The 4Xlounge Bigger Picture Market Barometer based roughly on monthly charts provides us with an ultra-long term view of the Forex market as each individual currency is depicted by its own line, and measured on a relative strength scale of 0-100. Those lines climbing to the upside reflect those currencies that currently enjoy a significant amount of buying pressure, where as those lines moving lower occur when sellers control its respective currency. While traders typically aim to speculate in the same direction as the current trend, we are always on the ‘look out’ for possible reversals that usually occur when a currency line crosses above and back below ‘70’, or below and back above ‘30’. The chart below shows the GBP, which has over time enjoyed a significant trend to the upside while the AUD has shown a relatively equal amount of weakness. However most recently the GBP has now crossed above ‘70’ and is showing real signs of a possible reversal back to the downside. In addition the AUD, which has nearly touched ‘30’ now indicates the likelihood of its own reversal back to the upside. Putting this together this chart tells us that we may expect a major market reversal in the GBP/AUD pair, which up until this time has experienced a near vertical assent to the upside.

4Xlounge Bigger Picture Market Barometer

The 4Xlounge X-Meter histogram in this case based on daily charts provides us with a different view of the trend that has existed for quite some time in the GBP/AUD. The X-Meter in particular shows the rate of acceleration the trend has recently experienced as the histogram bars accomplish ‘higher highs’ as the GBP/AUD’s pace has quickened. Historically traders may use the X-Meter histogram to identify and speculate in the same direction as the current trend, until the histogram bars are able breach the ‘10’ level, at which point reversals become more likely. Based on the following (daily) chart the GBP/AUD X-Meter histogram has recently broken above, and now back below ‘10’ reinforcing the possibility of a major market reversal in this pair.

4Xlounge X-Meter histogram

We may now take a closer look at the trend through the use of the 4Xlounge Technical Dashboard Console, which examines the strength of this pair from the point of view of 5-distinct time frames from the long-term on the right hand side, to the short-term found on the left. Calculating the average strength of all trends together produces the ‘Global Trend Value’, found to the left of this indicator. Trends to the upside are painted green while those to the downside are shown in red, and the higher the figure, the stronger the trend. Below the Technical Dashboard Console shows a Global Trend Value of (-) 57 indicating the pair now enjoys a strong surge to the downside, and upon further examination of the individual time frames also tells us the most significant element of this trend exists on the shorter-term time frames. This tells us that this new move lower may have only recently begun.

4Xlounge Technical Dashboard Console

Finally we may consider the long-term price charts to better understand the historical significance of the pair’s current price action. Based on the following weekly charts we can see the GBP/AUD has established a rather consistent trading channel over the course of the past year between the approximate support and resistance levels of 1.45 & 1.63 respectively. In addition we can see the most recent price action shows the current (weekly) candlestick is also the first red in quite some time. Of course the GBP/AUD could very well break to new highs and above its down-trending resistance line, but this weeks (red) candlestick may be interpreted as a positive sign of a likely reversal lower.

GBP/AUD - Weekly chart

Putting this all together while the longer-term indicators tell us the GBP/AUD, which has experienced a tremendous surge higher over the course of the past few months now shows credible signs of a reversal, the shorter-term time frames now show the current trend is in fact pointing lower. Taking this into consideration along with the actual price charts helps better understand not only the current direction but also the most likely future of this pair. Of course the GBP/AUD like any Forex pair will ultimately move under the more dominant influence of either buyers or sellers, but these tools allow us to examine the market condition and the most probable future, and over time, provide us with the highest probability of success.
We wish you the best of luck in all your trading endeavors.
Sincerely,
Adam Rosen
adam@4Xlounge.com

Quantitative Easing I (11/24/2008 – 3/31/2010)
Post QE I (3/31/2010 – 11/3/2010)
Quantitative Easing II (11/3/2010 – 6/22/2011)
Post QE II (6/22/2011 – 9/21/2011)
Operation Twist (9/21/2011 – June, 2012?)

Quantitative Easing

“On November 25, 2008, the Federal Reserve announced that it would purchase up to $600 billion in agency mortgage-backed securities (MBS) and agency debt. On December 1, Chairman Bernanke provided further details in a speech. On December 16, the program was formally launched by the FOMC. On March 18, 2009, the FOMC announced that the program would be expanded by an additional $850 billion in purchases of agency MBS and agency debt and $300 billion in purchases of Treasury securities.” 

The intention of this program was simple; to encourage consumers to make ‘big ticket purchases’. As the Fed purchased enormous quantities of treasury securities, and those bond prices naturally rose, their respective yields sank. These lower yields in turn helped to reduce mortgage rates for potential homebuyers as well as the financing costs for other ‘bid ticket’ items such as autos and other goods.

