Deciphering the Bank of England

The Bank of England released the minutes I have been waiting for. What could all of this mean? If you want to read it yourself, go to the Bank of England site at http://www.bankofengland.co.uk/ and then click on minutes. Or you can read this highly informative and even higherly (new word) biased view of the minutes.

Information item #1: The Bank of England (BoE) voted 8 to 1 to leave rates alone. If you were to read this, your first thought may be to assume that this is very bullish for the GBP for the fact they were so united (there is always one rebel mixing things up). But to know why they voted to leave it the same is even more important.

Information item #2: The BoE said, "The preparation of the November Inflation Report and its projections would give the Committee more opportunity both to assess the impact of market turbulence and other developments in order to reach a more considered judgement and to explain its policy stance." -Translation: We need more information so we can make an informed decision. In fact in the minutes they specifically said they wanted more time and information before they take a rate cut. No discussion of leaving it long term, no discussion of raising rates, just timing a cut.

Information item #3: CPI has now reported in under 2% for 3 months now. This is not growth, this is slowing to a point that is teetering on recessionary if the CPI can bleed into GDP.

Information item #4: The BoE said, "It was possible that a cut in rates this month could be misinterpreted as a signal that monetary policy was focused on supporting the financial system and not on meeting the inflation target." - Translation: We wanted to cut rates because we thought it would be a good thing but we were afraid that it cause a misdirected focus on the balancing act we have to follow as the BoE, hence the "No Comment" two weeks ago.

Information item #5: The BoE said, "A reduction in Bank Rate this month was not widely expected. There was a danger that such action would be misinterpreted as a signal that the outlook for growth and inflation had shifted decisively to the downside." -Translation: The market didn't expect it and this would have been a huge shock, so we didn't do it. Note, the outlook for growth and inflation has shifted decisively to the downside.

Information item #6: Oil record highs, from August 1, crude oil has risen 13%. The GBP/USD is no higher today than it was on August 1. If 10% of what drives this economy growing at 13% can't help the GBP what can. Dive a little deeper, if you assume that oil prices account for 10% of GDP for the GBP and oil prices have risen from 40% since January 1, near $55 at the beginning of the year to $87 a barrel, then there should be a similar move in the GBP. Just in the past 2 months the 13% would equate to 1.3% growth of GDP based on oil alone. GDP for the entire quarter reported in September was 0.8% and expected to come in at .7% for the October quarter over quarter report. Take out oil growth and what do we have? 90% of the GDP is shrinking or decreasing by roughly .5%. Two quarters of negative GDP is considered a recession.

On the surface it appears there is growth and concern about inflation. Diving deeper, adjusting for climbing oil prices, the British economy may be in a hidden recession. What do I expect...weakening pound. This is why I still would expect a GBP/AUD short to play out if time right, a EUR/GBP long trade if timed right, and the GBP/CHF trade as referenced earlier in this blog to play out.

~~note: anything underlined in this blog is a hyperlink to view more information.~

Leverage and Margin Examples

My friend posted a great video on explaining leverage and margin and common pitfalls. Here is the link to view the video.

So when you are thinking of Leverage And Margin Examples or of my friend John, just remember this handy acronym---LAME

