When Upbeat Data does not result in Dollar Rise

Yesterday the U.S. reported upbeat durable goods data and to the surprise of many, the dollar did not rally immediately. Instead, it lost across other pairs before recovering. There various reasons why the dollar failed to rally immediately as anticipated.

For instance, it might have failed to rally because the focus of traders could have been on the upcoming FOMC statement, which is a high risk, high reward event. In addition, it might have failed to rally because traders were anticipated more upbeat data, and when this was not case, traders became disappointed and hence were not motivated to buy it.

Another reason that might have undermined the ability of the dollar to rise on upbeat data is the just released 30-year U.S. Treasury bond data. The data indicated that the 30-year Treasury bond rose by more than a point thus leading to a drop in yields to a nine week lows.

How does the Treasury bill affect the dollar?

The correlation or relationship between 30-year Treasury bond yields and the U.S. dollar is not that straight forward. This relation is affected by the existing economic condition. For instance, when the economy is strong and hence there is inflationary pressure, like is the case now, rise in yield may pressure the dollar by causing a sell off in the bond.

In such an environment, where the economy is strong and hence there is inflationary pressure, strong economic data does not necessary lead to a rise in dollar. It may actually hurt the dollar by causing sell off in the bond.
A drop in yield could also be an indication the investors are becoming risk conscious and hence avoiding the stock market. This could consequently hurt the dollar by reducing its demand. Concisely, a rising yield is indication of a bullish dollar, and vice versa.

Conclusion

This article serves to show that there a number of factors affecting a currency at particular time. As much as being aware of these factors is important, sometime avoiding a trade is the most viable option.

FOMC Minutes Update

The FOMC June meeting minutes was finally released yesterday. As it was stated, the minutes provided an opportunity for Forex traders to analyze FOMC sentiment concerning interest rates. Below are some important takeaways from the minutes.

  • Fed might raise interest rate later on in the year. This nonetheless is subject to economic developments.
  • Greece situation might affect the U.S. economy, hindering growth, and undermining Fed decision to raise rate hike later in the year.
  • Labor market though improving, it has not reached a point whereby it warrants a rate hike.
  • Reduction in unemployment level should be accompanied by an increasing in average wage to increase chance of a rate hike.

The fed tone is dovish and hence it is not easy to make out what their plan really is. Nonetheless, please note that the Fed is very keen on what is happening on the global arena, particularly the Greece situation and collapse of China stock market. The Fed is unlikely to raise the interest rate unless it is sure the US economy has fully recovered and hence capable of withstanding shocks arising from unfavorable global events.

FOMC Released Minutes: What does it mean to FX Traders

FOMC (Federal Open Market Committee) Released minutes is one of the high impact news watched by forex traders around the world. The minutes are usually released three weeks after FOMC meeting. The June 2015 minutes are due to be released today. Traders should be keen on FOMC news since it can result in drastic changes that can easily wipe someone’s account.

For instance, the March 2015 FOMC announcement resulted in a drastic movement that wiped out many accounts. Zulutraders signal providers, particularly Sofia FX suffered significantly because the announcement changed the market sentiment, particularly EUR/USD sentiments from being bearish, which most traders were accustomed, to bullish. I feel that investors will be safer if they have an idea of what to expect from the coming minutes release.

Why is FOMC Released Minutes Important

FOMC released minutes are important because they provide further insights on what was discussed during the previous FOMC meeting. Even though FOMC announcement is usually made immediately after the meeting, the minutes provide clarification and further insight on the near-term monetary policy discussed. The meeting clarifies the sentiment held by members of the committee and hence create great volatility presenting both risk and opportunities for Forex traders.

What to expect from the coming released minutes

Traders will be keen to establish the FOMC sentiments and decisions regarding anticipated interest rate hike. Also watched is the FOMC view on the labor market. The previous FOMC announcement was not very clear and hence traders will be looking for clarification.

Interest Rate Anticipation

The general sentiment, however, is the Fed will raise the interest rate in September. Any surprises, such as raising the interest rate early or postponing raising the interest rates highlighted by the minutes can result in drastic volatility. Important to note is a hike in the fed rate is theoretically likely to strengthen the dollar against other major currency.

What influence the Fed decision to raise the interest rate

Fed usually adjusts the interest rate to stimulate the economy. It has maintained a very low-interest rate since 2008 because the U.S. economy has been struggling. As the economy strengthens, moving closer to full capacity utilization the Fed is likely to hike its interest rate to curb inflationary pressures.

Signs that the Fed will raise the interest rate (Fed fund rate)

The Fed is likely to raise the interest rate if all essential economic indicators suggest that the economy is strengthening. If you have been following the news then you are aware the US dollar has been experience a string of positive news that has led to strengthening of the dollar against all major currency.

Below is a snapshot of economic data published by marketwatch.com. What this means is that condition for a rate hike are increasingly becoming favorable. The rate hike is not however likely to occur until september or next year.
us data

Relationship between unemployment and interest rate

Reduction in unemployment rate does not only signify the strengthening of the economy, but also is a key economic indicator used by the Fed to decide whether interest rate should be adjusted. The unemployment rate has been drastically declining, threatening to reach the Near full employment level. In fact, the declining rate has forced Fed to adjust its estimate of full employment level.

While Near full employment is a good thing, it indicates that the economy is reaching full capacity and, therefore, the inflation rate is likely to soar. At this point, the Fed might be forced to hike their interest rate.

Concluding Remark

Opportunities and risks will present themselves if the minutes highlight new insights that differ from previous FOMC announcement and market expectation. Watch out for insights regarding interest rate hike and unemployment data.

While the minutes are important, it is also crucial to note that many factors affect the Forex market and trading. For instance, the FOMC had not taken into account the Greece referendum and the crashing of Chinese market during their previous meeting. Also, it is keen to note that IMF has warned the US that raising the interest rate this year is immature because it is not certain the US economy has fully recovered. Raising the interest rate when the economy has not recovered can undermine the recovery process.

FX Risk and Opportunities Presented by the Greece Situation

Almost every forex trader is now talking about the Greece situation. The situation is so unpredictable that it would be advisable for a trader to stay out of the Euro currency just in case it decides to pull the Swiss franc stance after SNB decided to lift the currency cap. Avoiding the Euro doesn’t however mean that a trader will be shielded from the Greece effect. The forex market is so correlated that events in one currency can greatly affect another currency. A trader can only be safe by understanding what an event in one currency means to the overall market. In fact, acquiring this knowledge can also present new opportunities to make some extra pips. For this reason, it is important to analyze how the Greece situation is likely to affect other currencies.

Short-term implication of the Greece situation

My personal view is that retail traders should be more concerned about the short-term implication of the Greece situation. Scalpers, day traders, and Swing traders can adjust their strategies as the events unfold. They, therefore, do not need to worry about what will happen several months or years after, for instance, Greece is kicked out of the Eurozone.

To short-term traders, focus should be on the implication of the Greece crisis on particularly, the Euro, the USD, and the Yen. These currencies are likely to be affected more by the Greece situation.

The Euro

Any negative news concerning Greece is expected to have a short-term negative impact on the Euro. One thing however I have so far learn is that things are not always straightforward in the forex market. At the moment, I would say it is safe to avoid the Euro currency pairs unless your extremely experienced or have some ‘insider’ knowledge. Look for trading opportunities at JPY and USD

Impact on Yen and the Dollar

The fact that people of Greece voted no in the referendum has somewhat lead to a risk-off sentiment. A Risk-off sentiment simply means that traders are risk-averse. They are therefore likely to seek refuge in what they perceive as safer investments. In this case Japenese yen. The Yen is, therefore, likely to strengthen.

Euro and JPY are highly correlated. My observation based on the past three weekends is that every time there is a gap in Euro currency pairs, there is also a gap in JPY currency. See an example of a gap in EUR/USD and USD/JPY in the figures below.

USD/JPY GAP

USDJPY CHART

EUR/USD GAP

EURUSD CHART

The gap clearly tells me that there is a significant correlation between the Euro and the Yen. A further analysis of this relationship indicates that the risk can best be explained by considering risk-on and risk-off sentiments.

Risk-on and Risk-off Sentiment

Past observation, views from various analysts, and some studies suggests that when investors are risk-averse (market experiencing risk-off sentiment) the Euro is likely to weaken while the Japenese Yen is expected to strengthen. This can explain the gaps highlighted by the above figures. Traders were risk-averse and therefore they sold the Euro leading to a down gap in the EUR/USD. The risk-off sentiment pushed traders to buy more Japanese Yen, leading to down gap in USD/JPY. In other words, the Japanese yen during that weekend was stronger than the USD dollar.

The vice-verse also applies. In other words, in case traders and investors accepts more risk (risk-on sentiment). The euro will gain, and the Japanese yen will weaken. We can, therefore, anticipate the dollar to strengthen against the yen.

Yen is currently a safe haven

My sentiment at this moment is that the risk-off sentiment is likely to continue as long as the future of Greece and the Euro is unclear. The yen, therefore, is expected to be a safe haven as the euro and dollar weaken against it. Traders should, therefore, be watching for news and other indications hinting an exit of Greece from the Euro Zone and place their trades accordingly.

The Swiss franc is also another safe haven. The Swiss National Bank, however, has stated that it will control any irrational buying of its currency. NZD and AUD might also act as safe haven but their fundamentals are currently weak.

Worth noting, however, is that the dollar is likely to strengthen against weaker currency pairs, particularly AUD and NZD. This likely to occur firstly because international businesses may consider it as an alternative to Euro, and secondly because AUD and NZD fundamentals are currently weak.

Trade ideas

According to Bloomberg, Institutional investors are considering the risk-off sentiments while choosing their trades. They are therefore considering shorting the EUR/YEN as oppose to EUR/USD in case Greece falls into deeper problems. The yen is likely to strengthen than the USD dollar (since it is the safe haven) in case Greece falls into deeper problems. Therefore, the Euro versus the Yen is likely to decline more than the Euro versus the dollar.

Where is my Forex Trading Holy Grail

Forex trading can be very confusing to a new trader. No wonder most spend a lot of time searching for the Holy Grail-the one system, strategy, or indicator that will make them numerous pips and turn them into millionaires. I am currently at this stage, wondering whether I should rely on a single indicator, or use a combination of various indicators to increase the probability of identifying winning trades.

There are so many articles on the internet against the use of multiple indicators to identify strong trade setups. At the same time, there is a healthy amount of articles suggesting that using multiple indicators might increase one’s chances of identifying strong trade setups. I am still not sure which advise I should adopt and as a result Sometimes I usually feel its best to ignore all the noise and set my own rules.

With that said, I strongly believe it is important for new traders to confirm their trades with more than one indicator. Using different indicators will make one question their setup before entering into a trade.

For instance, you might see a bearish engulfing forming on your chart and be very sure that the market is about to reverse. However, before entering a trade, you decide to use Bollinger band and discover the bullish engulfing was formed in the middle of a strong trend. The trend is confirmed as strong by checking the relative strength index (which is at over 50). This will definitely hint to you that the bearish engulfing was not a strong trade set up and hence you decide to wait. The next candlestick is bullish, confirming the continuation of the trend.

As you can see, using various indicators would have prevented you from entering into a losing trade. A combination of indicators and methods of analyzing the market is therefore essential. The million-dollar question is how to combine the various tools (including fundamental analysis) appropriately to increase the odds of being successful in forex trading. I will hopefully address this in one of my upcoming articles.