FOMC event on Wednesday:

I haven’t heard much talk or speculation in advance of tomorrow’s FOMC interest rate meeting which is surprising to me. I suppose market participants think the Fed can’t possibly lower rates, so it’s not worth paying much attention to, but I don’t necessarily agree with that view.

Fed funds lower?

Although the effective Fed Funds rate is currently set within a band of 0.00% to 0.25%, there’s actually room to take that trading band lower. The Fed could pull a BOJ-type move and drop the Fed Funds trading band to something like 0.00% to 0.10%. Although I give this type of move a lower probability I’m not ruling it out and I’m prepared to see it. If the FOMC did further reduce the Fed Funds trading band obviously the USD would come under pressure, sending the USD Index lower and majors like the EUR/USD, GBP/USD, and AUD/USD higher. But, there’s an even greater risk on the dollar tomorrow…

Expansion of Treasury purchases–

The more viable and probable risk on the dollar is that the FOMC announces further plans to expand their quantitative easing program. At the last FOMC meeting the Fed announced their plan to buy $300 billion worth of Treasuries. If you’re new to the market or don’t remember how it all played out, I’d encourage you to re-read my market commentary from that day for a re-fresher.

So, the biggest risk for the dollar will be an announcement from the Fed in the FOMC statement that they are further expanding their quantitative easing, which is really nothing more than forced currency devaluation and price-fixing of interest rates. I think if the Fed announces they are further expanding their balance sheet, the USD Index will come under pressure and the dollar would be sold-off across the board.

At this point the Fed’s ability to price-fix Treasuries, which were supposed to lead to lower mortgage rates, hasn’t exactly worked the way they planned. Since the start of their quantitative easing in March, Treasuries have turned bearish and have lost… so far in April Treasuries lost over 1% after losing almost 1.5% in Q1. Go Fed go!

There’s really no way to predict whether or not the Fed will announce new plans to further expand their $300 billion program to buy Treasuries but it is my opinion the Fed has to expand the buying program. In fact, I give the Fed a 70% probability of announcing this to the markets tomorrow. Again, this is just my opinion and it’s pure speculation. And even if they don’t announce it tomorrow in the FOMC statement, I still believe their Treasury buying program will have to grow to at least $800 billion in the near-term.

FOMC statement–

Besides the Fed possibly dropping Fed Funds and announcing new measures to buy more Treasuries, it will be critical to dissect the FOMC statement because the statement will tell us about the Fed’s current views on inflation, growth, housing, jobs, and the consumer. I would expect to get a lengthier FOMC statement tomorrow with more detail than what we’ve been given in prior statements.

In recent weeks Bernanke has been talking about positive signs in the economy. He and some of his comrades at the Fed have been subtly telling the markets that the “worst of the worst is over” in order to sustain the slight amount of confidence being built with market participants. Here again, there’s no way anybody can predict what will be contained in the FOMC statement, but I’m fairly certain the markets will not get hit with any shocking or alarming rhetoric and I think the overall picture the Fed wants to paint is a brighter one.

Real-time price action example for trading EUR/USD:

Many traders who are new to understanding and using price action and the market correlated variables often ask me to explain how it all works and how they all tie in together. Well, this morning the market gave us a beautiful example for how it works and how my system takes this real-time market data to show trades that carry 95% or better probabilities of paying out.

At the 1100 EST / 1600 GMT timeframe the EUR/USD made six consecutive highers, which also corresponded perfectly to the euro failing at the 1.3085 upside key level, the S&P 500 futures (ES_cont) failed to break the 855 level after making five consecutive highers, and then spot crude failed to even get to the $50 level after making several attempts and it dropped to test the $49 level.

That’s what I call a silver-platter trade… let me break it down another way:

  • EUR/USD made a sequence of six consecutive highers
  • Four of the six consecutive highers had a pip differential of at least 15-pips per higher
  • S&P 500 futures made five consecutive highers
  • Spot crude failed to break $50, moved lower
  • EUR/USD failed at upside key level of 1.3085 after making three attempts to break higher

So, with all that data my criteria to take a EUR/USD short at 1.3085 was met. And, based on the number of consecutive highers, based on the sequence of pip differentials, based on the price action of the EUR/USD’s market correlated variables, my system showed a 98% probability of a short at 1.3085 paying me a minimum of 20-pips, and this probability is based on almost 8-years of pure EUR/USD price action patterns in addition to how equities and commodities impact upside/downside moves for the euro.

At 1142 EST the EUR/USD hit 1.3065, my 98% probability was achieved and my trade paid-out, the trade took well under an hour to pay, I had zero drawdown, and not a care or worry in the world unless an unforeseen geo-political event or rhetoric from a central banker changed the gameplan. Fortunately that was not the case and I got my 20-pips with no stress.

Probabilities are the key–

Not every trade is going to run that smoothly and be that easy, that’s just not how this market works, but in terms of not having to worry about my entry, it’s a piece of cake because the whole basis for my trade is simply a probability. And it’s a probability based on thousands of repeated patterns caused by human behavior, behavior that is driven by two things — fear and greed. And that’s how it works.

Is 20-pips a big deal? Of course not, lots of traders can make 20-pips but just as fast as they can make those 20-pips they’ll give back another 50-pips or to the market. So the other reason I prefer to trade on probabilities is because of how it takes away the stress of drawdowns and making knee-jerk, emotional reactions which cause unneeded losses.

