Sarrafx's Blog

Is the situation in Europe out of control?

It seems that more and more issues are piling up on the already unsolved problems that have been in existence virtually since the crisis began in 2008!

Greece has apparently met only 22% of its responsibilities to cut spending under the latest bailout and has asked for a two year extension to its obligations.

It is hard to imagine that Greece can survive within the Eurozone given its lack of ability driven by social unrest to meet the agreements it has signed.

Want to Read more? http://www.sarrafx.com/en/view-blog-article/49/Out-of-Control

In the banks I have worked in, all the traders specialized in one , two or a maximum of three currency pairs and that was all they traded.

The reason for this is that they got a "feel" for their market and understood what was happening, could align technical and fundamental analysis. This gave then an all round view of those currencies and was a major factor in making them money.

It is important when trading currencies to have that "relationship" with the currencies you follow to build up a rapport with the market.

I genuinely feel that spreading oneself thinly simply because you see a signal on a chart is not a particularly successful policy.

I see a number of people talking about what I would consider "esoteric" trades in crosses like Nzd/Cad or Aud/Chf.

To me that is a reason why it is so difficult to make money in these markets.

It is very easy to become "married" to a trade like that and, particularly for short term traders there is plenty of opportunity concentrating on, say, Eur/Usd, Gbp/Usd and Aud/Usd.

Yes these are all dollar based pairs but the opportunities from getting to know how the market for these pairs react in every situation will bear fruit in a way chasing profits from one off trades never can.

It is easy and frankly glib to say that the interbank market bears no resemblance to retail but the truth is that there is only one price and that is interbank and that drives every market, cross and derivative.

Not taking notice of how that market operates is a recipe for disaster.

The market is now well and truly over the euphoria which greeted the EBC’s bond purchase scheme. It also didn’t murder the dollar when QE3 was announced.

The global economy is struggling and there are fewer and fewer bright-spots for the market to focus upon. The Aud, the darling of the risk on brigade has given way to the JPY, the darling of the risk off brigade! We can’t consider the Chf anymore as it is heavily shackled by the SNB.

Now it appears as though the Euro (the darling of no one it seems) has topped out as the market continues to digest the European leader’s ability to pass up every opportunity they manufacture to set their joint economy on the right track.

Read More: http://www.sarrafx.com/en/view-blog-article/48/Has-the-downtrend-resumed?

It seems that we can no longer label those heavily indebted countries of Southern Europe as being the periphery.

The idea that Greece leaving the Eurozone could cause the disintegration of the single currency means that the tail continues to wag the dog and will do for some time to come.

Europe is at last waking up to the idea that were Greece to leave, then the domino effect could be catastrophic. Keeping Greece in the club and funding its needs seems to have been accepted as policy.

Mrs Merkel added to the feeling that a solution is close by saying yesterday that “If Greece one day can rely once again on its own revenue, without having to borrow, then we’ll have to look at this situation and make an evaluation,” Merkel told Bild am Sonntag in an interview when asked about the prospect of debt forgiveness. It wouldn’t happen before 2014 or 2015, “if everything goes according to plan,” the chancellor said.

It remains to be seen just how constitutionally possible such an action would be and we are nowhere near getting ratification from inside the EU or, just as importantly, those outside agencies that are equally as heavily involved.

Those are very much matters for the future but the markets clearly liked what they have seen and have gone heavily into risk on mode with the Euro trading comfortably above 1.30 and looking very much lined up for an assault on the heavy resistance at 1.3120.

This is a heavy data week with the final NFP of the year to be released on Friday preceded by the PMI reports across both Europe and the U.S.

In line with current optimism, the expectation is for European data to show some improvement from very poor figures released last month and for the U.S. to see a slight pullback. Italy was the first to release and they showed a weaker than expected number.

Economic data has taken a back seat over 2012 as risk sentiment and the debt crisis have driven markets. Therefore it will take something spectacular (and PMI data isn’t considered spectacular) for the sentiment to change.

The JPY continues to be weak and trade comfortably above 80.00 and 106.80. It could be that we are seeing the beginnings of sustained weakness for the Japanese currency and that will be a relief for the new Government following the upcoming elections.

It seems that the Euro will be relatively strong into the New Year. The Greek issue has been deferred yet again but the markets don’t seem to mind. This has had a positive knock-on effect on Spain, their bond yields fell again in November and Italy has managed to avoid the limelight.

It remains to be seen if this serenity can be continued into the harsh reality of European winter following the festive season.

The President of the Czech Republic, Vaclav Klaus, is in New York for the United Nations General Assembly.

In an interview yesterday he made some very valid points regarding the peripheral countries and those on the outside looking to enter.

He called himself a “euro-realist,” saying he supports European integration while not embracing the shift towards “unification, centralization, harmonization, standardization” of the whole continent, including the single currency.

The term Euro-Realist would be a very good term to apply to those who have the vision to turn this potentially catastrophic situation around.

