Revisions Undermine A Rebound In US 2Q GDP – Forex Trading

Revisions Undermine A Rebound In US 2Q GDP

The world’s largest economy marked a hearty rebound in activity through the second quarter of the year; but revisions to previous readings have clearly distracted the market from the promising headline report. For the three-month period through June, US growth advanced at a 1.9 percent annualized pace – not an insignificant shortfall from the 2.3 percent clip expected. From the details of the report, it was clear that the usual suspects were responsible for the shortfall.

The gross private investment component dropped 14.8 percent (the biggest contraction in a year and a half) led by a 15.6 percent plunge in residential investment. On the other hand, there were promising readings from the economy’s other key sectors. A multi-decade low in consumer confidence and cooling in employment trends wouldn’t curb American’s spending habits. Personal consumption rose 1.5 percent through the period, against 0.9 in the pervious quarter, with a pickup in nondurable goods and services componsating for a 3 percent contraction in the discretionary spending-related durable group. Also, the weak dollar was starting to show through in export activity. A 9.2 percent increase in the value of shipments abroad offers the greatest potential for expansion through the remainder of the year.

However, while the economy seems to have picked itself up from the worst of an economic slump, economists and market participants are still concerned about the health of the US. Aside from the headline report, the first quarter reading was revised lower from 1.0 percent to 0.9 percent; but more importantly, the fourth quarter 2007 figure was recalculated from a slight pickup on an annualized pace to an actual 0.2 percent contraction. This was the first time the growth reading has reported an official recession (loosely defined as a quarter or three months of contraction) since the period through September 2001. On the other hand, the market is typically more concerned about predicting the future rather than looking back to revisions of history; but alterations to these numbers effectively undermine the current release of as traders worry the second quarter reading will be open to changes later down the line. What’s more the outlook for growth is already under duress from a quickly fading consumer sector (their spending accounts for an estimated 70 percent of economic activity) while the housing recession and downturn in business investment in more recent data are keeping the pressure on activity.

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

Tags: RevisionsUndermine A Rebound In US 2Q GDP

Non-Farm Payrolls Threaten To Sink The Dollar – Forex Trading

Non-Farm Payrolls Threaten To Sink The Dollar

Trading the News: US Change in Non-Farm Payrolls

What’s Expected

Time of release: 08/01/2008 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: -75K
Previous: -62K

How To Trade This Event Risk

Friday’s Non-farm payroll report is expected to show job losses for a seventh straight month as experts are predicting the economy gave back another 75,00 jobs in the month of July. The employment report is crossing the wires this month ahead of leading indicators such as the Challenger job cuts gauge on the ISM non-manufacturing and manufacturing composites, which leaves us jobless claims and the ADP report to gleam insight. The surprising 9,000 improvement in private sector hiring conflicts with consecutive weeks of above 400,000 initial jobless claims. Since, the ADP report hasn’t traditionally been an accurate predictor for the NFP report, the mounting unemployment payrolls may signal the potential for a drop in non-farm payrolls greater than 100,000. The expected uptick to 5.6% from 5.5% in the unemployment rate will also be concerning for traders, as the last increase was due to the seasonal factor of students entering the workforce. The outlook for the U.S. economy took a hit when GDP figures missed expectations of 2.3% printing 1.9% with a 0.1% revision to the previous quarter’s reading. Expectations were that the government’s fiscal stimulus plan would generate close to 1% growth on its own. Thus, growth in the economy was stagnate absent the government intervention, which may force the Fed to leave rates unchanged for the remainder of the year.

The growth figures miss led to a sharp decline in the dollar before a better than expected Chicago PMI report reversed its losses. A better than expected employment print could send the dollar to its highest levels since mid June. Therefore, for a bullish dollar trade(short EURUSD) we would require a job loss of less than 40,000. With a strong fundamental mix, we will look for red, five minute candle close for a short on two lots of EURUSD. Our initial stop will be set above the nearby swing high (or reasonable distance) and the first target will equal this risk. The second objective will be discretionary; and to protect against losses, we will move the second stop to break even when the first target is hit.

