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.

Market sees the Fed less worried about inflation

Treasuries gained in the week that CPI rose 0.8 percent in July, the "fastest pace in 17 years". Even an unexpected rise in Industrial Production doesn't changed the view that the Fed expect that the slow growth could contain inflation. Futures contracts show that there is less than 25 percent chance for an interest rate rise by the end of the year.

• Fed's Stern expects that "the U.S. economy will probably continue on a path of slow growth, with unemployment rising and inflation easing", Bloomberg said.
• In another report, Chicago Fed President Charles Evans said the second half "likely be extremely sluggish" and inflation should ease "over the medium term".
• Dennis Lockhart, Federal Reserve Bank of Atlanta President, who is not a voting member until the next year, views "the current situation as reasonably balanced, with a great deal of uncertainty around both the downsides to growth and upsides to inflation".

Calendar Highlights: 18 – 22 August 2008

Calendar Highlights: 18 – 22 August 2008

MON 18 AUG:
0100 GBP Rightmove House Prices
000? JPY Bank of Japan Rate Decision
0700 JPY Leading Economic Index
0915 CHF Retail Sales
1100 EUR Euro-zone Trade Balance

TUE 19 AUG:
0330 AUD Reserve Bank of Australia's Board Minutes
000? EUR German Import Price Index
0600 EUR German Producer Prices
1100 EUR German ZEW Economic Sentiment
1430 USD Producer Price Index
1430 USD Housing Starts
1600 USD Fed's Fisher Speaks on U.S. Economy

WED 20 AUG:
0230 AUD Westpac Leading Index
0700 JPY Bank of Japan Monthly Report
1030 GBP Bank of England Minutes
1030 GBP Public Finance
1430 CAD Retail Sales

THU 21 AUG:
0150 JPY Merchandise Trade Balance
0800 JPY Machine Tool Orders
0815 CHF Trade Balance
0900 EUR Purchasing Manager Index
0915 CHF Producer & Import Prices
0930 EUR German Purchasing Manager Index
1000 EUR Euro-zone Purchasing Manager Index
1030 GBP Retail Sales
1030 GBP Total Retail Investment
1300 CAD Consumer Price Index
1600 USD Philadelphia Fed Manufacturing Index
1600 USD Leading Indicators

FRI 22 AUG:
0150 JPY Bank of Japan Monetary Policy Meeting Minutes
1000 EUR Euro-zone Current Account
1030 GBP Gross Domestic Product
1100 EUR Euro-zone Industrial New Orders
1600 USD Fed's Bernanke Speaks on Financial Stability

All times are in CET (Central Europe Time)
Source: dailyfx.com/calendar

NZ Retail Sales; Exploring Kiwi's Reaction

Retail sales in New Zealand rose 0.9 percent in June when analysts expected no change. However it is still showing a 1.5 percent decline on quarterly basis which is the first "back-to-back drop in a decade" and "the most in 13 years".

Recent data already showed that the economy contracted 0.3 percent in the first quarter, and another 0.5 percent decline is expected for the second quarter.

The data looks disappointing but the NZ dollar might have other reasons for its relatively positive reaction. I see it mostly in response to the decline in oil prices which continued from the last night through the Asian and European sessions and improved sentiment in equity markets. In addition, the University of Michigan Consumer Sentiment was expected to show improvement which could have worked in favor of high-yielding currencies as well as the Kiwi.

When Inflation doesn't Work!

The cost of living in Euro-zone and UK rose in June but the market reaction looks completely different to what you may remember from July. At that time, rising inflation headlines in addition to revived concerns on the health of the U.S. financial institutions, Freddie Mac and Fannie Mea specifically, helped both Euro and pound reaching their records highs against the dollar. However inflation my look not so frightening when everything pointing to the possibility of a sharp slowdown in global economic activity:

• IMF's World Economic Outlook Update in July pointed to an increasingly slowing economy in the UK, EU, and Japan.
• Gross Domestic Product shrunk in Euro-area in the second quarter, for the first time since introducing the Euro, after economy contracted in Germany and France, the two largest euro economies.
• Japan GDP also showed that the world second largest economy contracted at an annualized 2.4 percent in the second quarter when Japanese officials earlier warned about it.
• The data also showed negative numbers for Industrial Production in Japan, France, and Euro-area.
• Moreover, the war in Georgia just increased concerns about the security issues in European economies.

