Bank of Canada Cut Rate; 65 pips Profit Made

Selling CADJPY made 65 pips profit.
(details to be added)

Japan Unemployment: Points for Interpreting Report

Unemployment rate unexpectedly fell from 4.0 percent to 3.7 in October. However it might be another case showing single numbers, especially the headlines, usually give the least information about the state of the economy and may be even misleading.

Analysts believe that the fall in the unemployment rate reflects the disappointment from job-seekers when the disappointment itself may be just the sign that finding jobs has been increasingly difficult and this is far more consistent with other economic data that point to the recession in Japan.

As a supportive fact, the Job-to-Applicant ratio, which shows how plentiful the job opportunities are, fell to 0.80 at the same period; more than estimates and lowest since 2004.

Industrial Production also fell as much as 3.1 percent from September, showing that the recession might have been deepened. Exports negatively affected both from the sharp slowdown in global economic activity and the recent appreciation of the Japanese yen.

Japan is one of the major oil importers and it is reasonable to see the negative impact of weak economic data on oil prices. Following chart may show that relation.

Dollar Weakened on Fed's Lending Facility

Tuesday morning the Federal Reserve and the Treasury announced a new plan to make borrowing easier for consumers. The new facility includes $800B trying to revive lending and lowering borrowing costs.

Recent attempts seem to have positive effects. Today's report showed that the average mortgage rates dropped in the U.S. most in seven years and the number of applicants for that mortgages rose in November.

Dollar weakened and gold rose in response to the news; not a surprise considering falling interest rates, or at least the possibility of such fall, and its negative effect on rate of return of dollar-denominated assets.

Also on Tuesday, OECD released its economic outlook for the members. As it was expected the report has nothing but concerns about the economic slowdown and need for further attempts to revive growth. I made profit by selling Euro against dollar before the report and closing the position near the pivot.

U.S. CPI; the Source of Inflation/Deflation Matters

U.S. CPI fell as much as 1.0 percent in October when a 0.1 percent decline in the Core CPI, which excludes food and energy as volatile items, was even more impressive.

But what does it mean for the economy? The answer depends on the sources of inflation/deflation. Price pressures can ease by different reasons. Demand and cost are two main sources of changes in inflation headlines.

A significant decline in cost-structure, like the recent sharp drop in commodities prices, could result in an increase in output but at lower prices. But when prices are falling in response to lower demand, may be because consumers are pessimistic about the future and cutting back in spending, then falling output and rising unemployment could be more probable.

It is the first time since 1982 that the Core CPI declines, reflecting that the slowdown has not been limited to commodities prices but it is now the whole economy which faces the danger of deflation.

It means nothing but lower interest rates. Following charts show the market's reactions after the CPI report. U.S. dollar weakened against its major counterparts though some analysts believe that technical reasons could be also blamed for that excessive reaction.

Update: U.K. CPI and U.S. PPI

There was limited reaction to the U.K. CPI which declined 0.7 percent to 4.5 percent annually, the sharpest in at least eleven years. It might be overshadowed somewhat by frequent news from the troubled auto industry in the U.S.

The U.S. PPI declined 2.8 percent just in October, more than analysts' estimates, but the Core PPI which excludes the volatile food and energy prices rose again showing that the recent sharp drop in commodities prices still needs time to be passed through the production channels.

Case Study: Canadian Dollar and Oil Price Decoupling

The correlation between the Canadian dollar and the price of oil became weaker and weaker since July after the oil price, along with other commodities, started to fall in response to increasingly slowdown in global economic activity.

Today's behaviors of oil and the loonie, as depicted in the following charts, can show that decoupling.

Euro-Zone GDP, U.S. Retail Sales, and ECB 10th Anniversary

The euro-zone officially fell in its first recession after today's reports showed that the economy contracted 0.2 percent in the third quarter, following a 0.2 percent decline in the previous quarter.

The GDP numbers turned negative in Italy and Spain, and Germany. France escaped the official recession by an anemic 0.1 percent growth which the finance minister called it a surprise. Some analysts believe that the service sector in France is also subject to downturn and getting negative GDP numbers is just a matter of time.

Today was also the 10th anniversary of European Central Bank and there was a meeting in Frankfurt with Bernanke and Trichet and also central bankers from Israel, Mexico, and deputy governor of China's People Bank of China. Ahead of the Washington states summit which officially starts tomorrow, policy makers expressed their support to help financial institutions to overcome the credit crisis.

