▲▲▲ interest/discount rate, ▲▲▲ currency
▲▲▲ inflation, ▼▼ currency
▲ exported good, ▲ currency
▲ unemployment, ▼ currency

(the following are selected excerpts from a reply I wrote in another private forum in reply to a similar concern)

1. Please read the Exchange Control Act along with the following BNM circular to understand the context: BNM Statement

The circular is called ECM9 and it has a section that says: "A resident individual with domestic ringgit credit facilities is allowed to convert ringgit into foreign currency up to RM1 million per calendar year for investment in foreign currency assets."

2. When Bank Negara mentions "foreign currency" only (as opposed to foreign currency assets), they usually mean foreign currency CASH. NOT the balance in your bank account, which, if you really think about it, is JUST A NUMBER.

3. Authorized dealers of foreign currency CASH in this country are Malaysian Banks and licensed money changers.

4. The term "scheme" refers to the deposit-taking by ONSHORE (not offshore) individuals or companies that are NOT LICENSED to accept deposits. The only licensed ONSHORE deposit-takers in this country (as far as I am concerned) are Malaysian Banks and discount houses.

5. Note that BNM mentions "illegal investments". Which means that "LEGAL investments" are ok.

6. "Under the Exchange Control Act 1953 (ECA), it is an offence for a person in Malaysia to buy or sell foreign currency or do any act which involves, is in association with, or is preparatory to, buying or selling of foreign currency with any person, other than an authorised dealer. It is also an offence for a person to aid or abet another person to buy or sell foreign currency with any person, unless the person is an authorised dealer."

7. ... which means I CAN sell my ringgit asset to USD with any authorised dealer (i.e. any Malaysian bank) and invest my new USD asset as per ECM9. The first part of the last paragraph refers to buying/selling foreign currency against the RINGGIT. How I invest my new USD asset afterwards will be my own affair and I won't cry about margin calls because I should always be financially solvent every time and as long as I'm strict with my stops.

8. Some of the examples of dangers given in BNM's last press release are true, however. Some disreputable training programmes do use hard-ball tactics to entice unready and unprepared investors/traders.

9. I also get the impression that some programmes are merely "introducing brokers" for fly-by-night FX brokers.... which is why there is a need to do proper research as to which brokers are (relatively) tightly monitored by the offshore countries' monetary authorities.. which basically rules out a lot of US brokers, and many Russion ones.. ;-)

10. As for the "margin call", this so-called "modus operandi" is no different from trading KLCI futures, for example. It only becomes an issue when the trader is trading on borrowed money (which HE SHOULD NEVER EVER DO!).

11. What must have happened: a financially unready investor loses money trading on borrowed money (eg. credit card advances). If this investor is already undisciplined enough to trade on credit, I think it's reasonable to expect he lost money due to undiscplined stop-loss management or consistently wrong application of the techniques taught to him. (such people should be called "gamblers", by the way)

12. What does he do next? He goes to complain to the government. *sigh* What to do?

13. To recap: Based on MY interpretation of the rules, FX trading (on non-MYR pairs) is legal subject to conditions:

Do trade responsibly.

BE responsible for your own trading.

Do not trade for someone else i.e. with someone else's money (because that means unlicensed deposit-taking).

Do not ask someone to trade on your behalf (because that means placing a deposit in an unlicensed person or company).

Do NOT trade against the ringgit.

Do convert your ringgit asset to USD (for example) with any Authorised Dealer (i.e. Malaysian Banks) without fear. And after you receive your new USD asset, you may trade/invest (i.e. place a margin deposit) within the context of ECM9 to your heart's content.

Do NOT convert your ringgit asset to USD with unauthorised dealers (you know who they are).

Do research for (relatively) reputable offshore brokers.

NEVER EVER EVER trade on credit. Always make sure you have backup capital to help you pay day-to-day bills during the losing spells.

Many begining traders fall into the easy trap of looking at a chart from south to north, instead of the more realistic west to east. North to south is exciting…it conjurs up the emotions of a trading windfall, and of how smart we are. It’s also misleading.

Once you take a signal based on a short-term trend shift the market will generally do one of 3 things. Follow thru in the direction of the shift, go sideways before following thru, or fail. Most people will lose money on 2 out of 3 of those occurences as they mistake the sideways price action for failure and exit at the wrong end of a range. To get to where they want to be, students need to recognize that it’s common for markets to give more sideways action and steeper corrections early in a trend — i.e. earlier in the trade. What will help the trader recognize that the trend shift is still likely to yield follow thru is a lagging indicator. The lagging indicator will often record that the momentum is still in favor of the original trend shift even as price pauses or corrects back against the shift.

This happens on all time frames and you will get better at recognizing it as it is occuring by first going back and seeing how it unfolds day in day out on the shorter-term charts. By doing so you will also start to see the value of reading a chart form west to east, and not north to south.

From the start of March 2009, the S&P 500, our favorite barometer of overall global risk appetite and market sentiment, was in a strong uptrend. Because the US Dollar is among the premier flight-to-safety assets that markets buy in times of fear, it was in an almost reverse mirror-image downtrend.

A number of months ago we wrote about what it would take to stem the downtrend in the US dollar, and said one or more of the following kinds of events was needed:
The First Two:

Events That Boost US Dollar Fundamentals Because They Improve Prospects for Stimulus Withdrawal and/or Rising Interest Rates: These include:

1. US jobs and spending data: Most notable, monthly US Non-farms payrolls change and unemployment rate reports.

2. Falling Demand For US Treasury Debt: That too would bring higher yields (though long term, not short term) and boosts US dollar demand.


The Second Two: Events That Feed Demand For The Dollar As A Safe Haven.

3. General Fear-Inducing Events: Feed demand for safe haven currencies like the dollar.

4. Any News That Undermines Euro Demand: Because the EUR/USD comprises about 30% of all forex trade, that means for every euro sold or bought, a US dollar is used and vice versa, thus the two are almost forced to move in opposite directions, like children on a seesaw. The recent credit rating downgrades to Greece and Spain are classic examples, for these feed doubts about the stability of the EZ and the viability of the euro.

For full details on these and likely sources of these events, see: Beware The 4 Key Events For The US Dollar, Global Markets, in 2010

Because of the strong negative correlation between the US dollar and risk assets like stocks, commodities or certain currencies that rise with most asset markets, like the Euro, these same event types were the ones to watch for signs of an impending downtrend in these risk assets.