You are my hero John.

~~~It appears that many of you felt my playful jab at my friend was an indication of the video. The video is very informative and not really lame, it was a joke, I was laughing anyway. I don't know if John was, maybe I was the only one... oh well live and learn and learn some more. Go watch the video by clicking the underlined link above.

Big winner and another chance?

A few weeks ago, I published a trade with both the spot market and the CDD ISE options looking for a bounce off of the 1.00 mark for the USD/CAD. If you would have bought the 100 November puts as described in the post, your position would have moved from 1.35 to 2.45. You would have had a maximum risk if $135 per contract and based on your risk you would be up $110 or 81% return on your maximum risk. Not too shabby. The spot market, if sold at 1.00 would be up $220 with variable risk available based on where a trader determined was the appropriate stop loss. Does this sound like you? "I frequently am right about direction but get stopped out of my trades." If so, lean to the options, if you are frequently right and don't get stopped out, go with the spot. If you are frequently wrong and always get stopped out, please send check to Blake Young's Tahiti trip fund, this way at least one of us will get benefit from your money.

I hear it frequently, if you set your stops too tight, start looking at these options, if you are giving yourself enough room in your trades, the spot usually makes them most sense and money.

Today, what are we looking at? The USD/CAD has pulled back to a short term resistance level. The pair has not moved a lot when it probably should have. So here is the trade and the fundatechnimentals behind it. Oil- record highs, should benefit the CAD. No rate change from the BoC, this is better than the FOMC cutting rates, should benefit the CAD. TIC data for the US not only didn't show the expected $60 Billion of foreign investments coming in to the US but showed a withdraw or fleeing of $69 Billion in foreign monies, bad for the US dollar.

No significant move from the pair, this could be a chance to sell will minimal risk or buy in to the CDD put. I like the December 97.50 put for $1.35 or $135 per contract. Fixed risk lots of potential 8 weeks of time to play with. The USD/CAD would probably need a little wider stop on this one 99.15 or even back above the $1.00 mark. Pick your poison.

NO COMMENT!!!

OK, think this through with me. When is the last time on television or radio or in the newspaper, any where for that matter, you heard the phrase "No Comment". Now, when is the last time you hear the phrase "No Comment" and that was a good thing? Let's imagine..."You just won the Superbowl, what are you going to do now...(reply) No Comment"..."Oooohhh, how cute, congratulations on the birth of your new baby...(reply) No Comment"...Doctor Rosen Rosen invented a cure for cancer and won the nobel peace prize and as he goes up to the podium he modestly says, "No Comment."...



None of that makes sense. The term "No Comment" is primarily reserved for the accused, politicians, and attorneys (just typing that makes me realize those three groups share a similar lack of scruples) or someone that is hiding terrible news.



This morning at 7am Eastern, the Bank of England left rates unchanged and said, "NO COMMENT". What is the likelihood that it was No Comment because they didn't want the world to know that it was a unanimous vote to leave rates unchanged, they didn't want to tell the world how great the British economy is doing or they had no concerns of the credit crunch and housing market? Could it be they left a no comment because they are concerned about how bad the news is and how much it would shock their currency if they exposed the whole truth of their decisions (minutes will be released on October 17th). I am betting on the second and I am a little surprised that the world market didn't read between the lines on this one. Lots of bad news and a weakening pound but No Comment must have been because they were tired and didn't want to say anything today.



Looking at the previous blog on why I thought the pound should weaken and why we should have heard dovish comments out of the Bank of England, I began my search for the right pair to trade and I found it in a peculiar place. I found it on the Gbp/Chf. This is not necessarily because I think this will be the most profitable trade, more that it is one of the easiest pairs to analyze and control risk. In the chart you can see a nice down trend over the past couple of months with an approach and likely bounce off of resistance.

Risk can be controlled with a 200 pips stop and a potential reward of nearly 500 pips if not more. As time goes on and if the lower trend line is reached, the lower trend line could be as low as 2.32 for a 750 pip move.

The problem with this trade is that the CHF is a weak currency. The benefit is, if I am right about the GBP, the minutes will reveal the dovish sentiment and further unwind "carry trade" pairs including the GBP/CHF pair.

Falling Ethanol, Diverging Oil, and the pound getting pounded...Maybe?

I am going to make this a brief analysis and looking at 3 correlations occurring right now. Starting with Ethanol, Ethanol is a corn based fuel that acts as a direct substitute for oil based products. Looking at the December 2007 CBOT Ethanol Futures, there are two things to note. First note, a high point in March/April time frame and second, a consistent downtrend to today.

If the demand is decreasing for the primary substitute for oil, this causes me to believe the demand in general has been falling recently for oil. What has oil been doing in the time from March until now? Climbing, surprisingly enough.

