Euro plunges from sharp drop in crude, S&P 500, and central bank rhetoric:
Today's strong market volatility can be best described by looking at what the world's three leading correlated markets did:
1. Crude oil dropped below the $70 level, losing over 2% on the day
2. The S&P and S&P 500 futures both lost over 20-points, closing down 2.4% on the day
3. The US dollar Index rose over 1.25% on the day
Those
three factors about sum it up to explain why the EUR/USD, GBP/USD,
EUR/JPY, and GBP/JPY came under pressure, each losing several hundred
pips to the dollar and yen respectively and crude oil was clearly the
main culprit responsible for leading the
higher-risk, higher-yielding markets lower which boosted the dollar and
yen against the majors and crosses. In yesterday's
update
one of the reasons I put such a strong emphasis on the tight
correlation that exists between the EUR/USD - crude oil - S&P 500 -
geo-politics was for exactly what we saw play out in the markets today.
To re-cap today's price action... between Tokyo's open and Wall
St.'s open the S&P 500 futures made a double digit drop which sent
the EUR/USD from the 1.4000 level at down to the 1.3870 level by the
time Wall St.'s opened this morning. As soon as Wall St. began trading
both the Dow and S&P 500 sank again, pushing the euro even lower.
Then the dollar was further helped from central bankers at the Fed and
ECB. At 1021 EST Fed Evans gave the dollar an added shot against the
euro with this comment:
"Sees rate hike when economy grows"
And
then at 1100 EST ECB Papademos made comments that put even further
downside pressure on the euro, sending the EUR/USD down over 60-pips in
less than thirty minutes... Papademos said:
"Euro-area
banks face USD$283 billion more losses by 2010; commercial property
market source of risk; risks to financial stability remain high; banks
should make use of government guarantees on new debt"
Papademos's
negative comments sent more fear and risk aversion into market
participants, easily pushing the euro below the 1.3780 level and then
crude oil's clear break of the $70 level in the NY afternoon session
further pushed the EUR/USD to hit the 1.3750 level. Now, there's a
little more to this story that we need to take a look at...
ECB gives markets negative view on Eurozone banks:
As
I mentioned in the update yesterday, the G8 voiced strong concern about
the European banking system and now today we heard from the ECB on this
issue. The ECB has done little to publicly address the systemic risk
still lingering within the European banking system but the ECB decided
they would talk about it today. ECB Papademos delivered the message
about Eurozone banks losing at least another USD$282 billion by 2010
and there were even more alarming comments... the ECB also said:
"Hard-to-value assets have remained on bank balance sheets
and the marked deterioration in the economic outlook has created
concerns about the potential for sizable loan losses"
One
ECB estimate shows that the total number of Eurozone banking losses
from the time the credit crisis started in 2007 through 2010 could
total as much as USD$649 billion. ECB Papademos further stated:
"There is no room for complacency because the risks for
financial stability remain high, also bearing in mind that the
credit cycle has not yet reached a trough; banks should be encouraged to take advantage of the
governments' commitments for support and strengthen their
capital buffers; the profitability of major euro-area banks has been
eroded and the prospects for a significant turnaround in the
short term are not promising"
ECB Nowotny also gave very euro-negative comments this afternoon, saying:
"Europe
is in a very deep recession; very dangerous to consider exit strategy
too soon; interest rates may stay low for quite some time"
There's
no telling how much more rhetoric we will get out of the ECB on the
European banking system but this is a very big geo-political issue that
directly effects the Forex markets so whenever you hear those types of
negative comments out of the ECB about their own banking system you can
be sure the euro will fall to the dollar.
Beware of geo-political rhetoric out of BRIC Summit:
Even
before the start of Tuesday's first ever BRIC Summit the geo-political
rhetoric was flying as Russia's Finance Minister Kurdin said Russia has
full faith in the US dollar and that it is too early to talk about
replacing the dollar as the world's reserve currency and Kurdin's
endorsement of the dollar was just another contributing factor to the
dollar's rise against the majors today.
Why does the BRIC Summit
matter to the Forex market? Easy, collectively the nations of Brazil,
Russia, and India, and China make up 15% of the entire world's economy
and what's even more important is that they collectively hold nearly
50% of the entire world's currency reserves. BRIC nations have both the
geo-political clout and collective buying power to move markets, pure
and simple... just look how the dollar positively reacted to Kurdin's
comments for evidence of this.
