Month: January 2010

Source: ForexYard

American and European stocks traded lower this week due to risk aversion among traders, and this has helped support the Dollar’s resurgence. With a EUR-heavy news day ahead of us, the USD may take a back-seat during the morning hours. A slew of positive releases from the Euro-Zone could allow us to see a rebound in a few of the major pairs. On the other hand, if Europe’s data falls short of expectations, traders should anticipate a continuation of the bullish run in the USD.

Economic News

USD – U.S. Dollar Trades Higher on Stock Market Declines

The U.S. Dollar continues to climb against its rivals as risk aversion appears to be on the rise. The USD has in fact climbed exceedingly higher against the EUR by reaching a price level below 1.4100 for the first time in over 20 weeks. The greenback also managed a recovery against the JPY’s recent surge by reaching back towards 91.50.

American and European stocks were traded lower this week due to risk aversion among traders, and this has helped support the Dollar’s resurgence. This week’s data releases have also supported this notion. While figures such as the NAHB Housing Market Index and US Housing Starts have shown a decline in the housing market, other sectors of the economy have shown modest improvement.

Tuesday’s release of TIC Long-Term Purchases highlighted a vast improvement in domestic and foreign investment in the United States. If this trend continues with the Phily Fed Manufacturing Index today, we could see the Dollar’s rise propel itself forward even more.

With a EUR-heavy news day ahead of us, the USD may take a back-seat during the morning hours. A slew of positive releases from the Euro-Zone could allow us to see a rebound in a few of the major pairs. On the other hand, if Europe’s data falls short of expectations, traders should anticipate a continuation of the bullish run in the USD.

EUR – EUR Troubled by Stream of Negative Data

The EUR’s woes do not seem to be showing any signs of stopping. As stocks trade lower, risk aversion appears to be winning the day and safe-havens like the US Dollar and Japanese Yen gain support. The EUR, in fact, hit a 20-week low versus the greenback as the American currency seems to be gaining more admirers in these trying times. Without some supportive data, the 16-nation currency may continue to plunge.

The Euro-Zone’s common currency’s recent plunge is not without merit, however. The recent string of data released from the European Monetary Union does show a steady decline in numbers over the past few weeks.

The Euro-Zone’s and Germany’s ZEW Economic Sentiment report showed a decrease in consumer/business optimism throughout the region; Italy’s trade balance was worse than many were forecasting; Greece’s sovereign debt situation continues to deteriorate; and today presents one of the best opportunities for a rebound, but also for a dismal showing that could decimate confidence in the EUR even further.

Today’s flood of manufacturing and services data from the Euro-Zone’s major economies is in fact predicted to indicate an improvement in the industrial and service sectors of the regional economy. Yet, if these figures fail to provide such evidence, the sentiment surrounding the EUR may rapidly fall further than it already has. Traders should be on the watch for any signs of deterioration as this may be the clearest indication that the EUR is going to be sold against most of its pairs by most investors.

JPY – Japanese Yen Receives Boost from Risk Aversion

The Japanese Yen, while matching the USD’s recent gains, has proven itself one of the more valuable safe-haven investments in this recent downturn. The EUR/JPY pair, for instance, has dragged down much of the other major pairs by putting heavy selling pressure on the EUR, and boosting the Japanese currency to a price level not seen since 17 December 2009 against the Euro-Zone’s common currency.

If world stocks continue to plummet in this risk averse environment, the JPY could continue rising just as the USD is predicted to do if the market falls short of expectations. The few data releases from Japan have been less than stellar, but the JPY performs better when stocks in Europe and the United States fall, regardless of economic performance in the island economy. If today’s data releases show Europe’s economy continue its deterioration, the JPY will likely receive heavy support from an increase in risk aversion.

Crude Oil – Oil Inventories May Support a Price above $80 a Barrel

Spot Crude Oil’s recent plunge in price has sustained itself over the past few days, with the price recently falling back below $78 a barrel. Much of this downward pressure may be caused by the recent upswing in the value of the US Dollar, but at least a few economists are less certain. Some have claimed that the recent up-turn the market experienced was lacking the fundamental data to support such a move.

If today’s Crude Oil Inventories report does shows climbing reserves, it may be that the fundamental data behind oil’s spike towards $84 a barrel a few weeks ago was indeed an anomaly. However, if the market can show that stocks are in decline, therefore pushing demand higher, there may be enough support to help lift oil back towards $80 a barrel in the short-term. This makes today’s Crude Oil Inventories report vastly more important than it normally has been in recent weeks and traders should pay close attention to its figures.