There were certainly reactions to this situation. Commodity prices lead by oil extended their declines. One month ago it was really difficult to imagine gold at 772 $/ounce but it happened on Aug 15.

The only winner was certainly the dollar which appreciated against all major currencies. The depreciation of sterling was the most in almost 37 years. Nevertheless, I think the appreciation of the greenback against the Yen was somewhat limited which may come from a widely reduction in carry-trading.

Finally, almost all economic data for the week were overshadowed, positively or negatively, by the big-picture which was the fear of a global economic slowdown. There was almost no significant reaction to the GDP or CPI in Euro-zone at the time of the releases showing that most of decisions had been already made.

The bet finally resulted in 8 percent loss

I closed my positions last night (after U.S market close). Every supports was broken and there was no supportive technical data. In addition, an only pre-order for buying GBPUSD automatically triggered at its daily support which resulted in 49 pip loss very soon.
Looking at sharp drop in commodities prices show that the market may be in an adjusting process. UK CPI and US Trade Balance are ahead but I have no specific plan for the rest of the week.
Although holding positions beyond a day was in contrast by my style but a relatively small size and making a difficult decision (closing all in loss) help to control the loss.
I forget it from now, looking toward the next week. (plan of the trade)

Moving Forward with Profit

German wholesale price index rose more that estimates, French industrial production unexpectedly slowed in June when Italian CPI rose nearly in line with expectation. In the UK, Trade deficit widened more than analysts estimates while Producer Price Index Output rose 10.2 percent from a year earlier suggesting inflationary pressures has still way to be moderated.

There is no significant economic data from the U.S. today, but Housing Starts in Canada could affect dollar. I decided to hold my positions, both EURUSD and GBPUSD which are in profit right now. Heading toward Tuesday's UK CPI, I would be prepared to increase the size in appropriate technical conditions. (plan of the trade)

30 pip profit; Reducing the size in European Session

I reduced the size before getting German Wholesales Price Index and French Industrial Production figures. I my increase the size again ahead of Tuesday's UK and French CPIs. (plan of the trade)

European Currencies look Attractive

I decided to buy Euro and sterling ahead of economic data in Europe. Italian CPI and UK PPI are ahead and I find the technical data appropriate. It is possible to hold positions through Tuesday when UK CPI and French CPI will face US Trade Balance. There was also a supportive article in Bloomberg reflecting a view that recent appreciation of dollar looks unsustainable both technically and fundamentally. (Background)

How Paulson's comment could affect this Monday?

Just one month ago, on July 13, the U.S. Treasury Secretary Henry Paulson revealed a rescue plan for the two struggling companies Freddie Mac and Fannie Mea. At that time it made calm the market and brought confidence in financial system.

However his today's comment from Beijing could have different effect at least on the dollar. According to Bloomberg, he said that "we have no plans to insert money into either of those two institutions'' and he added that their earning result were "not a surprise".

Reminding the magnitude of the housing slump he said "we have got some serious issues that we're dealing with in our economy'', "I believe it's going to take us well beyond the end of the year to work through all the housing problems."

I think such comments could to some extent revive concerns about the health of the economy. But to what degree it could affect market in a daily-basis is a matter of experience.

Weekly Outlook: 11 – 15 August 2008

I love Monday through Tuesday! Inflation data in France and UK, and probably-widened Trade Balance in the U.S could attract everyone who is seeking for reasons to buy the recently battered European currencies.

