To my US readers may i wish you all a very happy Thanksgiving. I hope you are all enjoying a wonderful meal with family and friends. Like Christmas i am sure Thanksgiving can be both stressful and joyful but as my daughter keeps reminding me: you can choose your friends, but not your family!
Tomorrow is Black Friday and it wasnt until recently that i understood what it meant and its significance to the US economy and the dollar. Briefly, the name comes from an accounting term and is the day when retailers turn a profit, or enter the black. I presume that before this date, they have been operating in the red (ie losing money). How true this is i do not know. What i do know is that it is one of best barometers of consumer spending and retailer profitability and therefore a good indicator of dollar health.
Today has obviously been a very quiet day with the US closed. The most significant event occuring in the markets has been a major sell in commodities. This led to an article in the Times online to question whether the commodity supercycle had come to an end. The sell off was also mirrored in a sell off in the Aussie dollar but consolidation in the loonie.
I think the writer has somewhat overstated the case. It’s hardly surprising commodity prices have fallen given the fall in the stock markets in Asia. A much more likely scenario would be profit taking and a pause to allow volatility to settle before re-entering the market. Options and future contracts (from the COT report – commitment of traders report) confirm that in fact the commercials (ie professional money) is still very bullish in this market. I propose to start writing detailed posts on the COT report as it is a useful indicator for currency sentiment. However, the data is not easy to interpret and is sometimes used as a contrarian indicator.
Once the results of Black Friday are known the effects on the dollar will be extremely interesting and taken with the price volatility in markets and commodities we may be able to establish whether we reaching a pivitol turning point or its a sign of even lower prices.
Tomorrow sees release of UK GDP figures – the chart is very lacklustre and reflects the fact that the forecast figure is as per previous – i.e 0.8% and the BOE has already signalled future rate cuts the figure would have to be wildly out to have a dramatic effect.
My personal view is that the pound will continue to weaken. However, we shall see.
My strongest recommendation is still a sell on the dollar yen.
Just discovered your site and went through your tutorial to check. Very nice job!
OK; so short the USD vs. Yen looks very correct and you expect this to trend to continue to 105. Why does AUD/JPY trendt he same way with gold at highs? Would this all be the carry trade bailing from risk? How would you reverse trade this trend? Which would you choose USD or AUD or EUR on the reverse?
Thank you for your kind comments. You are correct – everyone has been bailing out of carry trade pairs such as the aud/yen and until markets settle and risk appetite returns these trades will continue to unwind. Also bear in mind with aussie there is an election tomorrow in Australia which is always unsettling. Also take a look at COT data on Monday for a feel as to what the big speculators are actually up to.
Sorry not sure what you mean by reverse trade the trend – are you asking when would be a good time to re-enter? I assume you are referring to dollar, aussie, euro/yen pairs. Is this correct?
Sorry for not being clear. What I probably meant was a “reversal of trend” trade i.e. when this decline bottoms and the trend reverses the other way.
So yes I was referring to dollar, aussie, euro/yen pairs. Specifically I am drawn to the aussie/yen long term trade based on the carry differential, and the fact that the Euro and US will most likely be lowering interest rates into the first 1/2 of 2008. It seems an obvious choice, but in my trading experience, obvious is usually where I get hurt. Am I missing something in my analysis?