production and small business confidence are due for release this evening, but it should matter little to a market focused on risk appetite. Instead, keep an eye on China. Last night a Chinese newspaper suggested that the government could widen the trading band or make another one off revaluation. The odds are low, but unexpected events like these are exactly what triggers big moves in the currency market.

Dollar: Beige Book Report Validates Need for Further Easing

With the Federal Reserve at odds with market expectations, traders were banking on today’s Beige Book report to clear the air on who is more right about the outlook for the US economy. Recent Fed rhetoric has been all over the place with yesterday’s hawkish comments from Evans and Plosser offset by the dovish comments by Kohn today. The market on other hand has continued to price in a growing chance of a recession and even though we do not believe that a recession will occur, the US economy could come very close to it. This morning’s data indicates that weakness of the US dollar has done nothing to help the economy. Durable goods fell for the third consecutive month while existing home sales plummeted to eight year lows. Even the Beige Book painted a grim outlook with the various Fed districts reporting slower growth, little change in manufacturing, modest price pressures, depressed real estate markets and a slow holiday shopping season. The only reason why US stocks and carry trades are higher is because the market expects the Federal Reserve to lower interest rates and they are pricing in the expected benefits. Third quarter GDP and New home sales are due for release tomorrow. The forecasts for GDP are very high, which means that it won’t take much to surprise to the downside.

Euro Sees Strong Intraday Reversal

Having fallen to a low of 1.4712 intraday, the reversal in the EUR/USD was nothing short of impressive.  US and Eurozone economic data continued to surprise in opposite directions, leading us to believe that the currency pair still has a chance of testing 1.50.  M3 which is an inflation measure came out slightly stronger than expected, Italian retailer confidence was also stronger and even though the German Gfk consumer confidence survey was softer, the revision to the prior month’s number puts it right in line with expectations.  Tomorrow we are expecting another laundry list of economic data from the Eurozone including German unemployment, retail PMI and producer prices.  Most of these reports should surprise to the upside as the strength of the Euro fails to put a meaningful dent on the Eurozone economy.  Meanwhile in Switzerland, the KoF leading indicator was also much stronger than expected, but that did not prevent the Swiss franc from falling against the Euro as renewed risk appetite sweeps the currency pair higher. 

British Pound Rallies on BoE Comments

The British pound rallied against both the US dollar and Euro thanks to the strong demand for high yielding currencies and hawkish comments from Bank of England policymaker Sentence.  Although many people believe that a rate cut by the BoE is a done deal, Sentance’s comment that setting monetary policy in the months ahead will be a particularly challenging task suggests that the central bank has not made up its mind.  Like his other counterparts, he was worried about the upside risk to inflation and the downside risk to growth.  Unfortunately tomorrow’s data will not give traders any new information on where the greater pressure lies since the market has already discounted a further deterioration in the housing market and Nationwide house prices and mortgage approvals are expected to confirm that. 

Australian, New Zealand and Canadian dollars Unfazed by Weaker Commodity Prices

The Australian, New Zealand and Canadian dollars are stronger across the board despite a drop in commodity prices.  With no economic data released other than mixed Australian reports, the primary driver of commodity price strength is risk appetite.  The breakouts in the Australian and New Zealand are impressive and judging from the price action, we could see further gains.  USDCAD however is still holding above Tuesday’s low which means that there is a decent chance for a bounce.  We have a lot of important Canadian economic data due out over the next 48 hours.  Tomorrow we are expecting the current account and raw material prices both of which are directly impacted by the level of the Canadian dollar.  We expect these numbers to be weaker which could trigger the bounce in USDCAD.  New Zealand has money supply and business confidence due for release.  Building permits dropped -4.3 percent, but the change from the prior month should not be significant enough to offset the strong retail sales and PPI numbers that we have seen in the past few weeks.

Written by Kathy Lien, Chief Strategist

Source: DailyFx

This morning in Asia, the US dollar weakened heavily against the yen as investors pared back exposure to risky trade. The dollar-yen pair fell below 108 level and hit a new 2 ½ -year low of 107.54. This was compared to yesterday’s close of 108.46.

The dollar lost ground against its European counterparts too. The dollar slumped to a new record low of 1.4967 against the euro and 1.0887 against the franc. Against the pound, the dollar fell to a multi-day low of 2.0764. The dollar had closed yesterday’s deals at 1.4850 per euro, 1.1013 against the franc and 2.0620 versus the pound.

Increasing concern about the US economic outlook may induce the Federal Reserve to lower interest rates in December, and exert downward influence on the dollar. A weak dollar encourages demand for dollar-priced commodities because they become more attractive to investors using stronger currencies. Consequently, commodities such as gold and oil rallying in the recent weeks due to the extended slide witnessed in the value of the greenback.

Since its peak in 2002, the U.S. dollar has depreciated against most majors. The devaluation of the dollar was considered to be inevitable by many analysts, and the anticipated development could engender a global economic crisis, given the buck’s status as a reserve currency.

However, White House officials are tight-lipped about the dollar’s weakness. U.S. officials continue to reiterate that a strong dollar is in the best interest of their nation. While speaking to Chinese and U.S. business leaders in New York early this month, Henry Paulson, the U.S. Treasury Secretary, reiterated his commitment to a strong dollar. Paulson also said the value of the currency should be determined competitively based on economic fundamentals.

The recent down leg of the dollar is due to concerns over the credit crisis impacting the banks and markets. The dollar index, which tracks the U.S. dollar against the currencies of 6 major trading partners, has been on an extended downtrend since 2002 and is currently trading near an all time low of 75.40.

Wachovia Securities expects the downward trend in the value of the dollar that has been place for nearly six years to continue, as the recent dislocation in credit markets has significantly reduced the new issuance of structured fixed income product market, giving foreign investors fewer U.S. securities to purchase.

Additionally, the interest rate environment in the U.S. and the rest of the world is supportive of a secular dollar decline. The U.S. central bank is on an easing spree, while most other global central banks have been either holding rates steady or showing an inclination towards tightening. Despite sporadic corrections, the dollar may be heading lower until the end of next year, when domestic economic growth in the U.S. is expected to pick up.

The US markets were closed on Thursday on account of the Thanksgiving Day holiday.

Taken from: MoneyForex.com

Source: RTTNews.com

Was it a pause that refreshes or a sign of an intermediate term top? Dollars bulls and bears battled each other to a standstill as the pair tried but failed to make a new record high. On the other hand  any attempts to take it lower were met with steadfast bids. As we noted earlier in the week, ‘the market remains resolutely dollar bearish, keeping any retracements in the EURUSD relatively shallow. Only if the EURUSD breaks below the important 1.4500 figure will we have confidence that a serious correction in the pair has commenced.  For the time being the market continues to give the benefit of the doubt to the ECB while expecting the Fed to steadily lower rates.’

The greenback is beginning to suffer from another problem. Up until very recently  US was able to attract enough foreign capital to offset its massive trade deficits, but last months TICs data shattered the complacency of the market when it printed at -$69 Billion versus forecasts of $65 Billion surplus. This months data didn’t do much better printing only $26.4 Billion against $71.5 Billion forecast. If foreign capital flows are indeed drying up the long term structural implications for the greenback are very negative.  Friday’s announcement by UAE that it is considering a replacement of the dollar peg with a broad currency basket could only be that start of a massive  move away from the dollar as the reserve currency of the  world.

Next week, holiday thinned trading should keep price action contained, but the buck faces more challenges as the calendar is chuck full of housing data which is expected to be dour yet again. The one thing that may boost the greenback could be the release of the FOMC minutes, assuming they are hawkish in tone. At this point conventional wisdom expects another rate cut from the Fed in December. If the committee signals that it will remain stationary, the dollar may get a reflexive bounce. Overall, however, the momentum is still with the bears.

Source: DailyFx

Even though the US dollar has seen some big moves over the past two trading days, the volatility was not triggered by a shift in the market’s attitude towards the dollar but instead by the sharp swings in the US equity markets and carry trades. This dynamic will change when we receive the reports on US retail sales and producer prices tomorrow. Normally these numbers can single handedly make or break it for the US dollar but unfortunately traders these days have become very skeptical. The forecasts for retail sales are low which means that even if they come out better than expected the market will question whether a strong pace of spending is sustainable. With non-farm payrolls holding steady over the past few months, consumer spending may be less affected by higher food and energy costs. Also, gas prices did not tick higher until November which means that there is a stronger case for dollar positive numbers. Pending home sales today was good as well, rising by 0.2 percent instead of dropping 2.5 percent like the market expected. As for inflation, analysts are expecting a tepid rise on month to month basis, but on an annualized basis, inflation growth is expected to hit a 2 year high. The combination of a weaker dollar and rising food and energy prices should lead to stronger inflation. Whether that will have a lasting impact on the US dollar however remains to be seen. When Bernanke gave his testimony to the Joint Economic Committee last week he focused more heavily on the downside risks to growth than the upside risk to inflation. Tomorrow’s numbers will tell us whether Bernanke’s balance of risk assessment was right.

