Whenever I sit down to prepare for a new week of trading and to research the market for the week ahead I always focus on those one or two big fundamental events that I know hold the power to directly influence risk appetites, money-flows, and how participants will handle their fear and greed. For this week what I am seeing as the dominate fundamental and geo-political event is clearly the G8 meetings in Italy.
Beside the G8 event, I see the major economic and fundamental themes will revolve around central bank monetary policy, inflation, and growth. Once again risk management will be imperative as the combination of geo-politics, fundamentals, ill-liquid markets, and emotionally-driven participants will lead to sharp and erratic price swings over the next five trading days -- prepare your risk and trading game plan accordingly...
G8:
I always follow the rhetoric and jaw boning that comes out G8 meetings but this go around is even more critical for two distinct reasons:
1. Market participants are showing a heightened sensitivity to verbal manipulation and rhetoric from central bankers and finance ministers
2. The timing of the G8 meetings
In terms of the timing aspect of this week's G8 event, G8 meetings typically happen over a weekend when most of the major world markets are closed. When the Forex, equity, and commodity markets are in full swing 24 or 48 hours later, market participants have had some time to digest the event and make less emotionally-driven decisions. That will not be the case this week.
This G8 event is totally different because it starts on a Wednesday and runs through Friday. Wednesdays can be one of the most volatile trade days of the week and is the day where extended price swings occur. The timing of this G8 means all the markets and their participants will have the opportunity to react and respond in real-time as opposed to having a 24 or 48 hour "cooling off" period to digest, think things through, and control their emotions. This is where the psychological aspect to trading comes into play...
The other timing aspect to this G8 is tied directly into the emotional fortitude of market participants which is clearly lacking since the trend of better-than-expected fundamentals has begun to reverse. The prospect of a global economic recovery taking root in the US is not nearly as clear as it appeared to be back in April and May. Or, better stated, the premise that the US and the global economic system had somehow "bottomed" in a matter of a few short weeks has been vastly overstated.
Readers of my blog have never heard me say anything about a recovery and an end to the crisis because I'm not of that mindset. Those ideas were planted into the minds of market participants by the CEO's of the big banking institutions, central bankers like Bernanke and Geithner, and investment entertainers like Jim Cramer. Recent data trends have smashed some of the hope and optimism that ran roughshod through the markets back in the Spring and led to euphoric buying in the higher-risk, higher-yielding currency, commodity, and equity markets. So, for this week the markets will have to deal with the messages that come out of the G8, good, bad, or indifferent.
The China factor--
Earlier last week a Chinese finance minister reportedly requested the G8 bring up the idea of establishing a new reserve currency based on the IMF's system of special drawing rights. Of course this sent the dollar plunging against the euro and pound sterling but then a few days later the Chinese recanted this call.
Now the latest out of China is that they will not raise the issue of replacing the dollar as the world's reserve currency, however, they will engage in a discussion of this prospect if a G8 member brings it up at the meeting. Remember, China is not a G8 member nation but a member of the BRIC group which has been gaining influence over the markets the past few months. China and their BRIC comrades will be attending the G8 even though they are not official G8 members and this means any anti or pro dollar rhetoric will absolutely have influence over the direction of the US dollar this week.
Chinese president Hu Jintao will be at the G8 and will likely press the group to give the Chinese more power to set policy in the global financial system. Will their requests be denied? This I cannot say but the fact the IMF has already elevated China's role in the global finance arena leads me to believe in the coming months and years the Chinese will have sway over the markets. The same should be true for India. Indian officials will also be at the G8 and although India is often overlooked it should be noted the Indian economy shows great potential in the future and they should grow in power and influence.
Be on the lookout for any rhetoric that comes out of Chinese officials this week in regards to the dollar because I can assure you the market will react to their comments, and it won't matter what you think your candle chart is telling you, the Chinese don't look at candle charts when they have a pro or anti dollar agenda to meet. It cannot be predicted what the Chinese may or may not say about the dollar but if they run their mouths the dollar will move.
Russia--
Russia's economic status is rather ugly when compared to some of their BRIC comrades but in addition to being a BRIC member they are also a G8 member. Don't say до свидания to the Russians because they too hold the power to move the US dollar, they have done it in the past and they can do it again in the future. Geo-political tensions between Russia and the US have been growing as the global financial turmoil drags on and the Russians are singing from the same page as the Chinese and Brazilians in terms of calling for an end to the dollar's dominance.