Wednesday looks difficult to play. Industrial Production in Euro-area and Unemployment in the UK suggest weakness when the Bank of England Quarterly Inflation Report could just complicate the situation.

On Thursday I would be asleep through the day! CPI and GDP in Euro-area and Germany in addition to CPI in the U.S make it simply too difficult to analysis.

Friday might make opportunities but I think everything must be done on Monday.

Calendar Highlights: 11 – 15 August 2008

Calendar Highlights: 11 – 15 August 2008

MON 11 AUG:
0330 AUD Reserve Bank Quarterly Monetary Policy Report
0800 JPY Machine Tool Orders
0845 EUR French Industrial Production
1000 EUR Italian Consumer Price Index
1030 GBP Producer Price Index
1030 GBP Visible Trade Balance
1415 CAD Housing Starts

TUE 12 AUG:
0100 GBP RICS House Price Balance
0100 GBP BRC Retail Sales Monitor
0330 AUD NAB Business Confidence
0630 JPY Industrial Production
0700 JPY Consumer Confidence Households
0845 EUR French Consumer Price Index
1030 GBP Consumer Price Index
1430 USD Trade Balance
2000 USD Monthly Budget Statement

WED 13 AUG:
0045 NZD Producer Prices
0150 JPY Gross Domestic Product
0230 AUD Westpac Consumer Confidence
0330 AUD Wage Costs Index
1030 GBP Jobless Claims Change
1030 GBP ILO Unemployment Rate
1100 EUR Euro-zone Industrial Production
1130 GBP Bank of England Quarterly Inflation Report
1430 USD Advanced Retail Sales
1430 USD Retail Sales less Autos

THU 14 AUG:
0150 JPY Tertiary Industry Index
0200 NZD Business Purchasing Manager Index
0300 AUD Consumer Inflation Expectation
0330 AUD Average Weekly Wages
0800 EUR German Consumer Prices
0800 EUR German Gross Domestic Product
0845 EUR French Gross Domestic Product
1100 EUR Euro-zone Gross Domestic Product
1100 EUR Euro-zone Consumer Price Index
1430 USD Consumer Price Index
2030 USD Fed's Stern Speaks on Financial Shock

FRI 15 AUG:
0045 NZD Retail Sales
1430 CAD Manufacturing Shipments
1430 USD Empire Manufacturing
1515 USD Industrial Production
1530 USD Net long-term TIC Flows
1600 USD University of Michigan Consumer Sentiment

(All times in CET, source: dailyfx.com/calendar)

What made dollar so strong?

Commodities' Response to a Global slowdown:

• OECD and IMF both downgraded their estimate for the global economic growth in their latest reports.
• Italian GDP unexpectedly shrank 0.3 percent in the second quarter and GDP estimate for UK revised down suggesting that the economy is increasingly losing steam in Europe.
• The story is similar in other continents; Singapore revised its growth forecast down and officials in Japan warned that the world's second largest economy might have already contracted.
• It is when tightening monetary policy incorporated by central bankers in India and China make the prospect for growth even more gloomy.

Hence the recent sharp decline in prices of commodities, lead by oil, could reflect the fear that such slowdown could eventually take its toll on the global demand.

Monetary policy around the globe:

• Euro and sterling dropped in the week that policymakers decided to keep interest rates unchanged. However recent decline in commodities' prices, which has been the main source of uncertainty about inflation, strengthened this expectation that they can finally turn their eyes toward economic growth by cutting borrowing costs. Australia and New Zealand are also facing similar condition.

Mergers and Acquisitions:

• According to an article in FT, it seems that the U.S. has been increasingly a target for M&A which could fundamentally support the currency.

The possible risks to this situation:
Every source of strength could work in the other direction, usually by different reasons. Oil price could rise again especially in response to rising geopolitical tensions. In the other hand, the direction for monetary policy could change, in U.S or elsewhere, simply in reaction to a higher than expected jump (or fall) in inflation or unemployment which looks very probable especially in the U.S. remembering Friday's unexpected job lost in Canada.