Carry Trades Come Close to Erasing Tuesday Losses

The Dow is up 320 points and the Chicago Board Options Exchange Volatility Index (VIX) is down 7, paving the way for a sharp rebound in carry trades. There was no real news to drive the price action other than stronger than expected earnings by Wal-Mart and a 3 percent drop in oil prices. Although it may be tempting to believe that the downtrend in carry trades is over, with the exception of USDJPY, none of the Japanese yen crosses managed to close the US trading session above yesterday’s highs. This is not to say that the rebound will not continue but the lack of any real news to support the move makes it questionable. The Bank of Japan left interest rates unchanged last night at 0.5 percent, which was right in line with expectations. GDP growth was also stronger than expected thanks to a rise in exports. Part of the Yen’s weakness today was blamed on the comments from Prime Minister Fukuda who warned against a rapid rise in the Yen, but he also indicated that he had no problems with long term appreciation in the currency. It appears that 110 is the line in the sand for the Japanese government and if we break that again we could hear more serious calls for intervention.

Euro Unfazed By Sharp Fall in Analyst Sentiment

The German ZEW survey of analyst sentiment fell to the lowest level in 15 years but that did not prevent the Euro from rebounding against the US dollar today. Analysts have been notoriously more pessimistic about the outlook for the Eurozone than businesses and over the past few months they have been proved wrong more often than right. The German economy has been far more resilient in the face of Euro strength than most people could have anticipated and it is for this reason that the ECB stands ready to raise interest rates. The cracks are showing however with industrial production falling 0.7 percent in September. For the ECB, what matters the most is which gets out of hand faster; growth or inflation. If oil prices resume their rise and take out $100 a barrel, the central bank may have no choice but to raise interest rates. On the other hand if growth starts to slow materially, which it could if the US financial sector gets hit by another wave of major subprime losses. In the more immediate future, we are expecting Eurozone GDP tomorrow; both French and German GDP are expected to be strong.

UK Consumer Prices are Hot

UK consumer prices were much stronger than expected today but that was not much of a surprise given the sharp rise in producer prices reported yesterday. This was the first time since June that the annualized pace of inflation growth has surpassed the Bank of England’s 2 percent target. The gains were unsurprisingly led by oil, food and air travel. Even though there are troubles in other parts of the UK economy, the latest inflation readings should be concerning to the central bank and eliminates any prospect of a near term interest rate cut. Meanwhile house prices fell to the lowest level in 2 years last month adding to the evidence that the property market in the UK is cooling. Tomorrow we are expecting UK employment data and the Quarterly Inflation report. Although the labor market is expected to hold steady, we could see a nice rise in average earnings.

2 Percent Moves in Australian and New Zealand Dollars

The Australian, New Zealand and Canadian dollars are all stronger today despite the drop in commodity prices thanks to better than expected economic data and an overall increase in risk appetite. Even though the Australian dollar hit a new 26 year high and the Reserve Bank raised interest rates, Australian business confidence rose last month along with business conditions. New Zealand reported faster growth in both food and general producer prices, retail sales are expected tomorrow. The tight labor market in New Zealand should fuel stronger consumer spending.

Source: DailyFx

The Department of Commerce released its report on wholesale trade in the month of September on Wednesday, showing that wholesale inventories rose much more than expected while wholesale sales also showed a notable increase.

The report showed that wholesale inventories rose 0.8 percent in September following an upwardly revised 0.7 percent increase in August. Economists had expected inventories to increase by 0.1 percent compared to the 0.1 percent increase originally reported for the previous month.

The bigger than expected increase in wholesale inventories reflected increases in inventories of both durable and non-durable goods. Inventories of durable goods rose by 0.7 percent, while inventories of non-durable goods increased by 1.0 percent.

As mentioned above, the Commerce Department also said that wholesale sales rose 1.3 percent in September after rising 0.8 percent in August. A 2.1 percent increase in sales of non-durable goods contributed to the strong sales growth.

With sale growth outpacing inventories growth, the wholesale inventories/sales ratio edged down to 1.10 in September from 1.11 in the previous month. In the same month last year, the ratio came in at 1.15.

Source: MoneyForex

On Thursday morning in Asia, the Malaysian Ringgit advanced against the US dollar. The Ringgit hit a new multi-year high of 3.3306 at 11:10 pm ET, compared to 3.3375 late Wednesday in New York. The Ringgit then declined slightly and the pair is currently worth 3.334. The US dollar plunged against the other major currencies as the Federal Reserve lowered its interest rates by 25 basis points to 4.5% on Wednesday.

On Tuesday, the Malaysian central bank left it overnight policy rate unchanged at 3.5%. The decision came in line with economists’ expectations. In an accompanying statement, the apex bank said that Malaysia’s economic fundamentals continue to remain sound. Domestic demand has been the key driving force behind the headline GDP growth number. The bank believed that the strength of domestic fundamentals will help mitigate the impact, arising from higher oil prices and the uncertainty in the global financial markets.

Source: RTTNews