USD Heavy Ahead Of Non-Farm Payrolls: Intervention Threats Subside

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9708.63	9738.71	9692.57	-0.14	62.91%

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.15 percent lower from the open after moving 63 percent of its average true range, 
and the greenback may continue to push lower ahead of the highly anticipated Non-Farm Payrolls report as it continues to trade within the downward trending channel carried over from the previous month. 
However, as the world’s largest economy is expected to add another 145K jobs in January, 
the ongoing improvement in the labor market should help to increase the appeal of the USD, 
and index could be putting in a short-term bottom around 9,700 as there appears to be a bullish divergence in the 30-minute relative strength index.

Indeed, Fed Chairman Ben Bernanke maintained a cautious outlook for the world’s largest economy amid tight credit conditions paired with the protracted recovery in the labor market, 
while the central bank head expectations inflation to stay subdued in light of the ongoing slack within the private sector. 
Nevertheless, U.S. policy makers spoke out against the zero interest rate policy, stating that the very accommodative stance curbs incentives to save while raising the risk for another asset bubble, and the central bank may come under increased scrutiny should the FOMC look to expand its balance sheet further. In light of the recent developments, 
it looks as though the Fed will maintain a wait-and-see approach throughout 2012, and we should see the central bank soften its dovish tone for monetary policy as the more robust recovery dampens the risk of a double-dip recession. 
Nevertheless, we expect to see a rebound in the USD as long as the relative strength index holds above 30, and the non-farm payrolls report on tap for Friday could serve as a catalyst to strengthen the dollar as it raises the outlook for growth and inflation.

The U.S. dollar continued to weaken against its major counterparts, led by a 0.21 percent in the Australian dollar, 
while the Japanese Yen continued to gain ground despite speculation for a currency intervention. 
Indeed, the DailyFX Speculative Sentiment index for the USD/JPY advanced to 16.89 as the retail trading crowd sees Japanese policy makers increasing their effort to stem the recent appreciation in the local currency, 
but it seems as though the Bank of Japan will continue to sit on the sidelines as the central bank wants more time to assess the potential impact to the real economy. 
As the USD/JPY fails to break below 76.00, the risk of seeing an intervention has certainly diminish, and we should see a near-term correction in the exchange rate as the relative strength index holds above oversold territory.

EURO/U.S.D and G.B.P/U.S.D SSI: The Speculative Sentiment Index

Symbol	LastWeek	Present	%Long	Change: Open Interest	Signals	Chart Links
EUR/USD	-1.67	-1.67	37.0%	2.9%	bullish	View Chart
USD/JPY	7.49	16.55	94.0%	66.9%	bearish	View Chart
GBP/USD	-3.43	-2.37	30.0%	-32.2%	bullish	View Chart
USD/CHF	1.24	2.49	71.0%	2.7%	bearish	View Chart
USD/CAD	2.44	2.01	67.0%	0.5%	bearish	View Chart
GBP/JPY	2.22	3.01	75.0%	-1.0%	bearish	View Chart

Fresh Euro Highs Favored on Sentiment

EURUSD

Trading crowds turned aggressively short the Euro against the US Dollar as the pair broke above 1.2700, and fairly consistent selling suggests that the EURUSD could yet trade to further highs. 
The pair has recently consolidated and has yet to break convincingly above the psychologically significant $1.3200 mark. Yet the trend favors further short-term gains and trading crowd sentiment leaves us in favor of further highs.

Our SSI ratio of long to short positions in the EURUSD stands at -1.67 as nearly 63% of traders are short. Although past performance is no guarantee of future results, such one-sided extremes can often come at major turning points.

Near-term resistance remains at recent multi-month peaks of $1.3220, while support is at 2/1 lows of $1.3025. The next move may be pivotal, and we expect that a break to further highs remains more likely.

How do we interpret the SSI? Watch an FXCM Expo Presentation that explains the SSI.

British Pound Targets Peaks

GBPUSD 

Forex trading crowds have turned aggressively short the British Pound against the US Dollar since it traded above $1.5400, giving us consistent contrarian signal that the GBP/USD may in fact continue onto fresh highs.