Events 3 and 4 Were What Did It- As the EU/PIIGS/Greek Debt Crisis

The current downtrend in risk assets, from stocks and commodities to high yielding currencies, has been mostly driven by the EU debt crisis, a toxic combination of event types 3 and 4 that both undermines confidence in the general global recovery and in the Euro in particular. Concerns that stocks had already priced in likely growth prospects (as shown by the markets’ tepid “sell the news” reaction to a relatively good earnings season) were also a factor, but the EU debt crisis fear was a factor weighing against growth prospects too, and lately has dominated market movements.

After the Dubai World threatened default (still unresolved) caught international credit rating agencies by surprise and embarrassed them, they went looking where they knew they could find some major debt to downgrade and justify their existences and fees.

News soon followed of credit downgrades to the bonds of Greece and Spain, (to a lesser extent warnings to the Japan, the UK, and the US) caused gold and the Euro to start their slide around December 2nd. Global stocks began to stall and fall between January 11-20th.
Watch For These Events To Identify An Upturn In Risk Assets

Safe haven assets like the US Dollar and risk assets like stocks and risk currencies like the Euro both respond to the same forces that move market sentiment. They just react in opposite ways.

Not surprisingly, then, the list of key event types to watch for is fairly similar

The First Two: Events That Boost ECONOMIC Fundamentals Of ANY Major Economic Block Because They Improve Growth and Earnings Prospects – also for Stimulus Withdrawal and/or Rising Interest Rates for the local currency. For example

1. Jobs and spending data: These have been key metrics for central banks in deciding when it they can raise rates to prevent inflation yet not kill off their still struggling recoveries. This will be especially critical for the economies of the weakest risk currencies like the Euro and the British Pound

2. Falling Demand For Government Bonds Or Other Bonds Denominated In Risk Currency Economies (AUD, NZD, CAD, EUR, GBP), because it would suggest investors are moving back into riskier assets like stocks or commodities, even though these pay relatively high yields with lower risk .
The Second Two:
Events That Feed Demand For Risk Assets.

3. General Economic Optimism Inducing Events: Feed demand for risk assets and currencies: Resolution of ongoing geopolitical or economic problems like the EU debt crisis (this is key), etc.

4. For Currencies Anything That Undermines USD Demand: Because the USD is involved in about 90% of all forex trade and commodities tend to be priced in US dollars, any sustained drop in the dollar benefits these other asset classes, as we saw from March 2009 until the beginning of 2010. As a safe haven asset, the dollar falls when there is optimism, thus when equities move higher, the safe haven currencies like the US Dollar tend to be falling and higher yielding or commodity based ones mentioned in point 2 above tend to rise with them.

5. Speculatively Driven or Genuine Supply/Demand Commodity Shortages: Will signal a bull market at least in that commodity and its related currencies, though it could easily damage other asset markets. For example, rising oil is great for the Canadian Dollar and oil itself, but ultimately damages global growth.
THE KEY EVENT TO WATCH: The EU Debt Crisis and Sovereign Bond Auctions[/B]

For now, it is difficult to imagine any kind of sustained rally while Southern Europe teeters on the brink of default and no clear plan exists to stop it. We have written extensively on the dangers and possible solutions in recent posts. See Southern Europe Will Not Be Allowed To Default as just one example of similar posts over the past weeks. As noted in these posts, it is very hard to see a solution coming by mid April, when Greece needs about 17 just to pay off maturing bonds, and a similar amount comes due in May. If just one of the troubles Southern European countries default, the rest are likely to follow quickly as bond markets seek unaffordable higher rates to compensate for higher default risk.

As we’ve repeatedly noted, if the collapse of just Lehman Brothers alone could cause credit markets to freeze and crash markets that were less skittish, imagine what a wave of European defaults will do to far more nervous markets.

Even the US is seeing its bond yields climb, and foreign demand for these bonds fall.

We don’t know what the end consequences will be, but they won’t be any less severe than we saw in the Fall of 2008, and are likely to be worse, given the amount of debt and stimulus “bullets” already fired by global governments.

SO, HAS THE DOWN TREND ENDED?

In short, we don’t think so. Until markets are satisfied that the EU has a solid plan for avoiding the most catastrophic wave of sovereign defaults in modern times, it is difficutlt to see markets making anything more than a reaction bounce. Until we have such a plan, bias to the downside. Long safe haven assets: UUP, short risk assets: FXA FXE FXC BNZ SPY DIA FXB, and so on.

DISCLOSURE: NO POSITIONS

There is an old saying that a journey of a thousand miles begins with a single step. This is also true of forex trading. Every trader wants to make big money, but trading just to make the most money turns investing into gambling. Successful traders should set goals that guide their trades. Not only do successful traders make goals, they make a series of targeted goals that are comprised of small achievable goals that lead to larger ends.

When sitting down to write goals for a trading plan it is tempting for a trader to only write down the biggest goals. Make a million dollars! Make a living day trading! Own a yacht! But these big dreams are reached only through reaching many baby steps. First you have to make enough money to buy a canoe and then you can earn enough money to buy a yacht. The most important aspect of setting goals is setting targeted, achievable goals. These goals should be start small. Think about what it takes to reach your overall goals. Do you want to have a 15% return rate on your investments? What does it take to get to 15%? Think of your goals like stepping stones. How do you step from one goal to the next? Targeted achievable goals give traders focus and lead to smarter trading.

Not only should traders choose goals that are achievable a trader should also consider all aspects of his or her trading system. Don't just set goals around how much profit you would ideally like to have, but also how much loss you would find acceptable. These goals can also cover how much time you spend trading, how many trades you make, and even what computer you would like to use to make those trades. Goals should also cover your personal trading habits. For the self-employed trader being disciplined enough to sit down for a specific period of time every day is the first step to reaching profitability. It is not just about setting a goal of wanting to make enough money it is also about setting goals on how you are going to make that money. Take a class, read so many articles, create a trading plan, etc. By making goals that cover not just profits a trader can work on different aspects of what it takes to be a good trader. Buying low and selling high is the obvious way to make money but knowing how to do this is the real trick.

In the final part of my guide to intermarket analysis, I will discuss the only market that even comes close to the global level of Forex: commodities. For the most part the relationship between the commodities and Forex markets can be seen by following oil and gold.

