FXCM/DailyFX Signals and Analysis

[Jason Rogers]

Welcome to the FXCM/DailyFX analyst thread!

In this thread, I will regularly post analysis and trading signals from the DailyFX Analysts, DailyFX+ trading signals, and any other news and analysis I may find interesting which applies to forex trading. I may even contribute my own humble trading analysis from time to time when I find something interesting. Any commentary or trading ideas you have is also welcome, and I look forward to discussing the market with everyone. Please note that the FXCM/DailyFX risk warning applies to any opinions, news, research, analyses, prices or other information in this thread.

Cheers,

Jason

[Clint]

Welcome to the FXCM/DailyFX analyst thread!

I'm looking forward to your thread, Jason.

[Jason Rogers]

The next major Euro-zone event to watch for is the ECB interest rate decision being released Thursday September 8. David Song of DailyFX.com released a report today on trading the ECB rate decision and here's what he had to say:

What’s Expected:
Time of release: 09/08/2011 11:45 GMT, 7:45 EDT
Primary Pair Impact: EURUSD
Expected: 1.50%
Previous: 1.50%
DailyFX Forecast: 1.50%


Why Is This Event Important:
The European Central Bank is widely expected to keep the benchmark interest rate at 1.50% in August, but we may see President Jean-Claude Trichet continue to soften his hawkish tone for monetary policy as the region faces a slowing recovery. Heightening fears surrounding the sovereign debt crisis paired with the increased risk of a double-dip recession may encourage Mr. Trichet to talk down speculation for higher borrowing costs, and the Governing Council may show an increased willingness to delay its exit strategy further as European policy makers struggle to restore investor confidence. As there appears to be an increased reliance on the ECB to address the risks for the region, the central bank may step up its efforts to ease the ongoing turmoil within the financial system, and the board may vote to expand its nonstandard measures in an effort to shore up the economy. However, the ECB may preserve a neutral tone as the risk for inflation remains tilted to the upside, and the Governing Council may carry its wait-and-see approach into 2012 as the fundamental outlook for Europe remains clouded with high uncertainty.


How To Trade This Event Risk
As the ECB maintains its current policy, trading the rate decision may not be as clear-cut as some of our previous trades, but comments highlighting an increased risk for inflation could pave the way for a long Euro trade as interest rate expectations pick up. Therefore, if the central bank talks down speculation for additional monetary stimulus and looks to toughen its stance against inflation, we will need a green, five-minute candle following the statement to generate a buy entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to lock-in our potential winnings.
On the other hand, the slowdown in economic activity paired with the heightening risk for contagion may dampen the outlook for inflation, and the central bank may adopt a dovish tone for monetary policy as the sovereign debt crisis curbs the prospects for future growth. As a result, if Mr. Trichet talks down speculation for higher interest rates and shows an increased willingness to delay the exit strategy further, we will carry out the same strategy for a short euro-dollar trade as the long position laid out above, just in the opposite direction.

Source: Forex @ DailyFX - EUR/USD: Trading the European Central Bank Interest Rate Decision

The key to tomorrow's ECB announcement will likely be the post-meeting press conference held by Trichet. It will be important to watch for any dovish comments about inflation or hints about possible future rate decreases. EUR/USD has been in a stubborn range between roughly 1.4000 and 1.4450, and the ECB announcement seems like the next best opportunity to for EURUSD to put the range to test on the downside.

Another event I am watching (but may turn out to be nothing) is Finland's threat to quit the Greek rescue package unless there is collateral for their loan. This seems to be small hiccup in the negotiations, but what if other countries say "me too" and it becomes a bigger snag in the bailout. Any snowballing of a minor setback could send the Euro heading lower and something to possibly keep on your radar.

[Jason Rogers]

DJ FXCM Dollar Index

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9585.58	9608.18	9561.07	0.17	64.44%

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.17% higher from the open after moving 64% of its average true range, and the reserve currency may continue to consolidate over the remainder of the week as price action breaks out of the upward trend from earlier this month. In turn, the short-term reversal from 9653 may gather pace over the next 24-hours of trading, and the index may fall back towards former resistance around 9515 to test for near-term support. However, dovish comments from Fed Chairman Ben Bernanke could exacerbate the recent weakness in the greenback, and the USD may give back the rebound from 9395 as market participants speculate the FOMC to expand monetary policy further over the coming months.



Three of the four components weakened against the greenback, led by a 0.87% decline in the Euro, and the single-currency is likely to face additional headwinds over the near-term as the central bank continues to soften its hawkish tone for monetary policy. Indeed, the recent comments from ECB President Jean-Claude Trichet suggests the Governing Council will preserve a wait-and-see approach throughout the remainder of the year, but the central bank may face increased pressures to shore up the economy as policy makers curb their outlook for growth and inflation. Given the increased reliance on the ECB, the council may have little choice but to delay its exit strategy further, and the central bank may see scope expand its nonstandard measures as the ongoing turmoil within the financial system bears down on the real economy. In turn, the recent decline in the EUR/USD looks poised to gather pace in the days ahead, and the exchange rate may threaten the rebound from 1.3836 as the fundamental outlook for Europe deterates.

