Foreign Currency Trading

Dollar bashing has driven the U.S. dollar to an 11 month low against the Euro and 1 year low against the Australian dollar. If you have caught my interviews on CNBC and Bloomberg, you would know that I have been bearish dollars and bullish Aussies and Euro for the past 2 months. Now that key levels have been broken, there is room for more gains for those currencies which means losses for the U.S. dollar.

Although the comments from the U.N. meeting triggered the sell-off in the dollar, recent economic data indicates that the for the time being, the recovery trade is still on. We have seen upside surprises in data from the U.S., Eurozone and the U.K.

It is very important for the EUR/USD to hold above 1.45 and as long as it does, resistance doesn’t come in until 1.4720. For the AUD/USD, my updated target is 89 cents and I am sticking to it. I think USD/JPY could also break support, but I explored that in more detail in my special report “Will USD/JPY Also Test Its 2009 Lows?”

The sell-off in the dollar is of course contingent upon continued strength in equities. If stocks start to lose momentum, the rally in the EUR/USD and the AUD/USD will fade as well. That is why the charts that matter has to include the S&P 500. The key levels to watch are 1039.47, the 2009 high and 1016.50, which is Friday’s high. If stocks rise above the yearly high, we could see an extension to 1100. If the index falls below 1016.50, we could see a move below 1000.

All Eyes on Gold

Gold prices are also gaining traction which is not surprising considering the seasonality aspect of gold in the month of September. In 8 out of the last 10 years, gold prices ended the month higher in Sept. So far it looks like this patter is repeating.

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Every month before the non-farm payrolls report is released, I write about whether I think NFP will be better or worse than the previous month and how to trade it. Hopefully you got a chance to read my report and see the charts of how the EUR/USD typically trades post payrolls - Bar is Set High for Non-Farm Payrolls. Now that NFP has already been released, this would probably be the more relevant article Non-Farm Payrolls Improves but Unemployment Rate Soars!

However what I think is more important for us traders is how the EUR/USD is trading. At the very bottom of the NFP Preview, I talked about how “the first reaction to the non-farm payrolls report is usually not the real one that lasts for the rest of the trading day. Seven out of the last eight times non-farm payrolls were released, the knee jerk reaction was quickly erased. Even though the direction associated with these instances has not always been the same, we can see that the immediate reaction is usually not sustained, and eventually reversed into a more substantial move that lasted for the course of the trading day. When it comes to trading non-farm payrolls, it pays to wait. ”

The following chart illustrates how the EUR/USD is trading approximately 1 hour after the NFP number was released. Once again, we see an interesting V shaped reaction with the initial rally in the EUR/USD post payrolls erased VERY quickly. Based upon how the currency pair has traded following prior NFP reports this year, we can expect that this sell-off will continue for the rest of the day.

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The Japanese Yen strengthened across the board as investors cheer new leadership in Japan. After more than 50 years of unchallenged power, the Liberal Democratic Party (LDP) has been finally defeated by the Democratic Party of Japan (DPJ). The big question of if and when Prime Minister Aso will announce his resignation was answered almost immediately with Aso conceding defeat and confirming that he will resign as LDP head. Mr. Hatoyama, the current leader of the DPJ is expected to be confirmed as the new Prime Minister of Japan in approximately 2 weeks.

Who is Mr. Hatoyama?

Yukio Hatoyama has politics in his blood. His grandfather was the LDP’s first Prime Minister in 1955 and Hatoyama will be the country’s first non-LDP Prime Minister since 1955. He comes from a weathly family that has made their fortune in the industrial and political sectors. He is a fourth generation politician with a Ph.D in engineering from Stanford University. Although Hatoyama inherited his father’s LDP seat in 1986, he has been reelected to that seat seven times.

Some people in the Japanese political circle have called Hatoyama the “alien” as he can come off as eccentric and aloof. The Prime Minister role of Japan has been a difficult one for anyone to hold down for more than a year since Koizumi left office in 2006. As someone who can sound more like a teacher than a politician and has been criticized for being indecisive, Hatoyama has a tall task ahead of him.

The political landscape has changed dramatically for Japan with the DPJ’s victory. As the new party attempts to announce fresh measures aimed at stimulating the economy, there could be political turmoil. The DPJ does not have practical experience running the country and their goals are ambitious. Unlike the LDP whose initiatives have focused on business and public works, the DPJ’s initatives will focus on increasing disposable income for households. The party expects to pay for their new initiatives by cutting wasteful administration costs. Having previously criticized the Japanese economy for being overly dependent on exports, Hatoyama will be focusing heavily on boosting domestic demand.

Political Change Will Not Have a Lasting Impact on the Japanese Yen

However as happy as Japanese investors are about the change in leadership, the positive impact on the Japanese Yen could be limited. Long term trends in USD/JPY are determined by market fundamentals and overall risk appetite and not Japanese politics. With that in mind, USD/JPY is very weak. The sell-off in global equities and thin trading conditions ahead of the U.S. Labor Market holiday could drive the currency pair to a 6 month low of 91.75.

In terms of Hatoyama and the Democratic Party of Japan, it remains to be see whether they have what it takes to deliver on their promises of turning the economy around. If the global economy continues to recover, the DPJ could benefit from having the wind behind their sails. Either way, it will certainty be a daunting task for Hatoyama as the economy and his party’s legacy now rests on his shoulders.

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Having been in Singapore for the past 2 weeks, I am delighted to back sitting at my desk here in NY with Boris behind me.

Hopefully you got a chance to check out some of the TV interviews that I conducted from Singapore. I posted one last week. Overall, I have been bullish Australian dollars and Euros. I received some heat from the commentators about my contrarian view, but the AUD/USD, EUR/USD and EUR/GBP have risen since then which means that sometimes the contrarian view may be a valid one.

Here are some more interview clips from earlier this week. I even got the chance to be on air with the Assistant Treasurer of Australia!

Click on the image to access the video

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The latest video preview of the London Forex trading session offers a technical analysis of GBP/JPY and GBP/USD currency pairs, based on the long-term trends and the Fibonacci retracements.

Posted on Forex Video Zone.
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This offers offers a general technical analysis overview for the major Forex pairs — USD/JPY, EUR/USD, GBP/USD and USD/CHF. The second half of the video is dedicated to the current situation with GBP/JPY, which promises some interesting trading opportunities.

Posted on Forex Video Zone.
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A Forex trading video that describes and explains the bullish reversal Japanese candlestick patterns that cab be often found on the chart and have a high probability of success — bullish Harami, inverted hammer, doji star, bullish engulfment and others.

Posted on Forex Video Zone.
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I am in Singapore right now getting the opportunity chance to meet some enthusiastic forex traders. Last week, I was on CNBC Asia talking about my outlook for currencies and equities. If you missed the interviews, here are the clips

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This video tutorial explains yet another wave theory (Goodman Wave Theory), which is supposed to help with understanding the current state of the market based on the swings and waves count. This is a first part of the series and it will describe The Goodman Swing Count System — GSCS.

Posted on Forex Video Zone.
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This video presents a technical analysis for USD/JPY, EUR/USD, GBP/USD and USD/CHF with a more detailed view on the euro/dollar pair with two definite trading possibilities.

Posted on Forex Video Zone.
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