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Author: Marsha Day

Blowing Through 1,000 Tracked Pips; Intraday Weekly Review

Last week was a great week. I racked up 619 pips (highest tracked-week yet) on light trading. Some of the profits came from short Yen positions held over the weekend. A substantial part of profits also came from positions on the Canadian Dollar. Mid week I had recommended looking at the Canadian crosses for possible plays (See post, Blame Canada! Loonie Strength on Speculation of Interest Rate Hike). All three discussed Loonie positions played out very well.

Trade ideas for this week coming out in the next post.

Here are the trades that were closed on StockTwits and Twitter.com for the week of April 19-23, 2010:

Long USD/JPY from 91.99 closed at 92.60 for +61 pips

Long AUD/JPY from 85.05 closed at 86.65 for +60 pips

Long GBP/JPY from 141.62 closed at 141.95 for +33 pips

Long CAD/JPY from 92.30 closed at 93.10 for + 80 pips

Long CAD/JPY from 91.40 closed at 91.30 for -10 pips

Long USD/JPY from 92.58 closed at 91.60 for +2 pips

Short USD/CAD from 1.0122 closed at .9990 for +132 pips

Long NZD/USD from .7092 closed at .7125 for +33 pips

Long EUR/GBP from .8696 closed at.8671 for -25 pips

Long AUD/JPY from 86.06 closed at 86.36 for +30 pips

Long USD/JPY from 92.9o closed at93.31 for +41 pips

Short USD/CHF from 1.0785 closed at 1.0730 for +55 pips

Long EUR/USD from 1.3303 closed at 1.2360 for -43 pips

Short USD/CHF from 1.0822 closed at1.0755 for +67 pips

Short AUD/CAD from .9288 (Old position, 1 week+) closed at .9185 for +103 pips

For a total of 697-78 = 619 pips; total for the week: 619 pips

Total cumulative tracked pips = 619 + 919 = 1,538 pips (5-week period)

Average pips per week: 307.6 pips

Still in the books: Short AUD/CAD from .9218 and short USD/CHF from 1.0690

Author: Marsha Day

Charlie Rose Interviews Jim Chanos on China Bubble

Charlie Rose’s highly anticipated interview with famous short-seller James Chanos is finally available. The interview trailers and anticipation chatter in the financial blogosphere made it seem like this interview was going to expose something Chanos had never mentioned before.

The interview was great, but it had nothing we haven’t heard before (maybe the quote “China is on a treadmill to hell ” is new :p). Jim Chanos did a lecture a few months ago on the China bubble that had the same talking points, except that it was 30 minutes longer and had a few more details. To see the lecture video and my notes, look at the post “Jim Chanos on China Bubble” or click on the first image below.
Lastly, the guys at Business Insider recently sat down with Jim Chanos and asked him a few questions. Here are the links to the first two Q&A sessions:

Q&A With Jim Chanos Part I: “Greece Is A Prelude”

Q&A With Jim Chanos Part II: China’s High-Rise Property House Of Cards

Investigate all the above and you’ll likely have an opinion (or second opinion) on the Chinese property bubble issue.

And most importantly, you’ll probably sound really smart when talking about it with your friends. Lol.

Author: Marsha Day

The 7% Greek Plague

The Bond Vigilantes are going to kill Greece. At the current pace, it probably won’t happen this week, maybe not this month, but it seems like it’s going to happen. A recent post at Abnormal Returns talked about a potential catastrophe for the U.S. resulting from a secular upward trend in long-term yields. However, if such a trend was to take place at a global level, what would happen to our good friends in Greece?

Too bad for the Greeks, but they are sitting between a rock and a hard place.
The Good Scenario

First, we have the general scenario of a sustainable global economic recovery where bond yields would naturally increase. (At the beginning of 2010, most Primary Dealers of U.S. Treasuries were forecasting higher yields.)

Higher inflation, reduced overcapacity, and reduction in unemployment all points to higher yields. If you’re in the more pessimist side, you could also argue that the over-supply of government debt would also add more fire to higher yields (Note: there are numerous other arguments to justify higher yields, actually, too many to list on this post).

