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Written by Boris Schlossberg, Senior Currency Strategist, DailyFX

Talking Points

•    Japanese Yen: LEI at 0% lowest level in a decade •    Euro: PMI Services beats PPI hot •    Canadian Dollar: Ivey PMI on tap •    US Dollar: event docket empty today

EURUSD resumed its uptrend in early European trade today as it once again challenged all time highs set last Friday at 1.4528. Boosted by a rebound in European equity markets and better than expected economic results from the Euro-zone, the pair continues to hold the 1.4500 figure as market participants await the ECB meeting this Thursday.

As we noted in our weekly, “The ECB meeting on Thursday remains the key to further gains in the euro. Although no one expects the central bank to hike rates in November, the European monetary authorities generally like to prepare the market for any policy moves. To that end Mr. Trichet’s commentary will be crucial in signaling whether the bank will tighten in December. ECB officials have been uniformly hawkish in their recent statements but it remains to be seen if they will be willing to raise rates in the face of record high exchange rates for the EURUSD.”

On the economic front EZ news was generally positive today with PMI Services printing slightly better at 54.7 versus 54.5 expected. Looking at the details of the subcomponent surveys the German data revealed that while new business improved markedly jumping from 52.1 to 54.5, business expectations slipped below the 50 boom/bust line to 48.7 suggesting that the higher euro is starting to weigh even on the region’s services sector.

With US economic calendar empty, the pair will most likely trade on risk assumption/risk aversion flows, driven by the price action of US equities. The trend in the EURUSD remains up, and the pair may well challenge the 1.4550 level, as euro longs try to knock out option barriers set at that price. However, we continue to believe that any forward progress in the pair is likely to be incremental from this point onward, unless US data shows significant deterioration, inviting further cuts from the Fed or ECB determines that inflation risks outweigh the dangers of sabotaging growth and chooses to hike rates to 4.25% by year end. For DailyFX news in Spanish, please visit Noticias Forex.

Source: FXCM

Written by Boris Schlossberg, Senior Currency Strategist DailyFX

Talking Points

• Japanese Yen: Tertiary grows fastest in 4 months
• Euro: holds ground as equities stabilize
• Pound: MPC 8-1, labor data shows steady growth
• USD: all eyes on CPI

Yen Eases on Carry Flows But Good News Lurks Underneath
 
A relatively uneventful night in FX after earlier bouts of risk aversion pushed USDJPY all the way down to 116.16. but the pair rallied back to the 117.00 figure on the carry trade flows as European bourses steadied  and demand for high yielders returned.  While the yen continues to be the whipping boy of risk aversion/risk assumption flows, a picture of steadily improving Japanese economic health is beginning to develop in the background. 

Tonight brought news that the Tertiary Industry index – a measure of service activity in Japan – rose to 1.3% from 1.0% forecast. This was the fastest pace of growth in 4 months and along with other recent Japanese economic data indicates that demand in perking up in the world second largest national economy.  Japanese economy is not yet at the stage where BoJ will consider another 25bp increase to further normalize rates, but it may be getting close. If the next round of wage data reports shows positive growth for a second month in a row then Mr. Fukui and company may feel far more comfortable in tightening monetary policy. This in turn should provide a better fundamental bid for the unit rather than its current status in capital markets as a mere proxy for risk.

Meanwhile in UK the MPC minutes produced no surprises revealing an 8-1 vote to keep rates steady with the main dove David Blanchflower voting for a cut. Furthermore unemployment rolls and wage data demonstrated healthy labor market conditions as rolls declined for twelfth month running  while wages increased  by 3.7% versus 3.6% expected.  The British pound, however, saw little follow through from generally positive news as the markets have now come to a consensus that the best that could be expected from the BoE for the new few months is simply neutrality. With very little chance for additional rate hikes in the future, cable has lost much of its carry trade momentum and now simply trades as an alternative to the greenback. Note that the EURGBP cross has maintained its support near 6950 level as rate hike projections for the euro continue to be high, while the consensus market expectation for the pound is an eventual rate cut. Were that to occur, the cross could  trade to 7100.  

Source: FXCM

Written by Antonio Sousa, Currency Analyst DailyFX

Trading strategies pieces are available weekly on DailyFX, and daily for live FXCM clients through DailyFX+ 

Entry Zone: Go both long and short at the market if the price is at any level within the 2.3500-2.4400 range

Protective Stop: Long stop below 2.300 and short stop above 2.5000

Profit Target: Long Target at 2.4400 and Short Target at 2.3500

Profit Potential: 900 pips (excluding transaction costs and slippage)

The most effective way to capitalize on currencies pairs that are trapped in tight ranges is through the use of hedging. The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.  For more information on FXCM hedging strategies please visit http://www.fxcm.com/hedging.jsp 

Hedging Strategy of the Week  

The GBPCHF is our primary target for hedging in the week ahead, with clear range-bound trade and concrete support and resistance levels. To hedge, go both long and short at the market if price stays within the above Hedging Zone. Take profits at R1 for longs and at S1 for shorts, covering losses above R2 or below S2.

