Welcome back. After a long weekend markets opened the week with not quite a bang but some interesting numbers and equally interesting moves among the majors and their crosses where we saw textbook reactions and some funnymentals off the commodity group.  

With European markets closed for Easter Monday volumes were thin and news sparse allowing us to focus on the only release of note US Existing Home Sales coming out at 5.03 million firmer than consensus expectations of 4.85 million right around the edge of our +/- 0.18 trigger for reacting to the figure. As it is the results should add to the camp of dollar optimists as further evidence that we have already seen the worst of the US downturn.  

Though too early to conclusively say the numbers suggest we may have seen the bottom for US housing in the January/December periods prompting some textbook response with respect to Euro and Cable where knee-jerk reactions saw a firmer dollar even as there is growing evidence that a housing slump is now taking root in their respective economies. Chart wise failure to break key daily Fib retracement levels in EURUSD and GBPUSD however should keep markets on its toes today with the return of liquidity. 

For the commodity pairs however reaction to the numbers appears to be a funnymental with a convoluted intermarket cause and effect. We actually saw the Aussy, Loonie and Kiwi firming after initial whipsaws on the idea that stabilizing US housing should mean the commodities pullback will not be severe, this complementing with charts where much as with the European currencies the dollar is facing some key daily price levels with these currencies.  

And then we have the Yen pairs where we have gotten used to such convoluted intermarket reactions that lately it has become axiomatic that anything that’s good for the US is taken as good for risk taking appetite and likely to push currencies paired with the JPY higher.  

Going forward high impact figures will be coming out of Canada with January Retail Sales on the cards where consensus expectations for the headline figure is at 1.1% and ex-Auto numbers are seen coming out at 0.5%. At this point focus should be on the core numbers where a bounce off the unexpected contraction in the prior month should tie in well with what we are seeing from the charts where USDCAD is coming off stiff daily resistances.  

Something to help this bearish view for USDCAD is US Consumer Confidence for the month where market is expecting to see fresh lows with median forecasts at 73.6 a number that could put a quick end to the greenbacks recent bounce.

As I was working on this post I found that I have to do a bit of rewrite with the New York Fed surprisingly cutting the discount rate 25bps at the open of Asian markets. This comes just ahead of the FOMC meeting Tuesday where market talk is looking for another aggressive easing in the Fed Funds Rate, and after going to the rescue of troubled Bear Stearns Friday breaking with four decades of laissez-faire practice.  

Far from soothing investor nerves reactions in the currency markets thus far suggests the Feds efforts may be having an opposite effect, the rescue and hints of aggressive easing seen more as symptoms of the malaise affecting financials markets rather than a cure. For now with this latest move a rate cut tomorrow is looking more and more a certainty, the question in peoples minds being, will it be 50bps or 75bps. While it is always a difficult and risky proposition to front run any decision what is clear at the moment is that the Fed cannot afford any form of miscommunication and their actions to me speak more loudly than their word.  

To the trader the question then becomes which pair should I go for? Would I go for higher yielders betting on Euro, or the Aussy or Kiwi, or would I go more for the risk aversion story. That trouble in financial markets would mean a stronger Swiss Franc and the Japanese currency. One thing I can be confident of is either way being in the dollar at the moment would be an act of faith and courage.  

To answer our dilemma we once again look at other markets, will all this lead to a decline in equities and ‘flight to quality’, ie interest bearing instruments, which would tell me go more for the Aussy and Kiwi. Or will it lead to a one-two punch on investor sentiment will a general pull back in all the asset classes likely to translate more into real haven plays with Yen and the Swiss Franc the greater beneficiaries.

We started the week with weak global equities as the US recession story continues to haunt investors. This has lead to continued risk aversion that’s seen Yen firming against high yielders while interestingly enough the dollar for its part has come off lows for what some could say is a ‘funnymental’, but is it really?  