Quantitative Easing II

“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

The intention here was the same; through the purchase of vast sums of longer-term treasury securities, the Fed hoped to encourage consumers to ‘go shopping’ and in turn help the economy get back on its feet. These bond purchases were funded with the printing of massive amounts of USD’s in turn were injected into the economy. With every action taken by a central bank or other financial institution of that magnitude, we can expect certain intentional and unintentional consequences. While the intention of these actions was to lower borrowing costs, one of the ‘un-intended consequences’ was the dilution of the USD (currency). This weaker USD helped contribute to one of the most substantial rallies in commodity prices in recent history, as each barrel of Crude Oil or ounce of Gold simply requires a greater amount of (diluted) USD’s. Below we will examine the net effects of these two rounds of Quantitative Easing to the capital and commodity markets.

Operation Twist

“The Federal Open Market Committee concluded its September 21, 2011 Meeting at about 2:15PM EDT by announcing the implementation of Operation Twist. This is a plan to purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, thereby extending the average maturity of the Fed’s own portfolio. This is an attempt to do what Quantitative Easing (QE) tries to do, without printing more money and without expanding the Fed’s balance sheet, therefore hopefully avoiding the inflationary pressure associated with QE.”

Here the Fed tried to accomplish the same result of the first 2-rounds of QE, without suffering the inflationary effects that occurred as a result of the printing of additional dollars, which in turn led to surges in gold, oil, and other commodity prices that created a severe burden to the US consumer. We will see below how this latest round of stimulus did in fact help to strengthen equity markets without the same impact to the USD and commodity markets. Below we will consider various capital markets, and their performance during those periods of time of stimulus, and the time that followed. Here we will consider the AUD/JPY as an example of a ‘carry trade’ that tends to benefit during prosperous economic conditions.

Quotes sourced from:
QEI

http://en.wikipedia.org/wiki/History_of_Federal_Open_Market_Committee_actions

QEII

http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm

Operation Twist

http://en.wikipedia.org/wiki/History_of_Federal_Open_Market_Committee_actions

The Fed’s most recent statement was accompanied by specific projections as to the probable future condition of the US economy given the current rate of the recovery. The Fed specifically cited 3-key economic figures including: GDP (Gross Domestic Product), Unemployment, and the PCE (Personal Consumption Expenditure). We have included the Fed’s projections as they will aid in the decision making process to adjust US interest rates as well as whether further rounds of stimulus are necessary. If the conditions improve above projections, traders may anticipate higher rates in the time to come. Conversely if the figures deteriorate far below the projections, it is logical to anticipate further rounds of stimulus from the Fed. The Fed’s 2012’ projections are as follows:

GDP: 2.4% to 2.9%
Unemployment: 7.8% to 8.0%
PCE Inflation: 1.9% to 2.0%
(Core PCE): 1.8% to 2.0%

Here we may consider the US Gross Domestic Product (GDP) during those periods of economic stimulus, and the time that followed.

Quantitative Easing I (11/24/2008 – 3/31/2010): -0.5% to 5.6%
Post QE I (3/31/2010 – 11/3/2010): 5.6% to 2.0%
Quantitative Easing II (11/3/2010 – 6/22/2011): 2.0% to 0.4%
Post QE II (6/22/2011 – 9/21/2011): 0.4% to 1.3%
Operation Twist (9/21/2011 – June, 2012?): 1.3% to ?
2012’ Projections        2.4% to 2.9%

US GDP

Here we may consider the US Unemployment Rate during those periods of economic stimulus, and the time that followed.

Quantitative Easing I (11/24/2008 – 3/31/2010): 6.5% to 9.7%
Post QE I (3/31/2010 – 11/3/2010): 9.7% to 9.6%
Quantitative Easing II (11/3/2010 – 6/22/2011): 9.6% to 9.1%
Post QE II (6/22/2011 – 9/21/2011): 9.1% to 9.1%
Operation Twist (9/21/2011 – June, 2012?): 9.1% to ?
2012’ Projections        7.8% to 8.0%

US Unemployment

Here we may consider the US Personal Consumption Expenditure (PCE) during those periods of economic stimulus, and the time that followed.

Quantitative Easing I (11/24/2008 – 3/31/2010): 1.4% to 1.8%
Post QE I (3/31/2010 – 11/3/2010): 1.8% to 1.2%
Quantitative Easing II (11/3/2010 – 6/22/2011): 1.2% to 2.6%
Post QE II (6/22/2011 – 9/21/2011): 2.6% to 2.8%
Operation Twist (9/21/2011 – June, 2012?): 2.8% to ?
2012’ Projections 1.9%% to 2.0%

US PCE

We may also consider a number of other commonly watched economic figures to better understand the effects of the various rounds of stimulus to the US economy. Here we may consider the US Consumer Price Index (CPI) (Month over Month) during those periods of time.