Technical News

EUR/USD

The long term uptrend on the weekly chart appears to have been broken as the price declines have accelerated. The pair has dropped below the 33% retracement level of the previous uptrend at 1.4220. We may now see the pair decline to its 50% retracement level at the price of 1.3745. Traders that are following the long term trend may look to go short until this support line. If the pair falls to this next major support line, the pair may once again continue the upward slanting long term trend.

GBP/USD

The daily chart shows the pair could continue its price decline. The 7-day Relative Strength Indicator is still trending down and has not broken its downward slanting trend line from the pair’s recent bearish move. There is also a bearish cross on the chart’s Slow Stochastic Oscillator, indicating the potential for a further bearish movement. Traders may want to be short on this pair until the next support line of 1.6195.

USD/JPY

The price of this pair appears to be floating in the over-bought territory on the 4-hour chart’s RSI indicating a downward correction may be imminent. The downward direction on the hourly chart’s Momentum oscillator also supports this notion. When the downward breach occurs, going short with tight stops appears to be preferable strategy.

USD/CHF

The USD/CHF cross has experienced much bullish behavior for the past week. However, it seems that this trend may be coming to an end. The RSI of the 4-hour chart shows the pair floating in the over-bought territory, indicating that a downward correction will happen anytime soon. Going short with tight stops might be a wise choice.

The Wild Card

GBP/CHF

GBP/CHF sustained upward movement has finally pushed its price into the over-bought territory on the daily chart’s RSI. Not only that, but there actually appears to be a bearish cross on the Slow Stochastic pointing to an imminent downward correction. Forex traders have the opportunity to wait for the downward breach on the hourlies and go short in order to ride out the impending wave.

Forex Market Analysis provided by Forex Yard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

FX Market Movers

The Dollar strengthened against all majors on increasing risk aversion as rumors circling the market suggested that Chinese banking regulator Liu Mingkang instructed banks to curb lending, a move that raised worries about a potential slow-down for global growth. China has been a key player for global recovery, and taking actions to slow the pace in order to avoid an economic bubble makes investors nervous about the effect of such measures on the global economy. EUR/USD reached its lowest levels in five months with an intraday drop below 1.41 as concerns over Greece weighed on the Euro in addition to the Dollar’s strength. The Pound showed stronger spirit as UK Jobless Claims dropped more than expected in December and the ILO Unemployment Rate decreased to 7.8%. The UK currency still lost against its US peer but continued to rally against the Euro, pushing EUR/GBP below 0.87. Minutes from the BoE meeting in January suggested it’s improbable that quantitative easing will be altered in February and showed that bank officials estimate inflation will fall short of its target as the economy remains delicate. The Canadian dollar weakened for a second day as commodities dropped and its CPI figures failed to meet expectations. The New Zealand dollar fell as well but NZD/USD managed to recuperate above 0.72 as the country’s Retail Sales numbers came stronger than forecasted.

Commodities

Gold fell for a second day as the Dollar strengthened on risk-aversion waves dominating the markets. The yellow metal plummeted from above $1130 an ounce to an intraday low below $1107, to finally settle around $1112. Silver suffered a massive sell-off as well, dropping from $18.65 to close around $17.85. Crude Oil retreated back to the $77.50 level eclipsing yesterday’s gains ahead of the EIA weekly Stockpiles Report.

The Day Ahead

During the European session the PMI Services and Manufacturing are due for release in both Germany and the European Union. Positive figures are expected, which could provide some support for the battered Euro. The ECB is not likely to appoint its new vice-president yet at its monthly meeting being held in Brussels. In Switzerland the ZEW Survey will shed light on investors’ sentiment about the country’s economic conditions. Moving to the US session, Initial Jobless Claims are expected to decrease to 440K from 444K last week and for the Philly Fed index a drop to 18.2 is forecasted from 20.4 the previous month.

Technical Analysis

AUD/USD DAILY

Bullish Scenario– Support around the 0.9050 area holds the bearish wave and sends the cross north in a new bullish cycle.

Target A– 0.9185

Target B– 0.9325

Bearish scenario– A break below 0.9050 fuels the bearish momentum to test the 0.90 level and potentially lower.

Target A- 0.90

Target B– 0.8940

Daily Forex Market Analysis provided by eToro

Disclaimer: Trading in the Foreign Exchange market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the foreign exchange market. Don’t trade with money you can’t afford to lose.