Gold is a great way to measure the long term inflation expectations, since gold is viewed as the quintessential store of value. As people begin to see their money devalue (i.e. inflation), they will buy more gold since its value is relatively stable.

When relating this information to the Forex market, it is key to understand what the market is expecting for inflation. The market likes a little inflation, since they will expect the central bank to increase interest rates to combat it. However, rampant, out of control inflation sends a wave of panic through the market. The gold market also gives useful information about the equities market. A rise in equity prices along with a rise in gold prices implies that the rise in equities in mainly inflation driven. While an increase in equities without a similar rise in gold implies that it is driven by growth.

Aside from being a proxy for market fear, gold has a strong relationship with the AUD. Australia has a large surplus of natural resources and are among its largest exports are metals. So, if gold begins to rise as a result of an increase in global demand, then this will increase the demand for Australian dollars and strengthen them.

The market loves growth, as long as the world economy is expanding then currencies are able to pay out consistent high interest. Oil is useful as a proxy for growth expectations. The larger that the world economy becomes the more energy that it will need, so as the demand for energy increases the price of oil will rise. The price of oil is generally positively related to the risk based currencies, since they pay the most interest.

In particular USDCAD is strongly correlated to oil since Canada is the top supplier of oil to the US. As oil becomes more expensive more Canadian dollars are need by American purchasers, which weakens the currency pair.

Commodities are most useful when taking a long term approach to your trades. While traders who keep a shorter time frame on their trades will find more useful information by watching the equity markets.

After another wild week and a very surprising rate hike, the last week of February also has its share of big events. Bernanke will continue to dominate the scene with two testimonies and revised GDP in the UK and the US will supply an exciting end to the week. And there are more market moving events. Here’s the weekly outlook.

Ben Bernanke stole the show with a surprising hike of the discount bank rate. This came after the close of the American stock markets but forex trading continues all the time – the dollar leaped. Some currencies took a bigger hit than others. This event will continue to dominate trading on Monday when there aren’t any major releases. Later there are more issues…OK, let’s start the review:

1. German Ifo Business Climate: Published on Tuesday at 9:00 GMT. This wide survey of 7,000 businesses has a strong impact on the Euro. Contrary to the ZEW report that is recently weak, this indicator has been rising steadily in the past year, edging up each time. From last month’s 95.8 score, it’s predicted to tick up to 96.3.
2. American CB Consumer Confidence: Published on Tuesday at 15:00 GMT. Consumer confidence impacts sales and the whole economy. In the past three months, this indicator rose from the low level it fell to, and also revisions to previous releases have been to the upside. This time, it’s predicted to drop from 55.9 to 55 points. This has a wide impact.
3. New Zealand Inflation Expectations: Published on Wednesday at 02:00 GMT. New Zealand has a high interest rate, but expectations for a rate hike like its neighbor Australia haven’t been met. A rate hike depends a lot on prices. This quarterly release will show the direction of inflation and a possible rate hike. Last quarter, expectations rose from 2.3% to 2.6%. Now they are predicted to edge up some more.
4. Ben Bernanke testifies: Happens during Wednesday at 15:00 GMT and Thursday at 14:00 GMT. After Bernanke’s shocking mini-rate hike that was made off the main hours, he’ll make his semi-annual report in broad daylight in front of two committees in Washington DC. Although he might use confusing language, his words will shake the markets.
5. American New Home Sales: Published on Wednesday at 15:00 GMT and overshadowed by Bernanke. New Home Sales took a big dive two months ago and showed everybody that the housing sector depends on government aid. It hasn’t returned to previous levels. From 342K, sales are predicted to edge up to 350K this time.
6. American Durable Goods Orders: Published on Thursday at 13:30 GMT. Orders have been revised to the upside in the past month, from 0.3% to 1%. Also Core orders have been revised to 1.4%. The positive trend is expected to continue, with a rise a rise of 1.6% in orders and 1.2% in core orders. This figure doesn’t touch the consumers, but has a long term impact on the economy.
7. American Unemployment Claims: Published on Thursday at 13:30 GMT and overshadowed by goods orders. The American job market is still fragile, and the number of claims refuses to leave the area it is in in the past months. Last week’s 473K is predicted to be followed by 466K this time. A number under 430K or above 480K will shake the markets.
8. British Revised GDP: Published on Friday at 9:30 GMT. Did Britain really return to growth? That’s a big question. The initial release for Q4 finally showed growth – but only 0.1%. Expectations are optimistic and a revision to 0.2% is expected. According to the unofficial NIESR GDP estimate, the economy did grow by only 0.1%. A drop to 0% growth or another quarter of contraction will be devastating for the Pound.
9. Swiss KOF Economic Barometer: Published on Friday at 10:30 GMT. This indicator, locally called Konjunkturbarometer, is an important composite index that usually reflects the situation of the Swiss economy quite well, and has a strong impact. From 1.77 points it’s predicted to rise to 1.77 points this time.
10. American Prelim GDP: Published on Friday at 13:30 GMT. The best is kept almost for last. There were many doubts about the rapid American growth that was reported in the first release. The second release is predicted to show only a small downward revision: from 5.7% to 5.6% in Q4 of 2010. The markets will surely shake with this release. A long term rise in the dollar’s value cannot happen without an improvement in jobs as well.
11. American Existing Home Sales: Published on Friday at 15:00 GMT. This release will be somewhat overshadowed by the GDP publication. Similar to new home sales, this figure, that accounts for more sales, is also volatile and is dependent on government aid. After a drop of 1 million sales last month, stability is expected this time – a tiny rise from 5.45 to 5.51 million

That’s it for the major events of the week.

GBP/USD was significantly hit by Bernanke’s move and tested an important support line. The upcoming week has a revised version of GDP among other events. Did Britain really exit the recession? Here’s an outlook for this week in the Pound, and an updated technical analysis for GBP/USD.