Quantitative Easing I (11/24/2008 – 3/31/2010): -1.0% to 0.0%
Post QE I (3/31/2010 – 11/3/2010): 0.0% to 0.2%
Quantitative Easing II (11/3/2010 – 6/22/2011): 0.2% to 0.2%
Post QE II (6/22/2011 – 9/21/2011): 0.2% to 0.4%
Operation Twist (9/21/2011 – June, 2012?): 0.4% to ?

US CPI

Furthermore as we have read the various rounds of stimulus were designed in part to encourage the purchase of ‘big ticket items’ such as homes, we may consider the New Home Sales during the Fed’s efforts.

Quantitative Easing I (11/24/2008 – 3/31/2010): 457k to 324k
Post QE I (3/31/2010 – 11/3/2010): 324k to 308k
Quantitative Easing II (11/3/2010 – 6/22/2011): 308k to 316k
Post QE II (6/22/2011 – 9/21/2011): 316k to 295k
Operation Twist (9/21/2011 – June, 2012?): 295k to ?

US New Home Sales

There are numerous conclusions that we may draw from the aforementioned charts. In particular we may consider which economic measurements responded better to Quantitative Easing as opposed to Operation Twist, as we should note the inherit differences between the two types of monetary policy. Furthermore in some cases we can see a deteriorating effect over time, as the initial rounds of stimulus appeared to have a significant impact to the economy, whereas the latter rounds did not. As we quickly approach the end of Operation Twist, which is scheduled to conclude June, 2012’, we may now anticipate the likely future conditions of the US economy from many different points of view. Once we form an opinion as to the probable state of the US economy in the near-term future, we can also position our trading accounts to take advantage of the most likely market climate and direction.

We wish you the best of luck in all your trading endeavors.
Sincerely,
Adam Rosen
adam@4Xlounge.com

Fed’s Projections:

On April 25th, led by Chairman Ben Bernanke the Federal Reserve met as it was announced the key benchmark interest rate would be left unchanged at record lows. Furthermore the Fed released their projections as to how well they believe the US economy will perform this year, and the years to come. These projections are classified into 3-basic economic data sets: GDP, Unemployment, and Inflation. The following are the Fed’s projections for the year 2012’, as well as the most recently released figures once they are available.

GDP:                                   2.4% to 2.9%           Actual: 2.2% (April 27th)
Unemployment:                 7.8% to 8.0%           Actual: 8.1% (May 4th)
PCE (Consumption):            1.9% to 2.0%           Actual: 2.1% (April 30th)
(Core PCE):                          1.8% to 2.0%          Actual: 2.0% (April 30th)

The Implications:

As the Federal Reserve like any central bank constantly monitors the state of the economy to satisfy their dual mandate of price stability and job growth, the Fed tracks the progress of a slew of economic reports released on a regular basis including the 3-aforementioned figures. If over time these economic barometers show the US economy is improving, the next step traders may anticipate is an increase in interest rates to control the pace of inflation. Simply put, better than expected data may lead to a stronger USD currency. Conversely if the economic data shows deterioration traders may expect rates to remain near record lows for a longer period of time. Moreover as interest rates have already remained near 0% for an unprecedented amount of time, the Fed has taken other actions in their attempts to spur the economy into recovery, in the form of 2-rounds of Quantitative Easing (Q.E. I & II), as well as the most recent creation of ‘Operation Twist’. The net effect of these stimulus measures can be seen in rising stock prices, as well as a general dilution of the USD currency. In other words, if the data in the weeks and months ahead shows the economy is weakening, the expectation of low interest rates and new stimulus measures may lead to a weakening USD. 

CPI:

Earlier today it was reported that the US Consumer Price Index (CPI) remained unchanged at a (year over year) pace of 0.0%, as the Core CPI registered an increase of 2.3%, the same figure as the previous month’s report. Although the CPI was not directly cited in the Fed’s Projections, this data set does shed further light on the state of the US economy. Today’s report that was neither a (significant) surprise to the upside or downside and in addition is similar to the most recent PCE data, which shows the economy is making little progress to the upside, but also has failed to decline rapidly either. With the lack of very poor economic news, traders may take this as a queue that the Fed will not enact a further round of stimulus, which has been known to dilute the USD currency. This in turn may have led to at least in part, the recent strength in the USD/CHF (shown below). This is illustrated, as the most recent significant economic figures have been disappointing or ‘flat’, but yet has contributed to a steady rise in the USD/CHF. Perhaps the Forex market will not anticipate a further round of stimulus unless the data worsens ‘significantly’?