© 2009 eToro Blog.

By David Adams

How Does the Relative Strength Indicator Function?

Have you read Welles Wilder’s “New Strategies in Technical Trading Systems?” If you haven’t I would advise reading the book today. If you want to trade the RSI, learn about it from the original text, and apply the original RSI knowledge to your trading. Don’t settle for the endless stream of reviews and technical explanations on the nature of this remarkable volume, and don’t be satisfied with simply understanding a bit about his technical indicators. No, I think a proper foundation in trading starts at the source, not the endless stream of late comers who have adapted aspects of the book into their trading systems. Now let’s get started with the RSI.

Let me ask you a quick question. What do all of the following have in common?

1. Relative Strength Indicator 2. Directional Movement Indicator 3. Average Directional Index 4. Parabolic Stop and Reverse 5. Average True Range 6. Wilder Smoothing Average

The were all in one book! Yep, “New Strategies in Technical Trading Systems” is the source. Of course, today we are going to concentrate on just one of those indicators, the Relative Strength Index, or RSI.

RS = Average of x days’ up closes / Average of x days’ down closes

The RSI is an indicator that compares recent gains and recent losses to formulate a system for determining overbought and oversold conditions. I can’t see it as a stand-alone indicator, as it tends to whipshaw you in and out of the markets, but it is the perfect indicator to use in conjunction with other indicators. I use it as a confirming indicator for my primary indicator.

There are three primary areas to pay attention to when trading the RSI. The overbought area is derived from the data when the indicator hits 70. The oversold indication is derived from data when the indicator hits 30. In his original thesis, both these readings (70, 30) were buy and sell points of the RSI. Since the RSI is used to measure the strength of the underlying security, there is a wealth of information to be gleaned from the RSI. Again, I caution you in trading the RSI as a primary indicator.

Another system uses the RSI in a similar manner, except it focuses on the 50 line in the RSI. Some believe that when the RSI pierces the 50 line going upward a buy signal is generated, and the corollary is true also…when the line is headed downward through the 50 line, a short signal is generated. While I am aware of these two trading methods, it’s not what I am looking for in the RSI, though the information is valuable for confirming trade decisions.

No, I want to look a price divergences with the RSI. When the RSI is headed one way and the price action on the chart is headed another I like to take notice, especially if I am currently in a trade. Divergent indicators are the stuff of gold, and they are hard to come across, especially in short term trading, but the RSI shines at it’s assigned task. When price is still headed in an upward direction and the RSI joins that movement direction, I am looking for a point in time when the RSI changes direction, and it usually begins to swing before the price movement reflects the deteriorating underlying short term trend. Put in less esoteric terms; if the price is going up and the RSI starts to head down, you better be prepared to take quick action. Convergence and divergence are what makes guys like me, who trade with price action and oscilllators, feel good. Any information that I can glean about what is happening in the market is helpful, especially when you are trying to scan your screen for something that isn’t necessarily reflected in the charts.

I feel using the RSI makes me a more nimble trader, more informed. It generally occupies the middle of the indicator row, second from the top. Once I am in a trade I generally keep a close watch on what the RSI is trying to tell me, and then plan my strategy accordingly. My recommendation is to give the RSI a try, and see if makes sense in your overall trading strategy. Are you paying attention to divergent indicators? You should be.

About the Author

You can learn to trade from a 15 year veteran trader, not a salesmen. This program comes with a lifetime mentoring program and an educational package that is second to none. Additionally, the trading system is time tested and has been in use more than ten years. You can get your free emini starter pack (valued at $500) by going to Click here for your free trading pack at Trading Concepts, Inc

GBPUSD formed a short term cycle top at 1.6456 level on 4-hour chart. Range trading between 1.6210 and 1.6456 is expected later today. As long as 1.6210 key support holds, the price action from 1.6456 could be treated as consolidation of uptrend from 1.5829 and one more rise towards 1.6550 is still possible. However, a breakdown below 1.6210 level will indicate that the rise from 1.5829 has completed at 1.6456 level already, then the following downtrend could bring price back to re-test 1.5829 previous low support.

