USD Weaker in New York But Yen Crosses Lower

It has been an interesting morning of trade in New York with the market extremely volatile following the economic releases but unsure as to the direction it wants to take. While equities are slightly firmer, currency carry trades have come off to reflect a notable divergence. Meanwhile, the USD has been offered with the Swisse leading the way against the greenback, followed by the Kiwi, Euro and Aussie. Although the headline reading for US GDP was better than expected, some downward revisions to the previous month, along with a much weaker personal consumption component left some traders with an unsettling feeling. Meanwhile, in Canada, headline GDP was weaker than forecast, with a downward revision also seen to the previous month. The only bright spot on the day came from Chicago PMI which managed to slightly better expectation. The IMF was back on the wires with a sluggish recovery call for the US economy despite some improved financial conditions. The IMF also stated that the USD was moderately overvalued. This follows a report from the same organization earlier in the week which also said the Euro was overvalued.

A Winning Forex Trading Philosophy

I'm starting to believe that being successful trading Forex has more to do with your philosophy than anything else.

You cannot trade based on how much money you want to make. You cannot trade based on how much money you need to make. This means that you can't push money into the market, desperately searching for opportunity, risking a large portion of your net asset value in the process.

You must trade lightly.

When you trade lightly, you simply let the market give you the returns that it is willing to relinquish to you. Quite simply, it is not a process of taking.

If you can change your mindset it will give you a lot of peace compared to the level of stress that many generate. Dip your toes into the market, following your strategy, with a level of investment that simply cannot begin to raise your blood pressure.

A little bit of market wisdom, developed with experience, combined with an appropriate philosophy will generate profits. I know that this is difficult to consider or even believe in today's rational calculating world, but the only way to win is to not fight the market. It is way too big for you.

Stop trying to generate winning positions and simply let the market give them to you.

Gold & US Dollar Tactics

1. The competition. You are long the Euro against USD. You are buying the Euro every 1 point down and selling every 3 up, with your trading position. Picture this situation: the euro rises 2 points from your buy, but then it looks bad. You get a sense of great discomfort, after reading a rumour that Goldman Sachs has apparently gone short the Euro, just as you’ve gone long! You think, “should I book profit now and outsmart my pre-set profit taking points?”
   
   
2. Now let’s look at “you” again. In the same situation. Only this time you are also short the euro in another account. Now the mental stress is off. You can wait for either the long or short position to hit it’s profit taking mark.
   
   
3. I already know your next question. It is: “OK, stewart, but how do I make money with this? What I’m making on one position, I’m losing on the other!”
   
   
4. Not so fast Sherlock….Yes, you are long and short at the same time, and at the same price entry points. But not in the same trade size.
   
   
5. This is exactly how the bankers operate. If gold is around 940, you can begin a buy and short program, both at 940, but the dollar value of the long positions must be greater than the short dollar value of the corresponding positions. I go into more detail on the ratios below.
   
   
6. Technical indicators can be of great assistance to you in setting up your buy/sell programs. Focus on general indications more than precise “buy” or “sell” points. Focus on a general 70% long exposure to any major mkt you target, so your buys are generally bigger than your sells. The overall long position must remain bigger than the short position 100% of the time, in all gold bull mkts.
   
   
7. I want to look at a couple of scenarios to build your positions. But rather than focusing on the euro, I want to focus on gold and the US dollar. With an eye to building a 70% long gold and 30% long US dollar. Here’s the weekly chart of the USD. It’s very oversold, so it could be an interesting time to look at working on USD with a professional pyramid buy program.



8. Just as I layer or “ladder” into positions in a technical pyramid formation, I use technical indicators the same way. Above you can see the 3 series of RSI all oversold, with the 4 series showing a possible upturn. The stochastics series are deeply oversold.
   
   
9. Here’s a second look at the chart, with the longer term MACD and TRIX indicators. Take a close look at the 4,8,9 series and the 7,14,9 series for MACD. They have already moved to buy signals. So has the 5,9 Trix. Notice how close price is to the green Keltner demand line. The keltner lines are like green river banks on the “price river”.



10. The key here is this, and this takes a touch of thought:
    
    
11. A USD buy signal is not a Gold sell signal. You sell gold ONLY to take profit on it, and do so into strength at a higher price than you paid. Not at a loss because the USD gives a buy signal. A USD buy signal is what it is: A signal to buy the USD and nothing else.
    
    
12. You could go for 70% long gold and 30% short gold, but that is far riskier than 70% gold, 30% USD. Remember, the 70% refers to a 70% maximum risk capital allocation to long gold positions, of a 100% “risk pot”.
    
