ZIRP and the currencies

All of the major indices were up the week ending 19th December except the Dow Jones Industrial Average.
For the closing week, the Dow Jones industrial average ended the week down 50.57, or 0.59%, at 8,579.11. The Standard & Poor's 500 index finished up 8.15, or 0.93%, at 887.88. The Nasdaq composite index ended the week up 23.60, or 1.53%, at 1,564.32.
The Russell 2000 index finished the week up 17.83, or 3.8%, at 486.26. The Dow Jones Wilshire 5000 Composite Index — a free-float weighted index that measures 5,000 US based companies ended at 8,924.03, up 123.85 points, or 1.41%, for the week. A year ago, the index was at 14,644.64
What fundamental news we have that week?

On Tuesday the US Federal Reserve's decision to cut interest rates to near zero percent, a record low, and its promise to buy up more debt to rejuvenate the housing market and on Friday, the White House make a decision to lend U.S. auto makers up to $17 billion.
The Fed Zero Interest Rate Policy (ZIRP) cut the rates to the lowest level in the world and below the Bank of Japan rate of 0.30%. With ZIRP the Fed will applied the quantitative easing (QE) policy.
Quantitative Easing or ZIRP has only ever been implemented once in Japan during what came to be known as its "lost decade.'' A gigantic real-estate boom in the 1980's came crashing down in 1991, bringing many other prices with it. Efforts to restart the economy foundered time and again, as businesses were not able to generate the kind of profits that would reignite prosperity's cycle of hiring and spending. The Bank of Japan embarked upon this new concept of ZIRP to fight a frustrating period of economic stagnation and decline from the 2001 to 2006. The ZIRP was implemented to fight the wave of deflation. Deflation, another modern economic term, is an overall decline in prices over an extended period of time. The cause of the deflationary phenomena is when consumers become so resistant to spending that sellers are forced to continuously cut prices.

The word “Quantitative” refers to the money supply and easing money supply means to increase it. It basically involves increasing the money supply by printing money to buy a variety of securities with the end goal of flooding the financial markets with cash or liquidity thereby increasing the amount of currency in circulation which reduces the value of the currency and boosts inflation.

In the first year of Quantitative Easing, USD/JPY rose 18.5 percent. This means that the Japanese Yen weakened against the US dollar, which is a textbook reaction to Quantitative Easing. The Nikkei also dropped 28 percent. Between 2002 and the end of 2004, USD/JPY fell 22 percent as the Japanese economy began to stabilize. During that same time the Nikkei recovered 20 percent, but not before it fell another 20 percent.

Since than the ZIRP or QE policy has been heavily debated whether the policy lead to the turnaround of the economy. Most of the US economists and market commentators were against the Fed’s ZIRP . Time will tell.

Last week, the ZIRP announcement lead the stock market higher, but the next two days the market were moving southward on problems face by the automakers and the senate reluctant to extend any financial support to them. By Friday morning with US President announcement of a $17.4 billion rescue package for the troubled Detroit auto makers that allows them to avoid bankruptcy, the market recovered. But before noon the markets turned around and closed near to last week close.

Refer to the chart of 15 min Dow Jones Industrial Average (DJIA) below.
DJIA opened on Monday above the daily pivot point (pp) but it was contained by the 60 and 200 EMA’s and the weekly and monthly pivot point.

On Tuesday it opened at daily pp, went up to and breached the 20, 60 and 200 EMA’s and rested at the weekly and monthly pp for more than 4 hours before moving upwards on ZIPR. The next day it tested the previous day high, failed and moved southward for a double top pattern. The target downward was reached at about the daily support S-1.

Friday, the news of USD17.4 billion handout to the automakers pushed the market temporarily upward but could not sustained the uptrend as reflected by the sharp fall in the blue lag indicator below 85 level with the red lag remain below the 15 level reflecting a bearish stance for the near term.

Overall, the market new lows have remained at benign levels with no new highs. The secondary indices have been stronger than the blue chips. Will there be a Santa Claus rally. The second and third days prior to Christmas are often a little weak, but the day prior to Christmas is usually strong. The day after Christmas i.e. Friday, there is likely to be a very low volume day that drifts upward, similar to the day after Thanksgiving.

For the forex the big mover is the US dollar.

The U.S. Dollar finished the week with a loss against all major currencies.
The Euro traded sharply higher after the Fed ZIRP. The news of the ZIRP came after comments by ECB President Trichet hinted that the ECB would not lower rates in January. Trichet’s comments and the Fed ZIRP triggered a massive rally in the Euro which took the market to a better than 62% retracement of the entire break from July to October. Crunching the numbers, the euro’s rally was the biggest since the currency began trading nearly a decade ago.

For USD JPY plunged sharply lower after the Fed cut rates. The rally in the Yen was relentless causing the Japanese government to encourage action by the Bank of Japan to halt the vicious rise in price. The government is concerned about the damage the high priced Yen is doing to the economy. Japan Finance Minister Nakagawa told reporters on Thursday that he is "keenly watching" currency markets. He also stressed that he has "the means" to take action against the rise in the Japanese Yen. The Yen plummeted after his statements as traders reacted by selling the Yen in anticipation of an intervention. Instead of intervening, however, the Bank of Japan surprised everyone by cutting its key interest rate to 0.10% on Friday. Traders reacted to this announcement by buying back the Yen, a sign that a rate cut would have less impact than an intervention. Although the USD JPY did not fall back to the low for the week, there was enough selling activity to signal that the BoJ may have to intervene to push down the value of the Yen.

The EURJPY was on the uptrend up to Thursday before the European session in line with the strength of euro as against the major currencies. The chart below is the 15 chart of EURJPY.