[Jason Rogers]

Most of the market reaction over the past several hours has been in response to the fallout from the European Central Bank rate decision in which President Trichet outlined a more intensified fear of the Eurozone economy and the need for the central bank to keep things on the accommodative side. One of the key take aways from Mr. Trichet and company was that inflation risks were balanced and no longer to the upside. The language clearly added weight on the Euro with the market dropping sharply in response, and paving the way for a good deal of negative sentiment into Friday. Talk of global monetary accommodation in the face of a struggling macro economy gained traction as market participants speculated of the possibility for some form of coordinated stimulus at the upcoming G7 meeting.


Relative Performance Versus the USD on Friday (as of 15:00GMT)

1. JPY -0.31%
2. GBP -0.41%
3. CAD -0.59%
4. CHF -0.93%
5. NZD -1.00%
6. AUD -1.01%
7. EUR -1.22%

Technically, today’s break back below the 1.3835 July low is significant with the market now potentially carving out a key lower top that exposes additional declines all the way back down towards the 1.2000 area over the coming weeks and months. A closer look at the longer-term Euro chart since the 2008 record highs shows the market moving in a downtrend and potentially on the verge of carving out the next major lower top. The rapid deterioration in the Eurozone supports this outlook on the fundamental front, and we contend that any attempts to offer some form of a soft landing in the region will still prove to be a tough task as the local markets are forced to battle far too many demons which include; bailouts on the peripheral, record widening bond spreads, a troubled banking sector, political turmoil, and threat of downgrade.





On the strategy front, we continue to recommend looking for opportunities to build into long US Dollar positions. The current market environment is definitively risk averse and should only continue to promote additional safe haven buying. With the Swiss Franc no longer a viable option and the Yen hardly being classified as risk free, we see the US Dollar emerging as the prime beneficiary of these flows in the currency markets. There have been those that have distorted perceptions of safe haven alternatives by shifting into higher yielding and emerging market plays, but we feel this strategy will soon prove to be quite painful as themes of instability and uncertainty eventually expose these markets for what they really are……risk correlated assets that will fall victim to liquidation on a further decline in the global economy. The idea of hiding in the Australian Dollar is one such example where the lure of yield will likely be severely offset on the reality that the deluge of global economic and financial market deterioration will soon initiate a third phase and extend from Europe into the Asian and emerging markets.

[Jason Rogers]

Written by Christopher Vecchio of DailyFX.com

Although market participants may have been feeling slightly more positive about the medium-term outlook of the U.S. economy after President Barack Obama’s speech on the labor market last night, any optimism was erased after developments out of Europe today. An event that has been a long time coming, it now appears that Greece will default on its debt and / or be forced to leave the Euro-zone. On such news, risk-appetite quickly evaporated, leading to a mass exodus from European banking shares and higher yielding assets.

One of the biggest losers throughout the European trading session was the Euro. After breaking below the psychologically significant 1.4000 exchange rate yesterday after the European Central Bank maintained its key interest rate at 150-basis points while simultaneously employing dovish rhetoric, the EUR/USD hit a six-month low on Friday. Trading at 1.3645 at the time this report had been written, the EUR/USD was the second weakest currency pair on the day, just behind the EUR/JPY.



The Euro was, in fact, the worst performing major currency across the board, even ahead of higher yielding currencies such as the Australian Dollar and the New Zealand Dollar, typically the two currencies that face increased selling pressure in times of risk-aversion due to their higher yields. The currency bloc was certainly not supported by the resignation of European Central Bank Executive Board member Juergen Stark, who apparently was leaving in protest of the central bank’s bond buying policy, according to sources. Although the European Central Bank said Stark was leaving for “personal reasons,” such a scenario is highly unlikely, given the state of European affairs.

Thus far, on Friday, the Dow Jones FXCM Dollar Index is significantly higher, trading at 9728.58, at the time this report was written, after opening at 9628.85. The index has traded mostly to the upside, with the high at 9731.94 and the low at 9609.17.

Key Price Levels: 15:30 GMT

[Jason Rogers]

EUR/USD has naturally been the currency pair on everyone's radar recently including mine. Here's a chart of what I'm watching on the EUR/USD:



Now that EUR/USD has broken through support, I'm looking at a Fibonacci Retracement from the 1.20 low to the 1.50 high for possible levels the EUR/USD may target. We've already crossed through the 38.2% retracement level, and the next levels would be 1.3405 and 1.3044.

If you haven't been following the news out of Europe and exactly what is happening, here's a fundamental overview from Christopher Vecchio of DailyFX:

European Session Summary
Although the major currencies were relatively unchanged across the board just ahead of the North American session open on Tuesday, the currency markets were turbulent throughout the overnight following a smattering of disappointing news out of Europe. In regards to the overall situation in Europe, revolving mainly around the Southern European economies, credit default swaps are now pricing in a 98 percent chance of a Greek default at some point over the next five years. In fact, because the perception of Greek finances is so dire, bond markets are pricing the 1-year Greek bond at a 135.768 percent yield, up more than 30 percent since last Monday.

