Category Archives: Forex Analysis

General forex analysis and broad market themes

12 of my favourite trading rules

12 great forex trading axioms

Some are sayings I’ve picked up along the way, some are rules I live by. Here’s to a great 2016.

Originally posted at ForexLive.

1.The trend is your friend
2.Everyone has a plan until they get punched in the face
3.Men who pick bottoms get smelly fingers
4.Beware of complex ideas. More trades have been ruined by making them too complex rather than too simple.
5.Half of everything (or more) we believe will be obsolete in the next 45 years
6.Never, under any circumstance add to a losing position…. ever!
7.If you start to see conspiracies, stop trading
8.Physical health, mental health and good trading are brothers
9.Time is on your side, You haven’t “missed” anything
10.If you feel ‘hope’, you’re in a bad trade
11.Never take tips
12.Living to fight another day is the most important trade

Go to ForexLive for the best forex education

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The Fed is wrong about the falling unemployment rate

On Nov 1, St Louise Fed President James Bullard lauded the US labor market and said the decline in labor force participation that has improved unemployment is a result of natural demographic changes. That simply isn’t the case.

I wrote about why the Fed is wrong about unemployment in a post in October.

Why the Canadian jobs market is much healthier than the US and why the Fed is wrong

Canadian unemployment is listed at 6.9% while in the US it’s 7.3% but that vastly understates the differences in the health of the relative jobs markets.

First of all, if you go back to pre-crisis times, Canadian employment was around 6% which is something akin to full employment by Canadian standards. Before the crisis in the US, unemployment was at 4.5%. Differences in how the countries measure unemployment, helps to explain the gap.

Skipping ahead to the present, Canada is now 0.9 percentage points away from pre-crisis unemployment levels while the US is 2.6 percentage points off.

Alone that’s an interesting story but it’s not even the kicker. The real story is in the participation rate. In Canada, the pre-crisis average was around 67.4% while in the US it was about 66.1%. Today, the Canadian participation rates has fallen by 1 percentage point while in the US it’s down 2.9 percentage points.

Canadian participation rate chart 2013

It’s been a much steeper fall in the US.

US participation rate chart 10 years

The nail in the coffin is demographics

The Fed has repeatedly pointed to demographics (ie older people retiring) as the reason for US workers exiting the workforce but US and Canadian demographics are very similar. What’s more is that based on demographics you would expect more Canadian workers to be leaving the workforce than the US.

The marginal worker leaving the workforce is 55-65 years old. In the US, the 55-59 year-old cohort is around 10% of the population; in Canada it’s 12%. In the US, 60-64 year olds are 9% of the total while they’re 10% in Canada.

US population pyramid

 

Canadian population pyramid

What does it mean?

A conservative (albeit simplistic) estimate would put Canadian unemployment around 3.8 percentage points healthier than the United States, far more than the 0.4 percentage point difference in official rates.

More importantly for traders, it shows that the Fed is vastly overestimating the health of the US labor market. It suggests that far more workers are leaving the US jobs market for reasons other than retirement/demographics — they’re likely discouraged workers.

What’s more, despite the large differences in employment, Canada doesn’t have any signs of inflation. The Fed may (and probably should) taper due to the financial risks of holding a $3.6 trillion balance sheet but any argument about tapering due to improved employment or inflation risks is a canard.

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The change in China that could suffocate the global economy

Note: Since I rarely update this blog, I will be using it to preserve and highlight some of my favourite posts from ForexLive. I’ll start with this one from April 24, 2013:

People in Beijing don’t wake up and check the daily weather forecast; they check the air pollution index so they know what face mask to wear.

China air pollution April 23, 2013

This shocking series of pictures were taken on a ‘clear’ day. The air is described as a noxious soup. Blow your nose and it’s black.

The problem didn’t happen overnight but air pollution indexes are up 30% in 2013, and that’s if you believe the government numbers.

Chinese officials are trying to curb pollution without hurting economic growth but those goals may be incompatible.

Change could come any day. Chinese politicians live in Beijing and their children are breathing the same air and getting sick. An unusual weather pattern could hit Beijing and cause a spike in pollution that sends hundreds of thousands of people to hospitals. That could be the tipping point for radical change and the consequences for the global economy are impossible to predict.

Bloomberg should add Chinese air pollution indexes to their tickers. Today’s readings aren’t high but half the day was still worse than living in an airport smoking lounge.