Other G8 members beside Russia and the US include Germany, Great Britain, Japan, France, Italy, and Canada but out of that group it is the Russians who need to be closely monitored for any market-moving rhetoric this week. It should also be noted that Obama is meeting with Medvedev and there will be press conferences and various talking points hitting the markets as early as Monday.
Stay on guard--
The last point I want to make on this G8 geo-political factor is to just reiterate how powerful of an event this can be in terms of moving the markets. I am not expecting any specific policy to be established and the G8 communiqué may be a little bland, but it's the rhetoric and comments that are said in the press conferences, back rooms, hallways, and corridors which end up hitting the new wires, causing market reactions. If there is an agenda to gradually weaken the dollar or to temporarily keep it propped up the G8 provides a perfect venue to further this process.
Fundamentals moving the markets this week:
In addition to the G8 there are several fundamental events happening over the course of the trade week that will cause the dollar to move one way or the other. For trading the EUR/USD I will most closely monitor the market's reaction to these fundamentals:
* ISM Services (Monday 1000 EST)
* German Factory Orders (Tuesday 0600 EST)
* Eurozone Final GDP (Wednesday 0500 EST)
* German Industrial Production (Wednesday 0600 EST)
* Crude Inventories (Wednesday 1030 EST)
* US Consumer Credit (Wednesday 1500 EST)
* German Final CPI (Thursday 0200 EST)
* Initial Claims (Thursday 0830 EST)
* German WPI (Friday 0200 EST)
* US Trade Balance (Friday 0830 EST)
* US Import Price Index (Friday 0830 EST)
* Michigan Sentiment (Friday 0955 EST)
The economic calendar for the US and Eurozone is a little lighter than normal but as you can see there are several inflation, growth, employment, and consumer related events happening and those fundamentals are very much in the focus of the big players.
Central banks--
There will be plenty of Fed, ECB, and Treasury speakers this week so be on the lookout for how they decide to verbally manipulate the markets. I didn't have time last week to comment on Trichet's monetary policy press conference but overall I would not classify it as being over-the-top in favor of the euro as in times past. Trichet very clearly backed away from his recent trend of talking the euro up.
Early Sunday morning Trichet made a very interesting comment on the US dollar. He said:
"On this issue, I am very very clear. I have just one message, it is extremely important that the United States of America has been saying that a strong dollar is in the interests of the United States of America. I consider that extremely important and I welcome this declaration"
It will be interesting to see if the market decides to respond to this pro-dollar rhetoric on Sunday/Monday, I think there's a good possibility to see it. But getting back to his monetary policy press conference, Trichet was clear that interest rates had not reached their lowest levels and based on those comments we saw the euro back off from its highs against the dollar by the end of the week. In regards to deflation, Trichet gave a pro-euro message by saying deflation has not materialized in the Eurozone and that it was not an issue... yet.
BOE and RBA Interest rate events--
If you trade the GBP/USD and or AUD/USD you will want to pay attention to the their respective interest rate and monetary policy events. On Tuesday at 1230 EST the RBA will release their latest decision on the Cash Rate and more importantly, their views on future monetary policy and the economic landscape for Oz. On Thursday the BOE will hit the markets with their latest monetary policy statement and I fully expect the market to move the pound sterling based on what the BOE has to say, especially if they comment on deflation and monetizing their sovereign debt.
The pound sterling will begin trading this week near its short-term lows and it could easily end the week even lower should the BOE give a message to the markets about UK inflation dropping below target, a gloomier view on the UK economic situation, or any plans to print more money to buy Gilts. Conversely, if the BOE tells the markets their days of monetizing debt are winding down and inflation should remain at or even above target, I would expect to see the pound sterling soar. Of course the G8 could negate some of the affects of these two monetary policy events but GBP and AUD traders should pay close attention to the BOE and RBA this week.
The fallacy of an established trend:
I often get questions from other traders about what kind of trend the dollar or euro or pound sterling is in. I trade repeated cyclical price action patterns so the "pain" that goes into finding a trend isn't something I ever really have to deal with. But, in my opinion, the idea that any of the markets like crude oil, gold, the S&P 500, or currency pairs like the EUR/USD and GBP/USD are in some kind of established trend is a joke. Those markets are moving purely based on the two emotions which control the behavior of market participants and dictate where they send their money-flows -- fear and greed.
Right now the Forex, equity, and commodity markets are moving in ranges, not trends. The reason they are moving in ranges is because that's exactly what the central bankers want. It's no coincidence that one week central bankers from the US, Europe, and Asia talk up the dollar and then the next week they talk down the dollar. This isn't bipolar verbal manipulation that's going on, this is a well coordinated, organized, and predetermined plan to keep all the majors and crosses in a specific range.
