» 2008 » February

Economic data affects the currency marketWhen forex trading on the currency market, it is important to take into account economic news. Economic data can have an effect on currency trading on the FX market.

The strength of an economy provides an underpinning for a currency. If an economy is growing, a currency is more likely to gain on the FX market. Likewise, if there are signs of economic weakening, then that is likely to affect a currency negatively in forex trading.

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• Currency Trading on the FX Market
  Learn forex trading

Source : GFT Forex

Records in currency trading not expected to last for the euroWhile the euro is expected to continue to make steady gains against the US dollar in currency trading on the FX market, the recent gains may be overkill. Forex trading strategy should consider that the euro may be overbought right now, and that it may head lower in correction before it resumes its steady gains. Bloomberg reports on currency trading with the euro:

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• Currency Trading with the Euro
  Forex trading with world currencies

Source : GFT Forex

Currency trading and risk aversionThe global credit crunch is affecting currency trading on the FX market as risk aversion increases. Additionally, higher interest rates in some countries support currencies that may soon fall because there is little economic growth, due to inflation.

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• Trading on the FX Market
  Currency trading on world markets

Source : GFT Forex

Currency trading with the US dollarCurrency trading with the US dollar should consider that Fed chair Ben Bernanke is indifferent toward currency dollar weakness on the FX market. Indeed, the US dollar forex trading forecast is likely to continue on the weak side, reports Reuters:

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• Dollar Weakness in Forex Trading
  Currency trading on the FX market

Source : GFT Forex

Currency trading with the yenThe Japanese yen is gaining in forex trading against the US dollar on the currency market. In currency trading, the yen is deriving strength from weakness in the US economy, possibly moving toward testing at the 100 level. Forbes reports on the Japanese yen in forex trading against the US dollar:

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• Currency Trading with the Japanese Yen
  Forex trading on the currency market

Source : GFT Forex

Profit taking of short Dollar positions likely to occur

Releases from Europe:    

January
German Retail Sales               (MoM)   +1.0%    +1.6%
German Retail Sales                (YoY)  - 2.1%    +0.6%
German CPI (F)                     (MoM)   - 0.4%   - 0.4%
German CPI (F)                      (YoY)   +2.7%    +2.8%

February
U.K. Nationwide House Prices   (MoM)   +0.0%    - 0.5%
U.K. Nationwide House Prices    (YoY)   +3.6%    +2.7%

German retails sales marked a strong recovery in January bringing the annual pace back into the black. Note that the annual pace recovered strongly due to the large dip last year following the sales tax hike.

Still, overall it does show that the German consumer is still hanging in there and this will help cushion the softness generated in other areas.

U.K. house prices continue to decline with the annual pace dipping to the lowest level in over 2 years at +2.7%. However, the building society pointed out that this had more to do with the dropping out of large rises a year ago.

Indeed they feel the decline is slowing and probably close to a base for the time being at least. They neither see a return to strong price gains for “some time to come.”

The following economic releases are due today:

December
Italian 2007 GDP                                 +1.7%  

January
U.K. M4 Money Supply (F)        (MoM)     +1.3%
U.K. M4 Money Supply (F)         (YoY)     12.9%
U.K. M4 Sterling Lending           GBP      21.6bn
Euro-zone CPI                        (MoM)     - 0.4%
Euro-zone CPI                         (YoY)     +3.2%
Euro-zone CPI Core                  (YoY)    +2.0%
Euro-zone Unemployment Rate                7.2%
U.S. Personal Income              (MoM)     +0.2%
U.S. Personal Spending            (MoM)    +0.2%

February
Italian CPI                             (MoM)     +0.2%
Italian CPI                              (YoY)     +2.9%
Euro-zone Business Climate Indicator        0.75
Euro-zone Consumer Confidence             -12.0
Euro-zone Economic Confidence              101.2
Euro-zone Industrial Confidence                 1.0
Euro-zone Services Confidence                 11.0
GfK Consumer Confidence Survey            -15.0
Swiss KOF Consumer Confidence                1.6
U.S. Chicago PMI                                    49.7
U.S. University of Michigan Confidence       70.0

It’s month end and the end of a week which has seen the Dollar sink lower on the back of poor data and increased prospects of a recession in the world’s largest economy. How things can change so dramatically in the space of 12 months.

