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Bernanke and the Federal Reserve responds to the current market cries with an emergency 75bp rate cut to temporarily stop the bleeding sustained in the equities markets around the world . This has limited the downturn on the Dow Jones for the time being with its peak drop today of -300 points. With no hesitation, the Bank of Canada followed suit by cutting interest rates by 25bp to further ease the huge draw downs occurring on the TSX stock index.
According to DailyFX’s Kathy Lien, the market “still expects another 25 to 50bp on January 30th because 75bp is just not enough. It failed to push Dow futures back into positive territory - we may only get a dead cat bounce in stocks which necessitates further easing.”
The Fed’s primary concern was increasing downside risks to growth, a deepening of the housing contraction and softening labor markets. The announcement has driven the US dollar lower against every major currency with the exception of the Japanese Yen. Significant rebounds have been seen in all of the carry trades. Further easing equals further dollar weakness.
Meanwhile a report put by PFXGlobal suggests a rate increase by the Reserve Bank of Australia due to rising inflation coming from Chinese demand for mineral resources. Keep a close eye on this week’s Australian Consumer Price Index (CPI) announcement. If it is high, watch for the AUD to gain strength.
No trading today due to the copious amounts of news flows coming out from the U.S. however the trend is still down wards on U.S. based pairs.
Well the results are in from last Friday’s trade which was taken on the 4 hour chart and has reached the target profit at the previous swing low at 207.05. Total profit for this trade is +324 pips which isn’t too shabby. It’s too bad I only entered with one lot instead of the usual two in which the other half would have been riding free. Given the weak British pound and the shaky markets still feeling the affects of the sub prime fallout, a good bet would be on the Yen still. Another rambling, here is the chart:
Currently up +177 pips on a trade off the 4 hour charts on the GBP-JPY pair as Yen pairs have pretty much moved sideways today after all the dynamic appreciation brought upon this entire week. On the GBP front, all Pound crosses where taken a nosedive across the board which made this trade pretty easy as retails sales fell dramatically.
I went aggressive on this trade and entered right after the pullback knowing there was lots of momentum pushing the Sterling down.
Profit target hasn’t been reached yet as I am looking at the 207.00 region to exit which was Wednesday’s low and if hit, total potential profit would be in the vicinity of +300 points.
Attached are the 4 hour charts and 1 hour setup chart.
What a few odd day of trading especially with the US Dollar gaining strength as indicated by the US Dollar Index Fund (DX-Y). Luckily my other position was a Yen cross which appreciated rapidly due to the subprime mess that is going on.
AUD/USD:
After reaching the vital 0.9000 region, the Aussie crashed back 200 pips to the 0.8800 region due to the short-term strength by the USD.
Previous position was placed at 0.9012 and was stopped out at 0.8980 for a total loss of -32 pips.
CAD/JPY:
Similarly with other Yen crosses, the Yen appreciated 200 pips as traders unwinded their carry trade positions to buy back the Yen due to risk aversion.
Previous position was entered at 105.94 and reached the profit target of 104.05 for a total gain of +189 pips for this trade.
Total result equates to 157 pips which isn’t too shabby.
Rational is that there will be more subprime write offs within the next couple of days as earnings reports are out as reported yesterday that Citigroup could write down as much as 24 billion US dollars in losses on subprime mortgage-backed investments and eliminated up to 24,000 jobs.
Speculation that the Fed could implement an emergency 50 basis points inter-meeting interest rate cut and Goldman Sachs said the economy may already be in a recession.
With all these worries and fear occurring on the macro level, this will only improve the status of the Yen as this pair overall has been pointing downwards ever since early November when the first news of the subprime shenanigans occurred. The pair has broken out of its bottom support level as per the Demark Trendlines and see looks bluesky until the 103.00-104.00 region.
AUD/USD
The Australian currency gained yesterday after it was announced that average weekly job ads in Australia reached a record high last month and that the TD Securities-Melbourne Institute monthly inflation gauge accelerated, providing further evidence that the economy is growing at a fast clip. This may prompt the central bank to raise rates next month which will make the Aussie pairs more favourable due to yield differences.
In conjunction with the weakness in the US Dollar, this seems like a no brainer pair for he time being.
The only risk I see pertains to that gap that occurred in early November wherein a gap existed .9085-.9100 regions which can act as heavy resistance. The pair has broken out of its 1HR and Daily Demark Trendlines are heading towards that 0.9400 region provided that there isn’t much resistance at the gap area.
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