Volume 8 Issue 10
www.TradingEducation.com
December 17, 2007

Good Morning Subscribers!


Wall Street extends last week's losses while investors continue to worry about the signs of rising inflation and weakness in holiday shopping impacting economic growth and corporate profits. In televised interviews Sunday, Greenspan, former chairman of the Federal Reserve, warned of the possibility of stagflation, when prices rise at the same time as the economy cools, and said there was a 50-50 chance of a U.S. recession. On a brighter note, the dollar rose against the Euro on Monday on speculation of of less aggressive Federal Reserve interest rate cuts after last week's inflation numbers.


Featured below is this week's newsletter. Enjoy!

 

Warm Regards,

 

Lane Mendelsohn
Lane Mendelsohn
Website Publisher

In This Issue...  

A Healthy Psychological Profile is Needed for Successful Trading
 by Van K. Tharp, Ph.D.

2

RSI Indicator: The "Cornerstone" of Andrew Cardwell's Trading Model
by Jim Wyckoff

3

Currency/Commodity Markets
 by Kevin Klombies

4

U.S. Stock Market Update
by Robert W. Colby

5

Weekly Currency Wrap-up
by Darrell Jobman

6

 
Volume 8 Issue 10
www.TradingEducation.com
December 17, 2007

Trading Psychology

A Healthy Psychological Profile is Needed for Successful Trading

by Van K.Tharp, Ph.D.

Excerpted from Van Tharp's Peak Performance Home Study Course

Many mental health professionals define an "uncertain" condition as being stressful. Uncertainty occurs because of too much information or because of too little capacity. The very fact that we cannot deal with available information is stressful. 

Available trading information far exceeds one’s capacity for making basic trading decisions, so one can only attend to some of this data. Limited capacity is a major factor in trading success and in understanding stress. 

Three factors are essential to successful trading: 

  1. a healthy psychological profile,

  2. the ability to make accurate decisions from a large amount of information, and 

  3. money management and discipline. 

A weakness in any of these areas reduces one’s capacity for processing information, resulting in stress, poor trading decisions, and losses. Losses, in turn, can produce stress, resulting in more losses. Readers who have taken the Investment Psychology Inventory Profile™ may recall that their test results were split into these three major areas.

A Healthy Psychological Profile

A healthy psychological profile might easily encompass all aspects of trading. However, certain psychological characteristics appear distinct from decision making and money management.

Everyone has a different set of past experiences. As a result of those experiences, one develops certain attitudes toward life. These attitudes may be open or restrictive. Open attitudes produce growth, encompass change readily, orient people toward self-improvement, and produce happiness and success. The successful trader, for example, might describe himself as follows:

I enjoy life to the fullest. I am constantly exploring new ideas, visiting new places, experiencing change, and having fun. I try to get everything I can out of life, and I eagerly look forward to each day.

I am in the best of health because I eat proper foods, get plenty of exercise, and sleep well. I am never overly stressed because I do not feel pressure—only challenge.

Although an open attitude is not essential to trading success, most successful traders are quite open. An open attitude will help a trader in the market because it enhances information processing capacity. Although the successful trader still has a limited capacity, his attitudes toward life keep his capacity at the highest possible level.

The losing trader, by contrast, often has a closed attitude toward life. Part of this closed attitude includes a number of defense mechanisms against winning, such as the fear of success or the fear of failure. Any form of defensiveness results in isolation, building protective walls, and resisting change. Consider the following statements that a losing trader might use to describe himself:

I am really unlucky. Every time I try to trade, something goes wrong. I end up losing. Other people make it impossible for little guys like me to be a winner. Perhaps that is why I am so depressed all the time. Money sure has been my downfall.

Trading is very stressful to me, perhaps because I worry about what will happen all the time. But I also worry about what will happen if I get out of the markets. I’ll probably never be able to get ahead in life.

The losing trader has closed himself off from the world. Some information still gets through, but it is all darkly colored by his restrictive attitude. His closed mind severely restricts his capacity for dealing with information, and he feels "stressed."

This is only a brief introduction to this concept.  To learn more about the relationship between stress and capacity, and how this relationship affects you as a trader, refer to Chapter V in Volume Two of the Peak Performance Home Study Course for more.