GBP/USD graph with support and resistance lines marked. Click to enlarge:




GBP USD forecast

Mervyn King continues to play a strong role in the Pound’s trading. He continued his refusal to admit the rising inflation, and hurt the Pound. He’ll have his chance to move the markets this week as well. Let’s start the review:

1. Inflation Report Hearings: Start on Tuesday at 9:15 GMT. Mervyn King, and possibly other members of the BOE, will come to parliament and talk about inflation as well as other matters. This lengthly session that discusses also growth and employment will probably contain a few headlines from Mr. King – headlines that will move the Pound.
2. BBA Mortgage Approvals: Published on Tuesday at 9:30 GMT. The British Bankers’ Association represents roughly two thirds of Britain’s mortgages, thus supplying a significant indicator that precedes the government’s release. The number of mortgages is rising steadily and it reached 45.9K last time. Another tick up is predicted.
3. Paul Tucker talks: Start speaking on Tuesday at 12:10 GMT. As Deputy governor of the BOE, Tucker is an influential member that already moved the market before. He’ll talk about the state of the economy in London.
4. Adam Posen talks: Begins on Wednesday at 9:25 GMT. Although he’s an external member of the MPC, Posen also had his share of shaking the Pound. He’ll be speaking in another conference in London.
5. Business Investment: Published on Thursday at 9:30 GMT. This is the preliminary release of this important quarterly indicator. It represents both public and private sectors. Investment is squeezing in Britain. In the previous quarter, it squeezed by “only” 3%, after huge drop of 7.6% and 10.2% beforehand.
6. Mervyn King talks: Starts on Thursday at 9:30 GMT. This appearance in parliament is about the banking system rather than the economy, but King is the King – and he probably won’t miss a chance to shake the Pound once again.
7. David Miles talks: Starts speaking on Thursday at 18:00 GMT. The last British speech for this week comes from a member that has different policy opinions. It will be interesting to follow his words after he realigned with his colleagues in the last rate decision.
8. CBI Realized Sales: Published on Thursday at 11:00 GMT. 160 wholesalers and retails are surveyed for this important indicator. After four positive months of expectations for growing sales volume, a big disappointment was seen last month as the result was -8 points instead of 11 positive points that were expected.
9. GfK Consumer Confidence: Published on Friday at midnight GMT. This barometer measures the consumers directly – 2000 of them. Consumers are pessimistic for quite some time according to this indicator that scores below zero for quite some time. After reaching -13 a few months ago, it fell back down to -17. A similar outcome is expected now.
10. Nationwide HPI: Published on Friday at 9:30 GMT. According to the Nationwide Building Society, British house prices are rising in the past 9 months. This is probably one of the reasons for the rising inflation. This is the earliest housing sector report and it usually has a strong impact on the Pound. Last month saw a surprise – a rise of 1.2% in prices, an accelerated pace.
11. Revised GDP: Published on Friday at 9:30 GMT. This is the key event of the week, kept for the end. According to the preliminary release for Q4, the British economy only barely got out of recession. The growth rate of 0.1% was also reported in the revised NIESR GDP estimate, and is expected to be confirmed at the revised version as well. In Q3, the contraction rate was revised in a positive manner so there’s hope. But a small downwards revision this time means that Britain is still in a very long recession.


GBP/USD Technical Analysis

The Pound got close to the 1.5833 resistance line, but that was short lived. It was supported at the 1.5530 line, but that was broken as well. After bouncing at the strong 1.5350 line, it manages to close above it. Most lines haven’t changed from last week’s outlook.

Close resistance is found at 1.5530, last week’s low. This proved as a clear line this week. Above, 1.5720 was a support line for quite some time, but is now a weak resistance line.

Above, 1.5833 is already an important resistance line that the Pound failed to breach. It also was a support line beforehand. Further above, 1.6110 is worth mentioning. Higher lines are just too high.

Looking down, 1.5230, which was a peak quite some time ago, proved to be a strong support line this week. Below this significant support line, the next number is a strong round number: 1.50.

Below the round number, 1.4780 is another support line, but it can be attacked only if Britain continues the recession.

I am bearish on GBP/USD.

The negative sentiment hasn’t changed. This week’s rise in unemployment was a setback to the Pound, and this was also felt in price action. The direction is down.

A sixth negative week brings the Euro close to another major support line. The upcoming week is quite eventful in the Euro-zone, with the IFO survey, inflation numbers and final German GDP standing out among the many events. Here’s an outlook for this week’s European events, and an updated technical analysis for EUR/USD on its lower ground.

EUR/USD graph with support and resistance lines marked. Click to enlarge:




EUR/USD forecast

The ongoing trouble in Europe also brought it to a decade low against the Aussie. This pair is also on the fall. Let’s start reviewing the 11 events that await us:

1. French Consumer Spending: Published on Tuesday at 7:45 GMT. The continent’s second largest economy enjoyed a big rise in consumer spending last month, and is doing well, all in all. This time, consumers are predicted to cut their spending by 0.6%.
2. German Ifo Business Climate: Published on Tuesday at 9:00 GMT. This major survey of 7000 businesses is rising steadily, contrary to other European surveys. Last month’s 95.8 score is expected to be followed by 96.3, continuing the steady rise of this index month by month.
3. NBB Business Climate: Published on Tuesday at 14:00 GMT. This survey from the small country of Belgium reflects the situation quite well – steady improvement, but still negative. It’s predicted to edge up from -7 to -5 this time, after disappointing last month. A positive number will boost the Euro.
4. German Final GDP: Published on Wednesday at 7:0 GMT. The zone’s largest economy has been the locomotive for growth in the middle of 2009, but failed to grow in Q4. The stagnant economy hurts the Euro. This 0% growth is predicted to be confirmed. IF the German economy contracted in Q4, this will be a blow to the Euro.
5. GfK German Consumer Climate: Published on Wednesday at 7:00 GMT and overshadowed by the GDP release. 2000 German consumers have reached the peak of their optimism in September, but have lost confidence since then. The score of 3.2 is expected to remain unchanged this time.
6. Industrial New Orders: Published on Wednesday at 10:00 GMT. New orders by manufacturers made a great surprise last time by rising in a scale of 2.7%. This indicator is usually volatile, so this month will probably see a drop of 1.2% in the sales volume.
7. German Unemployment Change: Published on Thursday at 8:55 GMT. After 6 straight months of drop in unemployment, a rise of 6000 people was seen last month. This negative will probably be continued with another rise – 18,000 this time. Yet another weak figure from this big country, which nicely fits into the double-digit European unemployment rate.
8. M3 Money Supply: Published on Thursday at 9:00 GMT. The amount of money in circulation fell in the past two months. This is a rare event. Less money means less inflation and a weak currency. A rise of 0.2% is expected this time – some stability.
9. Consumer Confidence: Published on Thursday at 10:00 GMT. This consumer survey is run by the official Eurostat institute. 2,300 consumers have showed less pessimism during the past months, with the score reaching -16 last month – in the negative zone. A retreat to 017 is predicted this time.
10. German Prelim CPI: Published during Friday. A significant rise in prices two months ago was erased last month. Europe is still suffering from deflation. The see-saw is expected to continue this month, with a rise of 0.5% in prices. Note that th figure is compiled from the reports of the different German states.
11. CPI: Published on Friday at 10:00 GMT. Together with Germany’s release, the all-European inflation numbers will also come out. They are reported in an annual format. Consumer prices are expected to be steady with an annual rise of 1%. Core CPI is predicted to edge up from 1.1% to 1.2%.


