Forex and Financial Market Update 23 June 2009

Last night in our chat room we got on the topic of how the Federal Reserve and European Central Bank use monetary policy, verbal rhetoric, and geo-politics to move their respective currencies up or down. And wouldn't you know, as fate would have it, just a few short hours later the ECB went on an extremely well coordinated and choreographed campaign to talk the euro up against the dollar...

Today's update is going to be short and sweet because I only want to cover what the ECB did to surge the euro against the dollar and then to talk about tomorrow's monumental fundamental event that will get the markets moving once again.

Here's how the ECB tag teamed the dollar today... this is what they said and in the order in which their coordinated actions took place:

0215 EST - ECB Trichet: "Interest rates are appropriate; fiscal credibility needed for confidence"

In a matter of seconds of Trichet's comments hitting the news wires the EUR/USD took off from the 1.3840 level and never looked back. And in case it's not obvious enough, the reason why this comment was very euro positive was purely based on the fact Trichet said he's not lowering rates. Interest rates and interest rate probabilities drive markets, bottomline.

Next...

0322 EST - ECB Trichet: "ECB obliged to preserve price stability; ECB rates are appropriate"

Next...

0429 EST - ECB Noyer: "April indicators show economic situation is less bad"

Next...

0448 EST - ECB Noyer: "Current ECB rate is appropriate"

Next...

0618 EST - ECB Bini Smaghi: "Everyone agrees recovery possible in 2010"

Next...

0621 EST - ECB Ordonez: "Sees inflation positive by year end"

Next...

0803 EST - ECB Ordonez: "Interest rates are appropriate"

Next...

0900 EST - ECB Weber: "Low rates can cause price bubble; ECB has used its room to cut rates; No need for ECB economic stimulus measures"

Next...

0930 EST - ECB Nowotny: "Signs financial markets are past the worst"

Next...

0958 EST - ECB Weber: "ECB has decisively used rate leeway; ECB current measures will hit the mark; ECB won't be influenced on exit strategy"

There should be zero mystery why the euro moved almost 300-points bottom to top today. With six different ECB's all saying interest rates will not be cut, economic conditions are getting better, and that the ECB will not go down the road of loose and sloppy monetary policy we can clearly see what a strong effort the ECB made to talk the euro up against the dollar.

This is very cut and dry stuff. The Fed does the exact same thing and this is how they control the euro and the dollar and the smart money knows exactly what to do when the central banks give the green light. Today's EUR/USD move is a great example for why I am so against charts and technical indicators because they stand no match for real factors that move these markets. I encourage all traders to keep up with the Fed and ECB because they really make trading simple and easy, especially on days like today when they come right out and tell the markets to buy the euro and sell the dollar. 

FOMC:

If you think what I'm saying about how the central banks have the power to move and control markets is a bunch of crap, please read this commentary I wrote after the Fed's FOMC meeting back on 18-March. 

For tomorrow's FOMC event, here is what's at risk for the US dollar:

1. The Fed announces it will expand it's program to monetize government debt
2. The Fed announces it will purchase more mortgage-backed securities
   
3. The Fed tells the markets it has no plans to raise rates in the foreseeable future
4. The Fed tells the markets inflation will go negative or remain extremely low for a long time
   
5. The Fed tells the markets there is deflation in the US economy   

The FOMC could help the dollar if they say:

1. They are ending their program to monetize government debt
2. They are immediately suspending any more purchases of Treasuries
   
3. They are concerned about inflation
   
4. They are going to raise interest rates in the near-term
   
5. The credit market is absolutely wrecked and they are concerned about another credit freeze
6. The US economy will continue contracting
   
7. The unemployment rate is going to 12% or higher    

I think scenario A is much more probable and likely as opposed to scenario B. And because of the risk the Fed will announce it's going to keep buying Treasuries in order to stabilize interest rates I have strong caution about the dollar heading into this FOMC event. I will say this, the skeptic in me is still questioning why the ECB went on such a concerted effort to make sure the euro rose against the dollar today and I'm wondering why they chose the day before the FOMC to talk the euro up?

We know the Fed and ECB work together to support or repress their respective currencies so we should not rule out the possibility the Fed may say or do something to strengthen the dollar against the euro tomorrow. Bottom line, I don't trust any of these central banks, I think they are capable of anything and I'm not even going to consider attempting to trade against either one of them.

So from a risk management standpoint I'm going into "safe mode" between now and the FOMC. Sure it could end up being a boring non-event but if it's not I'll be ready for whatever the Fed throws our way. Any monetary policy or verbal rhetoric the Fed uses to devalue the dollar will be an instant trade signal for me, just like it was back in March... if the Fed says to sell the dollar again, I'm selling the dollar without a second thought.

Be smart with your risk management and your money, don't fight against these central banks because the market will steamroll you... and consider that sometimes the best trade is no trade at all. 

-David