Oil has climbed up and hit record highs over the past couple of weeks. If you look at the price at the pump, at least here, retail gas has not increased while oil has climbed up approximately 26% or climbed from $65 to $82.50 a barrel. Retail prices should have increased by about the same or higher. Why hasn't it? No increased demand while price is rising. This is a divergence in the inter-market analysis.

As seen in this image, both the CCI and the RSI (differing times) are diverging from the price. In most cases the price snaps back in line with the indicator, if this is one of those times, I would expect oil to fall.

The pound has not really benefited as of late on such a significant move on oil. Why? Possibly the concern of the housing market, slowing global economy, maybe the fact that the price is going up but demand is not means less purchases from British Petroleum.

Now what does that have to do with anything going on right now? This week we are going to hear the Bank of England rate decision. If I my assumption of slowing demand and increasing price is correct, the lower than expected trade balance we saw 3 weeks ago from Britain would be correct. If the GDP is slow, PPI has been low and housing is still struggling than the economy is not growing enough to be concerned about inflation. Sound familiar? It should, this is not far off from what the FOMC was looking at, slowing economy, inflation not as much of a concern as housing and BLAMMO, a rate cut.

I don't expect a rate cut from the B of E, but I wouldn't be surprised if they became very dovish in the comments which could weaken the pair near a resistance level. Look for a short oportunity, not necessarily against the USD but maybe against the AUD or the EUR or the CAD or anything that has shown recent strength. You have between now and Wednesday night (US Wednesday Night) to find a good risk position...

...or what about an option on the BPX?

How did you know?

I received an email this morning asking how I knew not to chase the USD/CAD and that it would retrace early in the week to test 1.00. Simple, buy good hardware.

Remember the 1.00 is a strong psychological barrier and likely will hold. At this point simply watch for it to stop going up, look for a peak with low risk and trade.

$40 billion for swimming lessons

I compared the move by the fed to dump $40 BILLION into the market to add liquidity like having 3 drowning people in shark infested water. The housing market, the economy and the dollar are all drowning simultaneously, offering $40 BILLION in essence has the housing market and the economy trying to climb on top of the dollar to keep from drowning. Not only does this force the dollar to drown quicker but the life saving benefit is so temporary only offering maybe one or two more breaths for the two at the expense of the third. In the end, if nothing or no one can save the three of them, they will all suffer a similar watery, shark bate-y death.

You would think for $40 billion you could buy some pretty sweet swim lessons. Watch the fed with the $40 billion in swim lessons below.



"So, how do you like my swimming?"

Torn

I am very torn on this trade. We discussed the USD/CAD from the view that it could be in a bear flag but I expected a bigger move to the top side. Well it broke out of the bear flag we were watching and bounced off the 1.0000 level, proving a worthy foe to my bearish stance. Now that it has bounced, what do I really expect? A retest, maybe. A break down, probable. A bullish run, not likely but possible.

The interesting thing about this trade is that even though the price has dropped nearly 40 pips from yesterday, our put doesn't really cost us anymore than what we were looking at. So there is the dilemma. Do I take a short position now or wait for a bounce higher. I favor a bounce higher, this bear flag confirmation with a bounce off of the 1.000 level is exactly why I don't like trading break outs. I like selling resistances. The put would allow me to just buy the put, take the same basic trade, allow it to run for nearly 8 weeks with no more worry than a 150 pip stop max. That is very promising but now I have to wait until the morning to buy my put.

Fundamentally, New Homes came in worse than expected and the Fed dumped 40 billion on the market, both should have trounced the dollar, but instead the dollar held it's fleeting foothold. Tomorrow GDP for the CAD comes out, I wouldn't be surprised by a better than expected GDP and a worse than expected on the CPI from the USD both potential catalysts to break this pair out for another run, to be seen in the morning. If you are going to trade the put you will have to be right at your computer when the market opens, if you are trading the spot, watch for a retest near 1.0060ish.

No registration necessary

I have removed the need to register to add comments. This is for all you "anonymous" types, you know the kind that like to make anonymous phone calls, anonymous letters, anonymous subscriptions. You know who you are. At least now you have one more outlet to hide your identity yet let your voice be heard.

Just click on comment, write up your comment, and submit. Don't be shy and don't be over sensitive.

Longer term fib fans and estimated times to sell UsdCad

So here are the slightly longer term fib fans I am watching. How close are your line's to mine? Trade yours, not mine, yours will be more accurate for your trading.

I changed this to an 8 hour candle so the image is more visible but let me tell you the times that these fan lines cross the resistance levels as potential times and levels to sell into this trade.