EUR/USD Technical Analysis

EUR/USD had a good start to the week, peaking at 1.3788. It later fell sharply. At first it tested last week’s bottom of 1.3530 and then continued to test the important 1.3423 support line before closing above 1.3531.

Immediate support can be found at 1.3531, a new line that didn’t appear in last week’s outlook. Below, 1.3423 was successfully tested and provides very strong support.

If 1.3423 is broken, there are no significant support lines up to 1.3080, the area where the Euro began the long rally.

Looking up, 1.3790 provides immediate resistance. Further above, 1.3850 worked well as both a support and resistance line, and is already more significant.

Further above, the round number of 1.40 provides strong resistance followed by 1.42. Lines above that are too far to mention.

I continue my bearish sentiment on EUR/USD.

Bernanke’s mini rate hike joined the long list of factors that hurt the Euro. Remember that the Greek crisis isn’t really over. It’s on the sidelines. With this week’s GDP updates, we’ll probably see continued weakness.

After a wild week with surprising events, it’s time to site back and enjoy some good, long term reads, before a new week begins. Here are my picks:

* Michael Greenberg reports about a new service that allows sharing your MT4 trades in real time. The social trend continues. Here’s my piece about PT Multistation social features.
* Macro Man dives into the psychology and the effect of this week’s mini-rate hike.
* Kathy Lien clears up the definitions for this week’s big story – the difference between the discount rate and the Fed funds rate.
* Adam Kritzer talks about the correlation between the Euro-zone’s debt crisis and the British Pound. The aftershocks are felt everywhere.
* Casey Stubbs lays out the basics and shows how to create a forex trading plan.
* James Chen announces a webinar about finding high probability trading setups. His sessions are always interesting.
* Jay Norris discusses the right ways to look at a chart.

That’s it for now. Have a great weekend!

By Craig Torres and Jerry Hart

Feb. 19 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke will probably assure Congress that an increase in the benchmark interest rate isn’t imminent after the Fed’s decision to raise the cost of direct loans to banks.

The Fed chief will deliver his semi-annual report on the economy and interest rates to House and Senate panels Feb. 24- 25. Fed officials last month forecast growth of 2.8 percent to 3.5 percent, and minutes of their January meeting showed they are seeking more evidence the recovery is sustainable.

New York Fed President William Dudley indicated today that policy makers are more concerned about maintaining growth than fighting inflation, citing a smaller-than-forecast increase in the consumer-price index for January reported today by the Labor Department. Another measure of prices, which excludes energy and food, dropped for the first time since 1982.

“Monetary policy is about the economy,” Dudley, a voting member of the rate-setting Federal Open Market Committee, told reporters after a speech in San Juan, Puerto Rico. “We need to see solid growth and job creation. Today we got an inflation report that showed there’s no inflation pressure. So our focus needs to be on growth and jobs.”

The Fed yesterday said its decision to increase the discount rate by a quarter-point to 0.75 percent represented a “normalization” of Fed lending rather than a change in policy. Officials also repeated that economic conditions warrant low levels in the federal funds rate “for an extended period.”

That’s a phrase Bernanke is likely to repeat to lawmakers next week, said Ethan Harris, head of economics for North America at Bank of America Merrill Lynch.

‘Real Healing’

“He is going to say it over and over again,” Harris said. “Fed tightening doesn’t happen until there is real healing in the job market, and the job market hasn’t even turned positive.”

U.S. stocks erased losses after the consumer-price report eased concern that the Fed will need to raise its benchmark rate to fight inflation.

The Standard & Poor’s 500 Index rose 0.2 percent to 1,108.92 at 3:08 p.m. in New York after earlier declining as much as 0.5 percent. The Dow Jones Industrial Average was little changed at 10,395.93.

Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., told CNBC that he expects the Fed to keep its benchmark rate near zero through this year.

The increase of the discount rate yesterday was likely made to “appease the hawks” among policy makers, Gross said today. He doesn’t anticipate additional increases in the discount rate by the central bank.

Exaggerated Expectations

Fed Bank of St. Louis President James Bullard yesterday said expectations for a rate increase were exaggerated.

“The idea that’s in markets that there’s a high probability that we’ll raise rates later this year is overblown,” Bullard said in response to audience questions after a speech in Memphis, Tennessee. “There’s also some probability, maybe more, that this will extend into 2011.”

Atlanta Fed President Dennis Lockhart yesterday told a Georgia business audience that policy “remains accommodative.” Fed Governor Elizabeth Duke, speaking in Norfolk, Virginia, said the steps “do not signal any change in the outlook for monetary policy.”

In a press release accompanying the discount rate increase, the 56-year-old Fed chairman and his colleagues at the Board of Governors took care to say the outlook for monetary policy “remains about as it was” when the FOMC met in January.

‘Downside Risks’

Minutes of the January meeting reflect Dudley’s comments today that the world’s largest economy, while improving, still faces “some significant downside risks.”

Business contacts expressed “great reluctance to build inventories, increase payrolls, and expand capacity,” the minutes said. Officials forecast average unemployment of 9.5 percent to 9.7 percent in the final three months of the year, little improvement from the current 9.7 percent rate.

Dudley repeated that increasing the discount rate is the central bank’s last step in ending emergency liquidity for markets and not a signal the Fed is prepared to tighten credit.

“Think of this as the last adjustment tied to the end of all the liquidity facilities,” Dudley told reporters. “Think of this as the last piece of that package, rather than the first piece of a new package.”

Emergency Facilities

U.S. central bankers closed four emergency lending facilities this month and are preparing to reverse or neutralize the more than $1 trillion in excess bank reserves they have pumped into the banking system. The discount-rate increase will encourage banks to borrow in private markets rather than from the Fed, the statement said.

