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Thursday, October 15, 2009

FX Trading – Double Header Today: Keep Watching the Central Banks

Matinee: Bank of England Official Inspires Buyers, Spooks Sellers

Pent-up demand and sellers running for cover explains the move by the British pound today. Granted, it was comments from a Bank of England official who sparked the move. Apparently the quantitative easing measures are working as well as they’d have hoped for when this strategy commenced earlier this year.

Thus, traders are quick to jump at the idea that the BOE may not be doing much more pumping in the near future. The pound is up as much as one and a half percent versus the buck; and it’s putting a lickin’ on the euro and yen as well.

Today’s comments not only brought some buyers out of the shadows, but the move above daily consolidation range (resistance) likely led what had become a large number of shorts running to cover their butts.

We can look at this two ways:

1)This is a shake-out move and stops needed to be triggered before the price of the pound can be driven lower.
2)This is a legitimate change in fortune for the pound after being depressed by traders despite a continued move out of US dollars and into other currencies.

The UK economic concerns are not changed in the wake of the BOE officials recent comments; albeit sentiment could very well have made an important shift. The question is whether or not any change in sentiment will be powerful enough to make the pound appealing to investors.

Considering the mood of the markets, the pound could be undergoing a change in fortune versus the US dollar, starting today; but the strength could prove short-lived versus the euro and perhaps even the yen.

Traders and investors generally take a glass-half-full approach to the euro. Perhaps it’s all mental -- the Eurozone and its currency have come to represent an alternative the US counterparts.

There’s been a popular piece of data circulating the web recently. It states the move by world economies into reserves denominated in euro and yen. Most stories use it to point out that these countries are necessarily getting rid of their dollar reserves. But that is not the case. Reserves denominated in US dollars are still being added, but to a lesser extent than those denominated in euro and yen, according to the latest numbers.

While the euro may be able to keep running higher on healthy risk appetite and consequent US dollar weakness, then yen may have a tougher time. It’s increasingly viewed as having over-stretched from where fair fundamentals might allow it to go.

Japan’s Finance Minister had this to say today:

"Our political task is to stabilise the value of the currency. The basis for stability is the need for the currency's value to match the economy's strength. This must be ensured by politics."

The first test of USDJPY support (Japanese yen resistance) did not work out and the pair is bouncing. As with many central banks, intervention is on the minds of BOJ officials and Japanese yen traders. Is there room for more strength?

It may be worth being open to an extended bounce here.

John Ross Crooks III
Black Swan Capital

Night-Cap: Who’ll Be Hiking and Who Won’t?

David here ...

JR threw a piece of news by me this morning, as it plays into his and Jack’s evaluation of the deflation vs. inflation tug-of-war that’s happening right now.

So when I say a bit of inflation news hit the wires today, perhaps I should instead call it deflation news since prices are falling. From JR ...

In Czech Republic industrial producer prices slumped in the latest month. The month-to-month drop was double what had been expected (0.4% versus 0.2%) and the year-over-year figure came in dropping 5.4%. Czech hasn’t seen a year-over-year drop like this since records began being kept in 1991.

Agricultural producer prices showed a far more dramatic plunge – 21.2% in September after posting a year-over-year slide of 23.5% in August.

The bottom line in the wake of this data: the central bank could be motivated into rate cuts. And now that the yield differential game between currencies is back in full swing, potential rate cuts could be meaningful to the performance of the Czech koruna.

What’s interesting is this comes at a time when analysts are starting to look for central banks that will be next to hike rates, not cut them. Australia last week prompted the expectations that global central banks are becoming ready to mop up excess liquidity and tighten up their monetary policy stance.

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