Realism is sadly lacking but that is the stock in trade of many politicians.

The issues facing Europe do not span a single term in office for any of the leaders so they continue with short term fixes that do not hinder their chances of being re-elected.

The Czech koruna was the world’s best performer against the euro in the decade ended December 2010, advancing 40%. Investor confidence in the Czech economy is reflected in the nation’s 10-year local-currency debt, which yields 2.4%, compared with 4.8% for similar-maturity Polish bonds and 7.2% for Hungary’s.

I simply use that data to illustrate Mr. Klaus’ economic credentials.

He feels Greece is a “victim of the monetary union” and it’s better for them to not to be in the Union. “Leaving would be a victory”. This simply illustrates the flaws in the plan and failure of the whole system. What applies to Greece certainly applies to the rest of the PIIGS.

Looking at those countries with a commitment, however loose, to join the Euro, the view of those outside looking in is very interesting.

Regional apprehension about the euro has grown with Europe’s debt crisis. While euro-zone nations purchase more than half of the exports of eastern European nations, seven of the 10 former communist countries to join the EU since 2004 have yet to adopt the currency.

Poland, which three years ago shelved plans to join in 2013, deems the euro “completely unattractive,” Prime Minister Donald Tusk said in July. Hungary won’t adopt the currency before 2018, Premier Viktor Orban said in March. Bulgaria has indefinitely delayed plans to scrap the Lev, Prime Minister Boyko Borisov told the Wall Street Journal in a Sept. 4 interview.

The Czech Republic has an open ended commitment to join the Euro and Mr. Klaus concluded by saying “We accepted with some reluctance the prepared conditions for our entry into the EU. We were aware of the fact that joining the euro system was one of the conditions. But we are quite happy with the fact that there was no timing.

Perhaps in the year 2074 we can join the European Monetary Union as well,” he said

“No one is pushing us.”

What does this mean for the Euro? The conclusions I have drawn from this are here

In the not so distant past before communication reached the level it is now, pricing FX transactions was extremely slow and complicated.

For example, slang for the Gbp/Usd rate is "cable. This is because each price was made by cable (or telegraph) and as markets didn't move like they do today it could take the best part of a day to receive a request, make a price and confirm a deal.

Contrast that with todays FX markets where trades take place in milliseconds.

In the City of London, still the worlds largest financial market, there were over 350 banks all with trading rooms. The smallest had one or two traders trading major currencies and a money market dealer handling funding. The largest had a trader for each currency pair and one for each cross (e.g. Usd/Jpy, Eur/Usd & Eur Jpy). The correlation between what happens in the majors and crosses makes this essential in major institutions.

A corporate desk handles all client business and there is often a separate, smaller, trading desk to handle clearing their business.

Now there is also a desk which handles electronic business but a lot of this is covered by the two sided nature of the business.

When you trade fx, it eventually comes to the electronic desk and is aggregated along with every other deal the banks clients are transacting.

The market was structured in a reasonably flat manner in the past with all market practitioners having access to brokers who had live prices from banks who would "support the market".

Voice brokers would relay the prices via a microphone which would be heard via loudspeakers on the traders desk. Voice broking gave dealers a better "feel"for the market as the movement in the market and the volume of business being transacted was often portrayed in the voice of the broker. Interbank dealers dealt far more on instinct that they do now. When the first screen based brokers were introduced, the market became more clinical and less emotional.

As banks started to introduce their own platforms which they gave to tier two banks (non market-makers) and their clients the pyramid effect was born.

Now the markets are driven by liquidity and they have lost in emotion is more than made up by efficiency. The pyramid structure is controlled at the top by maybe ten banks who have the ability to clear large trades amongst themselves. They in turn price markets very aggressively and second tier banks use that pricing for their own business and clients.

Further down the pyramid come the retail clients who still achieve tighter spreads than banks were able to command five years ago.

Liquidity and spread are the main drivers of the forex factory now but it is a more controlled market now.

http://www.sarrafx.com/en/view-blog-article/43/FOMC-&-Beyond

The Federal Reserve's monetary policy statement was as dovish as it could possibly get. But then, surely it was acting in accordance with its mandate.

The Committee explained that, "without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions." They outlined their new bond purchase program, pledged to do more if the labor market doesn't improve and emphasized that a highly accommodative monetary policy stance would be appropriate "for a considerable time" after the economic recovery strengthens.

What the central bank is trying to tell us is that even if the recovery gains momentum, they won't be hurrying to unwind the stimulus until they are certain that the recovery is here to stay.

As has been the case with QE1 and QE2 the Fed has swung into action in a massive way.

The open-ended nature of QE3 came as a major surprise for the market and even before the news was properly digested; it was assumed that QE3 is bad for the dollar.

While currency traders may be confused, the rally in equities and the drop in bond yields confirm that investors are pleased that Bernanke was able to shrug off politics and rev up the printing presses.