Our SSI ratio of long to short positions in the GBP/USD stands at -2.37 as nearly 70% of traders are short. It is worth noting that short interest is down an important 38% since last week, while long interest fell a lesser 11% through the same stretch. 

The significant week-over-week slowdown in selling warns that the pace of gains may slow.

Yet trading crowds remain aggressively net-short, and we see few signs of imminent reversal. Our bias remains bullish until further notice.

US Dollar Targets Fresh Lows on Forex Crowd Sentiment

Forex trading crowds continue to buy into US Dollar (ticker: USDOLLAR) losses against the Euro, British Pound, Japanese Yen, Swiss Franc, and Canadian Dollar. We continue to call for fresh lows as our own Dow Jones FXCM Dollar Index trades near its lowest since November and remains at risk of further losses.

The pace of USD buying has somewhat slowed, which suggests that the rate of US Dollar declines could likewise moderate. Yet we see little risk of imminent reversal, and consistent crowd sentiment leaves us in favor of further weakness.

We will keep a close eye on the Dow Jones AvaFx Dollar Index for any signs of potential reversal. Yet the Dollar’s break below important support suggests that we could see fresh Greenback losses before any real chance of reversal.

How do we interpret the SSI? Watch an FXCM Expo Presentation that explains the SSI.

Fed’s Bernanke Testifies Before House; USD Drops on Dovish Tone

THE TAKEAWAY: [Fed’s Bernanke Testifies Before House] > [Urges Caution in Overly Rapid Deficit Cutting] > [USD Weakens]

Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee on the U.S. economic outlook today. The appearance comes just a week after the Fed’s announcement that it is likely to keep interest rates near zero until at least late 2014, extending its previous time frame by at least a year and a half.

At the testimony, Bernanke began by defended the FOMC’s decision to maintain its highly accommodative stance of monetary policy and to maintain its program to extend the average maturity of its securities holdings. Bernanke reiterated a bearish tone on the U.S. economic recovery, describing the pace of recovery as “frustratingly slow”, although the Fed is indicating that expect a somewhat stronger growth this year than in 2011.

Moving onto fiscal policy challenges, Bernanke warned against overly rapid deficit cutting, appealing to lawmakers that “even as fiscal policymakers address the urgent issues of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible--indeed, they are mutually reinforcing.” Even after economic conditions have returned to normal, the Fed cautioned that the nation will still face a sizable structural budget gap if current budget policies continue. Even assuming that the economy is close to full employment, the Fed anticipates that the budget deficit would be more than 4 percent of GDP in fiscal year 2017.

US Dollar 1-minute chart: 2 February 2012

Immediately after the release of Bernanke’s testimony, the U.S. dollar pared back recent losses, with the U.S. Dollar Index (Ticker: USDOLLAR) reaching 9723 before tumbling down towards 9706 at the time of this report. The U.S. dollar fell against major currencies including the euro, Australian dollar and Canadian dollar.

The U.S. dollar declined sharply as the markets viewed the FOMC’s announcement as “dovish”, allowing a third round of quantitative easing to remain on the table for some time this year.

In his testimony, Bernanke noted the following outlook on the U.S. economy and fiscal policy challenges:

Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth. To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt. High levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events.

Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.

To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. Attaining this goal should be a top priority.

Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible--indeed, they are mutually reinforcing. On the one hand, a more robust recovery will lead to lower deficits and debt in coming years. On the other hand, a plan that clearly and credibly puts fiscal policy on a path to sustainability could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today.

Fiscal policymakers can also promote stronger economic performance in the medium term through the careful design of tax policies and spending programs. To the fullest extent possible, our nation's tax and spending policies should increase incentives to work and save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. Although we cannot expect our economy to grow its way out of our fiscal imbalances, a more productive economy will ease the tradeoffs that we face and increase the likelihood that we leave a healthy economy to our children and grandchildren.

Forecast (Me and Ze Capital Management): EUR/USD to Fall to 1.15 in First Half of 2012

The Euro finds itself at a potential crossroads.
Does the single currency zone remain intact and prove that the Euro itself is a viable currency? 

Do Germany and other core nations come in to rescue the periphery despite significant domestic opposition? 