Until next week, this is Van Tharp.

x

 

 
Volume 8 Issue 10
www.TradingEducation.com
December 17, 2007


Weekly Futures Market Commentary

RSI Indicator: The "Cornerstone" of Andrew Cardwell's Trading Model

by Jim Wyckoff, Senior Editor

The ideal technical indicator, according to Andrew Cardwell, Jr., is one that offers capability to identify and monitor the current trend, highlight overbought and oversold extremes, and give early warnings of a trend change.

“The Relative Strength Index (RSI) is such an indicator, offering the best of all worlds,” said Cardwell, president of Cardwell Financial Group, Inc., based in Woodstock, Ga. The RSI “is the cornerstone of my trading model,” he said.

“In the lectures and workshops I have given, I have shown how the RSI can be used as either a completely independent trading model or an addition to and enhancement of a trader’s current technical approach. I use it as a completely independent model to identify trend, support and resistance, overbought/oversold levels, divergence, trend change, reversal and price targeting.”

Cardwell said most traders who use the RSI focus their attention on trying to identify bullish and bearish divergences. He said basic price and momentum divergence can and does help to identify extreme overbought or oversold conditions in market momentum.

“However, most traders fall prey to the concept of divergence and see it as the end or reversal of the prevailing trend of the market. All would be right in the world if markets were to reverse from simple divergence. But there are times when sentiment and momentum are so strong that the market continues to make new highs (or lows), which will keep the RSI at overbought (or oversold) levels for extended periods of time.

“Momentum and price corrections, when they do materialize, are usually sharp and swift. After these brief respites the market is then ready to resume its normal upward (downward) trend. With each successive new high (low) and divergence formed, anxious traders are ready to call for a top (bottom) and reversal of trend. However, in strongly trending markets, multiple divergences can and do develop, which only lead to corrections of the overbought (oversold) condition of the market.

“If a trader attempted to take positions based solely on divergences, he or she would need deep pockets and eventually exhaust his or her trading capital,” said Cardwell.

While Cardwell takes note of divergence, he said that only shows the market is overextended and needs to correct the overbought or oversold condition. Even though the RSI is considered a momentum oscillator, he said it has more values as a trend-following indicator.

“One of the guidelines I have established for myself is to identify a range for uptrends as well as downtrends. As the market trends higher or lower I will adjust the normal range of RSI (70-30) to account for the shift in market momentum and bullish or bearish sentiment on the part of the traders. The fact that this adjustment needs to be made in the range of RSI is one of the first indications that the market is undergoing a trend change.”

The ability of a trader to recognize a trend change quickly, reverse a position and trade in the direction of that next trend is the skill that traders must develop to be successful, said Cardwell. “By having a position in tune with the trend, the trader will have the opportunity to participate in the bigger market moves, which generate larger profits.”

Cardwell has what he calls “Three Keys to Success: have a trading program, patience and discipline.”

That is it for this week. You can also visit my daily blog at www.traderblogs.com

Have a great week!

x

 


 
Volume 8 Issue 10
www.TradingEducation.com
December 17, 2007

Commodity Markets Review

by Kevin Klombies

Currency/Commodity Markets

The chart at right compares copper futures with an overlaid view of the U.S. Dollar Index (DXY) futures (in green) and the ratio between the Morgan Stanley Consumer Index to the M.S. Cyclical Index (in black).

The basic point is that the dollar tends to trend inversely to commodity prices so when it is declining we tend to get stronger commodity markets. To the extent that stronger commodity prices go with cyclical growth a weak dollar should go with a declining consumer/cyclical trend and rising copper prices.

In a sense this chart helps to explain why the recent market has been so vexing. The cyclical trend has been quite negative as copper prices have declined along with the CAT/PEP ratio. On the other hand the basic commodity trend has been very strong led in large part by energy and grains prices as the dollar has declined.

On the one hand the weakness in the U.S. Dollar Index has suggested that commodities are the place to be while on the other hand copper prices have been falling since early October. On the one hand the CAT/PEP ratio argues that commodity prices should be lower while in reality the trend for commodity prices has been strong and rising. Not an easy market to sort through.