The moral of the story for the “economic recovery” path is the following: If investors are going to be paid 4-5% or more to hold U.S. Treasuries, why in the world are they going to hold Greek bonds for the same compensation?

PIMCO, the world’s largest bond fund, reminded us of this fact in a interview with Bloomberg. Here is an excerpt from the article:

“I don’t think that it [7% bond yields] would be an attractive enough yield,” said Clarida today in a Bloomberg Radio interview with Tom Keene. Greece is “sort of like the Titanic. Eighteen things went wrong, and when they go wrong at once it’s problematic,” said Clarida, whose Newport Beach, California-based firm runs the world’s largest mutual fund.

Alright, let’s think about this: PIMCO would not touch Greek bonds even if it came with icing on top. They are not the bond Messiah, but they probably speak for a lot of bond investors. The Greek officials are crying for a 4% yield claiming they won’t be able to sustain payments otherwise. All in all, it seems like a real bailout for Greece is still the only answer to the problem.

Lastly, we have to remember that the potential global recovery that would push yields higher would probably not happen in Greece. As the severe austerity plans take place, what you’re going to see is GDP contraction, social unrest, and a lot of pain.
The Bad Scenario

Now, moving on to the bad scenario: things don’t get better at the global level. The U.S. bond yields will probably do fine because of its safe haven status. However, a little country like Greece is really doomed.

Given the Greek austerity measures, slower global trade,and no global recovery, you have to ask once again why any investor would lend money to Greece at 4-5% ?

Problems are already severe and things will only get worse if the global economy doesn’t resuscitate. The four largest Greek banks are already asking for more financial help (Reuters) and the government is already overspending (EuroInteligence).

So, if the overall macro picture is bad, the weakling (Greece) is definitely toast.
Bad Signs

Back from the future forecasts, the present is showing bad signs. Investors are not just scared of holding longer-term Greek bonds. Short-term Greek bond yields are going through the roof. Here is a screen shot of Greek yields from earlier today:

grece ratges today 2 The 7% Greek Plague

7.27% yield on the one-year? You have to be kidding, otherwise, it’s just plain bad.

The infamous inverted yield curve is starting to play out in the Greek bond world. As most traders know, inverted yield curves are indicators of bad things to come. Additionally, if Greece is having trouble paying 7% on 10-year bonds, they’re definitely going to die if they have to pay those rates for 6-month notes too.

Zero hedge is also speculating that a large bank has sold a Greek bond that matures in about 20 days (link). Rumor or not, given all the other factors at play, it does not send out good vibes.

Overall, the weather forecast looks bad for Greece. Unless, we get a real bailout. But that’s a another story for a different post.

Lastly, you have the Euro. In the post The Big Euro Squeeze, I was recommending not selling the EUR/USD at 1.3300. It rallied to 1.3550 or so in a day or two after the post. At the time of writing, the EUR/USD sits at the 1.3350 level. From a risk-reward perspective, it’s probably not the best place to short. You’re probably going to get positive comments coming from German officials that will rally the Euro. However, as long as there is no real bailout, shorts from the 1.3500-1.3600 area looks very appealing.

Author: Marsha Day

Forex Scalping: Trading the US Non-farm Payrolls News

Christmas in Easter is almost here. The long-waited, much-talked about, controversial U.S. Non-farm Payrolls data comes out tomorrow at 8:30 AM Eastern time/ 12:30 GMT Time.

For weeks, this data release has been the focus of the markets and the financial media. The market have been long the number as investors have continued pouring into US equities. Investors are expecting the jobs data to likely throw us over 1,200 mark on the S&P 500 and over 11,000 on the Dow Jones.

There are a few factors at play tomorrow that make the situation slightly tricky. Here are the possibilities that I see happening as a reaction to the jobs number:

First, there is the possibility of a derivatives broker, which would put the talk of a “jobless recovery” back on the table. Markets have traded with the expectation that the number will be better-than-expected; so a negative number would definitely be a “shocker”.

US equities would likely react negatively following the news release. However, they would probably crawl back up (not necessarily Friday) because a bad jobs number would indicate that the Federal Reserve’s bunch bowl (low rates for an “extended period of time”) would not be eliminated any time soon. Overall, you could see substantial “buying on the dip” as investors close their eyes and look at the positive data (e.g. ISM Manufacturing, Retail Sales) to justify more buying.