As it stands, recent trends plainly point to continued turmoil and further Euro losses. 

Yet a lot can happen in six months, and it will be crucial to monitor developments in the Euro Zone in the first half of 2012 and how it affects the Euro exchange rate.

We foresee Euro declines in the first half of 2012.

How low can we go?

Many factors will affect this, but we expect to see Euro/Dollar (EUR/USD) to reach at least 1.20 in the next six months, and perhaps even touch 1.15. 
 

Debt Crisis Front and Center

The current European debt crisis started with serious doubts over Greek debt as early as 2009, but 2011 marked the year in which worries over the periphery spilled into the Euro Zone core. Whereas previous debt problems had been limited to the comparatively small Greek, Irish, and Portuguese economies, trader worries transferred into core nations as tensions hit fever pitch.

Investors aggressively sold Italian and Spanish bonds as they doubted the solvency of governments in the Euro Zone’s third and fourth-largest economies. Italy, the Euro Zone’s third-largest economy, has total public debts representing over 120 percent of domestic Gross Domestic Product. With such an enormous debt load, it is important to watch the interest rates that Italy must pay on its debt. If it must pay unsustainably high interest rates – believed to be around 7% for 10-year bonds, which was seen on several days in November and December – Italy may be pushed beyond the point of “no return”. That is to say, it will depend on external aid to remain fully solvent.

What could conceivably put Italy on the right path and stave off a fiscal crisis on a scale few could imagine? The first step must be a credible plan for Italy to meet its debt obligations—likely led by strong fiscal austerity and real commitment to economic reforms to enhance productivity. The new Italian government has announced measures to cut deficits via increased taxes and reduced spending. Of course such deficit-cutting measures are complicated by the fact that the Italian economy remains stuck in a period of extremely low growth. In the period from 2000 to 2010, Italy held the third-lowest GDP growth rate in the world behind Haiti and Zimbabwe.

The short-term budget cutting measures that have been taken thus far have proven insufficient and perhaps even counterproductive. The entire Euro Zone is now expected to enter a recession through the first quarter of 2012, and any aggressive spending cuts and/or tax increases from Spain and Italy could exacerbate the downturn.

The new conservative government in Spain has announced fairly aggressive deficit-cutting measures that have been met with noteworthy improvements in domestic bond prices, and hence lower interest rates. Yet the spread between 10-year Spanish bond yields and the benchmark German equivalent continues to trade near its widest levels since the Euro’s inception. Markets seem more optimistic, but the overwhelming theme is pessimism over the solvency of key Euro Zone governments.

The unvarnished truth is that an orderly solution to Euro Zone fiscal woes seems exceedingly unlikely. Ideally we would see commitments to real structural changes in regional governance. For example, markets might be more likely to lend to Italy and Spain if all Euro Zone nations were prohibited from running budget deficits beyond a certain level. Such rules have existed for years in the form of the Euro Zone’s “Growth and Stability Pact”, but the missing link remains the lack of real consequences for non-compliance. We foresee a continuation of the trend of patchwork short-term solutions that continue to roil financial markets. Such initiatives may involve attempts at Italian fiscal austerity, European Central Bank aid, and/or international aid. Yet the problems of Euro Zone debt and competitiveness will remain significant.

As traders, we will look for opportunities to play ongoing crises through the Euro/Dollar (EUR/USD) exchange rate. Although shorter-term rallies as high as $1.3500 seem possible, the overall trend favors further EURUSD weakness. 
 

Medium-term technical studies point to more Euro weakness

A closer look at the longer-term chart shows the market locked in a well defined downtrend since posting record highs just over 1.6000 back in 2008. An initial low was recorded in October 2008 by 1.2330, followed by a lower top at 1.5145 in November 2009, a lower low at 1.1875 in June 2010 and the latest anticipated lower top by 1.4940 in April 2011. The failure to move higher in 2011 opens the door for the current downside extension which should ultimately look to retest and eventually break below the 1.1875, June 2010 lows. This would confirm the next lower top at 1.4940 and potentially point towards a deeper drop towards 1.1500.