USD/CHF - May 15, 2012

Looking Forward:

The Fed’s minutes from their most recent meeting will be released on May 16th where we will gain further information regarding their economic outlook, and exactly what is expected in the near-term future. This will be followed by another GDP report at the end of the month; May 31st. With that said we should simply interpret each new report as a piece of the puzzle that helps illustrate the overall picture of the US economy. While one figure does not make a trend, it can shed light on the direction and strength of that trend and it’s probable future.

To read the previously published report that discusses the most recent Fed’s projections and any subsequent economic developments, please feel free to view the following link:

http://4xlounge.com/2012/05/4xlounge-market-insights-feds-projections-part-ii-may-7-2012/

We wish you the best of luck in all your trading endeavors.
Sincerely,
Adam Rosen
adam@4Xlounge.com

4Xlounge Fundamental Xtras

In the US the Consumer Price Index (CPI) was reported to remain unchanged for the month (0.0%). Over the long-term the CPI tends to move in the same direction as stocks as well as the likelihood of US interest rates. Join us for our Live Support Session this Wednesday at 1:00 pm EST.

US CPI & 12-month moving average

US CPI & DOW

US CPI & FOMC

4Xlounge Fundamental Xtras

As trading began in the EUR session, the Gross Domestic Product (GDP) figures were reported to have remained unchanged at 0.0%. Genereally speaking over the long-term the EUR GDP figure tends to move in the same direction as stocks found in the DAX & CAC equity indicies as well as the EUR/USD. Join us for our Live Trading Sessions hosted every Monday and Friday from 8-10 am EST.

EUR GDP & 12-month moving average

EUR GDP & DAX / CAC

EUR GDP & EUR/USD

4Xlounge Fundamental Xtras

Earlier today it was reported the German Investor Confidence figure (ZEW) rose to only 10.8 following the previous month’s level of 23.4. Historically the ZEW data tends to enjoy an imperfect correlation to the EUR/USD pair as well as the DAX & CAC equity markets. Join us for our Live Support Session this Wednesday at 1:00 pm EST.

EUR ZEW & 12-month moving average

EUR ZEW & DAX & CAC

EUR ZEW & EUR/USD

4Xlounge Round Table Trading Signals

We continue to work towards a managed account solution for our Pro Members. The process has taken much longer than expected. Much of the process is out of our hands. We make a few requests, fill out some forms and then wait. The process is very laborious, but necessary.

We are working with a few brokers trying to provide the best options for our managed account. We hope to have all of the following in place when we go live:

We hope to have our managed account solution ready for deposits very soon. We know that everyone is anxious to get started. We will send out more updates when we get closer.

EA Lot Size Guide

Market conditions have been a little erratic recently. We will release a new “EA Lot Size Guide” when market conditions normalize. We do not want to increase member risk levels until we have a better grasp on market price action. We’ve seen this before. Market conditions should stabilize soon.

As always, if you have further questions, please post them on our forum and we will be happy to answer them.

4Xlounge Forex Wake Up Call (market updates)

During today’s Live Trading Session we witnessed a strong push lower in US stocks as well as bond yields and the JPY crosses, such as the CAD/JPY & EUR/JPY. Join us for our Live Trading Sessions hosted every Monday and Friday from 8-10 am EST, as well as our Live Support Session every Wednesday at 1:00 pm EST.

4Xlounge Fundamental Xtras

Earlier today it was reported the Unemployment Rate in Canada rose to 7.3% from 7.2% the previous month, despite very encouraging jobs data. Over the long-run Canada’s Unemployment Rate tends to in the opposite direction as stocks found in the TSX index, and in the same direction as the USD/CAD pair. Join us for our Live Trading Sessions hosted every Monday and Friday from 8-10 am EST.

CAD Unemployment and 12-month moving average

CAD Unemployment and TSX

CAD Unemployment and BOC

CAD Unemployment and USD/CAD

4Xlounge Fundamental Xtras

As the US trading session began the US Producer Price Index (PPI) was reported to have declined into negative terretory by 0.2% following a flat (0) reading the prior month. Over the long-term, the US PPI tends to move in the same direction as US stocks as well as the USD currency. Join us for our Live Trading Sessions hosted every Monday and Friday from 8-10 am EST.

USD PPI & 12-month moving average

USD PPI & DOW

USD PPI & USD/CHF