More Hedging Opportunities

Entry Zone -> Go both long and short at the market if the currency is at any level within the Hedging Zone.  Profit Taking ->Target for the long order is the top of the entry zone, for the short order is the bottom of the entry zone.Stop Levels are Key Support and Resistance Points -> Place the actual stops a few pips above the higher level and a few pips below the lower level. The break of these levels signals that the ranges have been broken and the hedging strategy should no longer be implemented.

The lower the

Average
True
Range, the Less Risky the Currency is for Hedging.

**How is the % ATR Rank Calculated?

The average true range is the 90 days moving average of the currency’s true range. The true range is the greatest of: the difference between the current high and the current low; the difference between the current high and the previous close or the difference between the current low and the previous close.The %ATR is the relative value of the ATR when weighted against the price. For example, if the ATR for the EURGBP is 26 pips then the %ATR is 0.4 percent since 0.0026/0.6602 = 0.4% where 0.6602 is the quoted price of the EURGBP.

Source: FXCM

Written by Boris Schlossberg, Senior Currency Strategist, DailyFX

Last night it only took 70 euro cents to purchase one US dollar as the EURUSD reached a new record high of 1.4260.  As euro continues its relentless march upward against the greenback it is easy to imagine 1.4500 or even 1.5000 as the next big target for the pair.However, while the long term trend in the EURUSD remains up for the time being, this Thursday’s ECB announcement of its interest rate decision could prove to be a serious obstacle to further gains for the pair in the near term.

Consensus forecast call for the ECB to keep rates on hold and although President Jean Claude Trichet is likely to maintain a hawkish posture at the post announcement press conference  there is good reason to believe that the current 4% rate may be the top in current tightening cycle as EZ economic growth shows evidence of peaking. Once the foreign exchange  market begins to adjust to the notion of no additional rate hikes from the Euro-zone the euro rally may come to a grinding halt as traders abandon the idea of capturing further yield gains from the currency.

Eurozone Economy – Problems on the Horizon

Manufacturing Weakens

Although on the surface the economy in the 13–member region appears sound, the latest economic data suggests that EZ growth may be slowing substantially. The latest PMI manufacturing readings, while still signaling expansion recorded their  lowest value in 18 months printing just above the 50 boom/bust line at 53.2. Looking beyond the headlines, the French PMI  component came within whisker of falling into contraction territory as it printed at 50.5. Little wonder then that France has been the, most vociferous opponent of higher euro as its industrial sector is clearly suffering from unfavorable exchange rate differentials.

France’s problems are not unique, however. Higher exchange rates will hurt the other major EZ economies soon enough if they continue to remain at these elevated levels. Germany, which so far has fared better than its neighbor, saw July Factory Orders drop by -7.7% and this sharp decline occurred before the EURUSD crossed the 1.4000 figure. Should EURUSD appreciate further, the EZ export sector which has been the primary engine of growth in the region, would suffer from a serious competitive disadvantage and drag the rest of region’s economy down with it.

Inflation Tame

However, the ECB unlike its US counterpart is mandated with maintaining price stability rather than economic growth and while still susceptible to political pressures, the central bankers from Frankfurt are far more likely to focus on controlling inflation than stimulating output. Nevertheless,  the higher euro has dampened most of the inflationary effects of rising commodities which are traded and priced in US dollars. The latest CPI and PPI reading for the EZ have printed at very modest 1.7% and 1.7% levels respectively well within the central banks own target of 2% growth rate.  With inflation relatively muted the ECB has little reason to raise rates at present, as the higher euro naturally creates tighter monetary conditions and tempers price appreciation.

Banking Sector Remains Vulnerable

Yet perhaps the strongest reason for the ECB to remain stationary has to do with the European banking system. Ironically enough, while the sub-prime debt crisis has its origins in US, most of the negative fallout from the losses on those asset backed securities occurred in Europe.  Several German banks needed to be rescued over  the past several months as their losses on US sub-prime debt rose into the billions. As a result the European interbank market has been functioning very poorly with EZ LIBOR rates (the rates banks charge each other for overnight borrowing) trading more than 60 basis points above the ECB target rate.  

With conditions far from normal, the persistent problems in EZ banking sector are indeed the strongest reason for ECB to remain pat on the rate front. As the lender of last resort, it is the central bank’s duty to provide liquidity in times of stress and if the ECB were to raise short terms rates presently, it would only exacerbate an already precarious situation.     