On the other hand, another month of over job losses may be enough for dollar bears to grab momentum back especially if the total is above 100K . We will look for a inline or greater contraction in employment for a EURUSD long and will follow the same strategy as a short, just in reverse.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

Tags: Non-FarmPayrolls Threaten To Sink The Dollar

US Dollar – Could Non-Farm Payrolls Fall By 100K? – Forex Trading, Currency Forecast

US Dollar – Could Non-Farm Payrolls Fall By 100K?

The US dollar has appreciated in recent weeks, as overnight index swaps signal that traders expect the Federal Reserve to raise rates by 75 basis points over the course of the next eight FOMC meetings. However, the next release of non-farm payrolls is expected to reveal job losses for the seventh consecutive month while the US unemployment rate is anticipated to hit a 4-year high of 5.6 percent. What are the chances that non-farm payrolls will prove to be even worse than forecasted, and more importantly, how will this impact the US dollar?

What is the Market Expecting for July Non-Farm Payrolls?

Change in Non-Farm Payrolls: -75k Forecast, -62k Previous
Unemployment Rate: 5.6% Forecast, 5.5% Previous
Change in Manufacturing Payrolls: -40k Forecast, -33k Previous
Average Hourly Earnings: 3.4% Forecast, 3.4% Previous
Average Weekly Hours: 33.7 Forecast, 33.7 Previous

Of the 79 economists polled by Bloomberg, the most optimistic forecast is by First Trust Advisors, which calls for a drop of 10k jobs. The most pessimistic is, once again, ING Financial Markets who is calling for job loss of -150k. All of these economists expect a negative print, but the range of estimates is extremely wide which means that traders should expect sharp volatility in the US dollar and the financial markets in general on the back of the non-farm payrolls release.

In order to determine the strength of non-farm payrolls, we typically look at 10 pieces of data that we call the leading indicators for non-farm payrolls. Four out of the ten releases point to greater job losses, putting the odds in favor of a weak non-farm payrolls reading in line with expectations. More specifically, the four-week moving average of initial jobless claims increased to a new 5-year high while continuing claims jumped 6 percent to 3.3 million. On the other hand, consumer confidence has improved somewhat with the pullback in oil prices from record highs, while the ADP employment report unexpectedly showed an increase in hiring. However, we are missing three of the leading indicators we normally watch – ISM Manufacturing, ISM Services, and Challenger job cuts – as they will not hit the wires until later on Friday and next week.

Arguments for Stronger Non-Farm Payrolls

• ADP Employment Report Unexpectedly Rises 9k Vs. Expectations of -60k
• Work Stoppages Fall To Zero As No New Strikes Are Reported
• U of M, Conference Board Consumer Confidence Surprisingly Improves

Arguments for Weaker Non-Farm Payrolls

• Initial Jobless Claims 4-Week Moving Average Jumps To New 5-Year High
• Continuing Claims Jump 6% to 3.3 Million
• Monster.com Index Drops 14% in July From A Year Ago
• Help Wanted Online Index Declines For 5th Consecutive Month

Will May Non-Farm Payrolls be Better or Worse than June?

The majority of the leading indicators for non-farm payrolls indicate that July was a month of job losses, but there is an unusual amount of uncertainty surrounding this particular release. First of all, two of the key indicators that we normally utilize and are typically the most consistent – ISM Manufacturing and ISM Services – will not be released until after the non-farm payrolls announcement on Friday morning. As a result, our view of employment conditions in those two sectors is a bit blurred.

Nevertheless, though less-reliable, the ADP employment report unexpectedly reflected net increase of 9,000 workers thanks to hiring by small firms and in the services sector, which may help to alleviate some of the weight of job losses amongst manufacturers. Meanwhile, separate consumer confidence surveys by the University of Michigan and the Conference Board surprisingly improved during July. However, a deeper look into the Conference Board report shows that sentiment on the labor markets has steadily deteriorated, with more Americans saying that jobs are harder to get. As a result, despite the lack of more dependable leading indicators for non-farm payrolls, the odds are clearly skewed in favor for yet another round of gloomy employment data.

Could Non-Farm Payrolls Drop by 100k?

