Posted: 12 Feb 2010 02:34 AM PST

EUR/USD breaks to a new 9 month low after GDP is very worrying. An no – the Greek crisis is far from over. Next stop – 1.3420.

European GDP figures were very disappointing. Germany’s economy didn’t grow in Q4. This followed weak growth in Q3. According to the initial release, the German economy stalled. This fell short of early expectations for 0.2% growth. There’s a chance that in the final release this figure will be revised to the downside. Fears for a new recession in Europe’s largest country and the economic driver are very bad for the Euro.

French GDP was a positive surprise, rising by 0.%, better than expected. Italy erased the smiles on the faces as it saw a contraction of 0.1%. The bigger blow came from the last release – the all-European figure – Flash GDP showed growth of 0.1%, much lower than 0.4% that was expected.

Let’s look at the market:

The downfall in the Euro began after the first release from Germany as EUR/USD fell from 1.3680 down to 1.3630. It then continued falling, but met the 1.3580 support line, a level seen last week after the American Non-Farm Payrolls.

Now, after all the data is out, EUR/USD fell to 1.3555, below the line. This break has yet to be confirmed. As we’ve seen before, breaks of 50 pips can sometimes be reversed quickly and become false breaks.

Also on other fronts, the Euro is falling: EUR/GBP is below 0.87 – the lowest in two weeks. This has become a volatile pair in recent weeks. After EUR/GBP climbed and went for the 0.8840 line, it failed to break it and fell sharply. EUR/JPY is also falling.

If the break is confirmed, the next target is 1.3420.This is a strong line of support. The next significant line is only at 1.3080. If the break isn’t confirmed, EUR/USD will return to this week’s range – capped by the 1.3750 – 1.3800 region. More technical lines can be found in the EUR/USD forecast.

Greece

The Euro enjoyed back wind from the hopes on a positive outcome from the EU Economic Summit. Jean-Claude Trichet shortened his visit to Australia in order to help resolve the issue.

Well, it’s far from over. The European leaders talked about solidarity. This is nice but they made no promise to take action. This means that the crisis is still with us. Note that this crisis is affecting the whole world, and it strengthens the dollar and the yen – risk aversive trading.

All in all – it seems like another bad Friday for the Euro.

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Forex book review: Making Sense of the Dollar

Posted: 11 Feb 2010 10:41 PM PST

Guest Post by John Forman

John Forman is a Forex author and expert. He is the Senior Foreign Exchange Analyst for the IFR Markets group of Thomson Reuters and frequent blog poster on Currensee.com.

You may be familiar with Marc Chandler from appearances on CNBC and/or reading articles he’s published in a number of venues. Chandler is currently the Chief Foreign Exchange Strategist at Brown Brothers Harriman, having prior held a similar post with HSBC. He also teaches at NYU. His recently published book, Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange, is the subject of this review.

What Chandler looks to do with Making Sense of the Dollar is to dispute many of the commonly held views about the US currency, international trade, and related economic and political considerations. He does this by presenting ten myths and criticisms of them. Those myths are:

The Trade Deficit Reflects US Competitiveness
The Current Account Deficit Drives the Dollar
You Can’t Have too Much Money
Labor Market Flexibility is the Key to US Economic Prowess
There is One Type of Capitalism
The Dollar’s Privileged Place in the World is Lost
Globalization Destroyed American Industry
US Capitalist Development Prevents Socialism
The Weak US Dollar Boost Exports and Drives Stock Markets
The Foreign Exchange Market is Strange and Speculative

Viewing the book from the perspective of a forex trader, I found it to be a very interesting and potentially enormously useful read. In some places the author could have provided more evidence to support his assertions, and in places he gets repetitive, the book certainly contains a lot of thought-provoking and informative material.

The sections of the book most specifically interesting in regards to gaining insight into the workings of the dollar are 1, 2, 6, and 9. This isn’t to say the others aren’t. It’s just that these four most directly get to the major issues a lot of market watchers cite as to why the dollar has lost or can be expected to lose its high standing.