People cite Fridays payroll results where NFP’s came out at -63K with previous figures also revised lower to -22K for two months of job losses. This should have been license to sell the dollar right? While I basically agree with that statement, we did fresh highs in Euro and knee-jerk reactions in other dollar pairs, we should also consider the technical picture. We have seen across-the-board sales for the greenback for sometime now that we’ve basically been overbought in Euro and company for sometime that fresh money was just not coming in. Add to that your usual weekend position squaring and you have a recipe for dollars bounce in the end.  

So the question for us now is what then is instore. This week sees high impact numbers roughly distributed among the majors and through out the week. Friday is worth special mention given inflation measures, consumer sentiment and a Bernanke appearance but other wise lets just take things from day to day. 

For Tuesday main numbers for us will be trade figures from both Canada and the US and as such will have me looking for activity in USDCAD. First things first consensus forecasts, for Canada median figures are at CAD 2.6 billion while the US for its part is looking at a -$59.5 billion read, both numbers are for January which should make for an interesting comparative.  

While it would be easy to say look you have a negative figure for the US we must consider that market is already inured with that. The mover here is likely to come from Canada where the stronger Loonie is likely to have some adverse impact. True the loonie is a commodity currency and commodities the world over are rising yet with its main trade partner to the south on the brink/or in recession a weaker than forecasted read is looking very likely. Chart wise to me this could be a recipe for us to see parity yet again though I will be looking at how market reacts to the 1.0011 area, 61.8 fib off the drop from January 20 highs.  

From a broader perspective we would like to note the on going dollar bounce is at the brink of those long awaited pullback in Euro and Cable while Aussy and Kiwi to me appear to have started its moved with the break of their respective support levels yesterday. Having said that, note that as we get closer and closer to next week dollar bashing should again go back into fashion with the FOMC set to meet Tuesday and another easing sought by the markets.

Two days into the week and we still find ourselves little change between the dollar and Cable and Euro. Thus far we have seen data to support the weak dollar scenario yet daily resistances for both pairs have pretty much kept them from making any headway with mere knee-jerk reactions giving us daily highs only to close right around the open. Meanwhile brewing trouble elsewhere has actually seen the dollar in a limited rally against its neighbor to the north and with the currency from down-under.  

Latest releases from Canada have underscored the difficulties posed by a strong currency, while demand for its commodity exports remains strong the higher currency actually means that on a local currency basis we have seen exports dropping accounting for much of the GDP surprise Monday. This in turn has also seen the Bank of Canada going for a more aggressive 50bps easing yesterday, rather note worthy given that decisions by the Governing Council is not a mere vote but consensus that all six members have to agree on. In practical terms this more aggressive policy will now have me searching for possible shorts in the Loonie.   

For USDCAD this means our daily close above the 0.9895 (38.2 Fib of the drop from 2/20 highs) should be seen as a signal to seek out higher ground. Immediate objective right now would be a return to parity and from there 1.0090.  It has to be noted though that the coming days will sorely test this scenario given the US own vulnerability (if not more so) to poor economic numbers. What is important for core positions at this juncture is that we do not see prices dipping back below the 38.2 Fib levels at 0.9895.   

Our other mover Tuesday was the Aussy seeing numbers of its own with another rate hike to 7.25% and a none textbook reaction of a drop. As previously stated the move was largely expected and in the context of a surprisingly flat Retail Sales for January only underscored a growing belief that this could be the last. With the subsequent fall in the Aussy breaking our trendline from Jan-22 lows in AUDUSD we are now in search of a confirmation for this break an immediate objective being a close below 0.9263. Consistent with trend break outs we look to establishing new shorts at the pull back towards the trend line with generous stops above it on the odd reentry.  

Looking ahead we have another one of those days when Eurozone, UK, and US releases are on the same page, “what’s happening in services?”, though I have serious doubts that we are going to get markets reacting much to this.   

The more interesting results to me will be the ADP hiring figures where median forecasts call for a sharp drop to 17.5. Originally seen to provide a gauge on the official NFP figures from government note that ADP is now also seen as a high impact indicator by itself though its ability to consistently predict the official payroll results is far from desirable. For now I leave you with a number +/- 55,565 (from the median) the allowance I am going to use as a trigger whether to expect the initial volatility that accompanies the release to be sustainable or not.