Euro- Back to Anti-Dollar Status

For the majority of 2006 and the first quarter of 2007 the euro rally was driven by the organic strength of the EZ economy. In Q1 of 2006 as EZ GDP growth exceeded US GDP growth for the first time in years, the currency followed suit boosted by the prospect of  rising interest rates as the ECB continued to tighten monetary policy while the Fed remained stationary.  However this pro-euro GDP growth trend reversed itself in Q2 of 2007 as US data printed at 3.8% while EZ GDP disappointed at 2.5%.  While the “GDP cross” is a longer term indicator with substantial lag in price, it suggests that the best days of the EURUSD rally may be over.

If the ECB does indeed stop at 4%, the EURUSD will no longer trade on future expectations of additional rate increases but rather on its old familiar terms as the anti-dollar. It may indeed rally to 1.45 or possibly even 1.50 but only if US experiences a severe recession that would force the Fed to lower interest rates markedly, If on other hand, US economy stabilizes and continues to outperform the Euro-zone, the dynamic that propelled the EURUSD higher over the past 18 months may begin to reverse as interest rate expectation for the two largest economies of the world begin to change.  This week’s ECB meeting may be the first clear signal that EZ rates will no longer rise and as such could be a important milestone for currency traders to consider.

Source: FXCM

This is the answer of FXCM about my question on fractional pip pricing :

Hi, this is Tim Shea, the producer of the video about Fractional Pip pricing. I’d like to elaborate more on the benefits of fractional pips, and why I think that it is a great development in the FX market. As I mentioned in my video, since the introduction of fractional pips, we’ve seen generally lower spreads. The spreads I used in my video are real spreads coming from real prices.

Fractional pips introduces more precise pricing. This puts more pressure on the banks that provide us liquidity to offer us better prices. The multiple banks on our NDD system (currently 6, and we are working to add more) each have different prices. The system fills orders with the bank that offers the best prices for the necessary liquidity. So, that means if a bank wants order flow from our NDD system, it must give us higher bid prices and/or lower ask prices than the other banks are at the time. With an average nominal trading volume of over $200 billion per month, there’s a lot of order flow that’s worth competing for.

With fractional pips, the pricing becomes keener. There are many instances where several banks want to pick up some of our order flow. Without fractional pips, we had instances where 3 banks would quote a 3 pip spread, and that’s the lowest they are willing to go. They would want to cut their prices to pick up more business, but when a spread is 3 pips, going to 2 pips is cutting your price by 33%. That’s a lot! Many banks would be unwilling to do that. Now, with fractional pips, these banks can lower their spread by 5%, 10%, 20%, etc, in order to compete. So, in order to win the order flow, one bank might quote 2.8, while another quotes 2.5, and the third 2.9. Much of the time, the bank quoting 2.5 will get most or all of the orders, beating out the other 2 banks to get the business coming from the NDD system, while the bank with the highest price, 2.9, would get little or nothing of the order flow. This makes for more pressure on the banks to give better prices to the NDD system.

The result is generally lower spreads for FXCM clients. This means their cost of trading is now lower, saving them money. We’ve gotten a positive response to fractional pips from our clients, as they enjoy saving money.

Thank you for your answer.

FXCM announced today they will now offer fractional pip pricing. Clients can now see an additional digit in the price quotes.
I discovered this option this morning. On the first sight it seems cool but I saw the presentation, the video explain that FXCM give tighter prices. Look at http://forex.acrobat.com/p68453006/. This is a capture of the video:

It seems great for traders. But in reality the price is often as follow (Capture of the demo platform):

When the price is 1.40466 / 1.40493 the spread is 2.7. Before the fractional pip pricing the price was

• 1.4046 / 1.4050 spread = 4, cool !
• or 1.4047 / 1.4049 spread = 2, not cool :(
• or 1.4046 / 1.4049 spread = 3 but “bid” is worse
• or 1.4047 / 1.4049 spread = 3 but “ask” is worse

The fractional pip pricing exist on many platform (Oanda, Saxo?, FXCM). Personally I don’t care about it because I trade with a 5 pips grid. But I don’t think it’s a good evolution in forex trading.
I will certainly have an answer from FXCM, I will publish it here :)

Writen by David Rodriguez and Terri Belkas, Currency Analysts, DailyFX

· US Dollar plummets on Fed Rate decision 

· Can the Canadian Dollar set parity on tomorrow’s Consumer Price Index data?

· Be sure to view the rest of the week’s event risk on the Economic Calendar

To discuss these or any other FX topics with the DailyFX analysts, check out the Forex Forum

Click Link to Listen to our Evening DailyFX Radio PodCast:

http://media.dailyfx.com/podcasts/FXRadioPM091807.mp3

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Source: FXCM

Written by David Rodriguez, Currency Analyst, DailyFX

Over the past two months, the forex Carry Trade has seen its second-worst drawdown since the inception of the euro. In the last week however, most of the high yielding currency pairs have stabilized leading many traders to wonder whether this may be the true bottom. The recent movements provide a good opportunity to review previous carry trade liquidations to see just how far we have come. Although certain pairs may appear to be good values, a historical examination of previous carry trade liquidations suggests otherwise. In fact, a tremendous Japanese Yen appreciation in the early 1990’s led to an almost unbelievable 30% unwind in the span of two years.