The trade and current account deficits are things many folks, professional and otherwise, point to as unsustainable issues which eventually will have to correct – to the detriment of the dollar. Chandler says both are flawed measures based on outdated methodologies which do not properly account for modern trade and capital flow. That’s the focus of Myths 1 and 2.

In regards to Myth 6 about the dollar losing its stature, the author brings up a number of defenses for the greenback. One of them is the view that I myself have expressed on several occasions that one of the reasons that the dollar is the top reserve currency is the breadth and depth of the US financial markets. No other country or region can come close to matching them, making the US the place where excess savings looking for a safe place to sit comes, as witnessed by the dollar’s gains during risk aversion. This is why the greenback has not actually lost ground to in terms of the total % of global reserves.

Regarding the idea that the lowering dollar’s exchange rate will boost exports and reduce imports (Myth 9), Chandler indicates that there’s no real evidence to support that notion. For example, he notes that in the early 90s a pair of Congressmen suggested the dollar was 20% overvalued and needed to come down to close the trade gap. The dollar trended down for most of the decade, losing about 20% of its value in that span, but the trade deficit actually expanded. The author also points out that much of the cost of import goods to US citizens is actually added on to them once they reach our shores, so that the value of the dollar isn’t really a major influence on the prices we see. And of course he also points out that the largest portion of our imports comes in the form of oil and related products, the demand for which is relatively inelastic over the short- to intermediate-term.

New forex traders can often be heard to ask questions about what fundamental factors drive exchange rates, and with good reason. It can be a very confusing market in that regard as things which are clear drivers in one direction at one point in time can be drivers in the other direction later. Chandler does a really good job in the space of a couple of pages in the 10th myth chapter of addressing the primary factors impacting the forex market and the concept of currency valuation. That’s really the only place “trading” of currencies is discussed. The rest of the book is more focused on looking at the big macro dollar picture.

As much as Chandler makes some interesting points about Capitalism vs. Socialism, in my view he spends too much time on the subject. One could even ask whether he needed to address it at all, but I was fine with it overall. He just got a bit repetitive on the subject.

The bottom line as far as Chandler is concerned is that the dollar is just fine the way it is and that attempts to focus on imports and exports and weaken the dollar to influence them could produce serious negative consequences. I definitely recommend Making Sense of the Dollar to anyone interested in the macro view of the dollar and global currency markets.

Feel free to check out my other trading book reviews.

Forex Daily Outlook – February 12th 2010

Posted: 11 Feb 2010 10:39 PM PST

The final day of the week is all about the major pair EUR/USD – lots of figures will be pouring out of these two regions and will determine the direction of pair towards the close of the week. Let’s see what’s up for today.

European figures

Europe’s GDP number will take the attention in the morning. Germany’s Prelim GDP is the first and most important release. After a rise of 0.7% last quarter, the economy is expected to grow by only 0.2% this time. A small miss – and there’s no growth. This figure will sure shake the Euro.

Later, Italian and French will be released and are expected to show more growth. This will be followed by the Flash GDP for the whole continent, which is predicted to show a rise of 0.4% – like the previous quarter.

There’s more in Europe – French Prelim Non-Farm Payrolls are predicted to show another quarter of job losses – a squeeze of 0.2% is expected to follow last quarter’s 0.6% dive. Finally, Industrial Production is predicted to rise by 0.3%, less than last quarter’s 1% rise.

EUR/USD is quite shaky. For some technical levels of this pair, check out Casey’s Stubbs’ latest analysis. Also note the state of EUR/GBP – that has seen strong moves lately.

American figures – some delayed from yesterday

Moving to the US, the schedule is busy there as well: Retail Sales are predicted to rise by 0.4%, after dropping by 0.3% last time. Core Retail Sales are predicted to rise in the same scale, following a 0.2% drop last time. The dollar will shake then, and will later receive another major figure:

The initial release of the Consumer Sentiment by the University of Michigan is predicted to edge up from 74.4 to 74.8 – this directly affects consumer spending – retail sales.

Also in the US: Business Inventories are predicted to continue rising modestly. Also the Federal Budget Balance might be finally released.

That’s it for today. Happy forex trading!

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