    
13. I allocated aprox 1/3 of my gold risk capital to an inner gold core position, or about 30%. Any gold short positions I enter should never put me net short gold in a bull mkt. Not even close.
    
    
14. In practice, I rarely exceed 1/3 of my actual metals positions with shorts AND USD long positions combined, and if I do, it’s maybe by a couple of percentage points. I’m interested in making a real profit from the rises and falls in gold, but not in attempting to make all the theoretical money that can be made from a mkt swing.
    
    
15. Here’s the gold weekly chart, via IAU-n, the comex gold bullion ETF:

Central Bank dollar holdings - good for gold, bad for dollar?

The latest figures from the US Department of the Treasury show not only how the US liabilities to other central banks have rocketed by 31% over the eleven months to May, but also that the balance of the maturities of these liabilities is shifting towards the short end as major counterparties increase their flexibility and de facto demonstrate their increasing levels of concern about over-exposure to the dollar. The primary reason for the shift has been a massive absolute increase in short-dated instruments and a much smaller change in the longer-dated instruments, suggesting that a good part of the shift has been as a result of the QE exercises.

This is, in principle, good for gold, not because it implies an outright reweighting towards gold in major nations' foreign exchange holdings, as that would be wholly unfeasible and market-disruptive, but because a potential erosion in global dollar confidence and a reluctance to retain dollar exposure almost always leads to increased willingness to invest in gold as a hedge not just against the dollar, but more partially as a hedge against risk and uncertainty.

In June 2008, the US' total foreign liabilities to the official sector amounted to $1.7 trillion, with Japan the largest holder at 36% of total and China holding 36%. Among individual nations (i.e. stripping out both oil-exporting bloc and Caribbean banking centres with 13% between them) the next largest three were Brazil (6%), Luxembourg (4%) and Russia (4%). Since then the picture has changed. China overtook Japan as the world's largest holder in September 2008 with a huge leap from $574 Bn to $618 Bn and by May 2009 Chinese holdings in these instruments were $802 Bn, with Japan holding $677 Bn and the UK, which shot into third position with $164 Bn. In fact the UK's holdings tripled over the period.

The current pecking order, then, is China with 35% of total, followed by Japan (30%), the UK (7%), Brazil (5%) and Russia (5%) with the five between them accounting for 83% of total.

In June 2008 China's short-dated US holdings amounted to $15.2 billion, or just t3% of total. By end-May they had shot up to $210 Bn, or 26% of total, which is also the proportion held by the world as a whole. Russia is maintaining the most flexibility with 49% of its exposure in short-dated instruments ($61 Bn) and Brazil's short-dated balance is now 8% against 1% in June 2008. Japan and the UK have maintained broadly unchanged structures over the period and have continued to increase their longer-dated holdings. China, Russia and Brazil have been more reluctant to add to their longer-dated instruments.

So what does this signify? It is well-documented that Chinese politicians and bankers have been regularly expressing concern over dollar-heavy exposure and have recently been espousing an increased role for the SDR in the international system; it would seem that they are putting their gearing up for - or are already implementing - shifts in the balance of their international assets, although as always with central bankers the moves are likely to be gradual.

The trigger may be in 2011 when the voting powers of the IMF members are up for adjustment and there is a widespread push for the new voting tariffs more accurately to reflect international economic power. This may well also be the time when, if it comes about, the structure of the SDR is changed.

Although as noted above none of this necessarily signifies a major tonnage shift towards gold, it may herald a fresh shift in sentiment with respect to the implications for the dollar's role in the system. This is almost bound to lead to gold sustaining a yet higher profile, if only in the debate about reserve currencies and their relative merits.

Meanwhile the IMF is discussing the likely mechanics of the sale of those much-discussed 403.3 tonnes of gold that it is proposing to sell to aid the international funding process. The vote is likely to be taken in September, but with the new Central Bank Gold Agreement also under negotiation and due for implementation on 27th September this year, the logistics are likely to be decided before then. It is not yet known whether the IMF will become a signatory to the next CBGA or whether it will take up an existing allocation from other signatories with no large-scale sales intentions, but it has been made abundantly clear that any such sale fron the Fund is expected to be under the auspices of a CBGA.

And it is perfectly possible that it may all yet go out in an off-market transaction to another central bank or banks.

Japan to cap forex margin

TOKYO (Agencies): Japan’s foreign exchange margin traders will have their leverage capped at 25 times collateral two years from now, the government said on Friday, a move that could curb retail investors’ zest for currency speculation. The Financial Services Agency said leverage would be capped at 50 times starting in August 2010, and at 25 times starting a year after that, in line with a proposal it unveiled in late May. That would be a big cut for some brokers who offer leverage of 400 times or more, and for margin brokers in general. Foreign exchange margin trading, which allows investors to make large bets with relatively small amounts of money, has boomed in the past few years as Japanese households, dissatisfied with puny interest rates at home, looked abroad for higher yields. In a sign of their growing clout, a Bank of Japan report said last year that foreign exchange margin trading in Japan may account for 10 percent of all yen spot trades conducted globally each day

US Dollar Teetering on the Edge of the Abyss after a Better GDP Release?