Before August 2007, the discount rate was set at one percentage point above the federal funds rate. As subprime mortgage defaults began to ripple through the financial system in August 2007, the Fed reduced the spread to half a percentage point.

The Fed has kept the benchmark rate for overnight lending between banks in a range of zero to 0.25 percent since December 2008. Dudley said the Fed won’t necessarily restore the original spread between the discount rate and the federal funds rate.

“We don’t have a clear goal that 50 or 100 basis points will be the final resting place,” he said. “We felt 25 points wasn’t appropriate once we got to a situation where bank liquidity had returned and banks could borrow from each other more easily.”

GOLD was seen reversing its two-day loses on Friday bouncing off the 1,099.33 level and targeting its Feb 17’10 high at 1,127.00. The commodity will have to decisively break and hold above that level to create scope for the resumption of its corrective recovery triggered off the 1,044.20 level. The 1,141.48 level comes in as the next resistance. CRUDE OIL remains on the offensive following through on its Thursday recovery and testing a high of 80.24 on Friday. The commodity requires a break and hold above the 79.43/80.72 level to open the door for further upside gains towards its 2010 high at 83.93. SILVER now looks to head higher towards the 16.92 level following a reversal of its two-day correction on Friday. A break and hold above the 16.92 level will create further upside risk towards the 17.23 level. Although WHEAT still retains its corrective recovery bias, its failure at the 509 level and its subsequent declines has halted further corrective upside gains and turned threats to the downside towards its YTD low at 466. CORN maintains a similar pattern like Wheat. It has turned lower off the 368 level and now eyes its 2010 low at 347 though currently seen hesitating.

EURUSD: May Trigger Corrective Recovery

EURUSD: EUR is cautiously maintaining its broader medium term bearish structure closing marginally lower the past week after reversing most of its downside losses and upside gains to close at 1.3609 on Friday. With the pair reversing its Thursday losses on Friday and printing a high wave candle pattern (a sign of confusion)at the end of the week, we are suspecting the coming week may be that of consolidation to corrective recovery higher. Unless its 2010 low located at the 1.3442 level is retested and eventually broken, we may see the pair head higher in a corrective mode towards the 1.3787 level, its Feb 17’10 high where a break will put EUR on the path to further upside gains towards the 1.3838/51 levels (Feb 01’10 high/Feb 09’10 low). We expect that zone to reverse roles and provide resistance thus turning the pair lower again. Alternatively, a break back below the 1.3442 level, its 2010 low will put our corrective upside view on hold and trigger further downside weakness towards its Jun 03’09 low at 1.3211 with a turn below there targeting its big psycho level at 1.5000. Overall, the pair continues to retain its medium term bearish structure but may face a corrective recovery after failing to close below the 1.3530 level the past week.

Weekly Chart: EURUSD




GBPUSD: Broader Bias Points Lower

GBPUSD: While GBP is undoubtedly biased to the downside in the medium term having resumed that trend the past week, the risk now is its hammer candle formation(bottom reversal signal) currently seen on the daily chart. This suggests that a corrective recovery higher could be in offing with the key upside target standing at the 1.5532 level, its Feb 08’10 low. This level is expected to reverse roles and provide resistance thus turning the pair back down again but if that level snaps, we could see further recovery build up towards the 1.5610 level, its Feb 15’10 low and then its Feb 17’10 high at 1.5814 where a cap is envisaged. Its weekly studies are bearish and pointing lower supporting this view. Alternatively, below its 2010 low at 1.5343 will annul the efficacy of the mentioned hammer and resume its broader weakness towards the 1.5276 level, its .50 Fib Ret (1.3501-1.7041 rally) ahead of its big psycho level at 1.5000. On the whole, having decisively violated the 1.5532 level to resume its broader medium term downtrend, risk of further lower prices is expected with the immediate risk being a recovery higher on the back of a hammer formation.

Weekly Chart: GBPUSD




GBPUSD: Holds Above The 1.6234/39 Levels With Caution

GBPUSD: Immediate risk has turned to the upside having broken and held above its key overhead resistance at the 1.6234/39 levels, its Dec 31’09/Jan 04’10 highs. Though failing to follow through higher on the back of its Thursday strength on Friday, the caveat is as long as the pair holds above the 1.6234/39 levels, threats remain to the upside towards the 1.6409 level, its Dec 16’09 high where a cap may be seen thereby turning the pair lower. However, decisively violating that level will mean additional upside gains towards its Nov 25’09 high at 1.6744 and the 1.6875 level, its Nov 16’0-09 high ahead of its 2009 high at 1.7041 level. Its weekly RSI is bullish and pointing higher supporting this view. Conversely, we are watching to see if the pair will follow through to the downside as we enter a new week and if it does by breaking below the 1.6234/39 levels, then we will reverse our upside view as further weakness should shape up towards its Jan 12’10 low at 1.6060. A clearance of there will pave the way for further downside losses towards its Dec 30’09 low at 1.5830 ahead of the 1.5706 level, its Oct 13’09 low where a sustained break will see a 100% price retracement (from 1.5706- 1.6875 levels) and open the door for additional downside pressure towards its .50 Ret (1.3501-1.7041 rally) at 1.5273. This view is consistent with its short term downtrend activated from the 1.7041 level. In the bigger picture, GBP remains in a consolidation range between the 1.7041 and the 1.5706 levels and a break either way must be established to create meaningful directional moves.

"Currencies are the single biggest risk [for investors] at the moment. I'm scared
about what's going on," said David Jane, head of equity investment at M&G.

A fall in the cost of speculating in currencies is allowing hedge funds to make multimillion-pound bets against the euro "for just the price of a cup of coffee in Starbucks", one of Britain's leading investment managers warned today.

David Jane, head of equity investment at M&G – which controls more than £170bn on behalf of small investors – said it now costs just £1 a day to speculate in £1m worth of currency.

"Currencies are the single biggest risk [for investors] at the moment. I'm scared about what's going on," said Jane, who has bought insurance against currency movements for much of his portfolios.

As the Greek government struggles to impose an austerity programme amid widespread strikes by public sector workers, its future membership of the euro could well be decided by hedge funds and investment banks in London. Every day, global dealing in foreign exchange totals around $4tn, 90% of it purely speculative, and London traders dominate the market.