Reactions to the economic data were somewhat limited even to the record decline in the U.S. Advanced Retail Sales which fell 2.8 percent in October. Markets welcomed the central bankers' signals for continuing easing monetary policies with optimism to have at least some fiscal policy announcements from the Washington summit.

I made about 3 percent profit from selling eurjpy.

German GDP; Reaction to Supply and Demand Forces

Third quarter GDP for Germany fell 0.5 percent, worse than analysts estimates following a 0.4 percent decline in the second quarter. The economy entered in a recession after two consecutive quarters decline. Euro was under pressure but as always the supply and demand forces dictated the results:

Euro supply side:
- possibility of more rate cuts after weak GDP number
Euro demand side:
- equity indexes such as DAX rebounded later betting that more rate cuts are now in horizon and it could stimulate the economy.

Yen supply side:
- possibility of intervention by the Bank of Japan rose after earlier actions by the Australian counterparts that bought the Aussie to support the currency.
- rebound in equity markets after heavy losses in recent days
Yen demand side: -

As the charts show, selling eurusd might be a better option than eurjpy considering the downside risks to the Japanese yen. My position (sell eurjpy) resulted in 2.5 percent loss which was closed after the price broke its MA26, signaling a reversal may be likely.

BOE Quarterly Inflation Report: Making 10 percent Profit

The bet on falling sterling resulted in profit. I closed the positions, short on gbpjpy and gbpusd, near the support and before the actual report itself.

BOE Quarterly Inflation Report: Four Hours Left

The BOE is to release its quarterly report on the future of growth and inflation in less than four hours. Yen is weaker now. China's retail sales grew close to its fastest pace from a year earlier, a report today showed. If selling gbpjpy is an option there is more risk now.

Daily Outlook: Regarding Wed. Nov. 12

Regarding Wednesday Nov 12 2008:

Market Sentiment:
Positive side: -
Negative side:
• U.S. are in red now, for the second day this week, on continuing concerns about future of U.S. auto industry especially the GM
• Crud oil under 60 $/b reflecting possibility of weak demand from an increasingly slowdown in global economic activity

Currencies:
USD:
Demand side:
• Risk aversion generally
Supply side: -

JPY:
Demand side:
• Risk aversion generally
Supply side: -

EUR:
Demand side: -
Supply side:
• Industrial Production probably declined as much as 1.4 percent in September
• BOE Quarterly Inflation Report could also affect Euro negatively
• Risk aversion generally

GBP:
Demand side: -
Supply side:
• BOE Quarterly Inflation Report probably paint a dark outlook for growth and possibility of sharp decline in inflation headline, leaving hands of policymakers open for lowering interest rate both sharper and for a longer period of time
• Unemployment rate probably rose
• Risk aversion generally

AUD:
Demand side: -
Supply side:
• Falling oil price, below 60 $/b today, add more concerns about the future of a commodity exporter country like Australia
• Risk aversion generally

Daily Market Outlook

Daily Market Outlook

Regarding Monday 10 Nov, 2008:

Market Sentiment
Positive Side:
• The health of auto industry in the U.S., especially in the case of the GM which facing even bankruptcy, was a big source of concerns last week but it may work in the opposite direction considering a letter from the democrat leaders Pelosi and Reid to the Treasury's Paulson urging him to use some of his $700B to solve the problem.
• G20's members gathered in Sao Paulo on Friday pledged to use monetary and fiscal policies to stimulate economic growth and help to increase the international trade and capital flow. Ahead of the Washington on Nov 15 it may improve the sentiment or at least help investors to be less worried if not optimistic.
• President-elect Barak Obama expressed its support for a second round of stimulus package appearing in his first news conference on Friday.

Negative Side:
• News of heavy job losses in the U.S. may affect Asian markets negatively on Monday. Last Friday's report showed that the economy has lost 240K jobs in October when the unemployment rate reached 6.5 percent, both came more than analysts' estimates. Dow Jones rose near 200 points that day but after two consecutive 400 decline in the previous two days.
• Allianz may report its first quarterly loss since 2001 which could again raise questions about the health of financial system.