FunnyMentals indeed, we started the week with a flurry of data that after all things being said and done, finds us mixed for the USD pairs and curiously firmer among the JPY crosses. While there should be nothing unusual about this what I find to be a ‘funnymental’ here was that sustained movement did not come from the dollar pairs where releases turned out mostly inline with the consensus expectations (confirming that US manufacturing is now at a contraction). But with the JPY pairs, extending an earlier rally though this appears to be more of a limited unwinding from last weeks massive shorts.

The more interesting results actually came out of Canada, here we saw month-on-month GDP for December dropping -0.7% well short of the -0.2% consensus and a first since August of 2006. These are numbers that affirm the idea that a strong loonie and Canadian growth would not be both sustainable. Plain as that statement may sound we still have to deal with the fact that the loonie is a commodity currency, with oil pretty much seeing new highs almost constantly simply dumping the loonie is an exercise of bravery bordering on the foolhardy. For now I will continue to look for a build up of ‘fundies’ reinforcing the idea of a weakening Canadian economy and then and only then would I start to discount the currency’s seeming strength.

Turning to the charts yesterdays data and price action has me more and more convinced that some pull back is still needed for both Euro and Cable vis-à-vis the US dollar. Sure we saw mostly inline numbers for the manufacturing surveys but in the end a contraction is still a contraction and with ISM Manufacturing at 48.3 (a second bust over the last three months) one would have expected that knee jerk reactions to the top side would have been sustainable considering their own 52.3 and 51.3 reads.

Particularly in the Euro’s case, the fact that after fresh highs we saw a close right around where we started the day does suggest that despite all the bullish talk going one no one is willing put money where there mouths are. Where are the buy stops above 1.5240? With the apparent attempt to run the price area ending for naught we now have a chart that is more and more looking ripe for a pull back. Add to that what has long been an over bought daily chart all I need now is some for of catalyst, be it some positive new out of the US, poor Eurozone results or simply a close below 1.5160 in the daily charts. Medium term though I continue to be bullish for EURUSD with targets at the 1.5500 area, just need that pull back for a better entry.

At this point we take a look at what’s ahead and we have Australian policy rate decisions at 0330GMT where market is already pricing in a another 25bps move. Thing could get tricky ahead for the Aussy pairs given the surprisingly flat Retail Sales numbers for January and a close read of the accompanying statement would be needed. Any hints that this latest move could be the last may just be the trigger needed to break that long trend line from January 22 lows which could set us up for a pull back to the 0.9100 area right around your 38.2 fib retracement for the rally.

Ive been meaning to start a blog on forex and fundamentals for sometime now but things kept getting in the way and found myself shelving and shelving. Finally Ive found some respite to the daily grind to start putting things together.

Before anything else I think some explanations are in order. First off the title, FX FunnyMentals this is not to say that I do not take the matter seriously but the play in words refers to how often I have seen markets reacting completely outside of textbook wisdom.

No dont send those Econ manuals to the trash bin just yet, Im not saying that they do not work, in fact I have a healthy respect for those and keep quite a few of them close myself. What I would like to point out is often times people become much too fixated about this or that data coming out that in all the hawing and gnawing over what this and that analyst is saying the market has moved. Ask yourself, how many times have you waited and waited for that high impact data only to see markets give you a 20-pip move and missed out on the runners.

Unfortunately there is no panacea for this that I know of, short of becoming a pure technician (I use technicals as well for timing my entries but have an obsession for data). What we can do however is try to understand the context of the numbers coming out: what do they mean, how did they do before, what was the markets reaction. In answering such questions we should be able to properly plan on how to react to the numbers, if such attention is even warranted.

For succeeding posts in FX Funnymentals we plan to discuss pertinent issues for the market and develop actionable if-then conditions for economic releases. We will review market action and try to find out what exogenous forces were at work. Ideally further updates on this blog should be posted before or around the open of Tokyo markets.