Friday, May 21, 2010

Possible Intervention?

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By Mike Conlon | May 21, 2010

Talk is heating up around the globe that Central Bank interventions could be forthcoming in order to stabilize the currency markets.  Currently, the Swiss National Bank (SNB) has been active in trying to maintain prices for the Franc vs. the Euro, and now the market is jittery that a meeting today of Euro zone finance ministers could produce a similar result.  In addition, the BOJ has been known to intervene in its currency in the past, and there is speculation that Australia may be set to intervene as well.

This is effectively a form of market manipulation, but can be very profitable for investors who are on the right side of the trade.  In this regard, should interventions occur, investors would want to be long the Euro and Aussie, and short the Yen and Swiss franc.  Intervention is already occurring in Switzerland so this trade may be over, but what is important to know is which way policy makers want the currency in question to go.

In addition, German law-makers in the lower house have approved the Euro rescue package, as it is also in Germany’s self-interest to make sure that the Euro doesn’t collapse.

So what we’re seeing this morning is continued short-covering from yesterday afternoon and speculators starting to dip their toes back in cautiously to riskier assets.  Traders do not want to be caught short over the weekend, especially if coordinated action is taken.

In the forex market:

Aussie (AUD):  The Aussie is higher on short covering after aggressively declining for 5 days in a row.  Speculation of possible intervention has led the market to cover their short trades, so don’t mistake today’s action for risk-taking, though early investors may be starting to test the waters to the long side.

Loonie (CAD):  The Loonie is higher this morning as retail sales figures rose the fastest in nearly 5 years, and CPI figures came in slightly higher than expected, showing signs that economic growth is heating up in Canada.  While a June rate hike is still expected for June, much of it will be predicated upon whether or not the Euro can stabilize and whether risk has been reduced in the market.

Kiwi (NZD):  Consumer confidence rose 3.4% in NZ, showing signs of economic life in the country.  In addition, income tax cuts are expected to encourage workers to stay home which will be positive for domestic economic growth.  The Kiwi is higher on short-covering as well.

Euro (EUR):   The Euro touched one-week highs in the overnight session, as German law-makers approved the Euro rescue plan.  The looming threat of intervention has helped push it higher as traders don’t want to be trapped short over the weekend.  In addition, German GDP figures came in as expected, showing a gain of .2% for Q1 after being flat the previous quarter.

Pound (GBP):  The pound is also higher as it has been beaten up with the Euro over the last few sessions.  Expect the Pound to trade somewhat sideways as investors weigh UK policy vs. the threat of continued Euro problems.

Dollar (USD):   The Dollar is weaker this morning as short-covering is taking place.  Expect the Dollar to continue to trade on risk themes, though note that today is not a risk-taking day as both commodities and US stock futures are lower so far this morning.  Global austerity measures could affect US stock growth as demand wanes world-wide.  Especially with blue-chip and technology companies that have large exposure to the EU.  In addition, financial reform bills passed in Congress are adding fuel to the fire.

Yen (JPY):   The Yen is trading lower on short-covering rallies as well, and overnight, the BOJ left rates unchanged at .1%.  In what I would consider as something of an anomaly, the Yen is trading higher against the Dollar further illustrating that this is not a pure risk-taking day.  While the Yen is still far away from levels that the BOJ would consider in order to intervene, they have been known to act in the past.

Because today is a Friday, the market is taking a respite as fear has ruled this week and the potential for central bank interventions have caused uncertainty.  Right now we are at an inflection point; where markets could go one way or another and which way that will be is anyone’s guess.

So in the meantime, I advise taking cues from the market and take profits if you have them, and wait for next week’s action to initiate new trades.  More than one trader has “blown up” by coming in Monday morning to a bit of nastiness in the form of central bank intervention.  And while it is unlikely that this will happen, the threat is enough to cause caution.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

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