Currencies
USD
Demand side:
• Allianz may report its first quarterly loss since 2001 which could again raise questions about the health of financial system, raising demand for liquid assets such as the greenback.
• Lack of significant economic data on Monday
Supply side:
• Any improvement in overall market sentiment
• Improvement in money market rates, such as the 3M USD LIBOR, if continues could reduce demand for the dollar.
• Speculation about the possibility of more production cut by the OPEC's could affect dollar if it help oil prices to rise.

JPY
Demand side:
• All negative forces of the market sentiment
Supply side:
• All positive forces of the market sentiment

GBP
Demand side:
• Decline in PPI may reflect improvement in the inflationary pressures making it easier for the BOE to support the economy.
Supply side:
• The same force, decline in PPI, increases the possibility of both sooner and larger interest rate cuts.

EUR
Demand side:
Supply side:
• Generally, ECB has much more room to cut interest rate and it might not be fully priced in the currency.
• Reports this week are to show that the GDP in euro-zone probably shrank in the third quarter.
• Specifically, Monday's reports on Italian Industrial Production and French Manufacturing Production probably shows decline in September.

From Interest Rate to GDP; A Lovely Road toward an Unpleasant Destination

It is almost certain that the FOMC will lower interest rate today, but what would happen after that?

 

Regardless of what the Fed will do today, I think the market will finally turn its focus toward the GDP and may be more importantly the Personal Consumption; both are to be released as early as tomorrow. The third quarter GDP is expected to show the first contraction since the 2001 recession while the Personal Consumption, the most important driving part of the economy, may show the first decline since 1991.

 

It is important to keep in mind that the figures will reflect the economic activity even before the credit crisis start to intensify from the late September. Since then, central bankers around the world tried to thaw the frozen credit market by reducing their benchmark interest rates; either in coordinated or scheduled meeting.

 

So it may help to see the today's rate cut (if it happens at all) in this context and also remember that the consumer sector is the least responsive component to changes in interest rates. It means that such attempts at best can help to reduce the negative impacts, unemployment specifically, from other sectors on the overall economy.

 

Based on this analysis, I expect that any positive effect from a possible rate cut will finally start to fade as the market find itself closer and closer the GDP numbers.

OPEC Extraordinary Meeting: Missing Signals in a Noisy Environment

OPEC's members gathered in Vienna on Friday to cut production level concerning about oil prices, which has fallen more than 50 percent from its July 147 $/b to about 63 $/b in the last week. However, I was probably wrong for giving it too much weight in my daily assessment.

They finally announced a 1.5 Mb/day cut, when it was almost clear that there would be no cut more than 2 Mb/day and nobody expected to see any significant reaction to such a small cut. In fact, I was too concerned about the possibility of a temporary rally in oil, which didn’t happened at all, and its consequences on the dollar.

I think it worked as a noise, making it difficult to discover signals in the market that otherwise might be very clear. Specifically, and in combination with other factors such as being personally tired, an opportunity was missed for selling sterling at a very cheap price ahead of the U.K. GDP report (see the chart).

However, I made money that night betting on the positive reaction from the Canadian dollar, and I was completely true in closing the position (long on CADJPY) on perception of fading technical signals.

The Power of Sentiment: How analysis could be affected

(Note: This post has been originally written on Sep 30 but added later on Oct 16)

I used to see the market more challenging when market-moving factors become more psychological than fundamental. But recent days showed that such a psychological environment could have at least one advantage by eliminating many factors which in a normal condition should be entirely taken into account.

On Sep 29, everything was based on fear; first because of uncertainty before the House vote on the rescue plan, and second by a sever disappointment from the surprise rejection which finally cost the major indexes more than 7 percent.

And today, Sep 30, it was just optimism from revived efforts by the Congress' members and the U.S. President who are trying to make the market confident that the bill will be eventually passed. And it was when a 3.5 percent decline in Japan industrial production and a 16.3 percent decline in the U.S. house prices – reported by the S&P/Case-Schiller – were unable to prevent the market from a more than 3 percent advance.