Though it remains highly unlikely that the carry trade will reach depths last seen in 1993, it serves to note that the recent drawdown remains smaller than the sell-off following the Russian debt default and LTCM crisis in 1998. This is important is because some people including US Treasury Secretary Paulson have argued that the latest turmoil in the credit markets could last longer than the turmoil caused by the Asian Crisis, Russian debt default and LTCM. In that case, carry trades could continue to suffer.  In fact, a look at the chart below shows that the simple buy-and-hold strategy in 1998 fell 13.7 percent off of its peaks in a matter of months. By comparison, the recent July to August Yen rally has left the carry trade 10.3 percent off of its peaks. Though this is a mere 0.5 percentage points off of a similar trough in 2006, unease across financial markets hint at the fact that the worst may be yet to come.

Has anything changed since 1998?

The recent carry trade unwind began when a flight to quality across financial asset classes led the Japanese Yen significantly higher in a short period of time—a result remarkably similar to what we saw approximately ten years ago. Present-day troubles can be attributed to investor nervousness over the future of global credit markets and an overall re-pricing of risk. In August of 1998, Russia defaulted on international debt and sent global credit markets into a similar frenzy.  The Japanese Yen subsequently rallied an incredible 20 percent against the Dollar in a mere two months following the event—unsurprisingly fueled by risk aversion across global trading desks.

Overall market sentiment and measurements of risk appetite have reached levels last seen since the Russian debt default and Long Term Capital Management collapse. Indeed, options traders expect the most Japanese Yen volatility since 1998. Much like we saw in the previous credit market crunch, volatility had remained depressed for an extended period of time. Yet this proved to be the ‘calm before the storm’, as options markets swiftly corrected and drove prices significantly higher in the trading that followed.

Will the Yen Relive 1998?

The Japanese Yen has recently appreciated just over 10 percent off of its lows against the dollar, but this pales in comparison to the 20 percent surge we saw in 1998. Though this is in and of itself not an indication that it will behave similarly through the medium term, it does put the recent carry trade unwind into historical perspective.. Yet traders seem increasingly certain on the future of the Japanese Yen — both currency Forward rates and options signal the expectation for further USDJPY losses.

In fact, the one year forward on the USDJPY is currently being bid at 110.77—a full 454 points below current market levels. Such a bias in these over the counter transactions signals the fact that many major corporations are willing to guarantee an arguably expensive price for Japanese Yen. Just as significant are the Risk Reversals on currency options, which show the market’s incredible willingness to purchase calls on the JPY through the medium term. Measured as the difference in prices paid for highly speculative option prices, traders are significantly skewed towards purchasing JPY calls or USDJPY puts and the levels are the most extreme since 1998.

How Bad Can the Carry Trade Really Get?

Many have argued that the forex carry trade has little room left to fall after double-digit losses, but such arguments may prove short-sighted from a historically perspective. Given that financial markets have recently shown their propensity to make multi-decade record moves through a short period of time, it remains relevant to look back at similar moves in the past 25 years. The chart below shows just how bad the carry trade performed through the 1992-1993, when it fell a whopping 29.6 percent in a steady sell-off.

Clearly, a recurrence of such violent carry trade tumbles is highly unlikely. Yet such an image serves as a clear warning against trying to pick a bottom without first seeing a clear shift in market sentiment. A revisit to 1998 lows seems the more likely scenario, as recent market conditions are noticeably similar to those seen following the Russian debt default and LTCM collapse.

For additional currency news, and forex charts please visit DailyFX.

 Source: FXCM

Forex Capital Markets, LLC announced that they have opened four new currency pairs to clients for trading on certain account types:

• Great Britain Pound/Canadian Dollar, 8 to 10 pips spread
• Great Britain Pound/New Zealand Dollar, 15 to 17 pips spread
• United States Dollar/Danish Krone, 6 to 7 pips spread
• Australian dollar/ Swiss Franc, 4 to 5 pips spread

The GBP/CAD, GBP/NZD, and USD/DKK will be available with 100K accounts through FXCM.  The AUD/CHF pair has been opened to all FXCM account types.  The expansion means that the brokerage firm will then offer twenty-eight unique currency pairs to clients.

Spreads are interesting regarding the volatility of those pairs. I just tried the demo account but I only found 12 pairs instead of the 28 promised in the press release. :(

All the pair I trade are in the selection but maybe you need one or two more. What currency pairs would you like to see FXCM add?