The US non-farm payrolls report is one of the most critical releases for the US dollar, not only because it is market-moving, but also because it can help us gauge the broad status of the economy. Despite the fact that GDP rose 1.9 percent in Q2, up from 0.9 percent in Q1, it is far too early to say that the US economy has successfully avoided a recession. A “recession” does not necessarily mean that GDP falls negative, as the National Bureau of Economic Research (NBER) defines it as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” It could easily be argued that the slump in US GDP from 4.8 percent during Q3 2007 down to -0.2 percent in Q4 2007 and 0.9 percent in Q1 2008 represents a “significant decline.” Furthermore, these figures are often revised, as the -0.2 percent reading in Q4 was initially reported at 0.6 percent. Consequently, this advanced reading of Q2 GDP is by no means the final word on economic growth.

Over the past 3 decades, the US economy has gone through 3 recessions, according to NBER. In each of those 3 recessions, there was a string of job losses that lasted for a minimum of 10 months. Thus far, non-farm payrolls have fallen negative for the past 6 months, and the July report is anticipated to bring this tally up to 7. Some argue that the current downturn in growth could be more severe than the recession in the early 2000s due to the triple blow of a housing crisis, credit crunch and skyrocketing commodity prices. As if this weren’t enough, the odds are in favor of more severe job losses in coming months because in each of the past 3 recessions, the largest single month job loss was more than 300k! In this context, a 100k drop over the next few months is not only possible, but probable.

Trading the Non-Farm Payrolls Release

Very few economic indicators are as exciting to trade as the release of non-farm payrolls for the US economy. Indeed, the change in non-farm payrolls for the month of July could determine both the outlook of Federal Reserve monetary policy as well as the fate of the US dollar for the second half of 2008. Currently, the chances of the Federal Reserve leaving rates unchanged at the August meeting are above 93 percent. Yet, the dollar has been rebounding in the days leading up to the non-farm payrolls report and if this important economic indicator surprises to the upside we may see a sharp appreciation of the US dollar against all major currencies. In fact, according to overnight index swaps, which measure interest rate expectations for the next twelve months, traders expect the Federal Reserve to increase rates by 75 bps over the next eight FOMC meetings. Higher interest rates could make the US dollar more attractive to foreign investors and the higher level of demand for assets denominated in dollars could accelerate gains in the USD/JPY and losses in the EUR/USD.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

Tags: USDollar – Could Non-Farm Payrolls Fall By 100K?

DailyFX Forecasts – We Expect the New Zealand Dollar to Fall Further – Forex Trading

DailyFX Forecasts – We Expect the New Zealand Dollar to Fall Further

New Zealand’s economy could be on the brink of recession. We target the NZD/USD at 0.70 in three months and at 0.65 before the end of the year.

The New Zealand dollar has been falling sharply against the world’s most heavily traded currencies on speculation that the Reserve Bank of New Zealand would have to cut interest rates faster than traders had previously expected. Indeed, the rapid deterioration of the New Zealand economy prompted many investors to exit the so called carry trades despite New Zealand’s high level of interest rate. Yet, the current wave of risk aversion in the world’s financial markets which forced many investors to cut holdings of higher yielding currencies has not been the only factor putting downward pressure on the value of the New Zealand dollar. In fact, several economic indicators suggest the New Zealand’s economy could face bigger problems in the second half of 2008 as record high interest rates slow consumer spending and business investment. But is New Zealand’s economy heading into a recession?

New Zealand’s Economy is on the Brink of Recession

Over the past decade, a substantial search for yield propelled by spare amounts of liquidity drove up exchange rates for many small open economies such as New Zealand. This environment helped to fuel a sharp increase in domestic asset prices but also made New Zealand’s economy more vulnerable to external shocks. Now, with the world economy slowing down, New Zealand is facing its biggest challenge in more than 20 years. They have been hit by a slowdown in global growth and by rising high energy and food prices. In fact, according to Statistics New Zealand, the economy shrank 0.3 percent in the first quarter of 2008, largely due to the impact of higher energy prices, a drought on agriculture and a slowdown in construction and household spending. The widening of the current account deficit was mainly due to crude oil imports which surged 25 percent from a year earlier. However, energy prices are not the only cause to blame for New Zealand’s poor economic performance. Indeed, real household spending which has been the main driver of economic growth over the past few years, is now projected to contract over the next quarter. Despite the fiscal stimulus announced by the New Zealand’s government, record high mortgage rates and food price increases are reducing the amount of disposable income households have for discretionary spending. Moreover, several years of strong economic growth have contributed to an annual inflation running above 4 percent which fashioned higher wages but also made New Zealand’s products less competitive abroad. Currently, New Zealand runs a current account deficit equal to 7.8 per cent of gross domestic product and the trade deficit for the year to May was 4.8 billion dollars, up from 4.6 billion dollars in the year to April. Since foreign goods must be purchased using foreign currency such outflows may lead to a depreciation of New Zealand dollar unless countered by similar capital inflows. In addition, New Zealanders are very pessimistic regarding the future of their economy. According to a survey conducted by Westpac to 1,556 consumers on their personal finances, consumer confidence fell to the lowest level since the 1991, adding to evidence that the economy is already in recession.

