Friday, 3 May 2013

Forex Markets Required to Move with Agility

Ralph Shell, Excel Analyst

Forex Razor Industry Review Contest, May 2013There has been a steady stream of meaningful reports that has resulted in a lively trading session yesterday (02 May).  We started the day with seven European PMI's.  Although the numbers from Germany, Italy and a few other countries were moderately positive, there was nothing exciting in the PMI's.

Later, the ECB released their new bank rate.  As most expected, the rate was reduced to .5%, the lowest ever for the ECB.  The bank is responding to the bleak economic outlook, which would seem to be bearish.  The EURUSD sold down to almost 1.3120, and then perversely rallied almost 100 pips.  Not so fast though: there was, and still is, more data to come; and a 'presser' with ECB President Draghi.

The US data was interesting.  The initial US jobless claims were down to 324K, the lowest in five years.  At the same time, we also received the US Trade Balance, a negative $38.8B, less than the expected $42.3B.  Contrary to what might be expected, the trade balance improvement was not the results of less imported oil.  Rather, exports in March were down $1.7B and imports were down $6.5B.  Imports from China was down to $17.9 from $23.4B in the previous month. The reduction of imports might imply a weakening US economy as the consumer backs away.

The ECB was weakening from the top, perhaps in response to the US data.  Shortly thereafter, Draghi threw a bombshell when he said the ECB was "technically ready" to go to negative interest rates.  The EURUSD subsequently collapsed and is currently trading on the daily low at 1.3050. 

I suspect Draghi's wording was carefully prepared in advance, and he knew how the currency would be impacted.

He ended the news conference with a barb at the Fed.  Asked if the ECB was about to take on more risk and expand their balance sheet, Draghi said he does not go around with helicopter money; this, of course, refers to Bernanke's statement years back that he would keep dropping dollars from above in a helicopter until the economy is revived. 

Could this be a little spat amongst the MIT alums?

When doing our COT studies we noticed in the last month the speculative long in the Australian Dollar (A$) has been reduced from almost 100K contracts to only 29.1K in the last period.  As might be expected, the A$ has sold off down to about 1.0250.

Click to Enlarge USDCAD Daily Forex Chart

During about the same period specs were short the Canadian Dollar (C$).  Unlike the liquidation in the A$, the specs remain short the C$.  As the C$ has rallied up 200 pips from 1.0280, the pressure is on the spec.  There has been well over 10K reduction in the open interest in the past week, which we assume to be short covering.  This may have been the cause for the latest rally.

Click to Enlarge AUDUSD Daily Forex Chart

Today (Friday), the Bank of Canada Governor Carney is speaking, as he winds down his job in Canada and prepares for his new gig at the Bank of England.  Carney is certainly aware a richly-valued Loonie hurts the manufacturing sector of the Canadian economy.  Could it be Carney will come to assistance of the shorts, in comments designed to weaken the C$?

There are also some important reports coming out Monday - the Canadian Building Permits, and the IVY PMI - which may impact the C$.

Click to Enlarge AUDCAD H4 Forex Chart

The A$ (AUDCAD) has been a big loser to the C$, selling off from about 1.07 to 1.03  in the last three weeks.  We would like to buy the A$ versus the C$ around this level (1.0325) risking 100 pips.  As always, mind your money.
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