As such, our outlook for the first half of 2012 is predominantly bearish while the market adheres to the broader underlying downtrend, and we would expect to see a move towards 1.1875 at a minimum before considering the potential for any meaningful recovery. In the interim, any rallies should therefore continue to be very well capped, with overbought short-term rallies viewed as compelling opportunities to look to build on short positions. Ultimately, only a 2-week close back above 1.3500 would bring this outlook into question and give reason for concern.

Trading the U.S. Non-Farm Payrolls Report

What’s Expected:

Time of release: 02/03/2012 13:30 GMT, 8:30 EST

Primary Pair Impact: EUR/USD

Expected: 145K

Previous: 200K

DailyFX Forecast:135K to 160K

 

Why Is This Event Important:

Employment in the world’s largest economy is expected to increase another 145K in January, and the ongoing improvement in the labor market may prop up the U.S. dollar as the data dampens the scope for another round of quantitative easing. As the economic recovery gathers pace, we should see the Federal Reserve continue to soften its dovish tone for monetary policy, and the central bank may endorse a wait-and-see approach throughout 2012 as the risk of a double-dip recession subsides. However, as Fed Chairman Ben Bernanke continues to highlight the ongoing slack within the real economy, the central bank head may keep the door open to expand the balance sheet further, and increased speculation for QE3 will dampen the appeal of the reserve currency as the highly accommodative policy encourages risk-taking behavior. 

 

Recent Economic Developments

The Upside

Release	Expected	Actual
Durable Goods Orders (DEC)	2.0%	3.0%
NFIB Small Business Optimism (DEC)	93.8	93.8
Consumer Credit (NOV)	$7.000B	$20.374B

The Downside

Release	Expected	Actual
ISM Manufacturing – Employment (JAN)	--	54.3
ADP Employment Change (JAN)	182K	170K
Consumer Confidence (JAN)	68.0	61.1

Increased demands for U.S. goods paired with the rise in business sentiment certainly bodes well for the labor market, and a marked rise in hiring could lead the EUR/USD to work its way back towards the 20-Day SMA (1.2912) as market participants scale back bets for a large-scale asset purchase scheme. However, we may see a slowdown in hiring amid the ongoing slack within the private sector, and the FOMC may preserve a cautious outlook for the region as the fundamental outlook remains clouded with high uncertainty. In turn, a dismal NFP report could spark another short-term rally in the EUR/USD, and we may see the exchange rate work its way back towards the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as market participants raise bets for QE3.

Potential Price Targets For The Release

How To Trade This Event Risk 

As U.S. policy makers strive to strengthen the labor market, a positive employment report is likely to dampen expectations for additional monetary support, and the development could pave the way for a long U.S. dollar trade as the fundamental outlook for the world’s largest economy improves. Therefore, if NFPs increase 145K or greater in January, we will need a red, five-minute candle following the release to establish a sell position on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first target. The second objective 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 an effort to protect our profits.

In contrast, the slowdown in private sector consumption paired with weakening outlook for global growth may lead business to scale back on hiring, and a dismal employment report could strengthen the case for QE3 as the central bank aims to encourage a sustainable recovery. As a result, if NFPs miss market expectations, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

 

Impact that the U.S. Non-Farm Payrolls report has had on USD during the last month

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
DEC 2011	01/06/2012 13:30 GMT	155K	200K	-35	-55

December 2011 U.S. Non-Farm Payrolls

The U.S. Non-Farm Payrolls report showed a 200K rise in employment following the 100K expansion in November, while the jobless rate unexpectedly slipped to 8.5% from a revised 8.7% as discouraged workers continue to leave the labor force. The breakdown of the report showed a 212K rise in private payrolls, with manufacturing jobs advancing 23K, while public sector employment weakened another 12K during the same period after contracting 20K in the previous month. Indeed, the more robust recovery in the labor market will dampen the Fed’s scope to push through another large-scale asset purchase program, and we may see the FOMC preserve a wait-and-see approach in 2012 as policy makers see the economic recovery gradually gathering pace over the coming months. Indeed, the better-than-expected employment report propped up the greenback, with the EUR/USD slipping below 1.2700, but we saw the pair consolidate going into the end of the week as the exchange rate settled at 1.2714.

 

 Written by: Zeshan Muhammad Ali Awan

            Director Technicals

Are You Struggling With The Technicals.? The Moving Averages?