Dollar's Days!

Dollar continued to appreciate against all major currencies:

Euro-zone: Euro fell nearly 2 percent against dollar, touching 1.5005 and extending its weekly losses close to 4 percent, "the most one-day drop since September 2000". Selling euro accelerated after Trichet's comment on "materializing" risks to the growth, in addition to weak economic data from the euro-area.

UK: British pound followed the same scenario even after policymakers decided to keep the interest rate unchanged. Nationwide consumer confidence declined and HBOS home price index dropped when falling oil (and other commodities) prices strengthened this view that the MPC could finally get the flexibility to cut interest rate.

Oceania: Both Australian and New Zealand dollars extended their losses when having even more reasons. In addition to weak economic data and recent comments from officials on the possibility of interest rate cuts in the near future, these so-called commodity currencies had no choice but depreciation as a response to the sharp decline in oil, gold, copper, and other commodities prices.

Oil: Today's 116 $/b oil may looks relatively cheap and it might be the most important reason behind the dollar's strength and also the rally in stock markets. According to the Bloomberg's analyst, "the decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''

However there are people who believe that such reaction is mostly technical than fundamental. For example, falling euro below its 200 day moving average (around 1.5227) could have triggered euro-selling orders and resulted in a faster depreciation.

As a summary I want to quote an analyst's view from the Bloomberg: "The most important aspect of the dramatic collapse in the euro dollar is the absence of confirmation from other markets,'' said David Woo, global head of currency strategy at Barclays Capital Inc. in London. "None of the typical drivers of the euro-dollar in the past couple of years could have accounted for the magnitude of this move, which leads one to conclude that this is a technical-driven move. From that point of view, we do not think that this move is sustainable.''

Technical data always matters

Euro extended its decline after ECB signal downside risks to growth has been "materialized". Australian dollar also dropped below 0.9000 betting on the possibility of rate cuts from Reserve Bank of Australia. Today comments from the country's major banks which reflect willingness to "pass on potential central bank interest rate cuts to borrowers" showed that how near a rate cut is. In the case of Aussie I didn't aware of today's event but last night and in the lack of supportive technical data I refused to buy AUDUSD even at an apparently attractive price. (see also Aussie behavior in the new environment)

Britain is certainly located in Europe!

Bank of England and European Central Bank both decided to leave interest rates unchanged today. Since there was no statement from BoE, it was just up to ECB's Trichet to shape markets' view on the prospect for the economy and monetary policy in Europe.

Deteriorated consumer confidence, decline in investment, rising unemployment, and the possibility of contraction in the GDP are not hidden to the market and recent depreciation of European currencies is certainly its reaction to the data. However, today's comments worked as a catalyst and triggered another round of selling Euro, Swiss Franc, and not surprisingly the British Pound. (see euro's reaction)

Reactions to ECB's Comments

European Central Bank's Trichet acknowledged weakness in the Euro-zone economic activity after deciding to keep the benchmark rate unchanged. As the chart shows, there was no sign of consolidation even at the daily support and the Euro extended its decline against dollar below that level.

It was when Pending Home Sales unexpectedly rose 5.3 percent in June which overshadowed a worse-than-expected rise in jobless claims.

Update: German Exports

Germany's trade surplus rose to 19.7B in Jun from 14.3B in previous month. Imports declined 0.1 percent while exports climbed 4.2 percent, which is "the most in almost two years" and better than 1.8 that market was expected. Euro appreciated in response waiting for ECB Rate Decision.

Update: Japan Machine Orders

Yen appreciated after the Cabinet Office in Tokyo said that Equipment orders which "signal capital spending in the next three to six month" fell 2.6 percent in June, after 10.4 percent rise in May. It was less than 9.9 percent decrease which was expected. The reaction came two days after the Fed decision to hold interest rate spurred a 3 percent rally in U.S. indexes.