New Zealand dollar could depreciate further in the Second Half of 2008

The Reserve Bank of New Zealand conducts its monetary policy by setting the Official Cash Rate. Yet, the bank’s primary objective is to maintain price stability by keeping inflation between 1 and 3 percent, based on a contract negotiated between the Minister of Finance and the Reserve Bank. The complexity here is that the current economic environment of weak economic activity and high inflation is producing a difficult puzzle for the RBNZ to solve. In fact, significant increases in oil and food prices are occurring at the same time as the economic activity is weakening. Looking ahead, the combination of rising headline inflation, reflecting higher commodity prices, with weak economic growth, could prove to be very damaging for New Zealand’s economy. The RBNZ projects modest GDP growth over 2008 but we are expecting the June quarter to show a further contraction, satisfying the definition of a technical recession as two consecutive quarters of negative growth. In our opinion, although upside risks for inflation remain evident, they also appear to have diminished somewhat and the RBNZ is likely to focus its monetary policy on the downside risks to growth. According to interest rate swaps for deposits denominated in New Zealand dollars, traders have already priced in a series of rate cuts by the RBNZ in 2008. While the 3 month swap rate stands at 8.33 percent, the 2 year rate is being offered at 7.30 percent and the 10 year yield at a much lower 7.07 percent. Below is graph that plots a spread between the 3 Months and the 2 year interest rate.

Generally, lower interest rates make holding the New Zealand dollar less attractive to foreign investors and the lower level of demand for assets denominated in New Zealand dollars could place downward pressure on the value of the kiwi. On the other hand, a reduction in interest rates should help to stimulate New Zealand’s economy by making borrowing more affordable and investment more attractive. Then, easy money could stimulate spending and create the necessary conditions for a sharp economic rebound. Yet, despite the benefits of lower interest rates in the long term, they are unlikely to help the New Zealand dollar in the short-term. As a result, we expect the currency to continue to depreciate against both the U.S. dollar and the Australian dollar. We target the NZD/USD at 0.70 in three months and at 0.65 before the end of the year. In addition, we expect the kiwi to lose some ground against the aussie and we project the AUD/NZD to be trading at 1.30 by September and at 1.35 by the end of 2008.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

Tags: DailyFXForecasts – We Expect the New Zealand Dollar to Fall Further

FX Awaits US Jobs – Forex Trading

FX Awaits US JobsThe dollar is firmer against the majors by the New York afternoon following sharp swings in the morning to hover near similar levels from the previous session. The greenback sold off heavily across the board following a sharply higher than expected weekly jobless claims reading, which surged to 448k from 406k in the previous week due to “special factors”, prompting the dollar to lose footing to the just beneath the 1.57-handle. However, the losses were short-lived as traders took to the sidelines ahead of Friday’s key July labor report. The dollar also benefited from pullbacks in both spot gold and crude oil, which reversed their earlier session’s gains.The advanced reading for Q2 GDP was slightly less than forecast at 1.9%, marginally missing estimates of 2%, but improving from the previous reading of 1.0%. The employment cost index held steady at 0.7%, while the GDP deflator fell sharply to 1.1% from 2.7% in the previous quarter. Meanwhile, the July Chicago PMI unexpectedly improved above the 50-level to 50.8, versus 49.6 in June.Traders will turn to tomorrow’s key labor report, with estimates calling for the July unemployment rate to edge up to 5.6% from 5.5% a month earlier. The non-farm payrolls figure is seen remaining in negative territory for the 7th consecutive month, with forecasts calling for an increase in jobs lost to 75k in July, versus a 65k job loss a month earlier. The recent reports provided conflicting signals, with Wednesday’s ADP private sector payrolls report better than expected, revealing an increase of 9k jobs versus a loss 79k in the previous month while today’s weekly jobless claims unexpectedly spiking sharply higher.We expect a quiet trading session heading into tomorrow’s data with the major currency pairs likely to consolidate within range. A non-farm payrolls reading in the region of over 100k loss will promptly spark the greenback to relinquish its recent gains, while a positive reading will sharply extend the dollar’s gains and provide sufficient impetus to break through the 1.55-level against the euro. Also due out tomorrow is July manufacturing ISM, which is forecasted to reverse last month’s improvement above the 50-level, contracting to 49.8.MG Financial Grouphttp://www.mgforex.comLegal disclaimer and risk disclosureMG Financial Group, or any of its related companies, will not be held responsible for the reliability or accuracy of the information available on this site. The content provided is put forward in good faith and believed to be accurate, however, there are no implicit guarantees of accuracy or timeliness.