In the currency markets, the reaction is less certain, except for the direction of the Yen. The Japanese currency would likely soar across the board on immediate risk-aversion after the release. Given the significant appreciation of all the major currencies against the yen, the movement to the downside would probably be violent.

The dollar reaction is the less certain reaction. As bond yield sink on the news, the direction of the dollar will depend on whether it takes the role of a safe haven currency or it reacts to interest rate differentials. If it takes the save haven role, the dollar will soar (except for the USD/JPY). Recent US dollar movement against the Euro has been fueled by the widening spread between German bunds and U.S. 10 Treasuries. Overall, the relative reaction in the different debt markets could play a role in the dollar direction if markets don’t go for the “safe haven” play.

I would recommend targeting the USD/JPY as the scalp pair of choice. It’s reaction will be very clear: bad news, go down.

Second, you have the slightly bad number. This is when things get hard.

For US equities, you would likely see an initial small dip; however, I would not count on it. Investors would likely disregard the number and focus on “the trend”. You know, the ” this number is not as good, but the next one will be”. There would probably be a perfect bear trap as bears get really aggressive and the bulls continue to buy equities by the boat load.

The currency market reaction here is really a coin toss. The number is not bad enough for a “save haven” flight, but it is not good enough to confirm quick tightening of interest rates. I would stick with the Yen crosses on this situation too.

Even slightly bad news will probably send the USD/JPY cross down. Bond markets are pricing in a good number, so once again, a slightly bad number would send yields down and create selling of all major currencies against the yen.

Third, you have the consensus number. We get that nice 187,000, plus or minus 10,0000 jobs. The market has already priced in these number, so you’re likely to see less volatility.

US equities will probably inch higher with the Dow Jones cracking 11,000 and the S&P 500 crossing the 1,200 mark.

In the currency market, you would see more Yen selling across the board. As for the dollar, you would probably see a slight rise on the dollar as U.S. 10 year Treasuries continue to sell-off. The safer bet once again is to go long the USD/JPY cross, followed by shorting the Yen against the Australian or Canadian dollar.

Lastly, you have the off-the-wall super good number.

In the realm of US equities, the response is likely a big spike. Good numbers, means economic recovery, means yay equities.

The catch, as in the first option, is how investors will think about the Federal Reserve’s attitude toward monetary policy. A really good number would start calling for Fed tightening, which would initially be bad for equities. Therefore, after the spike (again, not necessarily Friday), you could start to see some selling.

This is when it becomes easy to play the currency markets again. Yields would likely soar and the Yen would sell-off like crazy. Long the USD/JPY and any other Yen cross would be a big winner.

The dollar would also likely soar as economic recovery in the U.S. starts to really outperform the Eurozone. Additionally, the spread between German bunds and US Treasuries would likely widen.

Easy.

Alright, summing all of this up, we can tell that playing the USD/JPY pair tomorrow is the best option if you’re going to be setting up straddles. I don’t usually like scalping NFP numbers because they can be VERY volatile. You’ll see prices flashing up 50 pips and then down 50 pips, where you just end up losing a lot of money.

However, it seems like the number tomorrow will definitely fall on the positive side, which makes things better.

If the number is super good or really bad, it’s definitely going one way without much volatility. The problem is if the number is ambiguous (slightly bad being the worst scenario), where there would be traders scrambling and creating chaos in the price action.

Good Luck!

Author: Marsha Day

The Big Euro Squeeze

The Euro-dollar (EUR/USD) is hanging out around its 2010 low. Debt concerns regarding Greece and other European countries has ripped the Euro apart. Additionally, as mentioned before, everyone and their grandmother is short the EUR/USD.

There is no doubt that the Euro-dollar is in a strong downtrend and possibly looking to crack the 1.3200 and 1.3000 levels in the very near-term. Besides the sovereign debt concerns, other factors such as interest rate differentials and a strong U.S. economy are supporting the dollar. In regard to yields, U.S. Treasury yields have been “soaring”, with the 10-year Treasury yield attempting to once again crack the 4% mark.

