Checkout this very insightful and interesting article put together by Greg Michalowski from FXDD (one of the brokerage firms that I use):
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What a week What a historic week What a scary week.
The stress on the market was unbelievable. It was as close to unraveling, spiraling, freefalling, than any time in history. I did not live through the Great Depression but did trade thrrough the stock market crash of 1987, LT Credit, the Sterling currency crisis in the 90s, the tech boom and bust and the other modern day financial upheavals. This week surpasses all in terms of risk.
I do applaud the actions that have been put in motion. They had to happen and it probably is not over. At this point, the final mechanism has yet to be determined, but am hopeful it will be decisive and enough to calm the markets and get the economic engine moving. This week that engine was not moving.
As anyone who has taken an economics course in college knows, when the economy seizes, the velocity of money moves toward zero and growth is slowed dramatically. It is exactly the opposite of when the loans were flying out the window. The velocity of money was multiplying at a unsustainable pace. Too bad it was not realized quick enough and actions take then, but the reality of human behavior is that more is better. More is not always better. More mortgages, more borrowing, more CDOs and more CMOs, etc were definitely not the way to go this time. CDO exposure ballooned from 900 billion to an estimated 62 trillion from 2000 to 2007. If the risk of that 62 trillion was spread out evenly it may have been fine. Apparently, however, the likes of AIG had a disproportionate amount of risk in their portfolio. So much that when banks were asked to pool resources to save AIG, they all said ”NO”. When the balance of risk skews toward too much, and it is in a 1 trillion dollar company, it does not matter that they have a great insurance business.
There will be a lot of finger pointing, and there will be those who may think that what was/will be done borders on socialism. However, it is time to right the ship. America needs to unite. And the first job is to stabalize housing. Period. This will require capital. It certainly will require a healthy financial system. It does not have to be from government and purely from banks either. Reforming IRA/401k rules to allow for the one time distribution of funds into a primary residence without penalty, would open up capital for new homeowners and could provide the capital for those who are on the verge of foreclosure. Make it simple. Make it easy. Also, allow for the gifting of IRA funds from relatives for the purpose of investing in a primary residence without redemption penalty is another possible solution to stimulate demand. Redistribution of some wealth voluntarily from the ”haves” to the ”have nots” within a family has always occurred. The IRA wealth is generally considered off limits because of the penalty of redemption makes it more costly. Don’t penalize this type of investment. Instead, open up this capital to save foreclosures.
After that, there has to be a plan to create REAL jobs. Stop. Look at the world. Look at the problems and disequibriums that exist and look to solve them one by one. Jobs create jobs. Energy dependency is a problem on a number of different levels. Don’t become so dependent on energy. Create an industry built on moving away from energy dependency.
Will it take regulation? Yes. Will it take sacrifice? YES. Will it take time? YES. But start.
Lest we forget what can actually be crammed in one week, here is a run down of some of the highlights (I think in order):
- Hurricane Ike pummels Houston. Millions without power
- Lehman files for bankruptcy
- Merrill thinks it best to not be the next to be pressured and decides to merge with B of A
- AIG rebuffs offer for capital infussion. Chooses to go on as is.
- AIG asks for a 70 billion dollar bridge loan from the Treasury
- Treasury says no loan. Work it out yourself.
- Treasury asks banks to all chip in to save AIG. It is in the best interest of all to do so.
- Banks say “NO”. Play chicken with the Treeasury (or they don’t have the capital?)
- Rating Agencies downgrade AIG. Have 24 hours to find capital or file for bankruptcy
- Treasury has second thoughts. Meet and announce a deal with AIG for 85 billion
- Gold goes up $87 in one day. The most ever.
- US T-bills benefit from a massive flight to quality. Rates go toward 0.0%
- The TED Spread (T-bills to Eurodollars) widens to the highest level since 1984
- Oil falls to $90. It is down from $146 on July 14th
- Money Market funds are bombarded with Redemptions. Consumers want to be in cash. They don’t want commercial paper.
- Putnam closes down redemptions to their instituonal money market fund.
- Redemptions of money markets lead to commercial paper seizure.
- The Fed doubles the “swap lines” to global Central Banks that will allow them to provide dollar funding to their banks and financial institutions
- Rumors of Treasury putting together a RTCesque bailout for banks and financial institutions
- Stocks gain +400
- Paulson and Bernanke meet with President and go to Capitol Hill to meet with high level Democrats and Republicans from the Senate and House.
- A bipartisan press conference is held with a who’s who cast of politicians coming together in support of a massive rescue plan. A presidential election is less than two months away.
- The SEC bans all short selling of stocks
- Paulson outlines a bold plan to free up bank balance sheets of the toxic MBS paper and to increase mortgage relief
- Dow rises 368 points. In two days stocks rally more than 800 points
- Markets close for the week. The world awaits
The Currency Market Reaction and Technical Summary
The currency markets were pretty much a sideshow this week. Sure there was your amount of volatility. There was a tremendous amount of fear and uncertainty, but relatively speaking, I guess it could have been worse.