Tags: FXAwaits US Jobs

Stop Loss?? I Don’t Want To Use It – Forex Trading

Last week I was reviewing a website which has a trading signal program for those investors who prefer to not being involved in confusing market analysis and I respect them because such services normally will bring them more time to do other important things in their daily life. But the interesting thing was the most of signalers did not actually place a stop loss point on their recommendations. Is that so because they know they are right all the time? Or that’s because they did not lose half of their trading account in an unexpected slump of 200 hundred points and a single trade.

However, the answer is most of them have something between -1000 to -5000 pips of open trades on their signal board and they actually trapped in desperately while they could cut the losing trades and ran another one instead. Also I should mention that there are some other types of system trading that called “Hedge Fund” and I don’t actually want to argue if they are right or wrong. I am definitely talking to day traders who get into challenge with big bear every day.

Sometimes, I don’t understand why a trader could be convinced of not having a Stop Loss while we see almost every month an unexpected uncounted impulse (I would call it Best of the Test for whom with less of the rest) in the market.

There is no specific rule as to where you should place the stop loss, so consider the below mentioned tips as the general rules and ask your mentor to fit reliable Stop loss rules just for you and your trading system(If you have one?).

• Many loser traders do place the same stop loss for all the trades they execute without even trying to measure market environment.
• Don’t be scared of placing a stop loss while it is for your gain and you must know what your profit objective is.
• Stop Loss should not be too close to the current price while most of the stop loss enemies have ruined their trading accounts already just by using very close ones.
• Stop Loss should not be too far from the point you get into trade while it’s better to not placing any Stop Loss rather taking an unreachable, fictional protector.
• Try to not to risk more than the points of your profit goal. Pro traders recommend to only take those trades which have at least 2 points of potential profit per 1 pip of potential lose, but I would say it is completely depends on the money management system that you use, as different money management systems has different recommendations for Risk & Reward.
• Sometimes a trading system does not work if you risk less than recommended %7 to %10 of your total account balance. It means you trade oversize or you just entered the market when everyone else getting out of the market. In this case this is not your fault as it has a clear message for you “don’t trade this way anymore and ask an expert to solve the problem”.
• If you are convinced enough that you can make up 1 million dollar out of your 10000 dollars account by not using stop losses as you may think you are the one who knows the price will be back on its way to you instead of hitting new highs, well, simply you are wrong.
• Remember, there are no sky limits for the price of any of currencies in FOREX market.
• If you don’t like to place a pre defined Stop Loss on your trades, please ask someone to show you how to follow a wining trade by using “Trailing Stop”.
• Be sure it is better to have one or two losing trades with 100 points of lose, instead of being desperate with sinking into -1000 pips of dizziness.

How to Define the Best Stop Loss point?

