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The US dollar traded modestly higher through end-of-week currency trading, as sizeable declines in the Dow Jones Industrial Average encouraged traders to close dollar-short positions. Indeed, the dollar has kept a strongly negative with the Dow Jones and other risky asset classes—effectively trading lock-step with the now-infamous forex carry trade. The dollar now carries the third-lowest overnight interest rate of all G-10 currencies, and traders have taken advantage of that fact to sell it against high-yielding counterparts. Yet signs of market duress will easily shake increasingly risk-averse speculators out of their low volatility forex strategies, and the dollar will likely gain on any continued drops in the Dow and S&P 500.

A virtually empty US economic calendar left the dollar to the whim of broader financial market forces, and little stood in the way of a Dow-led greenback rally. Such risk aversion likewise led to substantial drops in domestic Treasury yields and similar moves in short-term interest rate expectations. Yet markets seem impervious to developments in domestic bond yields. The dollar’s resilience in the face of sharp Treasury yield drops represents a clear break from more normal market conditions. That said, it remains relatively clear that risk sentiment will be the main driver of dollar price action through the coming months of forex trade.

Written by David Rodríguez, Currency Analyst for DailyFX.com

Source: DailyFx.com

Last week has been a tough week for the US dollar. On Wednesday the greenback fell to a record low against the Swiss franc and now it ends the week not far from its 2.5 year low against the Japanese Yen. Negative retail sales, signs of a recession in the US manufacturing and housing sectors as well as bearish comments from Federal Reserve Chairman Ben Bernanke all provide strong reasons for the dollar’s weakness. Although we do not believe that the greenback has hit a bottom, we would not be surprised to see a bounce in the dollar this coming week. The US economic calendar is light with the only potentially market moving report being Thursday’s existing home sales data. Don’t forget that today (Monday) is President’s Day which means that US markets are closed. This gives traders the opportunity to seriously think about whether the Federal Reserve will really deliver a 75bp rate cut. Fed fund futures are now pricing in a 72 percent chance that the move will happen. The possibility of an inter-meeting rate cut is also being floated around, contributing to the dollar’s weakness. If the Federal Reserve fails to deliver, those who have short the dollar on this expectation will have to adjust their positions accordingly. We continue to stress that a 75bp rate cut is a severe move. The last time the Federal Reserve lowered interest rates by three quarters of a point was during Volcker’s term when he raised interest to as high as 20 percent to curb double digit inflation growth. Over the last 30 years, there has been 4 recessions in the US economy. An interesting question to ask is if the Federal Reserve has cut interest rates by more than 75bp to fight a recession? Yes. In the past 3 decades, there have been times when the Fed cut rates by 200bp in a single meeting, but interest rates at the time was 18 percent. Since US interest rates are now at 4.25 percent, a 75bp rate cut on a percentage basis would be far more significant than a 200bp cut when rates were at 18 percent.

Click here to read more about last week’s market wrap up.

Written by: Kathy Lien, Chief Strategist of DailyFx.com

Source: DailyFx.com

Retail sales and producer prices both contracted in the month of December, leading many traders to wonder whether the US economy will fall into recession. Spending on cars, electronics, furniture, gas station receipts, building materials, clothing and sporting goods all declined, reflecting a broad based slowdown in consumer demand. According to Bloomberg News, this is the worst year for US retailers since 2002. With the growth in the labor market already slowing, will the drop in consumer spending push the US economy into a recession and if so, what does this mean for the US dollar?

Is the US Dollar Headed for More Losses?

Before discussing whether the US economy will fall into a recession or how much the Federal Reserve will lower interest rates, it is important to talk about what is in store for the US dollar. Despite weak retail sales and producer prices, the dollar did not weaken across the board today. In fact, it strengthened against the Euro, Australian and New Zealand dollars while selling off only against the Japanese Yen, British Pound and Canadian Dollars. The main reason for this price action is because the weak data has caused a sharp rise in risk aversion. The Dow dropped as much as 275 points today, triggering massive carry trade liquidation. Over the past few years, the AUD/USD, NZD/USD and to some degree also the EUR/USD all were bought for carry trades. However the latest wave of weakness in the high yielders may actually provide good buying opportunities if the dollar continues to weaken. As the Federal Reserve lowers interest rates, stability should be restored in the financial markets, allowing the currencies of countries with strong fundamentals and inflation pressures to appreciate once again. One great example is the Australian dollar. A tight labor market, rising consumer demand, higher inflation pressures and $900 gold prices all point to medium term gains for the currency. The only reason why it sold off today is because of carry trade liquidation. USD/JPY could also extend its fall because Japan will not able to raise interest rates if US growth slows materially.

Recession or No recession?