Following charts could show that how specific the situation is:
• The prices of oil and gold are highly decoupled (and between Euro and oil as well)
• Oil and USDJPY rise and fall in the same direction (reflecting less effect from oil on the dollar)
• It is also worth to see that the market still react strongly to simple technical patterns

Betting on Uncertainty - making 60 pip profit

Announcement of a rescue plan by the Treasury Secretary Henry Paulson – aiming to clear the banks' balance sheets – helped U.S. indexes to rose nearly 7 percent in the last two days of previous week. The plan must be passed by the congress when some members, especially from the Democrats, look reluctant to give the Treasury that huge power without making progress on their own policies.

It seems the bill will be passed but no earlier than this Friday. It is also noticeable to remember that the last week gains in equity indexes are mostly thanks to banning of short selling in the U.S. and some European and Asian markets.

In this environment I think the U.S. dollar could suffer in the medium term. The market will be flooded by $700B in coming months should the plan be executed.

But for this Monday, I found it a good time for buying Yen: 1- I thought that this uncertainty will affect the market sentiment negatively. 2- I also see that most of the optimism is priced at least in a daily-basis

I sold USDJPY at 107.07, making 60 pips profit when I closed it at 106.47. In my view, there are still much more room for appreciation of Yen (not just against dollar) in a week that is full of uncertainty and likely negative economic data.

Coming back with profit!

It was about two weeks that I had no trade. I sold USDJPY at 107.13 after U.S. market close. It was when:

• U.S. Indexes dropped more than 2.5 percent on fear of negative impact from job losses
  Jobless claims rose to 444k, about 15k more than estimates
• ADP Employment Change showed 33K decline which made the market more worry about the Friday's Employment Report
• Improvement in ISM Service index and Non-farm Productivity both overshadowed by negative reading in jobs market

I bet on continuing negative sentiment ahead of tomorrow's Employment Report, but the position resulted in 47 profit very soon when it automatically closed at 106.65 as early as the New Zealand market's open.

MPC Split when Market Need a Consensus

Bank of England Monetary Policy Committee split three ways on setting interest rate, today's minutes showed. However, they seem to be more optimistic about inflation regarding recent sharp drop in oil and commodities prices. More concerns also reflected about the growth but it is not encouraging when there is no consensus to support it. The votes were similar to the previous meeting but the reaction to sterling was negative.

Taking 40 pip profit

I sold AUDJPY last night after U.S. market close. It was when:

• Freddie Mac and Fannie Mea plunged near 20 percent on speculation that the government is going to rescue the two struggling companies.
• Fear of credit crunch cast its shadow again and caused equity indexes to drop about 1.5 percent.
• Oil was somewhat higher on possibility of interruption in supply by tropical storm Fay.
  Bank of Australia was due to release the minutes of its August meeting and it was expected to reflect policymakers' concerns about slowing economy.
• Bank of Japan was also expected to announce its decision on interest rate at 15:30 local time, highly anticipated to hold it at 0.5 percent and express concerns on growth.
  

So I find it the best time to sell Aussie, and I selected the Japanese yen as the partner, targeting both reducing carry-trading and negative impact from BOA Minutes.

The position closed automatically near the support, resulting in 40 pip profit. It was about 30 minutes before the release of the bank's minutes but I was comfortable with the result and didn't follow market after that.

Making Everyday a Monday; Time for Changing the Strategy

After reviewing my recent results I decided to no longer write a weekly outlook or any other restrictive view beyond a daily basis.

1. I found that such frameworks could significantly reduce flexibility in facing a rapidly changing condition which is the nature of markets.
2. Being indifference or ineffectiveness is the least dangerous result of sticking to what that may have been already changed. But it could be completely devastating when it shapes trader's view, perception, and expectation in a wrong way.
3. In fact I think that any non-adaptive general view will ultimately result in very limited options which are almost always technically and fundamentally meaningless.

It is a change to the strategy and I hope its positive effect be reflected in my performance from now. In a short term I expect that:
1 - The average number of trades start to rise
2 - The pairs that I trade be more diversified
3 - And I will have fresh ideas for everyday as I used to have for Mondays!

Stocks, Treasuries, and Yen; Toward Understanding the Big-Picture

Rising inflation is not always negative for stock markets especially when the prospect is improving and other asset classes look more risky.

Last week showed that the CPI increased in Europe and North America but the possibility of a dipper slowdown in global economy noticeably eased concerns about the future of inflation. It may explain why equity indexes climbed, yields on Treasuries fell, gold and oil prices dropped and even carry-trading somewhat resumed.