The point, we suppose, is that eventually one side or the other had to win out. Either the dollar was going to continue to decline until the consumer/cyclical ratio broke back in favor the commodity producers or the dollar was going to snap upwards to confirm the negative trend for copper prices and the strength in consumer stocks such as Coke and Pepsi. Week after week we have argued in favor the consumer stocks and the dollar so we were heartened somewhat by the dollar’s strength towards the end of last week.

The chart at bottom right compares the sum of copper and crude oil futures with the cross rate between the Japanese yen futures and the Canadian dollar futures.

In a sense Japan represent commodity ‘users’ while Canada represents commodity ‘producers’.

A popular argument of late has been that yen strength represents or goes with a bearish stock market and that the euro/yen cross is very similar to the chart of the S&P 500 Index. This is actually true if the equity markets are being driven by commodity prices.

The chart at right shows that each time the sum of copper and crude oil prices pulls back to the moving average line the yen/CAD cross rate rises to its moving average line.

If nothing has changed then the Cdn dollar should start to strengthen against both the U.S. dollar and Japanese yen while energy and metals prices move upwards. The argument that we were trying to make on page 1 today was that, in fact, everything is changing and the equity markets are no longer being powered by weak U.S. dollar and strong commodity trend. If we are correct then the sum of copper and crude oil will break lower while the yen/CAD cross rate moves on to new highs.

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Short-Term Views

At right is a comparative chart of Genentech (DNA), the U.S. Dollar Index (DXY) futures, and the stock price of aluminum producer Alcoa (AA).

Earlier this year we argued on occasion that the strength in the trend for aluminum stocks was helping to drive the Cdn dollar higher against the U.S. dollar.

The chart is set up so that the 35 level for AA and the DXY futures are roughly 81 represents a ‘swing line’ of sorts. When AA is below 35 the Dollar Index is above 81 and vice versa. Notice that AA ended last week at 35.19 (down 1.14) with the dollar nicely higher.

The biotechs have been trending with the dollar and inversely to the commodity trend represented by AA. The point that we are trying to make is that if AA continues to decline below 35 then the dollar and eventually the biotechs will do better.

Below is a chart of crude oil futures along with a MACD Indicator while below right we show the S&P 500 Index (SPX) from 1987 along with a similar MACD indicator.

The basic point is that the recent rally in crude oil prices is perfectly understandable and explainable if one assumes that oil prices are still in a strong and rising trend. In other words if crude oil prices are on the way up to 120 and then 140 and then, perhaps, 200 each correction in price represents a new buying opportunity. The same was true of the U.S. equity markets during 1987.

Notice that when the MACD indicator reached the same low point in September of 1987 as April and May the SPX began to rally. The same was true for crude oil prices as the MACD fell to levels that marked the bottom for prices in August of this year. Where this gets interesting is if the ‘business as usual’ rally ends up failing with crude oil prices breaking back below this month’s lows similar to the reversal lower in the SPX in October of 1987. That could lead to a very quick correction in oil prices back towards the 60 level.

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Best Wishes,
 

x

 

 
Volume 8 Issue 10
www.TradingEducation.com
December 17, 2007

U.S. Stock Market Update

by Robert W. Colby

Downtrends in multiple time frames.

The S&P 500 broke below previous 6-day lows.

The S&P 500 closed below its popular 200-day simple moving averages.

The S&P 500 and DJIA remain below the lower boundary lines of their broken Bearish Rising Wedges and below their popular 50-day simple moving averages.

The Cumulative Daily Advance-Decline Lines are Bearish for both the NYSE and the NASDAQ.

The Small Cap/Large Cap Relative Strength ratio fell to a new 2.5-year low.

Financial and Consumer Discretionary Sector Relative Strength ratios both fell to their lowest level in 6 years. These two sectors have been at the bottom of my rankings for many months.

On Friday, major stock price indices gapped down on news of greater than expected CPI inflation. Stocks recovered until 11:00 a.m., but then began a slide back to the opening lows. A wave of selling in the final 75 minutes drove socks down to below the lowest lows of the previous 6 trading days, thereby confirming a short-term downtrend. Prices closed on their worst levels of the day.