Plus it prevents me from being on the wrong side of the market. That short I took at 1.3085 means another trader took a long there and that trader bought at the top of a move while my probabilities were showing me it was time to short because the market had over-extended and exhausted itself and it would need to pullback before potentially testing the upside again in the future. There’s no chart or tech indicator on earth that could tell me every time that exact sequence played out with the EUR/USD’s 30-minute openings there’s a 98% payout probability if I took a short at 1.3085, and those price action patterns that reveal the probabilities are why it negates the need for me to even look at a euro chart let alone depend on lagging indicators.

But, the EUR/USD downside didn’t last long and I was glad to take my 20-pips because the markets were hit with more surprise rhetoric from an ECB member…

ECB talks euro back up:

Around 1228 EST this afternoon, as the euro was comfortably under the 1.3100 level, ECB’s Bini Smaghi turned things right around with these comments:

‘ECB’s non-standard measures will be different from Fed; sees problem buying government debt’

On the quantitative easing issue, Bini Smaghi was very clear on his opinions:

‘Quantitative easing make sense only when the interest rate is at zero or very close to zero; bringing the main policy rate too close to zero would risk hampering the functioning of the money markets as it would reduce the incentives for interbank lending’

Just as we talked about in yesterday’s update, here again we have a scenario where central bank rhetoric moves the EUR/USD, and in this case the rhetoric was EUR+ sending the euro to the 1.3150+ level within two hours after his comments hit the news wires. And now we have a situation where the ECB governing council is clearly divided on the path the ECB should with their key lending rate and how the ECB should proceed with buying debt.

The Maastricht Treaty clearly forbids the ECB from buying government debt like the Fed is doing. Special provision would have to be in order to grant the ECB authority to buy German bunds or the sovereign debt of any of the sixteen EU members. I don’t really see it happening but I also have no clue what the ECB’s been up to the past 30-day, and there’s no way of predicting what kind of backroom political deals are going down to facilitate the needs and desires of the ECB.

No matter what, with all this rhetoric flying around and various members of the ECB governing council talking out of both sides of their mouth and disagreeing on monetary policy, you can expect another circus sideshow at the next ECB rate event.

Wednesday trading:

Surprise, surprise… Consumer Confidence printed better than expected but I think we all knew that was going to happen anyway. But for tomorrow, in addition to the major FOMC event, the markets will also have to contend with US Advance GDP. This is a major piece of fundamental data and it should not be pretty. Unfortunately, I have little faith the truth will be told, especially based on recent data trends with the fundamentals. But, I do have a forecast for GDP, and my forecast is based on fact, not fiction. My forecast is for a print of -5.2%. Do I think we’ll see it? No, probably not, we may see even lower than -4.5% if they want to continue playing the smoke and mirrors game, but be prepared for a volatile response in the markets no matter what the print is.

Euro–

There aren’t any fundamentals that the market would consider “major” but they are to me, specifically the M3 and Private Loan data. The Eurozone needs M3 to keep moving up, not moving down and they need the velocity of their money-supply and monetary-base to start going the other direction because there’s a serious threat of disinflation in the Eurozone right now.

Kiwi–

I’m not a NZD trader but it’s important to note the RBNZ has a rate decision and monetary policy statement event at 1700 EST on Wednesday. Most forecasts are calling for a 50bps reduction in the RBNZ interest rate and anything more than that in addition to announcements of looser monetary policy should likely send the Kiwi lower. It could present a good opportunity for interest rate traders. I’ll definitely be watching that event and making an interest rate-based trade if the opportunity is there.

JPY–

The BOJ also has an interest rate event on Wednesday. The BOJ doesn’t have a set time, they meet and then make their announcement whenever they feel like it, but be on the lookout for their decision anytime past 2300 EST. With their interest rate already at 0.10% there’s only a tiny bit of room they can go to further reduce rates, I suppose they could just knock them flat to zero but I’m not expecting this. What yen traders need to be ready for is the BOJ’s monetary policy statement.

If the BOJ wants the yen lower, which surely has to be the case, they may use their monetary policy and statement to send it lower. Economically, Japan remains in a dire situation and a strong currency is one of their worst enemies right now.

Lastly, in the spirit of things, I’d like to give my own personal report card for the Obama administration’s first 100-days in office:

  • Spending $1.1 trillion bailing out insolvent companies: F
  • Nominating tax-evaders to high level government positions: D
  • Exceeding George Bush’s prior record-breaking deficit spending: F++
  • Launching the promised 500K new “shovel-ready” jobs by Q2: F-
  • Granting unconstitutional powers of authority to the Fed and Treasury: F+
  • Creating the largest budget in US history for a single year ($3.6 trillion): F+
  • Asserting government control over CEO’s and corporate management: F+
  • Increasing government funding for education, science, and technology: D-
  • First lady gains fame for her $5,000 dresses while 6.1 MILL are unemployed: F-
  • Adding 14 new “czars” to positions to expand government control without congressional oversight: F-

On a positive note, I think one of the best moves the Obama administration has made was submitting a bid for the US to host the World Cup in 2018, other than that I’m not seeing much to get excited over… and just for the record, I’m 100% bi-partisan, I don’t like or trust Democrats or Republicans, they are both devils and having just a two-party system in a so-called democracy is a joke.

That’s all I’ve got for now, as always, be smart with your risk and money management, especially with the big central bank interest rate events tomorrow, it could be a wild one…

-David