Daily Forex Forecast

By CountingPips.com

New Zealand retail sales increased by more than expected in December as consumer spending on retail goods advanced after two months of no gains, according to a report by Statistics New Zealand. Total retail sales increased by 0.8 percent in December to surpass market forecasts that were expecting a 0.4 percent advancement for the month. The retail sales data from November and October had shown no change from the previous month. New Zealand’s retail sales have now increased by 2.5 percent from the February 2009 level and have averaged a rise of 0.3 percent per month since that period.

Core retail sales, excluding the automobile related industries, increased by 0.8 percent in December after core sales rose by 0.5 percent in November.

Boosting the retail sales numbers in December were a 3.8 percent gain in automotive fuel retailing and a 7.3 percent increase in “other retailing” which includes used goods, flowers & gardening supplies, jewelery and antique sales. Also contributing to the increase in retail sales were gains in department stores, liquor retailing and automotive electrical, smash repairs and tyres. Motor vehicle retailing was the largest negative contributor to the December sales report.

Kiwi edges higher after report but still lower on day.

The New Zealand dollar bounced a bit higher immediately following the retail sales report but has been under pressure most of the day in forex trading. The NZD has fallen in trading today versus the US dollar, Euro, Australian dollar, Canadian dollar and Japanese yen.  The NZD/USD pair has fallen by approximately 110 pips today while the NZD/JPY pair has also declined by over 100 pips as the U.S. dollar and Japanese yen have traded higher on investor risk aversion.

NZD/USD 30 minute Chart – The New Zealand dollar dropping sharply today in forex trading versus the US dollar. This pair broke out of its short-term declining price channel sharply to the downside before finding its support level around 0.7185.

By Sylvain Vervoort – During an illness in the mid-1930s, Ralph Nelson Elliott discovered the correlation between human emotion and trend patterns contained within stock price charts. Elliott discovered different patterns that repeated themselves in form but not necessarily in size or length of time; these patterns could always be subdivided into smaller waves within the framework of certain rules. He called this phenomenon the “wave principle.” There are two basic waves in Elliott wave theory: a five-wave impulse pattern in the direction of the main trend and a three-wave correction pattern against the main trend. In a later stage, Elliott used Fibonacci numbers together with the waves to predict target prices.

With this article we continue investigating Elliott waves, looking at the application and rules for impulse waves. These are the 5 waves of the impulse wave:

In wave 1 there are a limited number of people believing that the underestimated value of stocks is worth buying; a long-term belief in survival. In about half of the cases, wave 1 is still part of the bottoming pattern of the previous downtrend. As a result, wave 2 will redraw most of wave 1. A lot of investors look at wave 1 as a correction in the downtrend in order to profit from getting a higher price to close positions. They believe the trend will continue farther down. In the other half of the cases, there is a strong belief that the trend will turn up again, in which case wave 2 will usually only make a small correction.

Wave 2 is a test of the low point of wave 1. There are not yet any visible fundamental changes. With the start of correction wave 2, believers in an additional downtrend will get confirmation. As a result, and often out of pure panic, call options will drop fast in price. Selling pressure drops with lower volume and lower volatility. Wave 2 never goes below the start of wave 1.

Wave 3 is strong up-move based on good economical prospects; real improvement in living conditions and never the shortest wave. On its way up, wave 3 will find the resistance of the wave 1 top. This may take some time, but once it is broken, more investors will step in, believing that the trend is really up again. Wave 3 is usually strong because it is supported by big masses. The trend is clear, and there is positive news. Wave 3 makes the biggest move and has intermediate extensions. Almost all stocks take part in this move.

In wave 4 there is the question; is this already the end of the growth cycle? No, just some temporary profit taking! Wave 4 never reaches the territory of wave 1. Correction wave 4 is generally predictable in size and pattern. Wave 4 mostly is a limited correction and rather flat. Wave 4 can be used to synchronize the wave.

During wave 5 there are more positive developments; usually not as strong as in wave 3; there is psychological overestimation. Those who missed wave 3 believe in a further uptrend. Usually, wave 5 makes a higher top than wave 3 with lower volume from a smaller group of investors. The price acceleration is usually slower than in wave 3. If, however, wave 5 proves to be another extension of wave 3, the acceleration will be stronger.

Recognizing wave patterns is the most important occupation within Elliot wave analysis. An impulse wave is always composed of 5 waves, numbered 1 to 5. Waves 1, 3, and 5 are, again, impulse patterns. Waves 2 and 4 are correction patterns.

