Tagged "Fundamental Analysis"

8-25-09

18:12 GMT – Although my forex signals are 95% technically-based, like any good trader I also keep an eye on the underlying fundamentals as well. My philosophy is that the fundamentals will provide the trade direction while technical analysis will give you the specific entry and exit points. To that effect, I’ve talked a lot recently about some of the risk-aversion that is driving the market. Under normal market conditions investors want the highest return on their investment, and that means investing in a currency that has the higher interest rate or other, more risky investments such as stocks.

In the past few months, however, we’ve seen the dollar gain against currencies with higher interest rates, defying normal fundamental expectations. So what gives? The answer is Risk Aversion. Risk Aversion is when investors take money out of possibly riskier investments (e.g. stocks or developing countries) and put them into safer vehicles (such as the US Dollar). This is why recently we’ve seen the US Dollar do the opposite of US stocks – when stocks go up, the dollar went down; when stocks turn south  the dollar rallies.

But with fundamental news coming out that signals a semi-recovery of the US economy, why aren’t higher-yielding currencies a no-holds barred freight train against the low-yielding dollar?

Well, the dollar has lost some ground this week on news of better home sales, increased consumer confidence etc., but it certainly hasn’t plummeted.  I came across this excerpt this morning which pretty accurately explains the fundamental picture of the market right now:

“With trading volume light, analysts said differing views about how to trade strong U.S. economic data was causing the odd price action, with some seeing it as a signal to buy risky assets and others expecting it to lead to a U.S. recovery and higher interest rates, increasing the dollar’s appeal.

“This push and pull of two different viewpoints is why you’re seeing this ambivalence in the currency market,” said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. “There are those who think the dollar just might be supported on the back of a U.S. recovery.”

So the short answer is their are two schools of thought on what is the safer/higher returning investment in the short and mid-term. And some people further aren’t convinced the news out of the US is all that great considering much of the recovery to date has been because the US government has printed money to help itself and that can’t last forever.

Expect more volatility in the months to come, which means range trading with an eye toward further USD losses.

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6-6-08

16:27 GMT – USD dropped sharply across the board as unemployment rose to 5.5% and payrolls shrunk for the 5th straight month, adding fuel to the argument that the US is already in a recession. The deeps setbacks in the dollar blew out many dollar bull’s stops and a rebound looks limited.

The shocking factor about the NFP releases was not the NFP release itself – it was actually better than expectations by at least 11,000 jobs – it was the details of the employment rate. Specifically the 5.5% unemployment rate was much higher than expected and traders took that as a sign the US economy has more trouble ahead. Couple that with the fact that the NFP payrolls decreased for the fifth consecutive time – the most since 2003 – and you can see why dollar bulls sat out and why dollar bears sold at an incredible rate.

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6-5-08

18:35p GMT – After the ECB’s announcement that the European Central Bank may actual raise rates by the end of the month the markets are looking for direction. It seems a shift is coming but theories abound as to which way that shift will go. The US signaled it will raise rates by the end of the year, NZ signaled it would start lowering rates during 2008 and ECB will possibly raise.

Meanwhile news out of the US economy is mixed at best.

Some argue we are at the beginning of the end of the worst in the US economy while Europe is just starting to have the bad news come out, especially in UK. The data coming out in the next month will help to determine the direction of these pairs. In the short-term, it seems the higher rates of the Euro and near-future hawkish raises could happen much sooner than a USD rate hike probably means further Euro strength against the greenback.

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6-4-08

21:57 GMT – RBNZ signalled that they would begin lowering interest rates by the end of the year to combat a softening economy. With Bernanke of the Fed signalling a stop or even a raise of interest rates by the end of ’08 look for the NZ to continue to weaken against the USD as “smart money” (big banks using carry trades) begin to pull out of this pair in favor of more stable pairs. This could be the start of a downtrend in this pair for a few years.

After the announcement the pair immediately dropped over 100 pips to .7700

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5-29-08

9:08a GMT – UK housing data came in five times worse than expected and was the cause of the rise in USD across major pairs as traders feared that the a global recession could be closer at hand. If more bad data continues, especially in light of hawkish comments by the Fed on inflation expect the dollar to retain the gains. In the short term look for oversold and overbought currencies to rebound, especially those that are in support/resistance channels.

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5-27-08

GMT – Oil prices declined for the first time in over a week today leading to a rise in US Stocks. If oil prices continue to retreat it could give the Fed breathing room concerning inflation and give them more reason to not lower interest rates. If oil continues to decline and US stocks continue to rally it would give the dollar a bullish position for more gains.

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