Tuesday, January 6, 2009

Entry for 1/06/09


Is the sterling finding support against the dollar?

Since New Years eve I had opened a short position on the GBP/USD, a pre-emptive attempt prior to the "supposed" rate cut that will bring the UK to its lowest level of interest rates with in the 315 years as the media portrays it. Interestingly enough it would seem on the 60 minute chart we are seeing short term bullish patterns forming. This is a possible indication of the markets have priced in such a dramatic change such as an interest rate cut. If this is surely the case, perhaps a opening such a short so early might have been a bad idea. Opening a short right before the Central Banks decision would have been most appropriate since there would only be the initial drop (weakening of the GBP) before resuming a bullish trend if market sentiment is more bullish. This past week in general, the first week of 2009, I have noticed increased levels of bullish sentiment in the US equity markets. Correlated to this is the rise in the dollar in many of the Major pairs. My point in general is that the new year has hailed in some bullish sentiment, though I doubt this is not sustainable. Fundamentally the economic situation has not changed much, so even if the GBP/USD is indeed in a upward bullish trend it is probably something that will only be seen on the weekly charts. I have not been trading on technicals since the New Years Eve, though however Bollinger Band analysis could confirm such a temporary change in trend. The obvious volume and momentum indicators could be useful as well if one worked with these indicators often in relation specifically to the GBP/USD pair. However, I have decided to ignore more in-depth technials in the mean time and just focus on fundamentals and macro trends and sentiment. However, if I were not paper trading I would of course include all forms of analysis.

basic technical analysis:

If volume is strong enough with a break in resistance of 1.476 the GBP/USD could rally much higher at the end of the week. However it is most likely we will see a battle between the bulls and bears which we will see much indecisiveness towards the end of the week, and more likely we will see where the trend will be in 3rd week of January. In addition, if price levels were far extended beyond 2 deviation BB (which I have not looked at) any bullish price movements would be supported by this (look to weekly chart to confirm this). Based alone on the basic technical analysis I would say the trend would most likely go up based off bullish pattern formation such as higher highers and higher lows the past week(this is not including volume analysis).

(For those more interested in depth analysis in pattern analysis one can consider possible head and shoulder bottom reversal on the monthly chart (roughly 11/20/2008 to 12/31/08). Current prices moves from new years onward can be seen as flag and pennant continuations or possible formation of ascending triangles support a bullish move to neckline resistance on the head and shoulder reversal pattern... for you super bulls you could even develop your price target at around 1.65 based off this pattern, which would be inline with 1.65 resistance)


However, what can be worrying for a bullish model based of technical analysis is sentiment. Today I noticed that the US equity markets closed in the red. Considering this is the beginning of the week, this could possibly mean that past weeks bullish sentiment is ending, though it may possibly be that last week bull's are just taking some gains and bullish sentiment will carry through the week. One would would have to look to the equity future markets more carefully to see where sentiment will be for the week. If sentiment is truly bullish, people trading weekly charts could benefit from long positions. The next 2-3 weeks can be bullish weeks.


Macro considerations:

I would say any risks to a bullish model would be overall economic conditions. Those trading longer term charts would probably want to consider cutting back on some of their GBP/USD positions or hedging them considering strong arguments for short term bullish moves. Overall based on fundamentals, ignoring the extendedness of the GBP/USD on the monthly chart, the pound should still be in a downward trend.

Evidence as follows:

1. Credit markets are still stale as ever, less room for business to grow
2. Continued loosening job market, today i saw that Marks & Spencers decided to cut another 1,000 jobs, which leads me to my next point...
3. Consumption: despite a holiday boost, the fact that a company such as Marks & Spencers has to cut jobs truly shows a weakening of consumer willingness to support the economy. The reason I point out Marks & Spencers is that it is usually considered for middle class shoppers, and if middle class shoppers are getting hurt, this only leaves the upper class to support consumption and considering the percentage of rich to middle class and poor, it provides a bleak out look for consumption. Any models that say the middle class can continue to support economic growth should be abandoned as that may have possibly only been the case for 2007 and early half of 2008.
4. Rate cuts from Central Banks: The US interest rates are at an all time lows and the UK central Bank is planning on following suite.

All these fundamentals are the factors that are going to be driving a continued downward trend.


In conclusion, I would have to say that the next 2-3 weeks will be bullish for the GBP/USD considering sentiment can remain positive. However, if the next 2-3 has some bad economic reports or we have some more surprise job cuts, or if more financial companies show further signs of distress, then I would say price of the GBP/USD should remain around the same levels of the past week (around 1.45). Though, I believe that that sentiment will not be totally killed as much of the bad news will be priced in and I do believe we will see bullish moves within the next 2 weeks, we will definitely see prices hitting around 1.49 vs the current 1.46.

However, for the first quarter 2009, I would still say that the GBP/USD will remain weak and in downward trend.

For those of you who are trading charts longer than monthly charts, one can ignore what was discussed above and call long term support seen from 2001, and say that the charts are way over extended due to the financial crisis and maintain long position from here. This definitely would be popular for currency managers who agree with the media in that there may be economic recovery in the second half of 2009 leading to recovery in further years... though I would not personally subscribe to this long term trading idea as there are too many economic uncertainties that may take a few years to play out, such as restructuring of the financial sector and political impacts yet to be seen.

Brief on other currencies:

Of my other open positions, my best calls were shorts on EUR/USD from new years eve, and going long on the AUD/USD from new years eve. Though I had one really bad call long on the USD/JPY from new years eve, which I closed yesterday.

Another day to talk about a different currency...

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