*Wave 1 is an impulse wave or a starting wedge impulse wave (we will look at later on) *Wave 2 cannot move beyond the start of wave 1. *Wave 3 is an impulse wave. *Wave 3 is never the smallest wave. *Wave 4 can be any type of correction pattern. *Waves 2 and 4 are not overlapping. *Wave 5 is an impulse wave or an ending wedge impulse wave.

A correct count is of course utmost important. Counts with wave 4 and 2 overlapping or where wave 3 is the smallest wave are wrong. Beware that of course not all impulse waves look perfect!

Waves 1, 3, and 5 can be extended and therefore take much more time than the other waves to complete. A wave extension is very common for all waves; in most cases, this happens with wave 3. Waves 1 and 5 than incline toward equality.

Many times, price targets are given by Fibonacci projections. You will note many times that a Fibonacci price projection based on the height of wave 1 is reaching targets at 161.8%, 261.8% and 423.6% to complete finally the impulse wave 5. We will talk about Fibonacci projections in a future article.

The starting wedge impulse wave can only appear in waves 1 or a correction wave A. There may be, at first, some confusion when wave 3, within the starting wedge impulse wave, is seen as an extension wave. You must recognize the starting wedge impulse wave at the start of wave 5 by drawing the wedge pattern between 1 and 3 and 2 and 4. You know now that the starting wedge impulse wave 5 is really just the top of a new wave 1 of a higher order. The wave that follows is not an extended impulse wave 3 up, but a correction wave 2 down.

*This pattern has 5 waves. *The price is moving between 2 converging lines, a wedge pattern. *Wave 1 is an impulse wave or a lower order starting wedge impulse wave. *Wave 2 is a correction pattern smaller than wave 1. *Wave 3 is an impulse pattern. *Wave 3 is never the smallest wave. *Wave 4 can be any correction pattern. *Waves 4 and 2 may be overlapping. *Wave 5 is an impulse pattern or an ending wedge impulse wave.

Ending wedge impulse waves are mostly found in higher order impulse waves. Because the ending wedge impulse wave is a wave 5 impulse wave or a wave C correction wave, there will be a bigger market reversal on wave completion. At first, there may be some confusion when waves 3 and 4, within the ending wedge impulse wave, are seen as the start of extension waves 1 and 2. It is important to recognize the ending wedge impulse wave at the start of wave 5 by drawing the wedge pattern. You know now that the ending wedge impulse wave 5 is really the end of wave 5 of a higher order wave. The wave that follows is not an extended impulse wave 3, but a bigger correction wave. The ending wedge impulse wave can be easily recognized by the internal 3-wave-structure for all waves.

*The price is moving between two converging lines, a wedge pattern. *Waves 1, 3, and 5 are 3-wave zigzag patterns. *Wave 2 is a correction pattern. *Wave 3 is always bigger than wave 2. *Wave 3 is never the smallest wave. *Wave 4 can be any correction pattern. *Waves 4 and 2 may be partly overlapping.

In my next article we will have a look at Elliott correction waves.

About the Author

Want to learn everything about technical analysis? You can find free information at my website: http://stocata.org/. Sylvain Vervoort is a trader and the author of a new book “Capturing Profit with Technical Analysis” and a regular contributor to Stocks & Commodities magazine.

A Greenback Alternative That’s Better Than Gold, Part I

By Justice Litle, Editorial Director, Taipan Publishing Group

http://www.taipanpublishinggroup.com/taipan-daily-012010.html

Why do fiat currencies have value? Is it “faith alone,” or is there something more? Today Justice explains how countries are like companies, and currencies like shares of stock.

In response to Turbo Timmy’s Christmas Eve Coup, Taipan Daily reader Dave K. wrote in to ask, “How can we get our representatives to read and understand this?”

Another reader named Jeff said, “I wish this article would be on the front page of every newspaper and magazine and on every News channel.” (So do we, Jeff!)

Countless other responses expressed similar sentiment. How do we get the word out… how do we get Congress to pay attention… and in the meantime, what can we do?

