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GreenForexTrading.com
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Hi everyone,
In this e-mail I am going to give you my view on the markets for Sunday the 20th to Monday the 21st of March 2011 and the week.
WEEK AHEAD: One of the reasons that leveraged carry trade positions explode is a rally in the underlying currency which has financed the trade. In this case, it is the Japanese Yen which has been the funding currency. Those who put on this sort of trade are effectively short the Yen because when they exit the trade, they have to close out the positions that they financed and then buy Yen to pay back the original loan in Yen terms. As the funding currency rallies, they begin losing money because they are forced to pay a higher price for the Yen when they do the foreign currency exchange. When we saw the Yen rallying sharply this past week it set off a cascade of unwinding of the carry trade as hedge funds dumped both stocks and commodities that had been purchased and then leveraged up as risk trades were quickly going underwater. It now appears that the Bank of Japan has secured the cooperation of the entire G7 in knocking down the Yen which had appreciated to a level nowhere near an accurate valuation of the currency given the fiscal condition of the nation. If it now appears that the G7 agrees to keep the Yen at bay then it could well be that the same hedge funds that were blowing out of their carry trades will be eager to reinstate them since they will feel that they have an effective upside cap on the Yen thus eliminating an element of risk in the trade. And they call these free markets.
The Fukushima reactors were all shut down at the time of the earthquake helping to limit the amount of damage. Not radioactive fallout, but economic fallout should now be the major concern as it has caused a crippling of the world’s most important just-in-time producer. Auto-parts users around the world, for example, could start to feel the strain of Japan’s power outage this week and shortages in many other key areas of global production are bound to be felt soon. This developing story has been underplayed so far, but it seems inevitable that Japan’s economic slowdown will negatively impact a global economy that was already on the edge of depression. The one asset class that has benefited from nuclear-disaster talk is U.S Treasury paper, in which the lame stream media persist in calling a “safe haven”. And enter the G-7, eager to dig itself in deeper to protect the mountain of bogus U.S. paper its members hold. Most recently, they helped the US Bankers throw everything they could at the yen to hold it down. If the short-squeeze on yen carry-traders had grown any more intense than it did last week, it would have forced a massive unwinding out of US Treasury paper, derivatives and everything else that the banking minions have bought using yen borrowed for next to nothing.
All of this has put added strain on the US Dollar and will continue to do so for some time. With each subsequent bounce becoming smaller and smaller in the USDX, a fast move to 75 is in motion followed by a collapse to as low as 72 but beware that a bounce is possible here as sentiment has gotten a little ahead of itself and there are plenty of new “Johnny-come-lately” players to the short the USDX party right now as the USDX is near a zone of weekly support at 75.5-76.5. Finally, in the broader context, the monthly chart shows that the rising trend line that forms the bottom of a reverse pennant formation is now at 76.5 and a decisive breakdown from that pennant to below 75.5 (USDX now at 75.6) would have serious implications regarding the potential downside.
Therefore, this week, I will be looking for continuation entries into U.S. Dollar denominated longs on any USDX strength early this week for both scalp and longer term positions. Witness a weekly PPO SELL signal in alignment with a new daily SELL. So look to go long U.S. Dollar denominated pairs on any weakness (USDX strength) into some retracement zones anytime this week, although I expect a USDX rally early this week as the USDX is looking pretty sick now and due for a bounce, as seen in the USD daily and weekly chart here http://www.stockcharts.com/charts/gallery.html?$USD.
The EUR is the inverse of the USDX and with the backdrop of a PPO that now has triggered a daily BUY signal against a weekly BUY signal extended from the 50-day moving average, and the bounce here looks to continue and now look for some bottom action on lesser time frames to enter and go long. Now look for 1.419, and with retrace to 1.405 expected, we can look for chop again in the 1.402-1.405 area before 1.425, 1.45 and 1.50 can be seen in short order, as can be expected on future dollar weakness as seen in the chart here, http://www.stockcharts.com/charts/gallery.html?$XEU. Place your trades accordingly. All charts courtesy of www.stockcharts.com.
The GBP has seen some serious choppy swings and a reversal upon reversal bar on the daily and we have been avoiding this on of late but still watching it with a long bias as it becomes less stretched on the long side, now looks in good BUY area at the 50-day moving average. A PPO daily SELL that is turning up against the backdrop of a weekly BUY signal makes cable choppy as of late. All these cross-currents still make cable a cautious long play, as seen here, http://www.stockcharts.com/charts/gallery.html?$XBP.
The JPY caught the “safe-haven” BID and intervention is again in the cards and the USD/JPY 80.0 level is where some nimble BUYS can be set as that area will be defended at all costs with newly printed yen. No other recommendations on JPY that can be played as seen on the chart given here http://www.stockcharts.com/charts/gallery.html?$XJY.
This week’s activities and reports of consequence are:
1. Mon. Mar. 21, 2011 - (10:00am EST) USD Existing Home sales and EUR ECB President Trichet speaks.
2. Tues. Mar. 22, 2011 - (5:30am EST) UK CPI and (8:30am EST) CAD Retail Sales.
3. Wed. Mar. 23, 2011 - (5:30am EST) UK MPC Meeting Minutes and (10:00am EST) US New Home Sales and Fed Chairman Bernanke speaks.
4. Thurs. Mar. 24, 2011 - (5:30am EST) UK Retail Sales and; (8:30am EST) US Core Durable Goods Orders and Unemployment Claims.
5. Fri. Mar. 25, 2011 - (5:00am EST) EUR German Ifo Business Climate and EU Economic Summit.
The swing trade for today’s Asian-London-U.S. session is to SELL the EUR/USD @ 1.4175 with a STOP @ 1.4202 and a TARGET of 1.4050 for over 120PIPS.
That's it for today. Remember that I trade in the Live Forex Trading Room between 1am-6am Eastern Time. I will be hosting my regular 3-4 hour session and assessing and exploiting PIP opportunities as they arise.
Enjoy trading and good luck everyone!
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