Having just completed the last edition of What Really Profits (http://www.whatreallyprofits.com), it’s been great to get back in the trading hot seat over the last few days. I enjoy writing, but nothing beats the feeling of being in a trade, or more importantly being able to give the trades the proper time and attention they desire.
I’ve an embarrassment of riches at my finger tips, so I’m fighting hard not to over trade.
FX53 is still working well for trades over a few days and I’ve just discovered a fabulous new tool called The Wizard (www.TheWizard.com). You can read my full review of the latter in the latest edition of What Really Profits due to hit your letter boxes within the next 7 days. (If you don’t want to miss out see www.whatreallyprofits.com).
As well as reviewing The Wizard, I’ve also taken a look at the social groups available to traders including Investment Clubs and SIGNet. Continuing the social theme I’ve also taken a look at some of the net’s best and worst trading chat rooms.
Trading wise, we’ve got a huge week ahead of us with the US interest rate decision on Thursday. Will they raise rates to stem inflation or keep rates on hold to stimulate growth?
On this note, a member recently emailed about these fundamental economic news items and how you can become a pro at trading the news.
So on that note…
Here’s a quick summary of the major news items and how you could trade them.
Give yourself an advantage – trading the news
Before we get into the specifics of any one individual news item, it’s probably worth highlighting a few things about economic news items.
There are some clear top tier news events that will impact on forex and stock markets more than others, but this effect is usually relative. Before the release of an event, analysts will reach a consensus figure on what they think the announcement will be.
If the announcement is very close or exactly the same as the figure that analysts had predicted then you may not get any movement at all. Alternatively, if the announcement was way off what people had predicted then get ready for some wild moves as traders adjust their outlook to take into account the new data.
On the other hand, there are also many occasions when there is a division in what people are expecting the numbers to be. In these circumstances markets can often be extremely jittery before and after a news announcement.
US INTEREST RATE DECISION (FOMC/ FED)
In my humbled opinion, the biggest economic announcement of them all are US interest rate decisions. This importance does depend on the market conditions though and the consensus estimate vs the actual number.
Interest rate decisions impact on forex markets directly because on the whole, the stronger an economy, the more foreign countries want to invest in that country. Also, of more direct consequence is the fact that when an economy is in danger of over heating (through inflation specifically), the weapon of choice for any central bank is to raise interest rates. As interest rates rise, so a currency will appreciate.
Currencies also rise and fall as confidence in a particular country waxes and wanes, but the most direct and immediate impact is squarely down to interest rates and interest rate expectations.
If you were an international mega rich investor, where would you park your money? In Australia with interest rates around 8% or in Japan with interest rates around 1%?
It’s a very crude way of looking at it, but generally higher interest rates equal a higher currency. However, it’s not just the interest rate itself, it’s the expectation of future interest rate changes that’s important. Markets generally think about 3 months ahead. They’ll have already moved to price in tomorrow’s interest rate decision and will be more interested in what the Fed (FOMC) say in their accompanying statement for the prospects of a rate cut over the next 3 to 6 months and beyond.
The currency exchanges with the biggest volume are the USD/ EUR, USD/ JPY and USD/ GBP. Although its influence has fallen over the last few years, the US dollar is still the main driver of news flow.
Stock markets react slightly differently to US interest rate statements. Generally they’ll go up with interest rate cuts and down with interest rate rises as lower rates generally tend to stimulate growth. The US markets leapt higher when the Fed slashed rates earlier in the year. However, as with Forex, its generally not the rate statement itself, but expectations of future rate and what this might mean for the economy. In general I’d say forex is more directly impacted by rates.
Other interest rate statements have an impact on currency exchange rates, like the MPC in the UK or ECB in Europe. These rate decisions will of course impact on the GBP and EUR pairs, but there is nothing to compare to the FOMC US interest rate statement for its impact on global stock and forex markets.
NON FARM PAYROLL
The next biggest announcement in terms of its impact on the global stage is the US Non Farm Payroll. The employment report is really two reports – the household survey and the establishment survey. These two surveys contain a wealth of timely information which justify this report’s status as the most important economic release of the month. This same wealth of information can nevertheless turn into a dearth of knowledge if it is not placed in the proper context.
Without question, the single most important piece of data of the whole report is the NonFarm Payrolls data itself. As the name implies, Nonfarm payrolls measure the number of people on the payrolls of all non- agricultural businesses. The monthly changes in payrolls can be quite volatile, occasionally varying by better than 200K from one month to the next. Even with this volatility and the possibility of large revisions to past data, the payrolls figures offer the most timely and comprehensive snapshot of the US economy.
Non Farm Payrolls happen on the first Friday of the month at 8.30 Easter time.
The best resources for these news times are as follows:
http://bigpicture.typepad.com/ – Unbiased interpretation of the latest US statistics, a must read.
http://www.tradethenews.com/ – Live news feeds
http://ransquawk.com/ – Free Squawk box with the news items read out to you (delayed by 30 seconds).
Trading the news live is incredibly difficult and is best left alone unless you trade the retracement. The banks and hedgefunds pay millions for feeds that get them the news microseconds before the general public, there’s no point competing.
However in terms of the longer term macro trends, you can certainly gain by looking over the data (with help from websites like Big Picture) and see if there is something in there that the market is discounting or ignoring at its peril.
Some great trades from UFXP, bring in 35 points in the week – great considering I was only able to trade a few days over the last week!
It’s interesting to see the filter I’ve been using (add a 60 period moving average) is still working well. In general the total pips remain the same or increase, butthe number of trades required decreases dramatically. I’m using it flexibly, but generally only trading if the signal comes with the bars close very close the moving average. I’ve also been ignoring any trades when the moving average is flat which has work really well.
This week’s hot trading buttons
The week’s news flow is dominated by the US interest rate announcement tomorrow. A no change verdict is expected to be the more likely outcome, but aside from the small potential for surprise next week, it is the prospects for the rest of the year that will cause the most excitement. Chatter that US rate hike speculation is overdone caused some initial excitement last week, but this alone wasn’t enough to push markets higher in the face of some difficult head winds.
Thursday sees the release of US existing home sales. US Housing starts were down 3.3% last month, falling to a 17 year low. It is little surprise US builders are unwilling to add to their housing inventories in light ofrecent data. According to the S&P/ Case-Shiller Home price index of 10 major US cities, house prices are now down 15.1% compared to the same month a year ago. In addition, nearly 18.8% of subprime mortgages were past their due in the first quarter of 2008.
Soft landing for UK houses? Hmmm
I’d be a bum on the street with a tin cup if the markets were always efficient” Warren Buffet
Until next week,