The good news is, at least one person in Washington is paying attention (and actually has a firm grasp on what’s going on). Congressman Ron Paul recently gave a four minute speech titled “Current Conditions or Just a Bad Dream.” You can watch it here via YouTube. The opener pulls no punches:

Could it all be a bad dream, or a nightmare? Is it my imagination, or have we lost our minds? It’s surreal; it’s just not believable. A grand absurdity; a great deception, a delusion of momentous proportions; based on preposterous notions; and on ideas whose time should never have come; simplicity grossly distorted and complicated; insanity passed off as logic; grandiose schemes built on falsehoods with the morality of Ponzi and Madoff; evil described as virtue; ignorance pawned off as wisdom; destruction and impoverishment in the name of humanitarianism; violence, the tool of change; preventive wars used as the road to peace; tolerance delivered by government guns; reactionary views in the guise of progress; an empire replacing the Republic; slavery sold as liberty; excellence and virtue traded for mediocracy; socialism to save capitalism; a government out of control, unrestrained by the Constitution, the rule of law, or morality; bickering over petty politics as we collapse into chaos; the philosophy that destroys us is not even defined.

We find it hard to argue with the man.

It would be presumptuous to suggest Congressman Paul is doing “God’s Work” – that’s a Goldman Sachs thing – but at least he is out there telling it like it is.

The Invisible Burden

Moving on… Milton Friedman once observed that “the burden of government is not measured by how much it taxes, but by how much it spends.” This is true as a general rule, yet all the more true when a government’s spending decisions are shrouded in secrecy.

When you really think about it – and as we have pointed out before – there is no definitive reason why a government has to directly tax its citizens. Instead, the government could simply print up fresh currency at will to pay all its bills.

This hidden form of wealth confiscation (printing up currency) is just as much a hit to one’s wallet – assuming there is paper in it – as the direct taxes one is forced to pay. (It’s just harder to detect, that’s all.)

And when Congress borrows more than the country can afford, squandering the cash on foolish or unproductive pursuits, this activity has the same long-run effect as ginning up worthless scrip… because the ultimate resolution to an unsustainable fiat-currency debt burden, however far off in future, is always printing that burden away.

So why bother with direct taxes in the first place? One big reason, your humble editor submits, is to divert the public’s eyes from the quiet shenanigans taking place. If we assume the government is funded by visible taxation, we will forget about (or otherwise ignore) the pernicious invisible stuff. All in all, we are subtly encouraged to pay attention to what we see – i.e. the IRS bill – and blithely ignore what we don’t see.

A Force-Backed Claim on Assets

My colleague Michael Sankowski, the razor-sharp editor of Currency Profits Trader, makes another keen observation in regard to taxes. He points out how the government’s ability to tax creates currency demand in and of itself:

There is a built-in demand for specific currencies. Taxes.

Yep, as much as I minimize my tax bill and hate paying taxes, I still pay them. I have to. I have to acquire U.S. dollars. I have to get lots of good ole’ Ben Franklins into my checking account, and then write a fat check to the U.S. Treasury. And so do you and everyone else you will see today. We are all are paying taxes in USD to the government.

Taxes can only be paid in the fiat currency. You cannot pay a tax bill in gold, silver, real estate, stocks or a foreign currency. No, the only thing the U.S. Treasury accepts to pay taxes is U.S. dollars.

While maintaining agreement with Mike, your editor suggests taking the argument one step further. Consider that it is not just a government’s power to tax that gives a currency its value… but the fact that a base of productive wealth exists which government can tax in the first place!

The logic chain goes something like this:

• Via the power to tax, sovereign governments maintain a force-backed claim on assets.

• The “force-backed” part comes from the fact that, if you don’t pay your taxes, big brother can shut down your business, confiscate your property, and throw you in jail.

• Therefore, fiat currencies are ultimately backed by the productive power and wealth-producing capacity of the sovereign economy on the whole.

Of Assets and Liabilities

Not to get too abstract on you, but in this manner we can now see how fiat currency is a bit like shares of company stock. Except in this case, we are not talking about companies but countries (sovereign nations run by sovereign governments).

What is a share of stock worth? On its own, nothing. It’s a flimsy piece of paper… or even less than that, a pattern of electron smudges in a computer database somewhere. Stock shares have value to the extent they represent a claim on the company’s underlying assets and future productive capacity – be it an oil major, a software company, a financial services firm or what have you.

Similarly, fiat currency is “worthless” on its own but, via the government’s force-backed claim on assets (i.e. the power to tax something worth taxing), that paper scrip actually represents the present and future productive capacity of the country it hails from.

(Still with me so far? If not, tell me where I lost you: [email protected].)

Now that you’ve gotten your head around the idea of fiat currency being like shares of stock, let’s take the logic chain a step further:

• Countries are like companies in that, just as a share of stock is backed by the company’s assets and prospects, the worth of fiat currency is backed by a country’s assets and prospects.

