US GDP and the Forex Market’s Behavior: A Technical Case

Today’s report from the Commerce Department showed that the US Economy, the world’s largest, expanded at a 3.5 percent annual rate in the third quarter.

In recent days and ahead of the report, the sentiment in financial markets was relatively negative as the growing pessimism about the prospect for a sustainable economic growth, especially when the central bankers and policymakers finally start to unwind their stimulus measures, cast its shadow and negatively affected the investors’ confidence.

As the charts show, the yen was rising against the dollar in that period, and it was when the de-leveraging process was generally working in other parts of the markets.

At the same time, and if you wanted to bet on a possible turnaround based on good news from the GDP report, it seems that there were some signals and opportunities. Look at the daily chart, where the USDJPY hit the 26-day moving average – the blue line - which is also the intraday low at the support line (90.22 in the 15-minutes chart).

In addition, the charts below show that the leveraging process was dominant after the GDP report, causing the dollar to depreciate against the higher-yielding currencies.

US GDP Shrank Less than Estimates

(to be written)

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)

GDP, Oil, and Unemployment; Demand & Supply battle

Second quarter's GDP missed estimates when in Q4 (2007) revised to negative, and jobless claims climbed by 44K to 448000 which is usually considered a recessionary number. It is at the time that Employment Report, which is scheduled for tomorrow, may show that the economy lost jobs for seventh consecutive months.

The reaction to the report was interesting. Oil price dropped after earlier jump betting that the slowing economy would decrease demand. It helped dollar to pare its sharp losses against other major currencies. However, from the supply/demand perspective, it looks a little complicated for the dollar:

• From the demand side: Some economic data on Friday may show more weakness in euro-area. German Retail Sales may attract more attention which in expected to be declined in June. Oil price may extend its decline in response to any depreciation of Euro and such process could increase demand for dollar.
• From the supply side: It seems reasonable to expect that the current situation could bring more challenge for the greenback. Considering the increasingly deteriorated job market, the prospect for rising interest rate would be completely uncertain.

I think that taking a position ahead of tomorrow's US Employment Report could be a more difficult balancing act; so it would be necessary to be more cautious about technical data.

Selling GBPUSD Ahead of US GDP

About 3 hours after FOMC meeting I think it has been mostly priced in the market. I decided to buy dollar against British pound at 1.9745 and increase the size if technical data become more supportive.

(The Blogger was inaccessible at the time and this post has been added later)