The prevailing winds from China blow toward the Pacific ocean but occasionally they shift Northward and Japan and Korea are covered by smog, and they’re increasingly unhappy. If a 10,000km ocean buffer didn’t separate California from China, the United States would never tolerate being poisoned by the people taking their jobs.

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Incredible time to buy EUR/CHF

It’s not often that a trade comes along with so much upside and so little risk. Buying EUR/CHF at 1.2050 is one of those trades.

I didn’t think we would see 1.2050 in EUR/CHF this year and I’m sure it won’t last. My money says 1.25 is coming with 1.30 not far behind.

The SNB didn’t institute a peg to give it up 4 months later. These are serious people and all the credibility of the institution is on the line. With the situation slightly more stable in the eurozone at the moment, it’s all the more reason to be hold the peg.

The SNB releases balance sheet data later today and there are rumours of a hike in the peg. Don’t wait.

It’s not often that I’m extremely confident in a trade but if it goes bad, it’s only 50 pips. My stop is at 1.1999, no exceptions.

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Last Gasp for The Euro

The news out of Greece is good. A coalition has been struck that will pass the EU-mandated reforms in order to receive the upcoming aid tranche. Papandreou will step down, a new PM will be named Monday and an election will be held after the aid is dispersed.

Barring any surprises (and they can’t be ruled out) this clears the way for a short-term bounce in the euro, which opened the week at 1.3780. Looking at the chart, I expect a climb toward the 100-day moving average at 1.4040, or perhaps a shade below, followed by a prolonged downtrend that will be confirmed by a break below 1.36.

 

My trade will be to sell EUR/USD around 1.40 and hang on for the ride lower. I will add on a fall below 1.36 and take profits after the first significant spike lower, or 1.32.

The two catalysts I envision for the move lower are slower growth, highlighted by further ECB cuts and political discord, which will resume in Greece in the elections and is likely to arise in Italy.

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Greek Referendum Could Be a Gamechanger

Greek Prime Minister Papandreou had a Halloween surprise for markets on Monday as he announced a referendum on the EU bailout deal. The move was completely unexpected and could throw Greece (and Europe) into chaos. The euro dropped almost 100 pips as the news hit.

The Greek public will decide whether or not to accept the troika bailout terms. It seems almost a certainty that voters will reject the deeply unpopular austerity measures, a move that would force an early election.

The referendum is slated for January and the only hope seems to be a constitutional clause that says referendums can only be held on matters of great national importance. Some are saying the current situation doesn’t apply, as hard as that is to believe.

Another hope is that Papandreou will not last long enough for a referendum, he may be defeated in a confidence vote on Nov. 2-4.

The current thinking is that Papandreou wants out or that he wants to share the responsibility of the failure of the state with the public. Bondholders who accepted a haircut only two days ago may already be having second thoughts.

Turning to the forex market, the news today highlights the endless uncertainty that will plague Europe for years to come. The euro was absolutely crushed today, falling to 1.3848 from the close on Friday at 1.4146.

The reversal back below the 55, 100 and 200-day moving averages and the close below these levels at the end of the month suggests the rally was a false breakout. Knowing that the market was positioned heavily short (via CFTC COT) it makes perfect sense. Thursday’s rally was nothing more than a massive short squeeze.

I expect a half-hearted rebound in the next day or two and I will be looking to sell it.

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All Bets Are Off as Japan Intervenes, MF Global Sinking

So far USD/JPY has shot to 79.48 from a low of 75.57 and the pair looks like it will push higher after the Ministry of Finance chomps through another set of sell orders  around 79.20. Officials may take aim at 80.00 but based on the comments out of Japan, a Swiss-like peg doesn’t sound likely.

What also has the market spooked is a few headlines from the Wall Street Journal suggesting that clearinghouses and regulators are preparing for an MF Global bankruptcy filing.

It looks as though Interactive Brokers will pick up some client accounts and the rest of the company will be placed into bankruptcy.

EUR/USD is down 120 pips, cable down 150 pips, AUD/USD down 165 pips, USD/CAD up 70 pips and gold down $35.

Intervention and bankruptcy are two of the trickiest trades out there. On the one hand, this channels Lehman and the crisis but MF Global isn’t a huge employer. On the other, what happens as all those bonds hit the market in liquidation. It certainly won’t help Italian spreads.

I want to trade this but I don’t need to trade this, so I’ll sort it out in the morning. If anything, I’m thinking of adding to my EUR/CHF long as traders are reminded about the power, and potential profits, of intervention.

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