The times I see on the 2 hour chart show 8am Eastern tomorrow morning at a price near 1.0100. The next cross happens at the same time, 8 am Eastern on October 1st (Monday morning). How predictive will these be. Are you feeling brave or disciplined enough to buy it now with the hopes or expectations of the price going up to 1.0100 by tomorrow morning.

I want you to be disciplined and not brave and I want you to be expecting the specific move and not hoping. Yes there is a difference. I personally am willing to wait until it gets up a little higher and then trade it rather than taking the short term trade. If you drop it down to an hourly chart there is plenty of opportunity to trade this in the channel, just make sure you are getting out of the trade at the right time.

Predictive power of forex options

The price has remained fairly stale in the past 18 hours. This doesn't mean there aren't some messages being put together in the mean time. First look at the changes in the price and where it to and returned to. What does that mean? The price has pushed beyond our short term fib fan line, a longer term fib fan puts resistance levels meeting fan lines near 1.01 and 1.02. Try it yourself and see if you get similar levels, I will post my long term fibs later.

If the bear flag confirms as indicated by the yellow line, 0.9750 is a fairly easy target that could play out in a matter of a couple of days. I have commented to those I work with a number of times that I think the Usd/Cad could trade in this range for most of the week or longer. So far so good. This leads me back to the idea of using an option trade. Before we get into the intricacy of option pricing, note that the at the money, and you can't get much more at the money than one one hundredth of a penny, is the same for both the November 100.50 call and put.

Call Bid Ask Put Bid Ask

CNJKA 1.35 1.50 CNJWA 1.35 1.50

So the 'at the money' costs the same. In theory the market has it priced equally the same risk wise. This is true but not not true. Looking a little deeper at the implied volatility shows nearly double the implied volatility on the puts than on the calls. This is not normal. The open interest is 8 times more on the call options too. How can implied volatility be higher and not price for the same options. I like the idea of selling a call or buying a put. What are your thoughts. Put them in the comments.

It's the CAD or the CDD

The chart was the Usd/Cad intra-day. As you can see I told you not to chase the trade because I expected it to come back up. Because it has come back up, is there a buy or a sell in this trade. I don't think we have seen any reason to be looking for a long trade on this pair. It is a pull back that can make money management difficult but could be a great longer term trade. How far will it pull back? Since I did this screen shot the price has risen back to 1.0035 and is still climbing slowly. I would like to sell this again but at the right time. Maybe near 1.0050 or 1.0075 but I wouldn't be surprised with a pull back to 1.0100 or even 1.0200. I seriously doubt a move to 1.03 before a drop.

So here is the trade I am looking at...a put on November 100.00 CDD. What is that? CDD is the International Security Exchange (ISE) option that trade the major currency pair. As you can see on the daily charts of the CDD, the price is in line with the spot market. The stochastic is possibly setting up for a short term divergence to sell of this pair. The advantage of the CDD over the spot market in this situation is being able to sell with a max loss, similar to a stop loss but the price can move beyond a traditional spot stop loss and still come back down and make you money as it move toward your price.

Currently the price is sitting at 1.0040, as I type the price is rising slightly, if I sold the pair now in the spot market with 150 pip stop, the pair could move to 1.0200 and push 10 pips past your trade and then move all the way back down and through the key 1.000 mark and potentially down to 0.9800 or lower.

For the CDD position, first let's recognize that the 1.35 price of the 100.00 put will cost $135 per contract because we buy them in 100 unit contracts. So when I reference pennies and dollars on the options contract, multiply it by 100 to get the per contract value. Now, let's use the 100.00 put this is the same as the 1.0000 price level on the spot market. If my anticipation is that it could go down to .9800 the value of the put at expiration in November could be worth 2.00.

The difference between the purchase (1.35 for the November 100 put) and the estimated value at expiration is only .65. That may not sound that great, but remember I am saying at expiration it would be worth that. Hopefully as it nears your limit you will step out with more than the 2.00 per option price. If you set this up as a bear put spread and sold the 98 put and bought the 100 put, the net difference of the spread is a cost of .85 with a max gain potential of 1.15. It nearly doubles the expected gains but it does cap the trade on both sides.

Max loss .85 (similar to a 85 pip stop but it can go beyond the level without getting stopped out) and a great target. Take a look at the prices here and we will watch this trade over the next couple of weeks. We will track it both as a spot trade and an option trade to measure both risk and reward for both trade potentials.

Good luck, more tomorrow.

Come on now, be brave, we're all friends here.

Answer the poll and put in comments. What would you do with this chart. I am going to put together an option trade in the next few minutes but I want your views and comments.

Can you guess what this is?