Some analysis believe that Japan economy is in or close to a recession but such numbers suggest that it could be a shallow one.

Calendar Highlights: 4-8 August 2008

Calendar Highlights: 4-8 August 2008

MON 4 AUG:

0330 AUD House Price Index
1100 EUR Euro-zone Producer Price Index
1430 USD Personal Spending
1430 USD Personal Consumption Expenditure Deflator

TUE 5 AUG:
0630 AUD Reserve Bank of Australia Rate Decision
0945 EUR Italian Purchasing Manager Index (Services)
1000 EUR Euro-zone Purchasing Manager Index (Services)
1030 GBP Industrial Production
1100 EUR Euro-zone Retail Sales
1600 USD ISM Non-Manufacturing Composite
2015 USD FOMC Rate Decision

WED 6 AUG:
0100 GBP Nationwide Consumer Confidence
0100 GBP Nationwide GDP Estimate
0330 AUD Home Loans
0700 JPY Leading Index
1200 EUR German Factory Orders
1600 CAD Ivey Purchasing Managers Index

THU 7 AUG:
0045 NZD Unemployment Rate
0150 JPY Machine Orders
0330 AUD Unemployment Rate
1000 EUR German Trade Balance
1000 EUR German Exports
1200 EUR German Industrial Production
1300 GBP Bank of England Rate Decision
1345 EUR European Central Bank Rate Decision
1430 EUR ECB's President Trichet Holds Public Press Conference
1600 USD Pending Home Sales

FRI 8 AUG:
1000 EUR Italian Gross Domestic Product
1300 CAD Net Change in Employment

All times in CET, source: dailyfx.com/calendar
(Note: This post has been added later)

UK Manufacturing; Another piece of Recession Puzzle

UK Purchasing Manager Index of manufacturing dropped to 44.3 from 45.9, apparently lowest since 1998. It is when inflation rose to a decade high, house prices continue to fall, and consumer confidence indexes such as GfK's set another record low.

Aussie behavior in the new environment

Australian dollar dropped earlier today after weak economic data suggested that that the RBA may reduce its benchmark rate from the current12 years high.

1. TD Securities Ltd., and Melbourne Institute in Sydney released its monthly inflation report today showing inflation decreased in July for the first time in almost a year, though still as high as 4.6.
2. In another report, Australian Industry Group (AIG) said in Canberra today that the performance of manufacturing index fell and remained below 50 for the second month.
3. It is when the retail sales declined 1 percent as another sign that the economic activity is slowing.
4. Australian's Prime Minister Kevin Rudd said "the nation's banks have a responsibility to lower borrowing costs if the Reserve Bank of Australia cuts its benchmark interest rate", according to the Bloomberg.
5. After all, falling oil (and gold) prices in recent weeks and depreciation of Euro against dollar in addition to the fear of a sharp slowdown in global economy just add more burden on this high yield currency.

Good decision made 40 pip profit

Considering the background, I also bought AUDUSD expecting that interest rate differential would be in favor of Aussie. But I changed the decision and replaced it by selling GBPJPY when I found it in an appropriate price:

• Oil price was dropping in response to the GDP and possibility of sharp slowing in economic activity and reduced demand. So the price of gold was also dropping in response to Oil and Euro.
• Some economic data was ahead, especially German Retail Sales that could show the economic activity is increasingly slowing in euro-area, and it was likely to accelerate the commodity-selling in response.

All of these reasons in addition to technical data made me convinced to close the position in 15 pip loss and time showed that it was a correct decision.

30 pip profit from the first position

I sold USDJPY yesterday, at 107.96 in about 4 hours before US markets close. It was when the GDP had been reported and dollar temporarily was strengthened thanks to dropping oil prices which itself was in response to possibility of lower demand.

The position automatically closed at 107.66. About 7 hours left to US Employment Report and I would prefer to reduce the size instead of closing it but if I had more flexibility. (background of this trade)