TIC Report and my CAD position

TIC data was released at 9 this morning and it was less than
forecasted.  Net foreign purchases of long-term securities were
$69.8 billion.  The forecast was for 80.2B.  I thought that
this would have been bearish for the dollar but the dollar took off
after the release.  I scratch my head sometimes and wonder why
what I thought would happen didn't.  Either way, I don't care
which direction the price goes because I was waiting for a channel
break either up or down.

The dollar did well overnight and my
long USD/CAD position was up about 70 pips during European session
trading.   Ahead of the NY session and the TIC report release,
some of the dollar gains were given back this morning.  I had
moved up my stop this morning to 1.1143.  I entered at
1.098.  The USD/CAD actually hit the .250 fibonacci at 1.1175 and
then bounced off.  This is where having multiple lots would have
helped.  I was watching  3 fibonacci levels:

.250 = 1.1175           .382=1.1280             .500=1.1374

If
I had entered with 3 lots, I would have placed a stop order at the .250
for the 1st lot and held on to the other 2.  This is all in
hindsight but something I thought about when entering this
position.  Either way, when the prices started consolidating a bit
this morning, I was stopped out at 1.1143 for a profit of 45
pips.  Should I have held on to the position longer? I don't
know.  I didn't want to give back all the gains if the dollar
started to get pounded again.  I figure I can go long again on a
break above the
.250 fib.

Popularity: 3%

FOMC

For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

Economic growth has been quite strong so far this year. The
Committee sees growth as likely to moderate to a more sustainable pace,
partly reflecting a gradual cooling of the housing market and the
lagged effects of increases in interest rates and energy prices.

As yet, the run-up in the prices of energy and other commodities
appears to have had only a modest effect on core inflation, ongoing
productivity gains have helped to hold the growth of unit labor costs
in check, and inflation expectations remain contained. Still, possible
increases in resource utilization, in combination with the elevated
prices of energy and other commodities, have the potential to add to
inflation pressures.

The Committee judges that some further policy firming may yet be
needed to address inflation risks but emphasizes that the extent and
timing of any such firming will depend importantly on the evolution of
the economic outlook as implied by incoming information. In any event,
the Committee will respond to changes in economic prospects as needed
to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke,
Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack
Guynn; Donald L. Kohn; Randall S.
Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M.
Warsh; and Janet L. Yellen.

In a related action, the Board of Governors unanimously approved a
25-basis-point increase in the discount rate to 6 percent. In taking
this action, the Board approved the requests submitted by the Boards of
Directors of the Federal Reserve Banks of Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Dallas, and San Francisco.

Popularity: 3%

Know your central bank characteristics

There is a new forex article on Investopedia called, "Get To Know The Major Central Banks".  Kathy Lien from FXCM gives a nice overview of the characteristics of the major central banks including structure, mandate, frequency of meeting, and key policy official.  Seeing that the Central Banks single-handedly can affect the direction a currency prices, it's a good idea to familiarize yourself with the way they tick.

Get To Know The Major Central Banks

Popularity: 1%

Do Interest Rate Differentials affect Currency Price?

I wanted to do a study on my own between the EUR/USD and interest rate differentials so I gathered all historical interest rate data from 1/1/1999 to present.  What I found was that there was no correlation between the actual differential and the price of the currency pair.  What I did find was the following:

We are in the third cycle of price changes.  What I mean by this is that there was an extended period where the USD gained versus the EURO (Cycle #1) and then an extended period where the EURO gained versus the USD (Cycle #2).  Currently there has been another extended period where the USD has gained versus the EURO (Cycle #3)

Here are my estimates of cycle length:

Cycle #1 - 01/1999 - 05/2001   BULLISH USD (29 months)
Cycle #2 - 05/2001 - 12/2004   BEARISH USD (43 months)
Cycle #3 - 12/2004 - present    BULLISH USD (16 months +)

I found that the most defining point regarding the change of cycle was that it happened right after the interest rate differential between the EURO and USD hit 0%.

Here are the periods of time when the differential hit 0.00%:

5/11/2001
11/10/2004 

As you can see, there is a correlation between the differential being 0% and the change of cycle.  Unfortunately we have limited data since the EURO has only been in existence for the last 7 years or so.

If I was to use this information to predict the future direction of this currency pair, I would have to predict that the USD will remain BULLISH for quite some time to come.  Seeing that the interest rate differential currently is 2.50% and the fact that the Fed may increase rates 2 more times, I cannot foresee this differential decreasing anytime soon.   

I don’t know if this study is B.S. or not.  There are many other economic factors that can affect currency prices and I didn’t take any of these into consideration such as the US Account Deficit or the Eurozone’s slower GDP growth.  In addition, with Iran switching to EURO’s for payment of oil, there are other things in play that make it more difficult to predict the future. 

 EUR/USD Interest Rate Diff- Excel (20.50 KB 06.03.2006 11:32) 

Popularity: 1%

EUR/USD longs make a comeback

As I stated yesterday in my forex blog, it looked like the EUR/USD was nearing solid support and I was thinking about going long on the pair.  Since then, the EURO has rallied in the forex market about 40-50 pips.  I unfortunately did not make a move since I was waiting for the pair to at least hit the support line. 

I listened to Greenspan’s speech on Bloomberg radio this morning and he spoke a lot about the ability of the economy to endure the .com bust of 2000, the September 11th attacks, and now the high energy costs. He states that the reasoning for this is that the US economy has a great deal of flexibility. I agree that the economy has been resilent but I can’t see how it will remain so in the coming months. I’m waiting for corporations to pass the cost of energy on to the consumer. I think this is going to happen sooner than later. How else are corporations going to be able to increase their record earnings over the last couple of years? Personally, I have been able to endure higher energy costs…

[Read more]

Popularity: 1%