What a Difference One News Item Makes...

Joined : 23 Dec 2007 Posts : 241 Location : Nigeria

Good Day Currency Traders!

Yesterday, I was watching my trading screens and suddenly the traditional carry-trades like EUR/JPY and GBP/JPY went nuts. These pairs leapt 100 pips as I watched the screens. I knew that all of the main "forex" news was already done for the day. So this sudden change puzzled me.

I went scouring for the news and there it was: Countrywide Financial (CFC) - the largest U.S. mortgage lender - stated they were in "advanced talks" to sell the company to Bank of America for around US$4 billion. Just by announcing that, Countrywide soared over 73%. Wow!

This vote of confidence gave the stock market a much needed jumpstart. And of course, that triggered a carry-trade rally (because healthy stocks mean that traders can make more risky investments - like carry-trades).

U.S. Stocks Influence Carry-Trades
My first thought was: "Yep, that shows you how "tied" these carry-trades are to the stock market."

One American company buying another American company doesn't have a direct impact on the forex market. However, the indirect impact is substantial.

FX Success Depends on
Watching Stocks and Commodities
I follow movements in stocks and commodities so I can prepare for those impacts. There's often something happening in one of those markets that creates a spillover effect in the FX markets. And if you're not aware, you'll miss it.

My forex success depends on tracking not just the currency markets. In fact, I've had many winning currency trades simply because I knew where stock indices were trading...not to mention gold, oil and agricultural commodities. These all have their own indirect impact on certain currency pairs.

Lately, I've had my eye on the Dow. I'm watching to see if the Dow falls below the key support levels of 12,400-12,500. The reason? Watching the Dow gives me great insight into how well EUR/JPY was going to hold up (this pair tends to track the Dow, so if the Dow falls, the EUR/JPY will fall too).

Here are a few other indicators that affect currencies:

Gold prices: Australian dollar
Oil prices: Canadian dollar
Agricultural prices: New Zealand Dollar
Major Stock Indices: Japanese yen and Swiss franc Carry-Trades
So being a successful currency trader means watching more than just the currency markets. You must keep an eye on every major global market. If you're doing your homework, you'll eventually be more informed than any stock trader on the planet.

For now, I'd say these stock rallies and carry-trade rallies are only temporary. However, it gives short sellers a better place to short from.

Yesterday's Sucker Rally
Traders call rallies like yesterday "sucker rallies," because they will draw a lot of "suckers" into thinking that a bull market is in place. However, even bear moves have corrective moves upward.

By the way, don't think that Bank of America is trying to play the "white knight" or good samaritan role either. They've got a US$2 billion investment they'll lose if Countrywide goes under. So they have a vested, selfish interest in making sure that Countrywide doesn't go under.

Bank of America can save their investment by taking Countrywide under their wing and consolidating all of it under the banner of Bank of America's stock. After all, Bank of America carries more clout right now than does Countrywide. Then, in time, Bank of America's stock will recover and Countrywide shareholders will benefit too.

Get ready and buckle up because the next down move in both stocks and carry-trades will be shortly underway. It will be like a Six Flags rollercoaster ride in the near future.

Sean Hyman, Currency Director

Making 'Cents' of the Headlines
Trichet and Bernanke Work Together to Boost EUR/USD

What Happened:

Yesterday, Trichet gave a speech after they chose to keep interest rates unchanged. He stated that the ECB would be diligent in fighting inflation.

In a nutshell he was saying, "We're holding rates steady for now, but if inflation and commodity prices remain high...we'll hike rates next time."

How the Market Reacted:

That's my interpretation of his speech. Apparently, the market agreed with my translation, because the euro vs. U.S. dollar exchange rate (EUR/USD) got an initial pop upward off of the hawkish comments

. Then later on in the day, Fed Chief Ben Bernanke spoke. He said that "additional policy easing may well be necessary." Interpretation: The Fed is cutting rates at the end of the month.

What I Say:

And just like that, the EUR/USD currency pair took off.

Between These Two Speeches, the EUR/USD
Jumped a Whopping 172 pips Yesterday!

You can bet Bernanke will cut rates by 25 to 50 basis points. He'd be a fool not to.

Greenspan would generally do an inter-meeting surprise rate cut in times like these. However, Bernanke doesn't want to shock traders into believing the economy is so bad that they can't wait until the end of the month to cut rates.

Bernanke did indicate to the market that he's "prepared to act in a decisively and timely manner." Interpretation: He can't wait until the end of the month meeting gets here so he can cut rates.

He's finally starting to admit how fragile the economy is right now because he said the "2008 outlook has worsened" and those risks are "more pronounced."

So if he felt that he could cut today without putting the market into a panic, he would.

However, he's counting the days until the Fed meeting.

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