The Euro is also far away from key technical levels that would indicate an end to the downtrend. Most traders claim that a daily close above the 1.3820 level or so would put an end to the downtrend. At 1.3300, that’s quite a few pips away.

Nevertheless, one must always look at the other side of the pond. Currently, the only perspective you get on the Euro is “down, down, down”. Traders with those preconceptions also end up only looking for evidence that confirms their view, which is something humans do for most things in life. Nobody wants to hear about the positive upside in the Euro because “everyone knows” the Euro is going to collapse. Some hedge funds are even looking to cash in on their “career trade” as they bet the Euro will retrace back to 1.000 against the U.S. dollar.

So, what are the catalysts that would create some upside for the Euro?

First, we have to acknowledge that most of the Euro losses have stemmed from doubts and concerns over what will be done with Greece. Uncertainty, which markets hate and punish, has been the leading factor in bringing the Euro down. Nobody really knows what is going to happen and as a result traders end up pricing in the worst case scenario.

Uncertainty, combined with massive short positions, opens up room for something a lot of traders hate: the big short-squeeze. Not a 50 pip squeeze, but a 300 or 400+ pip squeeze. Hence, when you take out uncertainty (think ‘healthcare reform’), the currency markets may be ready to give the Euro some slack.

Second, we’ve been told it’s the end of the world for the Euro-zone. While some headwinds do play out at times (e.g. tech bubble bust, real estate bust and financial crisis), most end-of-the-world scenarios never materialize (thus the term “headwind”). Nevertheless, experts have taken out their forecasting tools and drawn a line forward predicting a “Euro-crisis”. As mentioned before, the “US dollar crisis” in November 2009 was all too similar. As the Dollar Index reached the 74 level, hysteria had taken over and doom was the only path for the dollar. As we can all remember, experts, gurus, and the Kudlows of this world had a myriad of reasons as to why a collapse of the dollar was certain. Too much debt, too much issuance, hyperinflation, double dip, China takeover, the Euro as the new reserve currency (LOL ?), etc, etc, etc. We all know what happened.

The Euro is now holding the hot potato. The consensus is that the collapse of the Euro is imminent and that nothing can be done. Yes, the Euro can collapse. But all you need is some gentle words from Germany or France regarding bailouts and the Euro (in the short-term) would likely bounce like a squeaky ball.

In the longer term (a few months ?) the Euro may drop substantially if the worst case scenario plays out. However, most FX players are not investing in currencies but rather trading shorter-term horizons. Five-hundred pips against you and you’re probably deep in the red. Therefore, paying attention to potential short-squeezes in the next few days and weeks is essential. Once again, don’t let the bears consume you.

I don’t quite recommend going long the Euro, but I do promote locking in profits and using them stop-losses.

On this note, time to bring out my Dollar hat again.

Author: Marsha Day

EUR/USD Bears Crack Key Support

The Euro bears were out for the kill today. There were so many bears out there that it felt like a wild forest. I’m a US dollar bull and thus also a Euro bear.

However, I was a little skeptical about the excitement in breaking the key 1.3433 (March 2nd, 2010) low today. I was expecting the EUR/USD to stay in its range for a few more days until additional news came out relating to the Greek bailout; however, a Euro crackdown started early in the Tuesday Asian session. By 7 PM eastern time, the pair was already challenging the 1.3450 level.

@alaidi had said the Euro-cat was about to run out of lives and die. Not surprisingly, he hit the bull’s eye. Considering the major movements in the currency markets today, I had a sub-par performance. The saving trade of the day was my long USD/CAD from 1.0153 which enabled me to end the day flat.

Today was a trending day. There was a trend, and markets stuck to it for the whole time. It’s very difficult to trade a trending day if you don’t recognize it early. Indicators typically become worthless and the only chart patterns you get on the shorter-term charts are straight lines. Using oversold/overbought indicators and other reversal signals is the perfect way to lose money. Selling or buying when the pair touches the trendline becomes the best way to enter trades.

The EUR/USD was headed south and nothing could stop it. The concerns over Greece was overwhelming and the key technical level of 1.3433 was broken. Not even better-than-expected German Purchasing Manager Index (and the EU one) and IFO data was able to prop up the Euro. The Portugal credit downgrade was just more lumber for the fire.