• Just as bad company managers can destroy a share price by dumping too many shares on the market, bad country managers (i.e. politicians) can do the same thing by dumping too much currency on the market.

• Just as stock price is a function of supply and demand (shares outstanding versus desire to hold or accumulate those shares), the currency equation is the same.

• Just as you have to consider assets and liabilities to figure out what a company is really worth – and thus where its share price should be – the same logic applies to countries too.

Now we have a better handle on why the dollar (and the euro and the yen too!) will likely be toast in the long run.

To stick with the analogy, “USA Inc.” is still a great company in many respects. America has brains and innovation and favorable demographics all going for it… not unlike a software company known for its brilliant R&D team and dynamic entrepreneurial culture.

But USA Inc. is also burdened with the management suite from hell – gross incompetence, criminal neglect, kickbacks and cronyism everywhere you turn. While things look decent on the future earnings side for USA Inc. – and some would debate even that, given the serious erosion of our manufacturing base – we are racking up a veritable mountain of long-term liabilities (sovereign debt) as Washington eats through trillions like boll weevils in a cotton field.

The only way for USA Inc. to ultimately wriggle out from under the crushing liability side of its balance sheet, then, will be to issue lots more shares, i.e. print up lots more currency. Expect major “shareholder dilution” ahead.

Tying It All Together

The title of this piece promised a greenback alternative “better than gold.” We’re getting there… it was just necessary to clarify the country/company analogy first.

Now that you can see how a country is sort of like a public company – and fiat currency like shares of stock – an important question comes up. If countries are like companies, which ones should we buy?

You’ll have that answer soon.

By GCI Forex Research

Fundamental Outlook at 1500 GMT (EDT + 0500)

€

The euro depreciated sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4080 level and was capped around the $1.4295 level.  Dealers are talking about the victory in the U.S. state of Massachusetts by a Republican in a special Senate election and the impact this will have on the Obama administration’s ability to pass legislation.  Banks and financial institutions are trying to repair their balance sheets and the removal of Obama’s filibuster-free legislative ability could be positive for the U.S. dollar.  The common currency was also weighed down today by ongoing concerns regarding Greece’s fiscal position.  Greek finance minister Papaconstantinou today said the country is “reviewing all options” as to how to raise funds to improve its fiscal position.  Dealers cite concerns that the credit crisis could spread to other eurozone countries and engender a greater panic in capital markets there, possibly requiring intervention from the European Central Bank.  European Central Bank member Stark reported said the ECB wil “not change its rules” for Greece and that Greece’s situation requires a “radical turnaround.”  German Chancellor Merkel called on Germany to remain a net exporter.  In U.S. news, data released in the U.S. saw MBA mortgage applications decline to +9.1% from +14.3% in the latest reporting week.  Also, December headline producer prices were up 0.2% m/m and 4.4% y/y while the core ex-food and energy components were up 0.0% m/m and 0.9% y/y.  Also, December housing starts fell to an annualized 557,000 from a revised 580,000 in November and building permits were up 10.9% y/y to print at 653,000, up from a revised 589,000.  Euro bids are cited around the US$ 1.3885 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥91.45 level and was supported around the ¥90.80 level.  Data released in Japan overnight saw revised December machine tool orders up 27.2% m/m and +63.4% y/y.  As expected, Bank of Japan kept its assessment of the economy unchanged overnight and did not include exchange rates and stock price volatility as risk in its assessment.  Notably, the central bank also improved its assessment of the domestic housing market and upgraded its view on financial market conditions for the first time in four months.  BoJ said the economy is “picking up” but remains in a “difficult condition.” BoJ Governor Shirakawa reported demand for funds from small companies remains weak.  Data released in Japan yesterday saw December consumer confidence print at 37.6.  Former Bank of Japan Policy Board member Hirano reported a weak yen is positive for Japan’s economy.  Prime Minister Hatoyama, whose government is embroiled in a funds scandal, said the government and BoJ must cooperate in combating deflation.  This scandal has been brewing for several months but some traders believe the problems are worsening and could prevent the government from enacting needed reforms and budget agreements.  There is increasing speculation the central bank will extend its near-zero per cent interest rate policy and possibly ramp up fund injections into the economy.  Group of Seven finance ministers are expected to discuss exchange rates in Canada when they convene on 5-6 February.  The Nikkei 225 stock index lost 0.25% to close at ¥10,737.52.  U.S. dollar offers are cited around the ¥94.75 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥128.40 level and was capped around the ¥130.30 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥147.55 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥86.95 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8270 in the over-the-counter market, down from CNY 6.8277.  People’s Bank of China today instructed some banks to restrict lending and will restrict overall credit growth in China to CNY 7.5 trillion in 2010.  People’s Bank of China guided its benchmark one-year bill yield to its highest level in fourteen months to moderate record loan growth and slow asset bubbles.  PBoC sold bills at a rate of 1.9264% in open-market operations and this is the central bank’s latest signal that it is intent on tightening monetary policy this year.  Many economists foresee a GDP growth rate above 10% this year.