What chart is this? How would you play it? What does it mean in the short term? What does it mean in the long term?

Break and test

The Usd/Cad did what I said I thought it would yesterday, it bounced a number of times off of the 1.0000 range and then broke and has come up to test that level as resistance. It may be a little early to tell as we could see further consolidation near the 1.0000 level but it is responding as one would expect and a sell near here could be a good play. The big question I have is whether the divergence in oil will confirm and bleed down into the GBP and CAD trades as oil readjusts.

Another great article today by John on the divergence in oil is available. To see it, go here.

Don't Chase It

I posted this image a while back in the blog, I wanted to find a picture of a little fat kid chasing the bus and having his friends laugh, but because my mom loved me enough she didn't take pictures liked that.

The Usd/Cad is very likely a school bus. If you missed it, don't chase it. I think there is a very good chance that we see a bounce, a psychological bounce, here at the 1.00 level. Even if I am surprised and it breaks through to 0.9800 then I still would expect a pull back to the 1.00 level as a retest of the psychological level. Either way a bounce could be a better sell opportunity and a break would put still give you a chance to short this near 1.00 again. I personally am trying to decide to exit and take the profits. Decision made. Stepping to the side and watching for a bounce or a break and retest.

PARITY!!! PARITY!!! PARITY!!! (yell this like your yelling sanctuary)

We have hit it at last, parity for the USD/CAD. The low in the last hour reached .9998. Let us review the last week and then what that means. I was looking at the pair last week and even prepared an image on the 12th to discuss that this was going to be the run down to parity. Too bad I didn't get this posted then. As you may be able to tell, I got in the trade at about 1.0480. Not too shabby. Today the pair is just a continuation of that move. Rather than looking at the daily candles showing you the last week of the price dropping, here is the intraday chart looking at the hour candles so you can see the magic of hitting the $1=$1 mark for the pair...a moment of silence if you don't mind... Ok that is enough, back to work.

What does it mean? Why have I had a focus on this level? Why can't I think of anything witty to say? The whole world is full of puzzling dilemmas today.

Here is a historic perspective and a trivia question that will make you look smart at the water cooler or your next dinner party. When was the last time the USD and the CAD were at parity? Many of you may be saying never, you're wrong. It was 1976. Now I need you to start thinking of what was happening during the mid to late 70s. If you are not old enough or informed enough, let me help you. The mid to late 70s were riddled with high inflation, high gas prices, high interest rates and rising unemployment. Could we be heading toward similar times? Let's see, inflation and commodities are high, check. Oil is near record highs as well as gas, check. Interest rates were cut by the fed by home interest rates are on the rise, check. Unemployment...we are still OK but we did see our first layoffs in the non Farm payroll numbers this past month. hmmmm interesting.

What does the future hold, short term doesn't look so bright. Future could be "totally awesome to the max." More on that in my next post.

Great information and big day today

I was watching my good friend, John's, video post today and thought all of you should take the time to go and view it, if you haven't already.

Watch this about trading options and today's 50 bpp cut by the fed.

Also, I made some good returns today but now I am watching for an add position and new position on many trades, especially the carry-ish trades. Keep an eye for pull backs to key positions and then watch for a couple of longer term trades.

...Hello Friends, the game continues...

I have been away on vacation last week and out at a conference this week. I am back in the saddle and things are looking great. Could I have taken a better time for vacation, I think not. I got stopped out of 2 trades with reasonable losses and then haven't got back in to chase this volatility. After these past 2 weeks, I have looked at the fundamentals and the fundamentals have not changed the overall trends we have been watching. Prices appear to be testing similar channels or echo channels as I have called them in the past, still matching up to longer term support and resistance. Look at the 5 year charts on about any pair and determine your trend from the long long term view, if you see the same trends I do, then you will see great longer term opportunities setting up over the next couple of days.

I hope your accounts are doing ok with all the excitement.

How do you like them apples?

I said that the 100.75 to the 101.25 range was a good time to buy. The Aud/Jpy is playing well off of the support as the trend continues from prior. If you got in mid point you should be up about 240 pips as of today. Not too shabby for a few minutes of reading.

Now with the USD/CAD. I have been pro Canadian for months now and the pull back has played out well. We talked about selling off on August 1st, price was near 1.0600 but I didn't get any graphs posted. Now we have had a good move and a pull back. I think 1.05 is a good resistance and shorting point. 1.0630 is the next resistance level with some wiggle room to watch out for. We may see some consolidation and slowing near 1.0400 and again near 1.0350. If we can clear these levels, the 1.02 and even parity is possible. This graph is a 4 hour chart.



Gbp/Nzd is close.