Right now, it seems like everyone and their grandmother is short the Euro and waiting for 1.3000. While I can see the Euro reach the 1.3200 and 1.2900 targets of many people, swing trade entries (which I don’t do because I don’t swing trade) has to be done with caution at these levels. Everyone is long the EUR/CHF and we know how that’s coming along. Additionally, markets don’t usually move in straight lines; The EUR/USD can easily have a correction to 1.3400 before plunging to 1.3200 or so.

Lastly, the more shorts are in play, the easier it becomes for there to be a short-squeeze. Now, just imagine, if positive news (whatever that would be) came out from the Greece fiasco. Everyone thinks that’s not possible, but let’s trackback a bit and see recent times in the currency markets where everyone knew where the Euro and the Dollar was going.

Oh, the good old days of the US dollar index at 74 and the Euro flying through the 1.5100 level. Wait, that happened in November 2009, or less than 4 months ago. “Dollar crisis” was the catch phrase and people were telling me I was going to be using dollar bills instead of toilet paper. I’m still using toilet paper.

We all know that markets can stretch out in one direction non-stop (e.g. U.S equities). However, 100% consensus always raises a few concerns. Additionally, the Euro move is being fueled by the doubts over the Greek rescue package and overall Eurozone cohesion. These are major issues where the likelihood of something along the lines of the Eurozone falling apart is a big fat tailwind. It can happen, but it’s a risky bet.

In sum, shorting the EUR/USD is probably the way to go, but with tight stops, good entry points, and an open eye for any news. Also, watch out for possible short-covering before the weekend summit.

Author: Marsha Day

Short AUD/USD Position Closed

The short AUD/USD position hit its target today at .8980. It was a very close call because it hit the target and bounced off from .8978. As mentioned in the position analysis (Short AUD/USD from .9049), the .8980 is currently a big congestion and support zone for the pair. In the near-term, the only thing that is likely to break the support is the U.S. Non-Farm Payrolls data Friday morning.

Author: Marsha Day

US Dollar Pullback and Scalping Greece Annoucement

On the technical side, the US Dollar Bull Flag (daily chart) had held until now, with the dollar reaching a multi-month high of 80.82. However, it seems like the flag is overdone and a daily evening doji star has formed. A textbook explanation of the candlestick formation is below.
The medium-term momentum for the US dollar is still up but it seems like a temporary top may be at hand. On the downside, there are no supports nearby (e.g. significant moving averages or Fibonacci levels). The only thing I see is the 23.6% retracement level (79.30 area) from the 74.21 low to 80.82 high.

On the short-term, the EUR/USD (which makes up 57% of the US dollar index) is at an extreme oversold zone. The number of EUR/USD futures shorts is also at a record high that dates back to 1999. As long as no additional negative data comes out from Europe, it is unlikely that the Euro will be pushed lower because most investors are already in this crowded trade.

However, don’t pile up on the long side. A negative resolution from the European conference regarding the Greek debt problems can still send the pair crushing down.

One alternative option that you could set up is a light “risky” EUR/USD long that has a tight stop. The second option involves waiting until the end of the week and seeing what the European Union decides; however, you’re likely to lose on the major market movement following the announcement. The third option, which is my preferred choice, involves maintaining open order straddles around the pair. The volatility following any announcement regarding the Greece problem will create major moves in the market (probably more than 80-100 pips instantly in the EUR/USD). I definitely don’t want to lose out.

The catch with the third option is that you’re exposing yourself to the typical forex scalping risks. If the resolution is simple (i.e. some form of bailout we’re expecting or no bailout), the movement is likely to be somewhat straight forward to one side. However, if the resolution is some convoluted complex agreement where investors can’t decipher the bottom line of the announcement instantly, the market is likely to oscillate wildly.

A good example is the last US Non-farm payrolls data point. With all the revisions and seasonal adjustments, the U.S. data was complicated and created instant price flashes to both sides north of 30-40 pips (at least with my broker). On the other side, the Australian jobs number from a few hours ago was better than expectations by a substantial amount and created an instant upward movement on the Aussie dollar with no hesitation. Overall, clear data makes scalping easy.