Stagflation: The November consumer price index rose 0.8%. Excluding food and energy prices, the core CPI was up 0.3%, 50% higher that the 0.2% increase generally expected. The November PPI surged 3.2%, more than double the consensus estimate of an increase of 1.5%. It was the biggest inflation in 34 years—at a time when more economists are revising estimates down to recession levels. Recall that the Stagflation of the 1970’s was a very difficult time for investors.

Volume on the NYSE fell by 6%, suggesting a lack of confidence in a market upset and whipsawed by too many surprising news items. Falling volume suggests hesitation and fatigue.

Breadth ended 57% net Bearish, with more Declining stocks than Advancing stocks on the NYSE.

Up-Down Volume finished the day 70% net Bearish, with greater Down Volume than Up Volume on the NYSE.

New Highs-New Lows on the NYSE ended at 73% net Bearish.

Spotlight on event stocks: Here is a stock screen I designed to pick out potential “event” stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are revealed to be deal stocks, sooner or later, or are the subject of some other extraordinary events, positive or negative.

Bullish Stocks: Rising Price and Rising Volume
% Price Change, Symbol, Name

1.77% , HCR , MANOR CARE
2.04% , ADM , ARCHER DANIELS
1.70% , EFX , EQUIFAX
1.55% , PBW , WilderHill Clean Energy PS, PBW
1.18% , MYL , MYLAN LABS
0.72% , Q , QWEST COMMUNICAT
0.42% , NOVL , NOVELL
1.88% , PMTC.O , PARAMETRIC
4.22% , PKI , PERKINELMER
1.84% , TDC , Teradata Corporation, TDC
0.91% , VLO , VALERO ENERGY
0.51% , CCL , CARNIVAL STK A
1.54% , HES , AMERADA HESS
0.89% , MIL , MILLIPORE
1.03% , MYY , Short 100% MidCap 400, MYY
1.74% , STJ , ST JUDE MEDICAL
0.89% , CECO , CAREER EDUCATION CORP
0.66% , TWX , TIME WARNER INC
0.94% , NOV , NATIONAL OILWELL VARC0
1.29% , MHS , MEDCO HEALTH
1.61% , RIMM , RESEARCH IN MOTION LTD
1.09% , LMT , LOCKHEED MARTIN
0.33% , SCHW.O , CHARLES SCHWAB
0.34% , ADI , ANALOG DEVICES
0.62% , COL , ROCKWELL COLLINS
0.31% , CL , COLGATE
0.55% , CMCSA , COMCAST HOLDINGS STK A
0.34% , HMA , HEALTH MGMT STK A
0.27% , BF.B , BROWN FORMAN STK B
1.18% , PSQ , Short 100% QQQ, PSQ
0.76% , DIS , WALT DISNEY
0.27% , TXT , TEXTRON

Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name

-8.51% , BDK , BLACK & DECKER
-0.90% , IIH , Internet Infrastructure H, IIH
-1.32% , TTH , Telecom H, TTH
-1.12% , PMR , Retail, PMR
-4.45% , DLTR , Dollar Tree Stores Inc
-2.51% , VNQ , REIT VIPERs, VNQ
-6.89% , MAR , MARRIOTT INTL STK A
-1.93% , IXC , Energy Global, IXC
-3.14% , AA , ALCOA
-7.96% , CC , CIRCUIT CITY STR
-4.15% , SWK , STANLEY WORKS
-1.26% , PWT , Growth SmallCap Dynamic PS, PWT
-4.42% , EZA , South Africa Index, EZA
-1.06% , FPX , IPOs, First Tr IPOX-100, FPX
-4.08% , ADBE , ADOBE SYS
-5.15% , LVLT , LEVEL 3 COMMUNICATIONS
-2.86% , JBL , JABIL CIRCUIT
-2.41% , VGK , European VIPERs, VGK
-2.76% , EWD , Sweden Index, EWD
-1.98% , IOO , Global 100, IOO
-1.77% , SDY , Dividend SPDR, SDY
-0.84% , IGV , Software, IGV
-2.78% , MV , METAVANTE TECHNOLOGIES, MV
-2.29% , EWK , Belgium Index, EWK
-2.50% , PWP , Value MidCap Dynamic PS, PWP
-2.52% , EFG , Growth EAFE MSCI, EFG
-3.91% , EWJ , Japan Index, EWJ
-1.90% , CSC , COMPUTER SCIENCE
-4.35% , MLNM , Millennium Pharmaceuticals Inc
-1.78% , DSV , Value Small Cap DJ, DSV
-2.61% , MAT , MATTEL
-4.31% , MAS , MASCO
-2.47% , JKL , Value SmallCap iS M, JKL
-3.25% , VAW , Materials VIPERs, VAW
-3.42% , WPI , WATSON PHARM
-2.02% , ADRU , Europe 100 BLDRS, ADRU
-3.28% , SYY , SYSCO
-1.13% , LQD , Bond, Corp, LQD
-2.76% , ERIC.O , LM Ericsson Telephone Company
-3.36% , NE , NOBLE
-2.04% , PKB , Building & Construction, PKB
-1.13% , IGM , Technology GS, IGM
-1.89% , EWN , Netherlands Index, EWN
-2.30% , VDE , Energy VIPERs, VDE
-4.46% , THC , TENET HEALTHCARE
-2.82% , R , RYDER SYSTEM
-3.89% , VOX , Telecom Services VIPERs, VOX
-1.55% , PWV , Value LargeCap Dynamic PS, PWV
-4.08% , EBAY , EBAY
-2.84% , SPG , SIMON PROP GRP

Sectors: among the 9 major U.S. sectors, all 9 fell.

Major Sectors Ranked for the Day
% Price Change, Sector

-0.63% Technology
-1.10% Industrial
-1.23% Consumer Staples
-1.31% Consumer Discretionary
-1.52% Health Care
-1.60% Energy
-1.76% Materials
-1.80% Financial
-1.86% Utilities

Looking beyond the daily fluctuation to the major trends (listed in order of long-term relative strength):

Energy (XLE) Bullish, Overweight. Relative Strength made a new all-time high on 12/13/07. XLE made an all-time closing price high on 10/16/07. XLE has been strong compared to the S&P since 3/12/03.

Utilities (XLU) Bullish, Overweight. This defensive sector’s Relative Strength made a new 6-year high on 12/5/07, and price made a new all-time high on 12/10/07.

Materials (XLB) Bullish, Overweight. The short-term turned down but the long-term trend is still up. Relative Strength made new all-time high on 11/8/07. Price made new all-time high on 10/29/07. The long-term Relative Strength trend has strongly outperformed since 9/27/2000.

Consumer Staples (XLP) Bullish, Overweight. This defensive sector’s price made a new all-time high on 12/10/07, and Relative Strength made a new 6-year high on 11/26/07.

Technology (XLK) Neutral, Market Weight. Relative Strength turned up from a low on 11/30/07. And, long term, XLK has been relatively strong compared to the S&P since its low on 7/24/06.

Industrial (XLI) Neutral, Market Weight. Price and Relative Strength have been chopping sideways since 8/3/07. Longer-term trends appear Bullish.

Health Care (XLV) Neutral, Market Weight. XLV price moved up to a new 6-month high on 12/3/07. Relative Strength moved up to a new 13-month high on 11/27/07.

Consumer Discretionary (XLY) Bearish, Underweight. On 12/14/07, the XLY/SPY Relative Strength ratio fell to its lowest level in 6 years. Relative Strength has been trending down since 1/5/05. XLY price made a new 14-month low on 11/27/07.

Financial (XLF) Bearish, Underweight. On 12/14/07, the XLF/SPY Relative Strength ratio fell to its lowest level in 6 years. Relative Strength has been trending down since 2/20/07. XLF price hit a new 2.5-year low on 11/26/07.

 Foreign stock indices have underperformed U.S. stock indices short term, since 11/27/07. The EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) made a new price high on 10/31/07 and a new relative strength high on 11/27/07. EFA has substantially outperformed long term, since the Bull market started in 2002, and the secular trend is still Bullish. My Top 10 ETF Relative Strength Ranks have been nearly all Foreign for many months.

