G-8 Summit and Market Reactions to Geopolitical Factors

This week started with G-8 summit in Japan which still affects almost every movement in the markets. As it was expected, global leaders expressed concerns on inflation and its negative effects on both economic and social activities; and for almost a year it has been common to hear inflation and then the need for a stronger dollar, which is usually dollar-supportive.

Today dollar also finds another support from sharp drop in oil prices. Two reasons can express recent drop in commodity prices: first, expectation for a global economic slowdown, and second, the recent comment from Iran's Ahmadinejad at D-8 (not G-8!) meeting which is received as a softer expression.

But how powerful these factors are? I think this could be understood by comparing them to the reactions from other economic data and events today. US pending home sales drop more then estimates and Bernanke opened the door for extending current facilities to financial institutions into 2009.

Sharp loss experienced

EURUSD hit the stop loss at 1.5360, making 50 pip loss, but the size of position was three times more than my average trades, so increased the magnitude significantly.

I don't know the actual reason behind the reverse in the market. It might be a comment from an EU official. It happened very fast; considering the time of the event which is about shifting between Asian and European sessions, I guess it might be result of different views in the market.

It is relatively reasonable to expect that the general risk would rise when we move through different sessions. So I could be blamed for underestimating this fact when I decided to increase the size of position that time, but not more.

Another fact might be that I didn't give the market adequate time to reflect any possible effect from the last weekend G-8 summit.

Closing the positions when uncertainty increase, Taking 19 pip profit

I closed the positions, EURUSD and USDJPY, taking totally just 19 pip. There are reasons that increase uncertainty significantly:

• G-8 summit and the possibility of discussion on dollar weakness and currency intervention, at least in the words
• Bank of Japan will release its monthly report in less than one hour which is not expected to be positive for the Yen
• Although the US CPI and any other inflationary signs are generally negative to the stock market, but it makes people more convinced that the Fed will raise interest rate sooner.

Global inflation in G-8, Local CPIs in calendar

Germany CPI is ahead, always supportive for the euro, but the G-8 finance ministers summit, which is scheduled this weekend, makes it difficult to comfortably selling dollar; Inflation is the main concern and it is likely to be some comments in favor of a stronger dollar. US CPI is also scheduled tomorrow.

Inflation fear can negatively affect sentiment in global stock markets, and this is what I have no doubt about it. Generally it is in favor of Yen and Swiss frank, the two main sources of carry trading.