At the end of the day, this will be bearish for the dollar when viewed in isolation.

However (there is always a however!) this has been a monumental week for the markets yet we have seen the dollar fall by less than 1% since the package of measures was announced.

We have to remember that the U.S. is not alone in having problems with its economy and currency markets trade on relative value of one currency to another.

Japan, U.K. and, of course, Europe are all battling to regain traction in their economies and it is only history that will show how well Bernanke, Geither, Noda, Cameron, Osborne, Merkel, Dragi etc. have done in first containing, then growing out of the global economic slowdown. It should be noted that Japans’ Finance Minister killed himself a few days ago although the economic situation in Japan does not appear to have been the reason.

Japan has a track record of intervening in currency markets to weaken the Yen when its strength threatens Japanese exports. They seemed to be coming to terms with its currency trading at much higher levels. Indeed 80 had become the new 100. Now we see the dollar as unable to sustain a rally above 80 and Japan will not want to see a gradual rise in the value of the Yen so intervention is clearly on the cards.

Japan is not Switzerland however and the markets will gladly take on Japan if they intervene alone. It is unlikely in the extreme that the Federal Reserve or the ECB will join in concerted intervention so with a lack of policy options to weaken the currency, Japan will continue to suffer.

The U.K. is, to a certain extent, becoming sidelined globally as its influence wanes. Being apart from the EU allows it to make its own policy mistakes although given where Europe is headed that is maybe no bad thing.

Enough has been written about the woes of the EU and it is sure there will be more strong headwinds in the coming weeks/months.

The major currencies will continue to move according to that days or weeks news but this week was extremely significant in that not only were events Euro positive, they were also dollar negative.

There have only been two QE’s to compare to so it is very difficult to use them statistically to say what will happen to currencies following the third but the only certainty is that there will be volatility

Suppose for a moment you are given the opportunity to drive a two seat saloon car around Brands Hatch or Hockenheim race tracks.

Would you opt to do it either alone or with another novice driver or would you opt to have Michael Schumacher sitting next to you?

Of course most of us would choose Michael Schumacher. More of this later!

The interbank market is the driving force of the price action in FX markets yet to all but a handful of retail or margin trade its workings are a mystery.

The statistics for success in FX markets are well known.

It is likely that those who are able to trade successfully are those who have a good knowledge of how interbank markets operate; How false breaks are created, how a trader can “spoof” the market. These are the “tricks of the trade” that have been used by traders since long before retail trading existed yet there are very few day traders who know they even exist. Some market moves are a mystery to a number of day traders yet they are “all in a day’s work” to an experienced interbank trader.

Gaining an understanding of technical analysis requires some mathematical knowledge and fundamental analysis requires the trader to follow basic economics. These skills can be taught and frequently are in a number of quite expensive training modules. Even having spent a fairly large sum of money learning the basics of FX trading, the success rate among traders is still not that high.

You can now follow other traders who are, in essence, similar to you.

Getting back to Michael Schumacher for a moment, that is like following another novice driver like yourself as Michael stands in the pits no doubt giggling to himself!

Just about every retail, margin or day trader lacks the one ingredient that will make them successful.

That ingredient is interbank experience.

Trading with Sarrafx is like having Michael Schumacher in the car with you. Our trading experience is second to none.

Our team have been successful interbank dealers in some of the largest trading banks in the world. We can interpret price action and order flows and pass on useable, tradable knowledge to our clients to give them the advantage that no amount of study can give them.

To trade with Sarrafx is to Trade with Awareness!

We are Sarrafx. We ARE Different.

With the event risk ahead and the market slightly in over bought zone and the monthly trend line acting as resistance further gains on close basis would be difficult.

Now that the ongoing momentum took the pair towards the 1.2900 plus zone, one can expect a failure.

Dollar bulls lost the plot across the board.

Presently Euro price action is near 34 WMA and the Ichimoku has not thrown any change in the trend.

As we have been indicating in the big picture 1.2780 is the conversion point for bulls and bears and the longer the euro bulls stay around these levels the bigger is the threat for the dollar bulls.

Intra-day supports around 1.2870 resistance around the 1.2940 area are the two focal points. Bias is bullish. Near term however we would attempt on the short side as the rally is overdone.

Strategy : Sell here and 1.2945 Stop Loss:- 1.3022 Profit:- 1.2780

In much the same way that markets awaited the first week of September to see the market spring back into life and into the second week for the announcements and measures that would set the tone for Q4 we now await the next peak or trough on the rollercoaster.

Last weeks’ information has been digested and markets looked on Germany, The ECB and The Fed as positive for risk but not so positively that they feel we should shoot for the moon and stars.

The Euro has been on a huge rally that has taken it 1100 points higher from the low seen in July. A correction of 50% of that rally would be a popular technical view and the pullback from the high has to some extent already started that move.

Read More: http://www.sarrafx.com/en/view-blog-article/45/Delaying-the-Inevitable