NASDAQ Composite and NASDAQ 100 underperformed the S&P since 11/7/07. But trends in different time frames conflict. Longer term, NASDAQ outperformed from 8/8/06 to 11/7/07, including a new 6-year Relative Strength high on 11/7/07 and a new price high on 10/31/07.

Growth Stock/Value Stock Relative Strength ratio has been in a neutral trend since 11/7/07. The long-term, the main trend for the Growth/Value ratio (IWF/IWD) has been rising since 8/8/06.

The Small Cap/Large Cap Relative Strength ratio fell to a new 2.5-year low on 12/14/07. Small Caps substantially underperformed Large Caps since 4/19/06. The main long-term trend is Relatively Bearish for Small Caps.

January Crude Oil Futures eased lower over the past 2 trading days. It could be a normal pullback after a previous steeper 2-day upmove. Resistance is at the 12/13/07 high of 94.85 and at the 11/21/07 high of 99.29. Oil found support at the 12/6/07 low of 85.82. The U.S. OIL FUND ETF (AMEX: USO) is not a pure play on Crude Oil, although it generally moves in the same direction.

The Energy stock sector outperformed the USO since 11/26/07. Previously, over the 6 months from 5/30/07 to 11/26/07, XLE lagged oil the commodity.

February Gold Futures worked lower over the past 2 days. Gold remains in a consolidation pattern, with the upper end of the trading range at 855.00 set on 11/7/07 and the lower end at 778.40 set on 11/20/07.

Silver’s main trend is Bearish compared to Gold. The iShares Silver Trust (AMEX: SLV) has been relatively weak since 12/7/06.

The Gold Miners ETF (GDX) has underperformed Gold Futures since 10/31/07. Price made a new 10-week low on 12/14/07.

Inflation expectations have been recovering since 12/5/07. The short-term trend is up, based on the behavior of the ratio of two ETFs, TIP/IEF.

U.S. Treasury Bond prices still appear to be in a short-term correction since 11/26/07. Bonds remain reactive to news about the credit crisis: the worse the credit crisis, the higher the Bond prices; the better the credit crisis, the lower the Bond prices.

The U.S. dollar rose again to a new 7-week closing price high. Short-term price strength since the oversold low at 74.65 on 11/23/07 seems to have further encouraged bottom fishers. Longer term, however, there could be plenty of overhead resistance and the main trend is still Bearish. The dollar fell 19% from its high of 92.53 on 11/16/05 to its low of 74.65 on 11/23/07, moving it into “oversold”.


Daily Rankings of Major Global Markets, Ranked from Strongest to Weakest of the Day:

2.34% Airlines
1.13% US Dollar Index
0.21% Canadian Dollar
-0.24% Mexico
-0.28% Broker Dealers
-0.54% Canada
-0.60% 30Y T-Bond
-0.63% Technology
-0.64% Biotechs
-0.78% AMEX Composite
-0.78% Internet
-0.90% Health Care Products
-0.94% Hardware
-0.95% Health Care
-0.98% Hospitals
-1.02% Japanese Yen
-1.03% Oil
-1.05% Swiss Franc
-1.08% Nasdaq 100
-1.08% Computer Tech
-1.10% Industrial
-1.14% British Pound
-1.23% Nasdaq Composite
-1.23% Consumer Staples
-1.31% Consumer Discretionary
-1.32% Dow Industrial
-1.32% S&P 100
-1.35% Euro Index
-1.36% Russell 1000
-1.37% S&P 500
-1.38% Wilshire 5000
-1.41% Dow Utilities
-1.41% Russell 3000
-1.45% Dow Composite
-1.45% DOT
-1.52% Health Care
-1.52% Commodity Related
-1.52% Drugs
-1.58% S&P Mid Caps
-1.60% Energy
-1.61% Gold Mining
-1.61% Semiconductors
-1.61% Taiwan
-1.66% Natural Gas
-1.68% NYSE Composite
-1.69% Australian Dollar
-1.70% Dow Transports
-1.71% Chemicals
-1.74% Value Line
-1.74% Austria
-1.76% Materials
-1.78% Network
-1.80% Financial
-1.81% Oil Services
-1.85% Insurance
-1.86% Utilities
-1.86% Malaysia
-1.88% United Kingdom
-1.89% Netherlands
-2.02% Russell 2000
-2.10% S&P Small Caps
-2.12% Banks
-2.16% Disk Drives
-2.21% Hong Kong
-2.29% Belgium
-2.30% Switzerland
-2.35% Retailers
-2.46% Italy
-2.46% Singapore
-2.48% Spain
-2.56% Germany
-2.71% South Korea
-2.76% Sweden
-2.78% France
-2.91% Brazil
-3.10% REITs
-3.14% Paper
-3.91% Japan
-4.26% Australia
Best Wishes,
  
