Prospects of the FX markets

Greg

Interview with Greg Michalowski @GregMikeFX, chief of technical analysis and client education at ForexLive

Based on the current market situation and your personal experience in previous years, do you think there will be a year-end rally in the markets this December? How significant movement could it be?

Since I deal in the forex market, my focus will be on that market.

Typically, activity dies down but that can be a double edged sword in the forex market. Lower liquidity can lead to a market that hardly moves. It can also lead to up and down volatile moves, as traders get whipped around from the sporadic flows. As a result, if traders are going to play in the game, they have to be aware of the changing environment. Personally, it is not my favorite month. Nor do I recommend that traders in the forex market expect the month to be one of their best either.  So manage expectations and you should be ok.

Having said that, in the forex market, much is dependent on the economic data and events as well. This month the ECB interest rate decision on Thursday December 4th, followed by the US employment report on December 5th has the potential to rile the market especially in the current environment of diverging economic fundamentals.

If Draghi talks more dovishly and the US employment numbers surprise to the upside,that can ignite a continuation of a run into the US dollar and get the EURUSD moving back lower. Even so, a move to the 1.2131 area (around 300 pips) is probably the best that we can expect on the downside.  This level is the 50% of the EURUSD range since it’s inception in January 1999. It would be a nice level to trade around into the New Year.

Can the USD go lowert? I suppose so. The GBPUSD is scraping at low levels and a move to 1.6000 is possible. USDJPY reached 119.12 and could we go lower on weaker US data. That could push USDJPY toward the 115.00-116.00 area.  The AUDUSD made new year lows on December 1. The 50% of the move up from 2008 low comes in at 0.8542. A move above that level will be bullish for the AUDUSD in the short term. The EURUSD has upside resistance at 1.2660 and then 1.2746-57.  It might be a stretch to get there but illiquid markets can squeeze traders too.

Another event that will be on traders radar is the December FOMC decision scheduled for December 17th. At this meeting Chair Yellen will be holding a press conference and the members of the FOMC will be making their Central Tendency projections for GDP, Inflation and Employment. The members will also give projections for lower and upper band for rates in 2015, 2016 and beyond.  The last time the Fed did this was in mid- September. It will be curious to see how the distribution of rate forecasts come out.  I thought that the projections for 2015 were a bit too high in September. A few months hence, will the members tone down their projections for tightenings a bit?  That might be a little dollar bearish.

In your opinion, what are the best markets to operate in during the year-end rally? Have you any previous experience worth mentioning about trading in that part of the year? No real suggestions for this…..

Could you give same tips or advice for trading during the last weeks of the year? 

My advise for traders is it is okay to “fall in like” with the whatever you are trading, but try not to “fall in love” with anything.   It is probably not the time for a long term love affair with anything.

Other advise: Don’t be shy to take profits or partial profits when you have them. If you don’t feel comfortable, take a loss and finally, be patient on your entries.  Great trade entries often come from being very patient – even if you end up missing a trade or two.  The goal in December is to make what you can, don’t blow up and look forward to January.

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Dollar Reaches Two-Year High Versus Euro Before Confidence Dat

The dollar appreciated to the strongest level in two years versus the euro before reports this week economists said will show U.S. consumer confidence and retail sales improved.

A gauge of the dollar headed for its highest close in more than five years after China said imports unexpectedly fell in November, underpinning demand for the currency of the U.S. where growth is beating forecasts. The New Zealand and Australian dollars slid to the weakest levels in at least two years after the data from China, the nations’ largest trading partner. South Africa’s rand slumped to a six-year low and Russia’s ruble extended its drop versus the greenback this year to 39 percent.

“We’re seeing good fundamental support for the dollar move,” said John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “It’s not just about the currency moving higher we’re also seeing the market drastically marching forward the first anticipated Federal Reserve rate hike. Any currency where the economy is leveraged to oil is still weak. U.S. rates heading higher is a very strong negative for emerging markets.”

The dollar gained 0.2 percent to $1.2256 per euro at 10:11 a.m. London time, the strongest since August 2012, after gaining 1.4 percent last week. The U.S. currency fell 0.3 percent to 121.13 yen. The yen strengthened 0.5 percent to 148.46 per euro.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 trading partners, climbed 0.1 percent to 1,123.56, set for the highest close since March 2009.

China Imports

China’s imports fell 6.7 percent, the customs administration said, compared with the median estimate among economists surveyed by Bloomberg News for a gain of 3.8 percent increase. Exports (CNFREXPY) rose 4.7 percent from a year earlier, less than the forecast for growth of 8 percent.

New Zealand’s dollar slid as much as 1.1 percent to 76.24 cents, the lowest level since June 2012. Australia’s dropped for an eighth day and touched 82.60 cents, the lowest since June 2010.

The kiwi also weakened for a second day before the Reserve Bank of New Zealand meets to review interest rates on Dec. 11.