Putting everything together, this means that you need to find acceptable ranges to set up your limit orders if you want to scalp the ECB/European Union decision on Greece. With the EUR/USD, somewhere in the 50-70 pips zone is not a bad start. The EUR/JPY cross is much more volatile and would likely require wider ranges.

Lastly, if you’re doing a straddle, make sure you are in front of your computer screen at all times. The Greece news could come at any moment and you must be watching the price action because market movement could go wild. The key to successful scalping is to not be greedy and close the trade rather fast and then re-evaluate.

Author: Marsha Day

Front-Running Currencies

The long-awaited U.S. non-farm payrolls data released on Friday was disappointing. While November jobs were revised to a 4,000 gain, December saw an estimated loss of 85,00 jobs (keeping in mind that there is a wide margin of error for this number). In sum, as most economists stated after the release, it appears “we’re not out of the woods yet” (WSJ).

U.S. Dollar

This was a pivotal point for the U.S. dollar. Until December 2009, one of the factors contributing to the dollar losses was the sentiment that the U.S. economic recovery was going to under-perform the rest of the world and that the U.S. interest rates were going to stay low for an extended period of time. Then in December the dollar bounced back and also became positively correlated with equities as the idea emerged that the U.S. economy was going to outperform and investors anticipated quicker-than-anticipated rate hikes.

However, expectations of higher interest rates were based on the premise of an improving U.S. jobs market. In general, it’s hard to expect the Federal Reserve to increase rates while a “jobless recovery” is still in place and inflationary pressures are low. As a result, this puts us with an overall negative weekly bias for the dollar.

Additionally, the previous negative correlation between the dollar and equities markets (the “risk-appetite” trade) is likely to continue. This could be changed (while unlikely) depending on the earnings results on Monday and Friday from the major U.S. companies Alcoa and JP Morgan Chase, respectively.

Japanese Yen

Last week the new Japanese Finance Minister Naoto Kan started his first day on the job by calling for a weaker Yen. Specifically, he stated the desire for a U.S. dollar-Yen rate of 95. Not long after, Prime Minister Yukio Hatoyama

“sought to restrain his new appointee, telling reporters Friday morning: ‘When it comes to foreign exchange, stability is desirable and rapid moves are undesirable. The government basically shouldn’t comment on foreign exchange.’”

Source: WSJ

All of this rambling only served to add confusion in the markets. Nevertheless, I believe these comments put a slight negative bias on the Yen because we know that the Japanese central bank wants to see a lower yen. Even if it does not intervene in currency markets directly, the central bank and the government could use other methods to influence the currency.

Emerging Markets Currencies

Besides the U.S. dollar and Japanese Yen negative biases, we also have to notice that investors are fleeing into emerging markets by the boat loads. Even though this is a longer-term trend, we have to keep it in mind when putting the puzzle together. According to EPFR Global, emerging markets mutual funds raised $80 billion in 2009, shattering the previous annual record of $25 billion (NYT). And it keeps going up. It appears BRIC (Brazil, Russia, India, China) is still in fashion.

VIXConcern

Lastly, the new buzz on the financial news arena is the 16-month low Volatility Index (VIX). The index reached pre-Lehman levels which is raising concerns among some investors. Some people are arguing that this may be another “calm before the storm”. Therefore, keep your trading eyes open for any news that may change the course of the Vix.
Summary

* Bad jobs data puts a negative bias on the dollar.

*New Japanese finance minister adds a slight negative bias to the Japanese Yen

*Higher-yielding currencies still remain on their bullish long-term trend.

*Pre-Lehman levels on the VIX adds concern of a pullback.

Author: Marsha Day

Risky Stock Trade of the Year

There were two tumbling stocks that caught my eyes one year ago: Citigroup and Ford.

Both dipped down to the $1 range. Buying these stocks at that time was risky due to the high levels of uncertainty, the financial meltdown, and the high probabilities of bankruptcy. Additionally, these stocks were in the two worst possible groups at the time: U.S. banks and U.S. car companies.

Nevertheless, if you had some spare cash lying around, buying Citigroup or Ford stock could have been a nice risky bet.

If you bet on Citi, you only made some pocket change given the risk you took. Tripling your money if you bought at the bottom.