As for the US economy, although some economists will argue that the US economy is already in a recession, we do not agree. The definition of a recession is two consecutive quarters of negative GDP growth and in the last two quarters, GDP growth was strong. Even if the economy contracted in the fourth quarter, that would be one quarter of negative growth, not two. The first quarter has just started so it is too early to tell how the US economy will fare. Also, retail sales were bad but spending has been very volatile. Back in June and January of 2007, spending also contracted after a month of solid growth. Retail sales in November increased 1.0 percent which means that part of the decline in December was payback for the strong numbers. The Federal Reserve has the power to determine whether the US economy falls into a recession. If they step up to the plate now they can still prevent the slowdown from worsening.

50bp is a Band-aid

The futures market has completely priced in a 50bp rate cut, but this may only be a band-aid for a growing problem. Long term yields have remained stubbornly high and even though they will fall on a half point rate cut, the relief to borrowers may be minimal. The Federal Reserve really needs to act aggressively to restore confidence in the financial markets and to stabilize the economy. This means that either an interest rates cut now (yes, that would be an inter-meeting rate cut) or 75bp of easing at the end of the month. The goal is to send let the markets know that the Fed is not playing around and will do everything in their power to prevent a recession from happening. With producer prices falling, the Federal Reserve actually has the flexibility to make a larger move. Yesterday the Baltic Dry Index had its largest two day decline on record. The index is usually used as a measure for global commodity demand and the fall suggests that demand is slowing, which should relieve some of the upside pressure on commodity prices.

But will the Federal Reserve really cut by 75bp?

Probably not.

Since Bernanke’s term as Fed Chairman began in 2006, we have seen no surprises from the central bank. They have always done exactly what the market expected. Even though growth is clearly slowing, inflation risks are still to the upside. Bernanke is a hawk by nature which means that it will be difficult for him to take any measures that risks stoking inflation in an environment where the US dollar is already pushing prices pressures higher. Also, there has only been one 75bp rate hike in the past 15 years, the last time that interest rates were reduced by more than 50bp at a single meeting was in 1984, after former Fed Chairman Paul Volcker had taken interest rates to a high of 20 percent to tame double digit inflation. By raising interest rates as aggressively as he did, Volcker managed to bring inflation down from its peak of 13.5 percent in 1981 to 3.2 percent by 1983. We are not coming off double digit interest rates or even high single digit interest rates at the moment which means that a more aggressive move may be off the radar for Team Bernanke.

Expect the January 30^th Federal Reserve interest rate decision to be an interesting one. The market is currently pricing in a 50 percent for a 75bp interest rate cut. However as we have all seen, market expectations can change quickly. Bernanke will be giving his congressional testimony on January 17^th while President Bush is slated to deliver his State of the Union address on January 28^th. It will be difficult for the Fed Chairman not to shed more light on his plans for monetary policy. As for the President, there is a decent chance that we could see new policy proposals like tax rebates aimed to stimulate the economy.

In the meantime, once the US equity market stabilizes, broad based dollar weakness could resume. The highest probability trades will be to sell the dollar against the currencies of countries that are still looking to raise interest rates or to keep them unchanged.

Written by Kathy Lien, Chief Strategist

Source: Dailyfx.com

You can be super motivated to trade, filled with deep optimism, have millions of trading capital available, and a solid trading strategy, but if you don’t devote your full concentration to the trade that you have on at the moment, you will lose money.

It’s essential that you learn to concentrate while executing a trade and scrupulously monitor the market action during a trade

Why is concentration difficult? While in school did you have trouble studying in a noisy library? It’s easy to concentrate when we are in a quiet room and when we are calm and at ease. But trading is often chaotic and full of stress. It’s easy to become shaken and lose your ability to concentrate. When you aren’t fully focused on your ongoing experience, it’s easy for self-doubts to creep into your consciousness. You may start having second thoughts and may want to sabotage your trading efforts.

The more you can stay focused on your ongoing experience, the more you can trade effortlessly and skillfully. But how can you concentrate more easily?

First, it’s useful to remember that concentration takes psychological energy, and your supply of psychological energy has limits. If you want to maintain your focus, you must be rested and relaxed. Get proper sleep and nutrition. If you’re tried or hungry, you won’t be able to keep your mind focused on trading.

Second, it’s important to control your stress levels. Stress depletes psychological energy. Even when you are excited rather than agitated by stress, your psychological energy is depleted a little bit each time you encounter an event that gets your adrenalin pumping. The best way to limit stress is through risk management. If you know that you are doing your best to keep potential losses to a minimum, you’ll feel more comfortable and can focus most of your psychological attention on trading.

Concentration is essential for profitable trading. The more you concentrate, the more you feel you are in control. And when you feel your body and mind are synchronized with the market, you’ll trade profitably.

Source: Babypips.com

First of all, we at ForexYellowPages.com would like to wish you all a Happy New Year!

2007 has been an interesting year with lots of ups and downs and some drama every now and then. So to usher in the new year, we came up with a brand new theme and look that we hope will be easier to navigate as well.

Along with 2008, we shall continue to bring you news and articles on Forex, including tips and stories! We would also like to thank you for being with us throughout 2007, and we hope you will continue to be with us throughout the new year!