Thursday, 18 July 2013

Looking Beyond Bernanke's Testimony for a Forex Trade

Ralph Shell, Excel Analyst

Much of the news cycle has focused on comments by Fed Chairman Bernanke.  For equities, the Fed's activities are of prime importance.  Bad news is regarded as good news since a postponed recovery means Bernanke will continue expand the money supply.  This is regarded as bullish by the equities and commodity crowd and is usually bearish for the USD. 

This is straight forward enough, but a problem occurs when different analysts hear the Chairman saying different things.  One might think that Bernanke has said there is sufficient recovery, and some tapering of the asset purchases will commence as soon as September 2013.  Others, however, will insist Bernanke is going to wait for more data before the monetary contraction will begin.

Often the data is mixed, and we had an example today (Thursday).  The initial US Initial Jobless Claims number was down to 334K, less than expected and less than the previous week's 360K.  This got the attention of the bond boys betting on the early taper, and sent equities flying into new high ground.  Followed by the US Philadelphia Fed Business Outlook Index - recorded at 19.8 well, above the expected 8 and last week's 12.5 - the market continued it's rally. 

Numbers like these give us a glimpse of what has transpired.  Important yes, but what are the factors that give us hints where the economy is headed?  There was an obscure section of the retail sales report issued this week that showed:

"Food-service sales fell 1.2% in June, the largest decline since February 2008 and the year over year change in "eating out" rose by just 3.1% - the lowest annual increase since June 2010."

Also note the price of crude traded above 108 a barrel - the price of gas will soon follow.  This may not be a major issue for the East Coast residents, but for those in the rest of the US who travel many miles, the economy will suffer resulting in bearish news down the road. 

Perhaps analysts and traders alike hear what they want to hear.  Different positions might explain why there are different reactions to Bernanke's testimony.

While the crowd is waiting for the latest pronouncements from the Fed Chairman, there is some other news; most of it regarding the British economy has been constructive.  The Bank of England's MPC notes were released from Mark Carney's first meeting. There was agreement: no additional QE.  The UK unemployment unexpectedly by 21.2K, and UK Retail sales were positive.  But what do you sell against the pound?

Perhaps you can take a look at the yen for the short leg of the trade.  There is a scheduled election on the 21st of July.  Polls show that Abe's Liberal Democratic Party is in a position to pick enough of the 120 open seats to achieve a majority in the House of Councillors.  Should he attain a majority, the market may view this as approval of economic policies among which is a massive increase in the yen supply.
Click to Enlarge GBPJPY Monthly Forex Chart
GBPJPY Monthly 18 July 2013, Excel Markets ECN Forex Broker

Looking at the chart of the GBPJPY (FXY, FXP), this pair is not for the faint-of-heart.  Moves of 500 to 800 pips are commonplace. So far in July, there has been a move from 149 to 153, and the market acts like it is getting ready to challenge the 156 handle. Should the 156 level be conquered, the monthly chart shows a lot of open space.  In August of 2007, the pound was worth 250 Yen.

Click to Enlarge GBPJPY Daily Forex Chart
GBPJPY Daily 18 July 2013, Excel Markets ECN Forex Broker

Looking at the last COT report, specs have been big shorts in both the pound and the yen.  Recent market action since the report have punished the pound short, and helped the yen players.  Naturally, there is a lot of risk with this trade but the potential is great, so you need to watch your money closely.
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