econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 07 December 2015

Buy The Rumor And Sell The News Alive In Forex Markets

from EconMatters, EconMatters.com

ECB Disappoints

All those who continue to forget this trading maxim were royally punished last Thursday morning as the ECB could not match the trading enthusiasm built into the move in shorting the Euro and thus going long the US Dollar for the prior 7 weeks lead up into the ECB Monetary Policy Decision.

This is such a strong trading maxim to buy the rumor, and sell the actual news that it is the exception rather than the rule where an event over delivers. The best move is to take profits the day before the event as opposed to getting crushed on the news which happened today in the Euro and US Dollar forex trades. Literally the amount of crushing that some traders took this morning regarding giving up a month`s worth of profits in an hour is stomach churning.

Eurozone Economy & Growth

If one looks at the uptick in economic numbers the Eurozone economy is outperforming the rest of the world including the US on a relative basis since the devaluation program pushing the Euro Dollar Cross from the 1.40 area to the 1.05 level that began 17 months ago by Mario Draghi.

This has been a concerted effort to devalue the Euro by Mario Draghi, namely against the US Dollar and Japanese Yen to some extent. This is why many countries continue to do this practice because for the short term to medium term it is an effective tool to make currency related gains that juice up the economic numbers; at least from an artificial currency standpoint.

Currency Wars Work in the Short Term

It helps tourism, and this is a mainstay of European revenues, and the Eurozone has definitely benefited from being more affordable to tourists due to a much weaker currency. It also helps German cars be more competitive from an exports standpoint, especially when previously they were getting hammered by the Japanese Yen devaluation program that started before Mario Draghi. The BMW Lexus pricing dynamic of two years ago has definitely shifted and become more favorable for Germany. It also helps European exports become more affordable and competitive around the world. Of course, these are all artificial short term currency fixes that don`t address the real drivers of economic growth from a structural long term perspective.

German Unemployment Levels & Inflation Expectations

At any rate, I expect Inflation to pick up in 2016 for Europe as the energy comps become more favorable year over year, and the effects of the currency devaluation program continues to percolate through the European economies. Forget about 2017 the ECB will be raising rates long before this date, discussion of ECB rate rises will probably start towards the back half of 2016. Have you seen the German Unemployment numbers? I look for wage pressures and increasing housing costs to affect Germany and much of the core European countries, and the overall inflation numbers to trend higher for 2016. I think this is the big surprise for economists in 2016, the rise in overall core inflation readings in the developed world.

US Dollar Index

With regard to the US Dollar, I expect a few days of trying to find a support level against the Euro and then traders running the US Dollar Index up into the FOMC Meeting on Wednesday December 16th. On the day of the FOMC Meeting, I also expect either a quick spike to clear out the overhead stops on the Policy Announcement, followed by a prolonged selloff into year end. Or alternatively, a complete slam down of the US Dollar on the FOMC Meeting Policy Announcement. However, it is worth noting that even today in the US Dollar Index chart there is a long wick on the third 5- minute bar following the initial ECB Policy Decision. This is clearing out the overhead stops in the US Dollar Index, and protecting a few participant`s positioning so they can get back on the right side of today`s trading action - nice if you have the resources to trade in this manner!

This is a common Financial Market trading truism where you have manipulated markets, and all markets are manipulated; they always have been, and always will be. The truism is to clear out stops in the opposite direction of the big move that is going to occur for the day. But at any rate, I expect traders to try and run up the US Dollar into the FOMC event. Only to sell the US Dollar off for a prolonged period as Janet Yellen makes it abundantly clear to financial markets that although the FOMC wants to save face and actually show that the they can conduct a rate hike, they aren`t about to stand for a strong dollar in a world where it is a competitive advantage to devalue currencies from a multinational profits, tourism and global trading perspective.

Protective Stops

So again pay attention to buying the rumor, and selling the news as this trade has been a mainstay of financial markets since the Tulip Market Fiasco. The market dynamics of profit taking, priced in news, market hype, and herd mentality all contribute to why the old trading maxim of buying the rumor and selling the news comes to fruition more often than not in financial markets. Another truism as can be seen by today`s action in the Euro and the US Dollar Index is the necessity for stops in trading and investing. I cannot over emphasize this point for market participants. I guarantee you there were some professional traders today who got caught wrong-footed by the ECB Rhetoric leading up to today's meeting, and didn`t utilize protective stops which could have saved them a hefty sum of money. Therefore do your analysis, take a position, and protect your profits or limit your losses with strict protective stops.

Euro Policy Tools at Zero Bound

I expect the US Dollar Index to trade back to the 94 level sometime over the next three months, and then we will see who outperforms in 2016. As what we are really looking at is whether Europe or the United States experiences the biggest relative pickup in inflation, and inflation expectations since the Euro makes up the biggest weighting in the US Dollar Index. I think inflation and inflation expectations are both going to be higher than economists think for 2016 in Europe and the United States. And given the low starting point for European Monetary Policy with a negative deposit rate, and effective funds rate differential between Europe and the United States after the Fed hikes 25 basis points in December, I expect the biggest turnabout from the ECB in terms of quickly pivoting to meet these higher inflation readings for 2016. But it is too early to tell whether my assumptions regarding inflation expectations for 2016 surprising financial markets to the upside comes to fruition.

The 1.15 Level in Euro Dollar Cross

But my early forecast is that the Euro surprises to the upside against the US Dollar sometime during 2016, and eventually reaches up to the 1.20 to 1.25 level in the Euro Dollar Cross for my counterview. I realize this prediction is against the current trend, and against the forecasted currency projections for 2106. However it is something to pay attention to if the Euro breaks the 1.15 level with purpose, as the entire currency market will be off sides on this move above the 1.15 level. In conclusion, compared to many of the markets that have dried up, the currency markets remain some of the most vibrant and alive markets for trading and investing.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Joan Robinson’s Critique of Marginal Utility Theory
The Truth About Trade Agreements - and Why We Need Them
News Blog
How To Stop Using Filler Words Like Um And Uh
02 December 2016: ECRI's WLI Growth Index Improvement Continues
Preliminary December 2016 Michigan Consumer Sentiment Highest Since Early 2015
October 2016 Wholesale Sales Improved
Rail Week Ending 03 December 2016: Finally A Positive Month
November 2016 CBO Monthly Budget Review: Total Receipts Up by 1 Percent in the First Two Months of Fiscal Year 2017
Infographic Of The Day: Copyright - Illegal Download
Early Headlines: Asia Stocks Mixed, Oil Steady, Bank Mafia, Trump To Remain TV Producer, US Life Expectancy Down, India Stocks Suffering, Park Impeached, China Struggles To Support Yuan And More
Heavy Metal And Hard Rock Albums That Went Certified Diamond Status
Down The Drain: Wastewater With The Most Cocaine
Apple's App Store Set For 5 Million Apps By 2020
How Can The UK Government Meet Its Legal Air Pollution Targets?
Most Gun Deaths In The United States Have A Tragic Motive
Investing Blog
Are Your Trade Entries Patient Enough?
Investing.com Technical Summary 08 December 2016
Opinion Blog
Looking At Everything: Trump's $1 Trillion Infrastructure Plan
The Global Financial Mess Is Due To Political Failure
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
09Dec2016 Market Update: New Highs, New Correction Concerns Loom, Short-term Indicators Remain Bullish
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved