euro

Get Ready for a Euro Rally. Or Don't ... and I'll Get Ready for You

The US dollar has had a torrid rally. But my charts suggest a correction is due.

Maybe that is what this latest bout of currency-market volatility is telling us.

Volatility is often a precursor to a change in trend (in all time frames). We know dollar sentiment is overwhelmingly bullish – it seems a one-way bet right now. But Mr. Market is watching because he loves one-way bets. 

I'm not betting big on a correction right at the moment.  But I have told my subscribers to get ready. Today’s price action plus sentiment data suggest a speculative extreme may be near. 

Sentiment extremes suggest a turning point is imminent. Be careful, all you euro bears!

I watch open interest levels in the currency futures market. It is a good longer-term measure of sentiment. Often times, open interest reaches an extreme just ahead of a trend change. Below is a currency futures chart for the euro. The open interest level is huge and sentiment for the euro is extremely bearish: 

The red circles denote peaks in open interest that corresponded with key lows in the price of the euro. Given the extreme levels, I think euro bears should be very careful.

I am monitoring the major pairs closely.  Because if a correction lower in the dollar does materialize at these levels, it would likely be at a least multi-day, and probably a multi-week, event -- in other words, something playable. 


Analysis like this is one way I  keep my subscribers prepared. Until recently, it's been up to them to follow along and follow through.

Now, however, they don't even need to! 

They can check out for a day ... a week ... or a month at a time and not have to worry about missing profit opportunities. That's because I'm launching a new auto-trading opportunity they can use to replicate the trades I recommend and execute in my personal account ... in their own accounts!

This is open to new subscribers as well. Read more about it at this link.

Thank you. And be careful out there.


-Jack

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The $5 Trillion Answer No One Wants to Hear

Unbelievably, the average individual forex trader loses 3% per week.

I found that shocking statistic in The Wall Street Journal yesterday.

Combine that with what I told you last week:

We review...
all the fears and anxiety
...which are so
inherently symptomatic...
...of a losing team.
The mind is a strange thing, men.
We must begin by asking it...
...”What is losing?”

Losing is a disease...
...as contagious as polio.
Losing is a disease...
...as contagious as syphilis.
Losing is a disease...
...as contagious as bubonic plague...
... attacking one...
... but infecting all.
Ah, but curable.
— Two-bit carny hypnotist, The Natural

An observational study of 12 million actual forex trades made in the course of one year showed that traders’ losing trades are 80% larger than their winning trades.

The Wall Street Journal sums up the situation:

“The National Futures Association ... found that 72% of individual forex accounts were unprofitable and that the average life of an account was only four months.”

Four months?

In the words of the late Harry Carey, holy cow!

Despite the unfortunate proportion of losing traders, forex remains a $5 trillion market, all that money changing hands faster than we can imagine. So I have to ask:

Why?

The $5 trillion answer ...

No one wants to admit they lose.

“I lost $2,000 on a stupid euro trade last week because I was wrong about their inflation numbers.”

“I got killed on USD/CAD because I guessed wrong on the Canadian employment report.”

“The Bank of Japan added stimulus money to their economy and I got clobbered in JPY because I didn’t have a stop-loss in place.”

You probably don’t hear traders say things like that even though there is no shortage of losers out there.

People don’t want to talk about losing because losing carries a stigma. Losing suggests you’re wrong. And you don’t want to be wrong. In our own minds we equate being wrong with being inferior, inept or just plain dumb.

If you harbor thoughts like that, your trading account will surely be wiped out in four short weeks.

It’s why I told you yesterday to get your mind right. And last week I said you don’t have to know – or even think you know – what’s going to happen in the market in order to make money.

You must accept that losing is an integral part of trading. And managing losses is an integral part of success.

The Wall Street Journal article even acknowledged this.

I share this with you so you acknowledge it too. And so that you might do something about it.

Easier said than done. I get it.

It took me many years to develop a disciplined systematic approach that wins by keeping my personal rationalizations from sabotaging my success.

So I offer you my service, Black Swan Forex.

And I also want to offer you a way to further straighten your path to forex profits.

I’m rounding out a working relationship with a reputable firm. I’ll share the details with you later this week. But consider the arrangement a way for you to get all the success of Black Swan Forex without requiring your constant attention.

It will be like having your own personal money manager at a tiny fraction of the cost.

Until then, trade smart, learn from your losses and stay tuned.

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Get a load of this tidbit out of the IMF ...

REUTERS - IMF CALLS FOR ECB RATE CUT AND ANOTHER LTRO OR QUANTITATIVE EASING TO AVERT DEFLATION RISK

It seems like this can shake out one of two ways:

  1. A new effort to air the dirty laundry. As long as global policymakers are being seemingly transparent, then the consensus will believe things will remain relatively under control thanks to these devoted policymakers.
  2. A genuine attempt to pressure the euro lower. The common currency remains a key feature of the Eurozone growth struggles. The periphery certainly won’t welcome a further rise in the euro should it break above nearby levels. As long as the IMF volunteers further action from the ECB, the outlook for the yield dynamic appears to favor the US dollar over the euro.

The former might mean the euro continues to climb higher. The latter, should sentiment sufficiently turn, would mean the euro rolls over and begins a push lower.

-JR

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Eurozone economy will "turn the corner" ... to a new LTRO?

And the headlines read:

Sharp euro zone inflation drop, record joblessness add to ECB conundrum (Reuters)

EU sees 'hope' but also lower growth (BBC)

Euro zone economy turns corner, but growth, inflation subdued: EU executive (Reuters)

Well, the downward revision of growth from 1.2% to 1.1% is certainly not jaw-dropping. But is it enough to spark a subtle shift in sentiment that generates a more fragile consensus on the eurozone?

Sure.

The joblessness is no surprise. As it has been in the US, unemployment will be a critical impediment to the eurozone's economic recovery. Spanish utility Gas Natural Fenosa has particularly acknowledged the depressed demand in Spain and the nearby areas. It's due very much to the severe unemployment situation. Gas Natural seeks to make its progress and profit in Latin America in the coming years because the outlook for economic growth in the eurozone remains grim.

But perhaps the most important piece of the headlines to be pulled out is the inflation data. We know what subdued inflation means in this era of monetary accommodation: more accommodation.

Does that mean another LTRO (Long-Term Refinancing Operation) is right around the corner, the same corner around which the eurozone economy will supposedly turn?

Doubtful, at this stage. But don't abandon the idea completely. If things get nasty, the European Central Bank will need to do something to help re-recapitalize a financial system built on crummy collateral. 

Instead, what's more likely in the interim is the strategy du jour for central banks: talk the market to sleep. 

The ECB's rhetoric, perhaps when they meet later this week, in light of subdued inflation, will signal:

  1. Economic activity shows stabilization but still has room for improvement
  2. The central bank has room to provide additional support measures IF needed without fear of generating inflation or asset bubbles

In other words: don't worry about the economy. But if you do, remember we're there to backstop it ... so don't worry about the economy.

Ok. Got it. More accommodation. Woo hoo. So what?

So, barring any real shocks to the financial system, real or perceived, we're left to juxtapose expectations for the European Central Bank and the Federal Reserve.

In the weeks following the agreement reached on the US debt ceiling, market expectations shifted mightily into believing Federal Reserve tapering was to be long-delayed. Decent US economic data is surely to erode that enthusiasm and expectations will then shift back to believing tapering is on its way in.

Assuming I'm right about the inevitable shift in Fed expectations, and the ECB's further-accommodation-if-needed rhetoric, the resulting change in yield differential will be US dollar supportive.

And that seems appropriately timed, since in just the last few weeks predictions for the US dollar's demise have ramped up noticeably. And this story about South Africa diversifying their currency reserves is sure to validate the bears' collective growl.

The euro may recoup some of its recent sharp losses in the coming days. But it could have very likely already made it through a turning point of its own, one that sends the value of the euro much lower in coming months.

-JR Crooks

P.S. We mentioned the open EUR/USD trade last week that was showing open gains of about $1,500. Well, that trade is still open in Jack's Black Swan Forex trading service -- and it's now showing $2,810 of open gains per one standard-sized lot. And Jack's locked in, gauranteed, $2,540 of it.

Click here to see how the rest of Jack's trading advice has panned out this year. I imagine you'll be impressed.


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130 billion bad reasons to think the euro's foundation has changed.

crushed taxi“So what?” he asked. “Things will only get worse. We have reached a point where we’re trying to figure out how to survive just the next day, let alone the next 10 days, the next month, the next year.”  

-Anastasis Chrisopoulos, Athens taxi driver (from Reuters)

 

130-billion-euro here, 130-billion-euro there, and pretty soon you have to start finding some growth!

One adage that seems to work as much as anything else, and why it is an adage I guess, is “buy the rumor and sell the news.”  I won’t bore you with the behavioral aspects of why this works, I think you know.  We are seeing it a bit this morning on display on news a Greek default has been averted: the euro is lower, and ditto for most Eurozone bonds since the announcement of a deal that gives Greece another 130-billion-euro it can pour down the rabbit hole with the rest of the money funneled in by Eurozone taxpayers.   

Of course, sooner or later financial engineering reaches the limits of its public relations effect and there must be some underlying payoff from said engineering besides getting funds to follow banks chasing into periphery debt for a trade.  It’s not that rising periphery bond prices, i.e. lower yields, isn’t helpful; it is.  But even at current rate levels, it will be mighty hard for many countries to maintain austerity pledges; all attempts to do so will likely accentuate the trend we see in the chart below:      

022112 ez gdp

And of course, this chart is the mirror image of the domestic adjustments periphery countries have to make because they do not have a free-floating currency available to help them make these adjustments:      

022112 ez unemployment

Thus, periphery economies desperately need some growth.  Rising unemployment and tighter budgets will not produce revenues needed to pay debt; instead it produces a self-feeing vicious spiral downward.  This view seems completely at odds with the Troika program even though the Greek economy provides them with live test case of abject failure stemming directly from the implementation of their own flawed theories.     

And here is why it will likely get worse for Greece and other periphery countries whose growth is heading lower—the real economy will be starved.   

We have already witnessed this economic/money/manipulation phenomenon in the US, from the WSJ this morning:  

“The eight giant European banks that have disclosed their annual results in recent weeks reported holding a total of about $816 billion in cash and deposits at central banks as of Dec. 31.  That is up 50% from a year earlier, when the same banks were holding roughly $543 billion.”  

Does any of this sound familiar?  You can lead a horse to water, in fact you can force-feed said horse with massive amounts of reserves, but you can’t make him lend any of it to the real economy where real people build real businesses and hire other real people who need real jobs.   

Just in case you forgot just how tightly US banks have held on to their Fed sponsored reserves via the massively steep yield curve that impoverishes savers to subsidize bank healing, here is a look.  This chart shows reserves in the US banking system ... hmmm ... three years and counting so far since Bernanke and Company decided this is the only viable strategy for the economy.  Viable for financial assets, but the other side of the economy is still starved ...    

022112 fed reserves 

The point is, despite the new Greek rescue (I am losing count how many we have had so far), it appears the Eurozone, now clearly a two-track world with Germany bathing in credit and low rates and low unemployment (which adds to more angst and animosity toward Germans amongst the PIIGS), appears collectively heading into deeper recession.  

One wonders if now, finally, EU leaders have run out of rabbits of financial engineering to pull from their hats.  Financial engineering is a lot easier than real growth.  If you don’t believe me, go ask Goldman; after all it is their fun and games that caused much of this Greek problem in the first place.  

022112 eur vs gdp     

Hmmm ...

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