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As predicted, the Board decided to increase the cash rate by 25 basis points to 7.0 per cent yesterday, the highest since 1996, and was spot on with analysts’ forecasts. What was more interesting was what was said afterwards by the Reserve Bank of Australia as new information points to significant inflation pressures. CPI inflation on a year-ended basis picked up to 3 per cent in the December quarter, with underlying measures around 3½ per cent. Indicators of demand remained strong through the second half of 2007, and reports of high capacity usage and shortages of suitable labour persist. In the short term, inflation is likely to remain relatively high and will probably rise further in year-ended terms, though the Bank expects it to moderate somewhat next year. Thus for now, the Aussie remains one of the hottest commodity currency due to current and future anticipated interest rate spreads.
Not much is going on with regards to the trading front as the majority of currencies are sideways trending simply due to the upcoming interest rate decisions from the BOE and ECB. Furthermore, investors also seem hesitant to take bets on major currencies with most Asian financial markets, including Hong Kong, closed on Thursday and Friday for the upcoming Lunar Chinese New Year celebrations.
The BOE is expected to lower its rate further while the ECB rate will likely stay unchanged at 4 percent and all eyes and ears will be glued to the ECB’s subsequent statements regarding any future policy changes and its intended directions as some are betting that the rates will go down by the end of this year, while others expect the ECB to keep the rate on hold for 2008 and start increasing in early 2009. While there is pressure on the ECB to follow its US and UK peers in easing monetary policy, the high inflation in the Euro Zone is preventing it from doing so.
Proceed with caution as the market is trading within a narrow range awaiting for a clear direction as there is also tons of vital U.S. economic data coming in on the horizon on Tuesday and Thursday.
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Regarding the on-going long-term trade on the Daily chart for EUR/GBP, I’ve decided to close one portion of my lot for a gain of +45 pips simply due to the uncertainty in the market regarding the ECB’s future direction and subsequent profit taking the past two days. The other position is running risk-free with position already set to stop loss and barring any good news, I will look to re-enter again possibly in the 0.7550 area and shooting for the stars with the previous swing high and the full extension of the previous swing to the upside. But for now, I have decided to bank some profit for the month and considering the EUR/GBP’s pip value is twice that of a USD-based currency, it isn’t too shabby at all.
All right, not much went on last week due to the influx of important news stemming solely from the United States stipulating that further rate cuts are forthcoming with many predicting cuts to 1.00% a realistic probability. Job growth as per the Non-Farm Payrolls numbers released on Friday declined dramatically from the already lowly December figures as the biggest job losses were seen in the manufacturing , financial and business services. If February payrolls decline even further, look for the Federal Reserve to cut another 50bp at the March meeting.
The spotlight for this week resides in the interest rate numbers from the AUD, EUR and GBP. Look for rate hikes coming from the Reserve Bank of Australia on Monday at a 25 bp increase to combat inflation as the RBA’s weighted-median index of inflation jumped 1.1% in Q4. Meanwhile the Bank of England takes the opposite view on Thursday as the latest PMI Manufacturing data missed badly signaling UK monetary authorities to follow their US counterparts by initiating a sustained policy of easing via rate cuts. Meanwhile the ECB continues to maintain maintain its rather hawkish posture and will be adamant in keeping rates at their current 4.0% due in part to their industrial sector remaining in an expansionary mode.
Meanwhile according to PFX Global’s Total Fundamental Strength Analysis chart, the pattern is exactly the same as last week with the the New Zealand and Aussie currencies continuing to be the most dominant pair with the Swiss and Yen to remain the weakest.
With respect to trading, the long-term EUR/GBP trade I have going on has reached the +75 pips mark and is 40 pips away from my first target which was the previous swing high and stop loss has been set to break-even.
The only current setup I see that is most likely to take place in the next few hours is the GBP/CHF on the 1-hr time frame and the fundamentals are in line with the weakening of the GBP as seen late last week. Entry around the 2.1380 area seems like an ideal area given that it is the current low of the day, we’ll see how this pans out.
Further to my last post wherein I entered the GBP/NZD trade, I revised my exit point to 2.4755 seeing that its Friday and profit taking would most likely occur after noon (EST timezone) and the Average Daily Range was literally blown out by a good 200 pips as the usual range is 377 wherein we experienced 578 today. Thus, it is highly unlikely that my original target of 2.4715 will be met within 4 hours (although its currently at 2.4740 w/lots of momentum on its side) and carrying the position over the weekend is rather risky and i’m not keen on letting all that profit disappear given that this pair is a high flyer.
Anyhow, it is a great start to the month with +288 pips in the bank.
This trade was taken on the 30th and has never turned negative on me from the get-go however has been ranging from the 0.7450 - 0.7500 region all yesterday and finally broke out to make a new weekly high. It still has a far ways to go and could see lots of resistance to come beginning at the 0.7550 and on. I will monitor the trade however stop loss has been set to break even and current pip count is at 65+ per lot.
GBP/NZD:
I’ve also taken a minuscule position on this pair as I like the downward outlook on the pair as per the Daily chart and given the relative strength of the New Zealand Dollar (COT + Commodities) lately and poor news coming out of the UK (negative Manufacturing PMI results), this is a decent trade. However I am breaking one of the golden rules by having two pairs of a currency trading at the same time; GBP, however the lot size is minimal and I will try to minimize this doing this in the future.
Currently up +100 pips on this pair with only one very small lot and will probably terminate this trade very shortly being that its Friday and profit taking sets in. Furthermore, the pair has already overshot its Average Daily Range for the day which only adds to the argument of quitting while your ahead.
…..
In other news, today was U.S. Non-Farms Payrolls and it turns out that the US economy lost jobs in January for the first time in more than four years, a decline likely to further stoke recessionary fears even though the unemployment rate dipped a bit from the prior month. The economy lost 17,000 jobs in January, a surprise drop compared to the 58,000 jobs economists polled by Thomson’s IFR Markets had expected from the survey of employer payrolls. This marks the first monthly loss in non-farm payrolls since August 2003. In summary, nothing really dramatic has changed as the downward spiraling trend and sentiment of the U.S. economy continues and hence putting continued pressure on the lowly U.S. Dollar.
According to DailyFX, “originally we expected a return gradualism, meaning that the 50bp rate cut would be followed by a smaller move, but at this point, we may even see another intermeeting cut. A return to 1.00 percent interest rates is also a realistic possibility. Traders should hold their horses however since we have over 6 weeks before the next rate decision and incoming economic data could easily change the Fed’s minds.”
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