Forex Daily Market Commentary provided by GCI Financial Ltd.

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By CountingPips.com

The US Dollar has continued its rapid ascent in forex markets today for the second straight day as the euro’s decline against the dollar hit a five-month lowpoint. The dollar has climbed versus the euro, British pound, Australian dollar, New Zealand dollar, Canadian dollar, Swiss franc and the Japanese yen in forex trading as of 1:33 pm EST in the afternoon of the US trading session. Yesterday, the dollar also rose against all of these other major currencies with the exception of the British pound which edged higher.

The EUR/USD pair has plummeted by over 150 pips today as continuing negative financial news out of Greece has helped propel the currency lower.  Yesterday, the EUR/USD fell by approximately 120 pips while today’s decline has brought the pair to its lowest level since August 19th. The EUR/USD had been flucuating between the 1.4217 and 1.4575 levels since the middle of December before today’s move broke out of that trend to the low side and declined below the 200-day simple moving average.

U.S. Economic news releases out of the U.S. today showed that producer prices rose more than expected in December as consumer food costs increased and edged inflation higher on finished goods. Producer prices increased by 0.2 percent in the month of December following an increase of 1.8 percent in November. Forecasts were looking for a flat reading in prices for December.  The annual rate of increase for December showed that producer prices were 4.4 percent higher than December of 2008 after November’s annual rate registered a 2.4 percent increase. Core producer prices, excluding food and energy prices, showed no change in December after a 0.5 percent increase in November.

U.S. building permits rose in the month of December while housing starts and housing completions decreased according to data released by the Commerce Department on new residential construction. Building permits statistics, used as a predictor of future construction, showed a seasonally adjusted annual rate of 653,000 permits in December which is an increase of 10.9 percent when compared to November.

Housing Starts, meanwhile, fell by 4.0 percent in December to a seasonally adjusted annual rate of 557,000 starts following an annual rate of 580,000 in November. Housing Completions for December fell to an annual rate of 768,000 privately-owned housing completions from a rate of 865,000 completions in November.

Fx Chart

EUR/USD 4hour Chart – The Euro falling today versus the US Dollar in Forex Trading and touching its lowest level since August 19th near the 1.4100 exchange rate.  The EUR/USD broke out below last month’s lowpoint (1.4217) today to enter into oversold territory on the Relative Strength Index(RSI). The EUR/USD is down by approximately 200 pips from the beginning of 2010.

By Fast Brokers – Gold is undergoing a heavy selloff right now in reaction to a combination of a huge pullback in the Euro combined with broad-based Dollar strength after an encouraging improvement in U.S. Building Permits.  Today’s rally in the Dollar has had its expected impact on gold considering their negative correlation.  Losses accelerated in the precious metal after it dipped below our 3rd tier uptrend line.  Meanwhile, it seems that a retest of our 1st tier uptrend line and the highly psychological $1100/oz level could be in order.  Attention will now turn to China with the release of GDP and Industrial Production coming during tomorrow’s Asia trading session.  Furthermore, investors will receive EU PMI data along with U.S. weekly Unemployment Claims and the Philly Manufacturing Index.  Hence, volatility could remain at a heightened state for the next 24 hours.  That being said, investors should keep a close eye on the interaction between gold and its highly $1100/oz level should it be tested.  Furthermore, investors should take note of signs of stability in the major Dollar crosses, particularly the EUR/USD.  Once the EUR/USD does create a base this should yield stability in gold as well.

Present Price: $1113.30/oz

Resistances: $1114.45, $1118.16/oz, $1121.93/oz, $1125.93/oz, $1128.42/oz, $1134.33/oz

Supports: $1111.01/oz, $1109.15/oz, $1106.04/oz, $1100.44/oz, $1096.40/oz, $11093.29/oz

Psychological: $1100/oz

Market Commentary provided by Fast Brokers.

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