Concerns are not limited to Greece, however. The Italian bond market has come under increased siege the past few weeks, and a critical bond auction earlier today did little to abate worries. Italy sold €3.9 billion of a near 5-year benchmark bond at an average yield of 5.6 percent on Tuesday, a higher premium than the 4.93 percent yield at a July 14 auction for bonds of similar maturities. A report yesterday suggested that in addition to the European Central Bank participating in the bond auction today, China would be as well, in order to help anchor market confidence in the periphery European country.

Full Article: Forex @ DailyFX - Demand for Safety Continues Following Italian Bond Sale

[Jason Rogers]

The outlook for interest rates is starting to become more dovish. In general, higher interest rates tend to benefit a currency since money will flow towards the country which has higher interest rates since investors are looking for the highest yield possible...hence the carry trade. Here's an article John Kicklighter of DailyFX wrote earlier this morning on the outlook for interest rates based on current forecasts.

Written by John Kicklighter of DailyFX

Rate ExpectationsThe change in the 12-month interest rate outlook was generally modest from last week; but the forecast for the eight major central banks is still leaning towards the dovish side. This is a discouraging bearing for the broader market as interest rates themselves are still historically modest. Without stimulus, the lack of a reward potential would have left us to succumb to the burgeoning risks long ago. However, confidence in stimulus is quickly diminishing; and a further withdrawal of yield expectations could tip the scales even further to encourage a full-scale reverse in carry trade interest.

Looking at the yield forecast, we can see that the heaviest outlooks rest with the Reserve Bank of Australia, the Bank of Canada and the European Central Bank. To the market, the spread of the European financial crisis from the sovereign space to the general banking level is a red flag that the central bank may soon need to step up its accommodation to a region that is already seeing severe recessions for some of its members. That said, the most remarkable standing is for the RBA which is currently pricing in 140 bps of rate cuts over the coming 12 months as the market deems the current benchmark simply too high. Dovishness has grown the point where there is now certainty of a 25bp cut at the next meeting and even further speculation of a 50bp cut. Noteworthy is the upcoming RBNZ rate decision as this is the last remaining hike candidate.

Full Article: Forex @ DailyFX - AUDUSD, NZDUSD and USDCAD Guided by Yield Expectations

[Jason Rogers]

Another update for those of you following the EUR/USD. Christopher Vecchio of DailyFX has pointed out a nice channel on the 15 minute chart that has developed over the past couple of days. The EUR/USD seems to be in holding pattern until we get further news on whether Greece will default or things somehow get resolved.

Source: Forex @ DailyFX - Euro Firms as Merkel Reassures Market on Greek Finances

Those of you having followed my EUR/USD post from a few days ago outlining fibonacci levels will also notice that EUR/USD is nearing the 38.2% retracement level at 1.3766 which could provide some resistance.

[Jason Rogers]

U.S. Dollar Offered Lower Following Coordinated Intervention

Written by Christopher Vecchio of DailyFX

Headed into the final hour before the North American session open, the U.S. Dollar was mixed across the board. While it was lower against the Euro and the British Pound, the Greenback was up against the commodity currency block. Yesterday’s mixed batch of news – continued support for Greece by France and Germany, while the Reserve Bank of New Zealand warned of a global slowdown – ultimately boosted risk-appetite if only slightly headed into Thursday’s trade.

The price action in the overnight was quickly forgotten after 13:00 GMT, however, as the U.S. Dollar tanked across the major currencies. The other funding currencies, the Japanese Yen and the Swiss Franc, traded lower as well. The Federal Reserve, in conjunction with the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, announced that three liquidity U.S. Dollar liquidity-providing operations with a maturity of three months would be carried out over the remainder of the year. The European Central Bank’s website noted that “these will all take the form of repurchase operations against eligible collateral and will be carried out as fixed rate tender procedures with full allotment.”

The coordinated action by the five central banks is indeed significant. Overnight lending rates between banks have risen in recent weeks, a suggestion that banks are unwilling or rather cautious about lending to one another due to a potential liquidity drain. The move suggests liquidity is becoming a major concern; a liquidity crunch was part of the reason why the Lehman Brothers crisis was so exacerbated. With additional Dollars in the system now, it appears that the U.S. Dollar is poised to weaken. The ultimate fate of the Greenback is hanging on next week’s Federal Open Market Committee meeting.

Thus far, on Thursday, the Dow Jones FXCM Dollar Index is lower, trading at 9723.61, at the time this report was written, after opening at 9740.25. The index has traded mostly to the downside, with the high at 9773.24 and the low at 9677.97.

Source: Forex @ DailyFX - U.S. Dollar Offered Lower Following Coordinated Intervention