“The New Zealand dollar is high beta to the U.S. dollar, so if the U.S. dollar rallies, the New Zealand dollar will be sold aggressively,” said Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland. “Also, we have the RBNZ this week, which will have a dovish shift from the previous forecasts in September,” he said, referring to the central bank’s policy decision on Dec. 12.

Click here to read the full article on Bloomberg

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Yen Weakens to 120 Per Dollar for First Time Since 2007

The yen weakened to 120 per dollar for the first time since July 2007, as policy makers’ decisions to expand monetary stimulus and delay a consumption tax increase highlight the risks the economy is deteriorating.

The yen has plunged 9 percent since the Bank of Japan on Oct. 31 increased the annual target for expanding the monetary base to 80 trillion yen ($667 billion), and Prime Minister Shinzo Abe delayed a second bump to the sales levy by 18 months, after the first in April sent the economy into recession. Abe is forecast to score a second landslide victory in a Dec. 14 election.

“It’s still the divergent-growth, divergent-policy story,” Robert Sinche, a global strategist at Amherst Pierpont Securities LLC in StamfordConnecticut, said by phone. “We are seeing capital flows out of Japan, and I think that helps bring capital out and continues this movement down in the yen.”

Japan’s currency fell to as low as 120.17 against the dollar before trading at 119.88 as of 10:02 a.m. New York time, down 0.1 percent.

The yen has been trading between 117 and 120 per dollar for almost three weeks, as traders trying to push the yen weaker ran into a wall of options centered around the price.

Options Obstacle

There were $3.01 billion of over-the-counter foreign-exchange options on the dollar-yen with a strike price of 120 that expired at 10 a.m. New York time, according to Depository Trust Clearing Corp. data tracked by Bloomberg. The strike price is the exchange rate at which call option holders can buy the underlying currency and put owners can sell.

Some options contain so-called barriers, causing the contract to either expire or to be activated if the pre-set exchange-rate level is reached. These types of contracts can also cause traders to attempt to push a currency through or away from barrier triggers. The barriers are often used as they reduce the cost of the strategy because they decrease the odds the options will be profitable.

The unprecedented stimulus by the Bank of Japan contrasts with the Federal Reserve’s discussion about raising interest rates as the world’s biggest economy strengthens, prompting further weakness in the yen. The Japanese currency will slide to 124 per dollar by the end of 2015, according to the median estimate of analysts in a Bloomberg survey.

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Click here to read the full article on Bloomberg

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GBP/USD poised for further potential breakdown

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By James Chen @JamesChenFX, chief of technical strategy at  City Index

 

GBP/USD (daily chart shown below) continues to be weighed down in the face of renewed US dollar strengthening against major global currencies, and appears to be poised for a further breakdown.

Currently nearing the one-year low of 1.5584 that was just established earlier in the week, GBP/USD is firmly entrenched within a strong downtrend that has been in place for more than four months since the 1.7190 multi-year high in mid-July.

The sharp drop since July, which represents more than a 9% decline down to this week’s noted 1.5584 one-year low, has consistently traded underneath a well-defined downtrend resistance line as well the 50-day moving average.

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Having recently consolidated in a bearish flag pattern, the currency pair has since made a slight break below that pattern, tentatively confirming a continuation of the current downtrend.

Click here to read the full article on City Index.

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Language of the Day: the Indo-Iranian family

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Hindi, Bengali, Persian, and Urdu are some of the most demanded languages here at Wordwide FX. The reason is simple: India and Pakistan are emerging markets (BEM), together with Brasil, Egypt, Poland, and others. Also, India is, with 1.241.492.000 inhabitants, the second most populated country in the world. To that we have to at least sum 177.276.594 inhabitants in Pakistan (2010 data) and over 77 million of Iran.

These languages belong to what some linguists call the Indo-Iranian family, a branch of Indo-European, divided into Iranian and Indic. The Iranian sub-branch includes about 2 dozen different languages, including modern Persian (also called Farsi or Parsi and spoken in Iran), Pashto (the official language of Afghanistan), and Kurdish (spoken in Iran, Iraq, Turkey, and Syria). Other Iranian languages are found in Pakistan, the former USSR, and China.

The Indic sub-branch includes around 35 different languages. Most of the languages spoken in  Northern India, Pakistan, and Bangladesh belong to this branch of Indo-European. Hindi-Urdu, Bengali, Punjabi, Marathi, and Gujarati are the most widespread. Hindi and Urdu are two dialects of the same language, but they use totally different writing systems and are also associated to different cultures: Urdu is spoken primarily in Pakistan by Muslims and Hindi is the spoken mainly in India by Hindus.

Less well known as an Indic language is Romany or Gypsy. It is believed that the Gypsies were an entertainment caste in India who were invited to perform in the Middle East sometime in the Middle Ages. They never returned to India but they traveled instead to Turkey and, eventually, Europe. Romany contains many borrowed words, particularly from Greek, which was spoken in Turkey at the time of their stay.

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