EURUSD
The EURUSD had a low of 1.4073 on Tuesday and high on Thursday of 1.4541. In between it went up and down, ending the week with a rally higher. The pair closed at 1.4473 which was just below a resistance level of 1.4481 but nearer the high than the low. It was able to move above the 100 hour moving average (which is currently at the 1.4271 level). The 200 hour moving average is lower at 1.4184 and starting to turn higher. This is bullish for the pair in the intermediate term.
On a daily chart, the EURUSD is still well below the 100 and 200 day moving average (bearish longer term), having moved sharply lower from recent high of 1.6037 (July 15th) and the September 11th low of 1.3882. The 38.2% retacement level comes in at 1.4705. This would be the target level on a break of 1.4481, and 1.4541 (the high from the week). Above the 1.4705 level is the midpoint of the same move down which comes in at 1.4959
GBPUSD
The GBPUSD moved higher on the week. The low was 1.7733 which was just below the 100 hour moving average. The pair moved along this key moving average for parts of Tuesday and Wednesday, but could not muster a move below it. When the opportunity presented itself, the pair moved sharply higher. On Friday, through the announcement uncertainty, the GBPUSD moved briefly below the 100 hour MA for the first time in the week, but once it broke back above the key moving average, it rallied strongly – taking out resistance levels along the way. A key level going into next week in short term will be the 1.8275 level. This was the ceiling for the pair for most of Thursday. A move below this level should pressure the pair lower and change the short term sentiment to bearish. However, in the intermediate term because the pair is above both the 100 and 200 hour moving average, the trend is bullish.
On the longer term chart, the pair remains well below the 100 and 200 day moving average. This is bearish. However, because the intermediate trend is higher, the expectation would be for a continued move up. The retracement target level comes in at 1.8481. This is the 38.2% retracement of the move down from the July 15th high of 2.0156 and the September 11ths low of 1.7446. A break above this level would target 1.8801, the midpoint of the same move lower.
USDJPY
The USDJPY ended the week down on the week but not by much. The close last Friday was 107.87 and the pair closed at 107.25. The high for the week was 108.01. The low was 103.54. Because the pair is above the 100 (currently at 105.39) and 200 hour moving average (currently at 106.18), the intermediate trend is bullish.
Clearly a break above the 107.87 to 108.01 area of resistance would be good for the bulls in the short term. On the downside the 106.69 level was the high price on September 17th and was support on September 19th. This will be the initial key support level for the week in the short term. Below that level is the 38.2% retracement level of the move higher for the week at the 106.33 level. The 200 hour moving average comes in at 106.18.
The longer term chart is more in a consolidation mode. By the books the price is above the 100 and 200 day moving average which is bullish for the pair. The 100 day moving average (blue line) is 106.89 and the 200 day moving average (green line) is at 106.27. Let the intermediate and short term technicals lead the way as the longer term may frustrate – especially since the Yen pairs are being influenced by the Yen crosses.
The USDJPY support – especially on Friday – was influenced greatly by the sharp movements in GBPJPY, EURJPY and the other cross pairs. For example, on Friday, GBPJPY had a high low range from 191.31 to 197.04 – a huge move. This helped support USDJPY throughout the day, but can also create increased volatility.
KEY ECONOMIC RELEASES FOR THE WEEK.
The economic releases took a back seat to the events of the week last week. This may continue to be the case this week as well. The effects to the respective global economies will play out over time. One must think, however, that the US economy will slow as a result of the financial turmoil and uncertainty.
Monday, September 22nd
8:30 AM EDT Canada Retail Sales
10:00 PM EDT, New Zealand Consumer Sentiment
Tuesday, September 23rd
4:30 AM EDT, UK BBA Mortgage Approvals
7:00 AM EDT, Canada CPI
10:00 AM EDT, FOMC Bernanke, Treasury Secretary Paulson and SEC Cox testifies in the Senate
Wednesday, September 24th
10:00 AM EDT, US Existing Home Sales
10:00 AM EDT, Bernanke, Paulson, testify to the US House of Representatives
Thursday, September 25th
8:30 AM EDT, US Durable Goods Orders
10;00 AM EDT, US New Home Sales
6:45 PM EDT, New Zealand GDP for the 2nd quarter
Friday, September 26th
8:30 AM EDT, US Final GDP
9:55 AM EDT, Univ of Michigan Consumer Sentiment
Have a great weekend and good luck with your trading next week.
Greg Michalowski
Source: FXDD blog
Related posts:
- Forex Trading: USD/JPY Trading off the 100HR Moving Average in a Quiet Session
- Weekly Technical Analysis
- Forex Trading News: Euro-News Helping Sustain a Euro-Bid
- U.S. Forex Market Commentary
- Weekly Forex Technical Overview