One year ago the market was still sunning itself in the comfort of the globalization boom only to be hit by an earthquake that has been felt around the globe. Can the same crisis occur in Europe?

No say the Europeans. But had you asked Fed officials a year ago they would have provided exactly the same response.

Only now that the financial markets have been weakened the vulnerability to further shocks potentially brings the risk much closer…

Never-the-less there is no additional crisis until it occurs and until then the States and the Dollar will remain in the firing line. The fiscal stimulation package actually looks as if it may be too late having seen the rise in jobless claims which will see consumer confidence sinking further deeper.

The release calendar is full but so full the market generally sits back and refuses to react with just too much to absorb.

On top of that most of the data is from Europe and thus will have limited impact. We have CPI numbers and European confidence numbers. Yesterday’s PMI numbers were good but a prominent feature of recent surveys has been the deterioration in consumer confidence and this could well be a problem for industry.

Thus for the while the Dollar will remain under pressure though the near term looks as if a small pause is possible. Not that the market will buy Dollars with enthusiasm but in these days of uncertainty profits pocketed provides a comforting feeling.

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res:  105.78-20    1.5315-22    1.0610-43    1.9946-71
Res:  105.06-42    1.5228-68    1.0525-60    1.9907-17

Spt:   103.98-36    1.5110-45    1.0453-83    1.9801-30
Spt:   103.26-44    1.4993-20    1.0395-10    1.9707-35

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Source : GFT Forex

Some trend lines are figments of the imagination

No, no, there’re no such things as non trend lines. It’s more that many analysts tend to try and invent them.

I was looking through some analysis the other day and I saw something rather like this:

It sure looks impressive but actually none of those lines actually produce any real information – except they prove that the lines were broken after they were drawn. Before that the lines are so flaky that it is often pure luck if they work…

Now I wouldn’t mind so much but there are no trends at all in that chart which makes the process of drawing a trend line rather fruitless… What’s more, in nearly all cases there are so many lines drawn it’s a wonder that anyone knows what they mean or how to trade them.

Take a look at this same chart:

Very clearly the first raising black “trend” line was drawn after the event. Or maybe it wasn’t but then whoever drew the line would have presumably drawn the one in red also. That ended up as a complete mess as price broke below the line, then back up and then reversed lower again. What use is that?

The blue line isn’t even drawn on a trend…

Trend lines are there to help you make trades and identify stop losses. It is therefore important to understand when to draw a trend line and what it is telling you.

(1) First of all is a very simple rule that will make you look differently at price.

Uptrend = A sequence of higher highs and higher lows

Downtrend = A sequence of lower lows and lower highs

Until you get this you don’t have a trend. To be honest some of the moves in the chart did see just those characteristics. However, you wouldn’t draw a trend line on the daily chart but on the hourly or 4-hourly. In that way it would be useful.

Consider the blue line in the chart. It has been drawn across three peaks but not all rising/falling and the swing lows are erratic as well. It isn’t a trend.

(2) You can only put more trust in a trend line once it has touched the price extreme 3 times or more. Think of it. How many lines could you draw if you only had to allow for two touches? Goodness knows – but a heck of a lot.

Seriously, relying on a trend line which has only seen two touches (and one of those from an extreme on the chart) is very, very risky.

(3) Don’t expect to draw many trend lines. I draw very few as there are a limited number that actually provide any good trading opportunities. If you can see rising lows and highs (or vice versa) but there is no way you can link three lows, then don’t do it. What good will it do? Rely then on break of the last major low (or high.)

(4) A good trend line will provide you with a clear trading opportunity and possibly two. When a correctly drawn trend line breaks it will do so, see follow-through and in the correction back to test the trend line. You can trade on the first breach and again on the trend line retest.

Look at how the uptrend prior to the consolidation touched price on 4 occasions and on breach it dipped then moved back high to retest the trend line from where we saw a sizeable decline.

Make life easy for yourself and use trend lines with reason and logic. It’ll help profitability greatly.

Ian Copsey

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Source : GFT Forex

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