For all the differences in the
four nation's political and social ideologies, each BRIC nation appears
to be speaking the same language when it comes to the role of the US in
the global marketplace. BRIC wants the US to take a declining role as
the world's economic superpower and each BRIC nation believes they
deserve to be viewed as relevant and a force to be reckoned with. I am
not expecting any specific policy to be set or for any major agreements
to be formulated but what traders need to be on the lookout for is
potential market-moving rhetoric, either pro or anti dollar. As much as
their ideological differences present too many challenges to solidify
policy, with BRIC's biggest beef being "the unheard voice" it's
entirely possible they will flex their muscle as their way to show the
world they can move markets.
Fed eases market fears, gives added confidence in dollar:
Just
as the ECB was out talking the euro down today the Fed was out talking
the dollar up. You starting to see a pattern here? If you read my blog
you will know one of the biggest fundamental factors stacked against
the dollar is the fact the Fed started monetizing government debt. The
market's fear that the Fed would monetize even more than $300 billion
in US debt kept a tremendous amount of downside pressure on the dollar
since 18-March. Well today the Fed used some verbal rhetoric to give
the markets confidence this will not be the case.
Fed Fisher said:
"Senses
no pressure from Obama to monetize US deficit; not convinced that
backup in rates due to fear Fed will monetize debt, largely measure of
supply and demand; Fed constantly working at an exit strategy"
Fed Evans was singing from the same page, saying:
"No need to boost Treasury, MBS purchases for now"
I
can't explain why geo-political market-movers are talking the US dollar
up all of the sudden, maybe they were overly pressured by China or
maybe there are other reasons. I don't really care, I trade accordingly
to what the Fed and ECB says, but here again, I encourage traders not
to get stuck on their charts and tech indicators and to pay as close
attention as possible to the central banks as their words are what set
market direction just as we saw today.
Tuesday trading:
I
hate sounding like a broken record and being repetitive but in terms of
trading and market bias, there's nothing else I can do but repeat what
I posted in
yesterday's update:
At least at the very start of the week I'm going to ease back on my
prior anti-dollar and anti-yen bias. I'm remain a strong dollar bear
but I'm going to keep an open mind to opportunities to buy the dollar
against the euro or to buy the yen against the majors only if one or more of the following fundamental/geo-political/market correlation factors exists:
- Crude oil falls
- The S&P 500 sells-off
- Negative fundamental and economic data causes risk aversion
- Geo-political tensions between the US, Israel and Iran lead to safe-haven money-flows
- North Korean geo-political tensions of nuclear war send safe-haven flows into the dollar
- Fall out from the G8 pressures the euro
- Central bank rhetoric causes fear and risk aversion and money-flows out of higher-yielding markets
Those
are my seven key indicators and trade triggers this week in addition to
using my normal price action patterns and probabilities based on price
behavior of course.
Crude
oil, the S&P 500, the fundamentals, and the central bank rhetoric
were all against the euro and all in favor of the dollar today so I
bought the dollar against the euro... I'm just keeping it simple and
sticking to the game plan. Traders who used the market correlated
variables listed above would have been on the right side of the market
today for their trades and market bias. And I'll repeat my
encouragement to traders to forget the charts because if a chart is
saying to buy the euro yet crude oil and equities are falling, the
chart is dead wrong, end of story. If a tech indicator says to buy the
euro and the ECB is out talking the euro down or the Fed is out talking
the dollar up, the tech indicator is dead wrong and will cost you
money. KEEP IT SIMPLE AND DON'T FIGHT THE MARKET!
Mega inflation fundamentals tomorrow--
The
Forex market will see more rounds of volatility tomorrow as we get key
inflation figures out of the UK, the Eurozone, and the US. For the UK
and the pound sterling I do not expect a negative print on their CPI
and Core CPI data but should we get a major downside shock here I
expect nothing less than a heavy sell-off on the GBP/USD and GBP/JPY. A
surprise rise in UK consumer inflation would obviously be a good thing
for the pound, so if you trade the GBP do not get caught off guard at
0430 EST on Tuesday.
The Eurozone has the biggest deflation
issues and I believe if we see negative or below expected prints on
their consumer inflation data it should give market participants
another reason to sell the euro against the dollar. I'd be very
cautious with any euro longs ahead of their CPI release at 0500 EST.
Inflation
data is just the tip of the iceberg tomorrow as the markets will also
have to contend with the latest German and Eurozone ZEW data and a ton
of fundamentals out of the US like Building Permits, Housing Starts,
Industrial Production, Capacity Utilization and more Fed speeches.
For
yen traders don't forget the BOJ's interest rate event, monetary policy
statement, and interest rate press conference which typically takes
place after midnight EST. As you can see there is a ton of crap going
down tomorrow and I can't say enough to be sure you're practicing
strict risk and money management disciplines and staying smart to keep
up with all the fundamental and geo-political factors moving these
markets.
-David
Visit Verite FX