M&G's concern is the fall in what is known as the "cost of carry", which is allowing speculators to place currency bets worth billions of euros at historically low cost. "You can currently short the euro for almost no cost at all. It's one of the unintended consequences of quantitative easing and action by central banks across the world to keep interest rates low," said Jane. "If they want to charge you almost nothing for money, then you can do interesting things with it. The risk of something happening in currencies is therefore quite high."

"If I want to short the euro, I merely have to write a six-month forward contract, and the cost is the difference between the interest rates of sterling and the euro. They are at 50bp, [0.5%] we are at 50bp, so it would cost me almost nothing.

"For the price of a cup of coffee in Starbucks I can short millions of euros. It costs about £1 a day to short £1m worth of currency. It's very attractive to speculators. You can easily short currency to multiples of the value of your assets."

Behind the huge daily dealing in ­currencies stand the world's investment banks, some of whom just 18 months ago were seeking bailouts from central banks and taxpayers, but are now enjoying record turnover and profitability from volatile currency markets. According to Euromoney, the top five traders in currencies in 2009 were Deutsche Bank, UBS, Barclays Capital, RBS and Citi.

But Hugh Hendry of Eclectica, a $450m hedge fund operator based in Bayswater, London, said: "The carry trade has always been there. The low cost of carry ignores the fact that you are still exposed to price movements." He added that government intervention to curb currency speculation would be "fundamentally wrong".

"Do we want to be Argentina? There are no currency speculators in Argentina. People like myself are questioning the judgments of politicians, and I don't get bailed out if I get it wrong. You have to be very worried when politicians start complaining when someone is telling them the truth about the euro."

So where did all the money go? Photo: REX FEATURES/BANK OF ENGLAND/CML

So here, for any of you who might have forgotten, is a quick reminder: some £76bn from the Treasury to buy shares in RBS and Lloyds Banking Group ; £200bn worth of lender-of-last resort liquidity support provided by the Bank of England to stricken banks at the height of the crisis; £250bn of wholesale lending guaranteed by the Bank through the credit guarantee scheme; £185bn of loans to banks through the Special Liquidity Scheme; £40bn of loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme. Then, deep breath, there is the £200bn of liabilities taken on board from the Asset Protection Scheme, and the £200bn of cash poured into the economy through quantitative easing .

It isn't really fair to add this all together – some of the cash is merely guarantees rather than actual pledged money, some isn't technically a fiscal injection; much of it will, in time come back to the Government – but if you did you would find that the total amount of cash poured, in one way or another, into the economy is well above £1 trillion. In fact, it is not far off Britain's entire annual income.

And what has been the effect? The answer, disappointingly, is far less than had been expected. It is impossible to know the counterfactual – what would have happened had Britain not benefited from the combined injection – but on almost any metric one cares to consult, lending to companies and individuals, a key sign of early-stage economic growth, is still at dangerously low levels. Yesterday, the Bank of England revealed that lending to businesses fell at a record pace in December, down by £4.3bn compared with November. The Council of Mortgage Lenders said that gross mortgage lending dropped last month to the lowest level for a decade. The broadest measure of money growth - M4 - has also failed to pick up in the wake of the crisis – a sign that Britain is facing deflationary headwinds, despite the rise in the official measure of inflation earlier this week.

It is not merely the UK facing this continued contraction in bank lending. In the US, bank credit has contracted so far this year at an annualised rate of 16pc. In the eurozone, too, bank loans to non-financial firms fell by 2pc in the year to December. In both the US and eurozone, broad money, the more abstract but deeper measure of economic expansion, is falling. For those who assumed the credit crunch is over, the figures are a fierce rejoinder.

So, goes the obvious question, where has all the money gone? In some senses, the answer is relatively simple. Much of that cash has gone into repairing a broken financial system. Some has gone towards repairing banks' balance sheets. Some has contributed to bank lending. But its effects have been to soothe the financial pain rather than completely curing it. And precious little of the money has filtered back into lending to households.

Dissecting why this is the case is not easy, because lending is just as likely to be down because indebted households and businesses have little appetite for more borrowing these days than because struggling banks are unwilling to hand out cash. As with so much in economics, the reality is likely to lie somewhere in the middle.

However, Bank insiders are quietly worried that the vast quantities of medicine doled out to the UK economy have not taken the effect they expected. When they launched quantitative easing last March, they suggested that its effects would be seen in an increase in the flow of money around the economy, or at the very least in providing a support to lending. Now that the scheme is over, and with some economists questioning whether this will imply that conditions will become even tighter in the coming months, some are worried that a double-dip, sparked by continued weakness in lending, is becoming more likely.

Part of the reason banks are reluctant to lend is that they are unsure about quite how far they must go in fortifying their balance sheets for the future. Most have now repaired their capital stocks and liquidity buffers to levels far stronger than before the crisis. But they suspect – probably rightly – that regulators will impose far tighter capital requirements and liquidity ratios in the future. Since these are, in the words of Jaime Caruana of the Bank for International Settlements, an effective "speed limit" for the banking system, they are reluctant to press on the accelerator and lend cash before they know the future rules.

To make matters worse, they are aware that doing so might not work even if they wanted it to. At the height of the bubble, banks were reliant on securitisation markets to support their lending. These markets remain frozen. The vast majority of UK bank lending over the past two years has, in some way, been supported either by the special liquidity scheme or the credit guarantee scheme. To complicate matters further, Mervyn King insisted last week that "the SLS will not be extended", saying that otherwise banks would end up "just hanging on, waiting for a handout".

So the implication is that the SLS will come to an end in 2012, while the Credit Guarantee Scheme, which has already closed to new entrants, will see its final loans expire in 2014. These two dates may sound a long way in the distance, but to banks, which have to offer mortgages over 25 year maturities, they are already playing an important part in their business plans.

With these two threats looming on the horizon, it is hardly surprising that banks are reluctant to lend, even given how much their balance sheets have been bolstered by government support.

Policymakers recognise that this is a once-in-a-lifetime opportunity to overhaul a mutant financial system with tighter rules. But so long as insecurity over their plans remains, the credit crunch is likely to continue. It is a stark reminder of why hopes of a quick recovery from this recession may be forlorn, and why financial crises such as this one cast a shadow over growth for years.

PRINCETON (SMRA) - The final week of February has a fairly steady stream of economic data releases, as well as numerous public appearances by Federal Reserve policymakers. However, while the economic data has a few standouts, attention is now turning to the upcoming February employment report on Friday, March 5.

