Peter Marsden's Forex Blog

Today the Yen has gained strengthened against all the major currencies. Against the dollar it has made an eighteen month high. The pair moved moved down around 400 pips on the day at the time of writing. Could this be the end of the yen carry trade? There is speculation that this could be the case, but we hear this every time there is a big unwinding. The interest rate differentials between many currencies and the yen is still great for the carry trade. This recent unwinding is caused by the reduction in riskier assets bought with borrowed money from Japan. Investors and speculators are very nervous about contagion of the U.S sub prime market spreading globally.
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Pete

The dollar took another beating today making fresh 26 year highs and breaking through 2.10 against the pound. The euro made new all time highs against the dollar too. The trend is firmly dollar bearish currently. The move was on china’s decision to diversify there huge foreign exchange reserves into stronger currencies and away from the US dollar.

Tommorow we have the ECB and BOE interest rate decisions. Both of these central banks are widely expected to leave rates as they are. It is unlikely that there will be any surprises. Mervyn King has firmly stated he doesn’t want to cut.

The trend for the buck is certainly down at the moment, and there doesn’t appear to be anything to stop it at the moment. Oil is still making record highs, currently in excess of $98 per barrel, this will also add to the dollar woes. It is very good for the canadian dollar which has also been making record highs against the dollar.

Today we had the NFP. The initial number was considerably higher than the expected 82k, coming in at 166k. However, there was a downward revision to the previous number to 96k from 110k. The market viewed this as dollar positive. Cable sharply moved down around 50 pips in a couple of minutes. The cable bulls soon ensured this dollar strength was short lived. The dollar gains were giving back in the next couple of minutes and cable made a fresh 26 year high. There really seems to be nothing at the moment that can save the dollar. Will we see 2.10 in the coming days? It’s certainly a possibility.

As you are probably aware the fed cut rates the fed funds rate yesterday by 25 basis points. This move was widely expected by many traders. The fed made it clear they are very reluctant to make any further cuts. This is not surprising with oil and other commodities near record highs. This is bound to cause further inflationary pressures to the US economy, at a time when they really could do without it. The pound broke 2.08 yesterday versus the dollar, a 26 year high. The euro made an all time high against the dollar breaking the 1.45 barrier.

Today we had the ISM which was below expectations, adding to the dollar woes. Just how low can the US dollar go? If we look at a long term chart for GBP/USD, we can see it has been above 2.40, but you have to go back a long way for this.

GBP/USD has just made a 26 year high. It managed to break through the resistance at the 2.0650 area.

As always, the market has moved on speculation. The speculation the Federal Reserve will continue to cut interest rates, whilst the Bank of England will leave them on hold. Mervyn King, the governor of the Bank of England has clearly stated that he has no immediate plans to cut rates as he feels there are still considerable inflationary pressures facing the UK. With oil making record highs, this will certainly be noticeable in the inflation figures in the coming months. A cut would also assist irresponsible lenders who have got themselves into trouble.

Personally, I believes banks like Northern Rock who have got themselves into trouble have inflicted it on themselves. The bosses at Northern Rock said the credit crisis was “unforeseen”. I have never heard such drivel. If they believe that they are clearly incompetent. Northern Rock has given mortgages to many people with poor credit ratings who have no chance of keeping up with the repayments. They got greedy and now it has back fired. I am fully behind Mervyn’s actions. Some one has to take a firm stance against these irresponsible lenders or where would it end?

Cable resistance stands firm today. We saw a test of the 22/10 high of 2.0550 but resistance held. This made a double top. Shorts from this area should have done very well. Price has now been in a very tight range for almost a month. It looked like there may be a break out to the downside earlier in the week as some of the carry trades unwound but there was no follow through and price has remained tight. When carry trades unwind it is usually good for the dollar.

Today we saw some major economic data releases coming out. Firstly we BBA mortgage approvals lower than expected at 52.7k. There certainly are signs that the UK housing market is feeling the pinch of the numberous interest rate hikes made by the Bank of England.

In the US we had Durable Goods Orders, which came in worse than expected, core durable goods was also lower than expected at 0.3%. Unemployment claims and New Home Sales were also worse than expected (when we include the revision to last months figure). All the economic data coming from the US has been disapointing lately. Is the US dollar doomed?

A nice clean triangle currently on GBP/JPY. This could provide us with a nice trading opportunity in the coming days or possibly even sooner. This pair has been very volatile in recent days, so there is good potential make some nice pips if we see a break out. At the time of writing price is at 235.17. The upper trend line is around 239.40 and the lower trend line 230.50. The trend line values will change with every new candle.

How do you trade this setup?

Personally, I wait for the trend line to be broken, then wait for a retracement back to the trend line, then enter the position. I move to a break even stop as soon as possible then use a trailing stop. If there is no retracement, I stay out. Simple as that, it has worked very well for me in recent months. Discipline is the key. If you don’t get the right conditions it’s imperative that you stay out completely and wait for the next opportunity.

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Looking at the weekly chart, for GBP/JPY there appears to be the possibility for the completion of a Head & Shoulders pattern. A Head & Shoulders pattern often suggests a more substantial downward move is to come. This is certainly a popular carry pair amongst many traders. This pair has a large correlation to the Dow Jones as there is a lot of borrowed money from Japan that has been placed in the stock market. Historically, when the stock markets have corrected, GBP/JPY has also corrected. There are still big concerns lingering in the financial markets related to the recent “credit crunch”. The dow certainly fell heavily towards the end of last week and looks set to continue the downfall today and possibly into the week. This could mean further declines for GBP/JPY. So far I have been selling good retracements to this clear downward trend and using trailing stops.

Oil prices seem to be making record highs on a regular basis. On the 16^th October they hit $88. How does this affect the currencies? Well, it tends to be good for oil exporting countries like Canada and bad for the oil importing countries like the US and Japan. In fact the currency pairs CAD/JPY and USD/CAD have a good correlation with oil prices in the long term. You can read the forexpm special article on this here. We are currently seeing USD/CAD, otherwise known as “loonie” making multi decade highs and is getting very close to all time highs. These all time highs could even be tested in the near future, especially if oil continues to rise. Some speculators are even expecting a break of the $100/barrel. We will have to wait and see. If the Canadian dollar does continue to appreciate against the US Dollar (This would mean USD/CAD going downwards) it will certainly hurt the Canadian exporters as they will find it harder to compete in the global market place as their goods will be more expensive to other nations.