It was an extremely dangerous way to end the week. The US dollar has held very close to general support for some time now; but the ante was upped when steady selling pressure pushed the single currency to its lowest close on a trade-weighted basis since September 30th. We can see the same level of intensity among the individual majors. EURUSD is just below its June highs of 1.4340 while GBPUSD managed to close at a nine-month high well above range resistance at 1.6600. Despite this tremendous pressure and the relative records, this is not a definitive bearish break for the greenback. When liquidity returns early Monday morning in the Asian session, speculators will immediately go back to work on trying to jump start the next major trend. For those that have dollar exposure or are waiting for the dollar to make its move, it will be an open not to be missed.

How did we come to this point? When did the dollar’s feeble attempts to rebound from its lows give way? The currency fell 1.2 percent through Friday’s session - the largest decline and absolute move since June 23rd - following the release of what at first glance seemed to be a better-than-expected outcome for the advance reading of second quarter growth. The Bloomberg consensus was projecting a tempered 1.5 percent pace of annualized contraction following what was initially a multi-decade, 5.5 percent plunge. Given this benchmark, the 1.0 percent decline that crossed the wires seemed to be a big step closer to realizing expectations for the inevitable return of positive growth. However, just below the surface, the cracks were clearly visible. The peak of the recession marked by the previous quarter was distended to a 6.4 percent malaise that matched the worst the world’s largest economy had seen since 1980. What is far more disconcerting (but not yet fully appreciated) is that the foundation for this recovery is unstable. Of all the major categories of economic activity, only government spending was rising. Personal consumption dropped 1.2 percent, exports 7 percent and private investment 20.4 percent. Fiscal stimulus is already reaching its limits and the cries to reign in aid and work down the deficit are growing louder. Without consumer spending (which accounts for approximately 70 percent of activity), the economy will not easily be able to recover on its own power. Expect to see the terms ‘L’ and ‘W’-shaped recession used more often.

The long-term outlook is highly uncertain and certainly bearish; but come next week, market participants may not immediately be concerned with underlying trends. With the dollar backed up to a technical wall, speculators will look to either force a break or offer a modest relief rebound first thing. The longer the currency holds to its technical floor, the more violent the eventual market shift could ultimately be. There is plenty of event risk on the docket; but its influence on the critical decision of breakout or reversal is likely low. ISM manufacturing and service sector surveys, consumer credit, personal spending and income are all notable indicators; but the NFPs once again holds the greatest clout. There are many indicators that hint at stabilization and eventual recovery; but none are as truly influential and accurate as the monthly payrolls report.

US & Canada

The US Q2 2009 GDP declined at a less-than-expected 1.0% q/q annualized rate after a downwardly revised 6.4% q/q contraction in Q1, according to advance Q2 GDP data released by the Commerce Department. The Q2 GDP shrank 3.9% y/y, the largest drop for any year in the post-WWII era. The largest negative drags on the Q2 GDP were business investment, personal consumption, home building, and inventories. The Q2 personal consumption declined at a more-than-expected 1.2% q/q annualized pace after Q1's 0.6% q/q increase. The strongest components of the Q2 GDP were international trade, which added 1.4 percentage points to the GDP growth rate, and government spending, which added 1.1 points. The GDP price index was up at a 0.2% q/q annualized rate in Q2, up 1.5% y/y.

US employment costs rose a slightly more-than-expected 0.4% q/q in Q2 2009 after a record-low 0.3% q/q increase in Q1, according to a Labor Department report.

The Chicago business barometer increased to 43.4 in July, slightly more than our forecast and the highest reading since September 2008, from 39.9 in June, indicating the rate of contraction in business activity slowed this month, according to the Chicago Report by Kingsbury International, Ltd. and the Institute for Supply Management – Chicago, Inc. The production index increased to 43.3 in July from 39.3 in June; the new orders index rose to 48.0 from June's 41.6; the employment rate of decline slowed; the inventories index was at 25.4, the lowest reading since mid-1949; and the price paid and order backlog indexes declined, according to the Chicago report.

Canada's GDP fell a more-than-expected 0.5% m/m in May, a tenth consecutive month-on-month contraction, after a downwardly revised 0.2% m/m decline in April, data from Statistics Canada showed. The GDP dropped 3.5% y/y in May, the largest contraction since October 1982.