Additionally, markets will be anticipating Chairman Bernanke's semiannual monetary policy testimony on Wednesday and Thursday before the House Financial Services Committee and the Senate Banking Committee respectively.

Federal Reserve Appearances

To some extent three things will reduce the news value of the Chairman's twice-yearly report to Congress.

First, the text of the Chairman's delayed appearance before the House Financial Services Committee on February 10 addressed the Fed's approach to exiting the current stance of accommodative monetary policy and reducing the enormous size of the Fed's balance sheet.

Second, the release of the minutes of the January 26-27 FOMC meeting have provided information on adjustments to the Fed's forecasts, and thus we have more information on their economic outlook as well as the discussions of exit strategy and balance sheet.

Third, Bernanke will appear before the House Financial Services Committee Tuesday, February 23 in a hearing on "Prospects for Employment Growth: Is Additional Stimulus Needed?"

With all this information, a lot of the topics that would first be explored in the testimony will have already been covered. Doubtless they will be covered again.

The University of Chicago's Booth School of Business hosts the U.S. Monetary Policy Forum in New York Friday, February 26. Several Fed officials will give speeches or participate on panels. These include New York Fed President William Dudley, Minneapolis Fed Narayana President Kocherlakota, Chicago Fed President Charles Evans, and Governor David Tarullo.

Earlier in the week, San Francisco Fed President Janet Yellen will give a speech Monday, St. Louis Fed President Bullard will deliver remarks Tuesday and again Thursday. Cleveland Fed President Pianalto will give a speech Wednesday.

There are no major central bank announcements scheduled in the coming week. The pace will pick up considerably in the first half of March.

Economic Data

The major threads of economic data during the coming week are for housing, consumer confidence and manufacturing.

The condition of home values remains a concern in the fundamentals of the housing market. The S&P/Case-Shiller Home Prices Index for December is out 9:00 ET Tuesday, and the FHFA House Price Index at 10:00 ET Thursday. Both indexes have shown greater stability and some improvement since the start of the government program offering tax credits for first-time homebuyers, but prices remain well below the recent peaks.

Sales of both new and existing homes struggled after the expiration of the first version of the homebuyer tax credit at the end of November 2009, but January should see some modest rebound with the introduction of the expanded and extended version. Data on home resales is scheduled for Wednesday at 10:00 ET, and for new home sales at 10:00 ET Friday.

There are three Fed district bank surveys of manufacturing for February on the calendar next week. The Dallas Fed's Texas Manufacturing Survey is out at 10:30 ET on Monday, the Richmond Fed's Survey of Manufacturing at 10:00 ET on Tuesday, and the Kansas City Fed's Survey of Manufacturing at 11:00 ET on Thursday. So far both the New York and Philadelphia outlooks have been stronger, and the hope is that they will be part of a general trend higher.

The Chicago Purchasing Managers Index for February is set for 09:45 ET Friday and will help shape forecasts for the ISM Manufacturing Index to be released the following Monday.

The January data on new orders for durable goods at 08:30 ET Thursday will probably extend a string of tepid readings for another month. The numbers likely hinge on soft demand for civilian aircraft being more than offset by new orders for motor vehicles, but there also could be some more broad-based support for orders.

The two most-watched measures of consumer confidence are released next week. The Conference Board's Consumer Confidence Index for February is at 10:00 ET Tuesday, and the final Reuters/University of Michigan Consumer Sentiment Index for February is out 09:55 ET Friday. The preliminary Michigan index reading was a decline to 73.7 at mid-February from 74.4 in January. The weekly ABC Consumer Comfort Index is looking less optimistic of late, and the IBD/TIPP Economic Optimism Index was down a full 2 points at mid-February to 46.8.

Weekly initial jobless claims will be for the week-ended February 20. The trend appears to be moving to a higher level in the last few weeks as layoff activity picks up again. It is still well below the psychologically important 500,000 mark, but any increase is worrying in the current labor market.

The first revision of the estimate for fourth quarter GDP is Friday at 08:30 ET. The advance estimate put growth at 5.7%, and this will probably hold up without major alteration. In any case, attention has shifted to the first quarter 2010, and concerns about a loss of momentum as the burst of fiscal stimulus wears off.

U.S. Treasury

The U.S. Treasury has a busy auction schedule with 30-year TIPS bonds on Monday, 2-year notes Tuesday, 5-year notes Wednesday and 7-year notes Thursday. The TIPS bonds settle on Friday, with the nominal notes settled March 1.

Treasury Secretary Tim Geithner will testify at 10:00 ET Wednesday before the House Budget Committee on the budget proposals for fiscal 2011. Expect it to get nearly lost in the mix as the Fed Chairman testifies before the House Financial Services Committee at the same time.

** Stone & McCarthy Research Associates **

CLEVELAND, Feb 20 (Reuters) - So many variables affect the value of the U.S. dollar that it is hard to know where the greenback is headed, Cleveland Federal Reserve Bank President Sandra Pianalto said on Saturday.


Taking questions after addressing a group of high school students, Pianalto, a voting member of the Fed's policy panel this year, was asked what policies were being put in place to safeguard the dollar's value.

Pianalto noted that dollar policy was not under the purview of the Federal Reserve, but added: "The value of the dollar is set by the markets and there are so many variables. It is just very hard to know what direction it is going to go."

U.S. dollar policy is directed by the Treasury Department.

Asked about the Fed's decision to increase the interest rate it charges banks for emergency loans, Pianalto described it as response to improving market conditions.

"As the credit situation improved and the financial markets improved ... we tried to get it so the banks would access those funds in the market," she said.

The Fed said on Thursday it was raising the so-called discount rate by a quarter point to 0.75 percent.

It made no move in the federal funds rate governing overnight lending between banks, which can broadly influence credit costs and has been the Fed's main monetary policy tool. That rate still stands in a zero to 0.25 percent range.

Pianalto did not address the outlook for the economy or monetary policy in her remarks, and largely sidestepped questions on fiscal policy, which she said was not the Fed's domain.

"It is important to step back and come out of this recession with recovery and to make sure that the correct fiscal policy is created," she said.

The Obama administration has forecast a record $1.56 trillion budget deficit this year. At 10.6 percent of GDP, it would be the largest deficit since 1945. (Reporting by Kim Palmer; Editing by Peter Cooney)