The Moving Average... It is a tool that is talked about in almost every trading book that has ever been written. Every day on TV, CNBC, Bloomberg, and others are telling us where the S&P and other key markets are in relation to the 200 day moving average, for example. Every charting package on the planet comes with every possible configuration of a moving average for you to use. Because of all this, moving averages must be one of the most important tools for traders and investors, right? You start to think that it must be impossible to make money in the markets without using moving averages. When we take a deeper look into the purpose and result of using moving averages, you start to see that not only do you not need to use them, but more importantly, they can actually hurt you if you don't understand the risk that comes from using them as a primary buy and sell decision-making tool and that is the focus of this piece.
Instead of going through many charts to find the perfect picture to use as an example to illustrate my logic, I like to use real trading examples from our live trading rooms in the Extended Learning Track (XLT) program. In our live Futures trading XLT, January 13th, we identified a demand level for our students during our pre-market analysis. This was a demand level in the S&P Futures of 1271.50 - 1274.50 (red box). Once price declined in the S&P to our demand level, the plan was to buy it when it reached our demand level with a protective sell stop just below the level to manage the risk and have our profit targets above the level.

Figure 1

Shortly after the stock market opened, price declined to our demand level where our students were instructed to buy. Price moved higher and the trade worked out very well for our students; they executed our rule-based market timing strategy. Now, let's go over the same trading opportunity, but instead of applying our strategy, let's use a moving average which again, is a tool talked about in almost every trading book ever written. Most people are taught to buy when the moving average turns higher. As you can see here, by the time the moving average turns higher, price has rallied quite a bit already which means high risk and lower reward if you use your moving average as a buy signal. Furthermore, notice that the moving average was sloping down when our rules gave the buy signal. Have you ever read a trading book that said buy when the moving average is sloping down? Also, notice that the short-term trend of price was down when our strategy gave us the low risk buy signal. Again, have you ever read a trading book that said to buy in a downtrend? Of course not, yet this is the action you take when you properly buy and sell anything in life, don't you? This is exactly how you make money trading as well, but the trading books almost teach you to do the opposite which is very flawed. Many of the traders following indicators such as moving averages are really smart people who have the best of intentions, they've just been taught wrong. It's not rocket science; traditional technical analysis can be overly complex, often inaccurate and may cause "paralysis by analysis." This is why we focus on teaching students our simple rule-based strategy using the principals of supply and demand aimed to help them find "real" low risk, high reward, and high probability trades. Waiting for the moving average to turn higher, you certainly get confirmation, but at the cost of extremely high risk and lower reward. Furthermore, that confirmation is an illusion because you still don't know exactly what price will do next; this is all about probability and entering a position when the odds are stacked in your favor.

Figure 2

Again, there are so many books on trading and most people start the learning process by reading the trading books, yet the vast majority of traders and investors fail when it comes to achieving their financial goals. For the most part, the books say the same thing and teach the same conventional concepts. Specifically, most of what those books teach is conventional technical analysis including indicators and oscillators such as Stochastics, Mac-D, moving averages and so on. Here is the problem... Conventional technical analysis is a lagging school of thought that leads to high risk, low reward, and low probability trading and investing. All indicators are simply a derivative of price meaning they lag price. By the time they tell you to buy or sell, the low risk, high reward opportunity has passed. They have you buying after a rally in price and sell after price has already declined. At Online Trading Academy, we don't use conventional indicators, oscillators, or chart patterns that you read about in the trading books as primary decision-making tools because adding any decision making tool to our analysis process that lags price only increases risk and decreases reward. Why would we ever want to do that? I know the information in trading books has been around for many decades, but that doesn't mean it works or helps people. Like learning anything else in life, there is the book version way of learning it and the real world learning. At Online Trading Academy, we focus on how proper trading and investing works in the real world which is what our core strategy is made of. Again, if you think about it, most people read trading books and most people lose money; maybe they should stop and consider how flawed the logic is in that conventional thought and action. My goal in this piece is not to beat up books and theories, it is simply to open your mind to a lower risk, higher reward way of trading and investing.
Hope this was helpful, have a great day.