the gestalt shift » intervention http://thegestaltshift.com/wordpress thinking outside the box to spot and profit from fx Tue, 10 Aug 2010 23:12:57 +0000 en hourly 1 http://wordpress.org/?v=3.0.1 The Third force http://thegestaltshift.com/wordpress/the-third-force/ http://thegestaltshift.com/wordpress/the-third-force/#comments Sun, 25 Oct 2009 15:57:54 +0000 pauls http://thegestaltshift.com/wordpress/the-third-force/ In addition to looking at fundamentals and sentiment, there is another force at work in the markets, and that is the central banks. They have significant power »»]]> In addition to looking at fundamentals and sentiment, there is another force at work in the markets, and that is the central banks. They have significant power to move markets, at least temporarily. They most often “jawbone”, or talk about what they want, or what is right, or what they might do. Less often, because it is expensive to do, they actually intervene in the markets. For example, if a central bank wants their currency to weaken, they will sell their own currency and buy something else (commonly a basket of currencies). It takes billions, but it does work. Here are a few recent examples.

Roth, the chairman of the Swiss National Bank (SNB) declared back in March of this year that the CHF had risen too high against their trading partners in the rest of Europe (the EU25 constitutes 62% of their export market), imperiling their Current Account balance. The SNB actively intervened; selling Swiss francs and buying Euros to maintain 1.51 or so. You can see the initial effect (EUR appreciating against CHF), and the resulting tight trading band (+/- 150 pips) in the succeeding 6 months.

Another example is the $/JPY. The Japanese economy is export-driven, and their largest trading partner is the US (22% of the total). The BoJ is famous for actively intervening in the markets. You can see from this chart the level at which they get rather uncomfortable- about 88 or so. They actively intervened back in February. I am not sure about in October, but it certainly was a good level from which to be bullish.

Trichet has made many comments recently about the TWI (trade-weighted) strength of the Euro, and the weakness of the dollar. While the ECB is not likely to intervene, I imagine that any approach to the previous high of 1.60 will be met with a lot of jawboning.

While trading limits like $/JPY of 88 can be done with the spot, options offer alternatives when the spot exhibits very low volatility like the EUR/CHF. You can actually profit from no movement at all with spread structures, and very limited downside risk. The topic is beyond the scope of this article, but you can reach me at stafford.paul1@gmail.com.

Please visit my website at www.4Xtradertools.com to sign up for my weekly Currency Briefing

]]> http://thegestaltshift.com/wordpress/the-third-force/feed/ 0 USD/CAD imbalance in the making? http://thegestaltshift.com/wordpress/usdcad-imbalance-in-the-making/ http://thegestaltshift.com/wordpress/usdcad-imbalance-in-the-making/#comments Sun, 09 Aug 2009 21:42:25 +0000 admin http://thegestaltshift.com/wordpress/?p=223 Courtesy of The Province

Ok, everyone knows I hate to make bold claims because, as a trader, my opinion could change in a heartbeat. However, I like »»]]> Courtesy of The Province

Courtesy of The Province

Ok, everyone knows I hate to make bold claims because, as a trader, my opinion could change in a heartbeat. However, I like to point out potential imbalances that could turn into trades. One such imbalance that I see in the making is the recent rally of the Canadian Dollar. The currency has rallied considerably against the Dollar, in fact, more so than any of the majors over the last month. The rally, which has finally taken a breather, seems to be largely due commodity (namely energy) price increases over the same period as well as the realization of Canada’s much better capitalized financial system.

The recent rally seems overdone for a number of reasons:

  • While CAD tested new highs (USD/CAD lows), crude did not even attempt to test its June highs.
  • BOC Governor Carney has repeatedly expressed concerns over a strong CAD
  • Sentiment is shifting: Evidence this week shows traders are starting to reward the USD on good US news instead of buying “riskier” currencies against the dollar. When the “rules of the game” start changing, trend reversals are often not far ahead.
  • Key Canadian economic data have both shown much weaker results than expected (Ivey PMI: 51.8, Employment: -44.5K) in contrast to the positive results seen in the US data counterparts.

The key opposing risk to this analysis is if commodities start to stage another rally. If you would like to read more on this argument, check out Scotiabank’s monthly report for August 2009 at the fx bank research page. Otherwise, it’s advisable to play this by either putting on a small position and buying dollars as USD/CAD starts climbing or waiting until sentiment really starts to shift and allowing the move to show itself. In order to protect against the risk that the timing of this analysis is off, one of these methods is necessary.

As usual, these posts are here to provide a perspective, and not for recommending trades.

]]> http://thegestaltshift.com/wordpress/usdcad-imbalance-in-the-making/feed/ 1