Try these tools to define the most accurate stop loss points easily:

• Use 10 pips over/below the first Parabolic SAR spot(dot) appeared over/below the price candles for Short/Long Trades.
  Note#1: Remember you just can use 10 pips above the parabolic SAR dots as an Stop Loss point when you have a Short trade and Vice Versa.
• Note#2: You realized that the Stop Loss obtained from SAR is too far from the point which you want to enter the market. OK, this means you are about to enter the market very late so better to not do it.
• Use 10 pips over/below the day before yesterday’s HIGH and LOW and in the case of the market has moved a lot far, use 10 pips over/below the yesterday HIGH and LOW as a Stop Loss point for your Short/Long trades.
• Use two Moving Averages of 55 EMA and 144 MA. You may place your stop loss just 10 pips below/above one of those two MAs depending on how do you set up the profit/loss game for your Long/Short trades.
  Note#: If you trade on the range market break out be aware of this kind of Stop Loss setting, and it is quite safer to use another way.
• Place the Stop Loss 10 pips over/below Bollinger Bands Upper/Lower band for Short/Long trades.
• If you use Elliot Waves theory to analyze the market:
  # Place the Stop Loss just 10 pips below the lowest point of the Second (2) wave in bullish trend when you LONG on Wave 3.
  # places the Stop Loss 10 pips below the lowest point of the 4th Wave when you go for LONG on 5th Wave.
  # Place the Stop Loss right above/below the top/low of the previous wave when you go for SHORT/LONG based on A-B-C correctional waves.

Notes:

• Aforementioned suggestions are based on 4Hours chart.
• Those ways of defining Stop Loss points has worked for me, but It does not necessarily works for you, so ask your mentor or an expert friend to do evaluate the probability of fitting those suggestions to your trading strategy.
• 10 pips are because sometimes price hit the important support or resistance levels by more than a touch.
• Please don’t forget, the Stop Loss issue is not actually a game. It is not even an option for you; it is a “MUST” and will save you when you can do nothing, so refresh your mind in this case.

Canadian Dollar: End of Month Trading Anomaly – Forex Trading

Did you know that the Canadian dollar has a very unique trading characteristic at the end of every month? According to our statistical analysis, we found that over the past 10 years, USD/CAD tends to fall in the last week of the month with a 95 percent confidence level. A more granular look at the data reveals that this drop is predominately concentrated around the 24th and 25th day of every month. Interested in knowing why this happens?

Settlement of Oil Futures

The trading anomaly in USD/CAD stems from the fact that Canada is one of the world’s largest oil producers. Their oil reserves are also second to only Saudi Arabia. Canada is also the top exporter of oil and other petroleum products to the United States, making the US dollar-Canadian dollar exchange rate especially correlated to energy prices and related money flows.

Therefore it is not surprising that the movement of the Canadian dollar is especially sensitive to end-of-month oil contract settlement. It is fairly easy to determine when firms are required to settle outstanding oil contracts and potentially convert US dollars for loonies on a monthly basis. More specifically, it is well-known that oil futures settle in the final week of every month.

Looking at the table below, we see that a 10-year sample of data shows the biggest appreciation in the Canadian dollar against the US dollar happening in the final week of every month. In other words, on average, USDCAD falls 6 points per day in the final week – a result statistically below 0,at a 95% confidence level. Six points is hardly worth getting overly excited about since it is difficult to take advantage of such a small price move on a vague, weekly basis. However when we take a much more granular look of the USDCAD’s behavior around specific days of the month, the moves become more substantial.

The chart below shows that the Canadian dollar tends to appreciate the most on the 24th and 25th day of every month, with continued gains into the early days of the month that follows. This dynamic is exactly consistent with settlement on oil futures contracts, as the “notice day” – the first day on which the purchaser may be called upon to take delivery – is typically between the 22nd and the 24th calendar day.

Taking a look at the NYMEX crude oil schedule through 2007, we see an interesting connection between the USDCAD and delivery dates.

Namely, it seems as though the Canadian dollar moves the most following the Notice Day, while the First Delivery Day likewise causes some strong moves in following month. Given that the Notice Day occurs today, August 23rd, it is especially interesting to note that the Canadian dollar has appreciated strongly against yesterday’s close.

The chart below shows USDCAD movements through Notice Days from December 2006 to present.

The statistical relationship showed signs of waning through the early months of the year, but it has clearly picked up from June through August. Given such a relationship, it seems clear that the USDCAD stands to continue declines through the short-term – leaving Loonie appreciation probable in upcoming days of trade.