x


 
Volume 8 Issue 10
www.TradingEducation.com
December 17, 2007


Weekly Currency News Trading

Weekly Currency Wrap-up
Week Ending December 14, 2007

by Darrell Jobman, Editor-in-Chief

 

There was a significant shift in investor attitudes during the week with at least a temporary shift in the trends that have dominated for the past few weeks. The dollar secured relief from stronger than expected US economic data while there was renewed selling pressure on low-yield, defensive currencies.

Following the latest FOMC meeting, the Federal Reserve cut the Fed Funds rate by a further 0.25% to 4.25% . The discount rate was also cut by 0.25% to 4.75%.

In the statement accompanying the decision, the Fed stated that uncertainty over growth and inflation had increased. There were also comments that consumer spending and business investment and shown signs of weakening slightly while the housing adjustment was intensifying.

Core inflation was described as under control, but there was still unease over potential pressures and the inflation data was a cocnern. Headline producer prices also rose very strongly by 3.2% in November, the highest increase for over 30 years as energy costs increased, although the underlying increase was held to 0.4% for the month. The consumer inflation data was also higher than expected with a 0.8% headline increase and a 0.3% core increase.

As credit conditions remained very tight, the Federal Reserve announced a series of fresh liquidity injections. A wider range of collateral would be accepted and the interest rates would not be set at penal rate in an attempt to free up the credit markets.

Retail sales rose strongly by 1.2% in November while there was a 1.8% underlying increase. Although sales were boosted by a strong rise in gasoline sales, there was still a solid underlying increase which boosted confidence over spending trends.

The US trade deficit increased slightly to US$57.8bn for October after a revised US$57.1bn the previous month as higher oil prices put upward pressure on imports.

The German ZEW index weakened to the lowest level since 1993 at -37.2 while ZEW institute warned that the strong Euro was having a damaging impact with growth faltering.

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The dollar weakened to lows near 1.4750 against the Euro, but then strengthened sharply to test important Euro support levels in the 1.45 region on Friday.

The Japanese Tankan index for major manufacturers fell to +19 in December from +23 the previous month which undermined confidence in the economy, although capital spending plans were revised up.

The yen hit selling pressure beyond the 111.0 level against the dollar and weakened to lows near 113.0 as carry trades found renewed buying support.

The Swiss National Bank left interest rates unchanged at 2.75% following the latest quarterly meeting, the first time rates had been left on hold for two years.

The bank upgraded its inflation forecast for 2008 slightly, although the bank expressed no urgency over the inflation situation. Bank chairman Roth also warned that the banking difficulties would have some negative economic impact.

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A renewed interest in carry trades pushed the franc to lows beyond 1.67 against the Euro while the Swiss currency also weakened to 1.15 against the dollar.

The UK housing data remained weak with the RICS index recording a further drop to -40.6% in November from -23.4% previously which was the weakest reading for over two years as underlying confidence in the housing sector continued to deteriorate.

The labour-market data was firmer with unemployment falling by a further 11,000 for November. Headline earnings growth remained under control with a decline to 4.0% in the year to October from 4.1%.

Wider inflation fears were still a significant factor with inflation expectations rising to a nine-year high while headline output producer prices inflation was also at a 5-year high, although the core data was more favourable with a 2.1% annual increase.

Sterling secured further support weaker than 0.72 against the Euro over the week while general dollar strength pushed the UK currency back to lows around 2.0250 against the US currency from a peak above 2.05.

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