There is no such thing as a single currency and the fact they are all paired up together means the central bankers need to coordinate their efforts to prevent any one pair from falling into an established upside or downside trend move. The coordinated efforts between the banks are also designed to temporarily prevent the dollar and US dollar Index from breaking through key resistance or support zones. If you were to inject some truth serum into the central bankers they would all tell you the exact same thing I'm telling you now.
Economic and financial agendas need to be met and this requires their respective currency to go through short-term periods of appreciation or depreciation. Take the Swiss for example... right now the Swiss are most concerned with Eastern European debtors paying their Swiss creditors so they are manipulating the value of the Swiss franc. Will it always be in the interest of the Swiss to have a depreciated currency? No, not likely, but for now that's the game plan for the Swiss.
If the pain for German exporters becomes to great, the ECB may go on a campaign to devalue the euro against the dollar and pound sterling. If the BOJ gets too uncomfortable with the range in which the USD/JPY trades, they will come out with their own brand of manipulation to depreciate the Japanese yen. This is simple stuff, economics 101.
Price is king--
When the SNB and BIS decide to perform an open-market operation to manipulate the price of the EUR/CHF do you think they are looking at a candle chart and worrying about whether or not the EUR/CHF is above/below a moving average or near a Fibonacci line? Of course not, they are looking purely at price and valuation and they are making a determination based on a fundamental and economic basis to re-value and re-price the market.
If Trichet sees the price and valuation of the EUR/USD at the 1.4200 level and knows the price differential between the euro and dollar is not favorable for the Eurozone, he and his ECB comrades can and will talk it down. Or, if Trichet sees a deflationary situation in Europe he will absolutely talk the euro up against the dollar. That's how these markets work, that's how they move and what makes them move.
Another case... a few weeks ago the Dow and S&P 500 broke above the so-called "magical" 200-day moving average and all the tech traders got excited because this was supposed to mean that equities were going to fly up. Wrong. Ever since that supposed technical breakout occurred, what has happened to the S&P 500 and Dow? They have plunged decisively off their highs.
My point here is to encourage traders to spend a little more time staying on top of the real underlying factors which determine price and valuation in the currency market and to spend less time looking for some kind of a holy grail indicator that cannot produce consistent results and causes undo stress. Concerning yourself over trends or whether a currency pair is above/below a moving average can distract you from staying on the right side of the market, that's why all the Forex brokers give that crap away because its extremely distracting and causes confusion and chaos in the retail FX market.
Trading outlook:
I'm very much looking forward to trading this week. Last week I personally put in a poor performance, took some unneeded losses due to lack of patience for certain price patterns to play out but with all the geo-political, fundamental, and central bank events going down I'm excited about the potential to see some profitable price swings in the markets.
Crude oil, S&P 500, and EUR/USD--
I'll repeat my mantra -- crude oil is one of the linchpins that make or break the markets. The correlation between crude oil and the dollar has remained clear. As crude has fallen from its yearly highs above the $73 level, the US dollar Index has risen from its lows below the 78 level. On 30-June spot crude oil hit its peak so far this year and has since moved decisively below the $66 level. Less than 24-hours after crude hit its peak the S&P 500 futures topped out around the 927 level and have moved down in tandem with crude, hitting a low around the 889 level as equities and commodities sold-off based on the latest NFP data.
The very same day the S&P 500 futures topped at the 927 level guess what the EUR/USD did? Surprise, surprise, it topped at 1.4200 and has done nothing but fall from there. Not a coincidence... equities, commodities, and currencies are all obviously moving just as their correlations dictate them to.
On Friday the EUR/USD flirted with its key support zone around the 1.3982 level after the market ran stops below there on Thursday. If the 1.3982 level breaks decisively to the downside the next price zones you will want to keep an eye on are: 1.3923 / 1.3853 / 1.3818 / 1.3784 / 1.3752. On the upside keep a watch at these levels: 1.4025 / 1.4088 / 1.4128 / 1.4172 / 1.4224.
As I've already mentioned, the G8, the monetary policy, the central banks, and the fundamentals will dominate these markets this week and will dictate whether or not risk is taken off the table or put back on the table. Market participants who were on holiday may decide to react to NFP early this week, a delayed response could very well happen. Also, there will be more US debt auctions and the markets will also begin focusing on the upcoming earnings season on Wall St.
There's a whole lot going on right now and the lack of liquidity and market participation is going to make things even more volatile. If you're in doubt sit it out... be smart with your risk and money management and don't let these central bankers catch you off guard, they love to use the element of surprise... I wish you a great and profitable week of trading.
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