Central Banks Interventions in the New Millennia – Forex Trading

Central Banks Interventions in the New Millennia

The universe of foreign exchange has expanded dramatically since entering the new millennium and its future remains golden. Fresh from the pruning dictated by the introduction of the euro, the wave of banks mergers, and the emerging market crisis of 1998, currency trading benefited greatly from the equity crisis in the aftermath of overinvestment in tech stocks in the late 1990s and the Y2K brouhaha. Currencies were finally recognized as an asset class and funds and corporations were happy to incorporate them in their portfolios, particularly given the low costs of electronic trading. But the explosion in FX trading also enhanced macro risks that affected major participants’ interests in specific economies. And that resuscitated the central banks, whose role had been continuously diminished since their days of glory in the 1980s. This brings us to the cases of three central banks: a G7 bank, a developed economy central bank and one from a premier emerging market.

But whether we are looking at the Bank of Japan, the Reserve Bank of New Zealand or the Brazilian Central Bank, the main questions are: why are these central banks intervening? Is it to fight back muscular and aggressive funds that unfairly bend the value of their currencies or to put the leash on the results of their own policies and decisions? And are they successful?

The Bank of Japan – the Group of Seven Representative

Central banks can no longer protect certain levels simply because they cannot compete any longer with the mighty CTAs, which can easily raise and trade billion dollars worth of yen. But that reality may not always ring true to some major central banks. In the most extreme example in currency trading, the Bank of Japan (BoJ) sold an unprecedented 32.9 trillion yen, which is equivalent to buying US$311 billion, in the fiscal year that ended March 31, 2004. The intervention was designed to stop the yen’s revaluation to under 100 yen per dollar, after foreign investors bought record amounts of Japanese stocks. Figure 1 shows dollar/yen bottoming at 103.38 at the end of March 2004 and then embarking in a sustained recovery for a month and a half.

Figure 1. The Bank of Japan sold 32.9 trillion yen (US$311 billion) in the fiscal year ended March 31, 2004, to weaken its strong currency.

At the time, the demand for Japanese securities reflected the success of that economy. Ironically, the BoJ had to try to pour cold water over the success of its economy. And $311 billion could certainly buy a lot of water. In hindsight, the BoJ probably had no intention of putting that much money in that prolonged intervention. Nor did it hope to reverse the direction of the market. Central banks simply lack the ammunition, drive and motive to do that. The best they can hope for is to dampen volatility of the currency enough as to not trigger the aggressive momentum models that funds fondly use. But the BoJ managed to do just that and the dollar/yen stayed away from the 103.38 level for several months. It eventually bottomed in December 2004 at 101.67 and rallied for three years. March 2004 was also the last time the Japanese central bank overtly intervened in the currency markets. And nearly three years later, BoJ officials are actually talking the yen up!

The Reserve Bank of New Zealand – a Bank from the Developed Markets

The New Zealand dollar appreciated from 0.3898 against the U.S. dollar in October 2000 to 0.7642 by June 2007. In response to this staggering long-term uptrend, on June 11, 2007, the Reserve Bank of New Zealand (RBNZ) intervened to push down the value of the kiwi. That was the first intervention in the market since its currency was allowed to float 22 years earlier. The bank was rumored to have intervened again several days longer. Given its shock value, the NZD/USD quickly buckled from its high levels, but this didn’t last long. In fact, it lasted only 2.5 days before the Kiwi resumed its powerful uptrend to reach new highs. See Figure 2. Clearly, the New Zealand dollar only managed to slow down the uptrend, but had a hard time slowing down the volatility.

Figure 2. The impact of the unprecedented Reserve Bank of New Zealand intervention to devalue of the kiwi lasted only 2.5 days.

Why? The country enjoys one of the highest interest rates among the developed economies and nearly everyone in the world wants a piece of the Kiwi, preferably while selling yen. While not perfect, New Zealand is fairly close to economic heaven. Its GDP accelerated 1 percent in the first quarter of 2007 from the fourth quarter of 2006, when the economy expanded 0.8 percent. That strength should continue despite higher interest rates that reached a record-high 8 percent. Unemployment is low and consumption is high – what’s not to like? RBNZ’s governor Alan Bollard argued that the intervention was necessary because the exchange rate was exceptional and unjustified in terms of economic fundamentals. But the high yield says otherwise. And so did investors, small and large.

Imagine you’re a Japanese salary-man looking to enhance savings. Would you resign yourself to receiving a meager 0.5 percent rather than 8 percent in New Zealand? When you could make some money from the exchange rate as well? Now picture yourself as a leading investment entity trading currencies. Would you fold your long-term long position in NZD/JPY just because the RBNZ intervened a couple of times? Probably not.

The Brazilian Central Bank – a Bank from a Premiere Emerging Market

The Brazilian Central Bank’s (BCB) has been very active in FX and has intervened heavily since the end of 2005, when government measures opened the capital and financial accounts. Foreign interests chased Brazilian high yields and the central bank was forced to balance the FX surplus in order to curb the excessive appreciation of the Brazilian real.

By May 2007, the BCB had accumulated a total of US$122.4 billion in international reserves, and by the end of the year the reserves could expand to US$180 billion. But how effective has the intervention been? Between the lowest low in May 2006 and the highest high in June 2007, the Brazilian real has already surged approximately 21 percent. See Figure 3.

Figure 3. The Brazilian real has already surged approximately 21 percent between the lowest low in May 2006 and the highest high in June 2007.

This means the intervention has been successful only in slowing down the appreciation of the local currency, rather than reverse its direction. What’s in store for the real? Probably only good things. For the time being, the Brazilian banks regard the real as “theirs,” as most of then simply limit their FX activity to buying and selling USD/BRL. But the real is no longer a lonely emerging currency best left to local interests. It is now a thriving currency that is a pre-requisite to any sophisticated currency portfolio. This means two things: the real will become subject to more volatility reflecting economic developments and expectations; and Brazilian banks will have to quickly expand their horizon to pair their real against the euro and the yen, and reduce their exposure to the real in favor of non-real pairs. And slowly but surely the BCB will lose its control on the real.

Conclusion

Central banks generally abhor interventions. It is more common for central banks from emerging markets to intervene. The effectiveness of their success is random in the short to medium term, but improves in the long term. Single-handed interventions rarely fare well, even though the example of the Bank of Japan was successful. Central banks must be on the right side of the fundamentals to succeed. The RBNZ is not.

Trading With The Trend And Consolidation Patterns

The FX-market will develop distinctive trends from time to time, as a result of the underlying fundamental factors which make up each currency within the pair traded. Often times these trends occur as one currency offers a significant higher interest rate, which continues to draw investment capital out of another other currency with significantly lower rates. In the midst of these long term trends, the market may establish a number of consolidation patterns. During these range bound market conditions, it is important to keep in mind, the direction of the prevailing trend, as the market has the tendency to break out of these ranges, in the same direction as the overall trend. We can see the following (daily) chart, the NZDJPY recently broke above an ascending triangle pattern, to continue it’s long term trend; to the upside. Therefore, when a clear trend (to the upside) exists, and the market establishes a range bound condition, traders may choose to ‘go long’ just above support with protective stops placed below support. Short term traders may choose to take profits inside this range, as long term traders may hold on to their position with the anticipation the market will eventually breakout to higher highs. In a down trending market, traders may opt to sell short just below resistance with the same long term outlook in mind. Best of luck in all your trades!!!

Bollinger Bands and Breaks – Forex Trading, Currency Forecast

The (FX) market follows a steady cycle of oscillating between a range bound and trending environment, on a long and short term basis. During range bound markets, the buying and selling forces remain more or less equal, and therefore compress the market into a sideways trading pattern such as the triangle consolidation pattern shown below. Once the market reaches a critical point, either the buyers or sellers overtake the opposing side, and force the market into a new trend; to the upside or downside. However detecting these breakouts can be quite tricky as the market has the tendency to trade to slightly new high or low prices, only to return inside its previous trading range. Therefore we must employ a filter that will hopefully help us avoid these false breakouts, and preserve our trading capital for only those ‘true’ breaks in the range. With that said, we can see as the market eventually broke out of it’s trading range, the break was marked by the first candlestick to close below the lower Bollinger Band as well as below it’s current support level. Once this occurred the market quickly began a new trend to the downside. For this reason, we should always consider the market’s activity more relevant when studying the ‘closing’ prices, and not simply the highs and lows.