The uptrend was well supported by the 200 period EMA and the daily pivot point. On Thursday, the euros spike up and revert back down immediately against the yen and the dollar after the first hour of London session when the European Central Bank announced to re-widened its interest rate corridor through reducing the deposit rate from 100 to 50 basis points to revive interbank lending.

Earlier in the week ECB President Trichet hinted that the ECB would use operational weapons to try to stimulate the economy instead of cutting interest rates. The action on Thursday was believed as one of those weapons. Since this aggressive action is going to take place after the next ECB meeting on January 15, it is probably safe to say that it will not cut interest rates and instead monitor the economy and the banking system to see if this action is working. Nonetheless, traders perceived the move as bearish to the Euro and took profits after a huge rally this week following the lowering of the Fed target rate to .25% to 0%.

The bearish sentiment continued on Friday when the prices limped below the daily pivot point and the EMA's.

Despite the interest differential between the euro and the dollar and yen, the euro is expected to be in the precarious situation. The euro’s path will depend upon the influence of risk appetite on broader investor sentiment. The demand for a safe haven is still as overwhelming as it has been over the past 3-4 month with the euro being snubbed by capital that flows into the US and Japan for risk-free government debt. But, if the market sours on these economies or if sweeping risk aversion lets up, traders may start looking to growth and interest rate potential as a market driver.

The Weakening Dollar

Traders of currencies have been facing this issue for the last two weeks: has the risk aversion stance of the market been impeded or to put in plainly; has risk sentiment taken a significant turn for the better or is the dollar losing its status as a safe haven currency?

Beginning in October when the chronic seizure of the financial/credit markets started to explode, it sparked a sense of panic and sent funds on the hunt for safety in the form of liquid, stable and essentially risk-free US Treasuries and consequently make US Dollar higher despite the outlook for growth in the US is particularly threatening and the need for bailouts of large financial institution and industrial firms.

However, the past two weeks, this extreme in sentiment has since clearly been contained - although with caution stance. A sense of stability has allowed investors the luxury of reassessing where their funds would be safest.

This sentiment could be seen in the EURUSD when the euro posted its best single-week performance in eight years, as an outright tumble in the US dollar left the Euro Zone currency as the prime beneficiary of a turn in market sentiment last week. The Dollar weakened as traders flush with confidence that something proactive was being done about the U.S. economy, decided to take on more risk in their portfolios. This negative tone toward the Dollar held most of the week and the Dollar finished on the downside for the week after the Senate killed the automaker bailout plan. The sharp euro recovery stood the test of continued deterioration in global risk appetite; sharp declines in global equity markets were not enough to sink the previously risk-sensitive European currency.

The Japanese yen (the other key flight-from-risk currency of choice) rallied against its liquid counterparts i.e US Dollar upon the problem of the big three US auto makers. (See the USDJPY of chart below ).


As for the EURJPY, The EUR was strengthening in similar fashion as against the US dollar, with 200 period EMA (the red line of EURJPY chart) providing support and approaching the Monthly pivot point by Thursday during the US session. It managed to recover the downtrend experienced the week before. But on Friday during early Asian session, the EURJPY dived to the week low and reversed back immediately, recovering during the European and American session. Looking back to the trigger of the heavy fall, it is clear that the failed US auto industry bailout was the culprit. However, the quick reversal (in all the yen pairs) suggests that this was a false alarm.

On the chart, the Friday dive broke the uptrend line but managed to be contained by the weekly pivot point and the daily S3 (Support pivot point). The psychological level of 118.00 also played the role as a support level.

While strength in Euro in crosses is still expected to continue in the short term, the tricky part of the overall outlook is on the relative strength in dollar, euro and yen. The euro strengtened against the dollar and yen but the yen strengtened against the dollar. Will the dollar be the weakest or strongest link among the three currencies or the dollar dive or rebound be a Euro led or yen led.

-A sharp fall in dollar accompanied by strong rally in EUR/USD and EUR/JPY will suggest that the Euro is gathering strong momentum and in such case, strong rally should be seen in EUR/JPY.

-Sharp fall in dollar accompanied by sharp decline in USD/JPY and EUR/JPY will probably drag the EUR/USD down, which is consistent with the consolidation case in EUR/USD. While Euro crosses might remain firm, this will be taken as a signal that another round of massive yen buying is underway.

-Strong rebound in dollar, accompanied by steadiness in USD/JPY and sell off in EUR/JPY will suggest that markets are back to the prior state where safe haven flows are going into dollar and yen again and should see other major currencies, including Euro, dragged down by such flows.

-Strong rebound in dollar accompanied by sell of in EUR/USD and rebound in USD/JPY will indicate that dollar is gaining back momentum and should see the greenback retest prior highs against other major currencies.

EURJPY..the risk aversion

The currency market was expecting a really horrible number to end the risk-aversion trades and stocks downternding. So what we have on Friday? A number bigger than the worst estimates and a lousy revision to go with it (see my last post).

The worst economic news instead on spooking the Dow, it facilitated the Dow to move upward. Dealers are impressed at the resilience of the stock market despite today’s horrible data
The rally in Wall Street give some relief to the appreciating yen. The appreciating yen is coming dangerously close to the level where the Bank of Japan will intervene. It is rumored that they not only expected to heavily sell the Yen, but they are going to flood the money supply with currency. This move will be different than it made years ago when it settled only on intervention. Every gain in the Yen causes a decline in exports which leads to lower profits for powerful Japanese corporations like Canon, Toyota and Hyundai Motors.

I have been following the EURJPY trade and employing various technical indicators. My past experience is in stock and future markets. Although some basic indicators can be employed in currency market in similar manners as in stock and future market, the approached is quite different since the currency market is a 24 hours market and the liquidity is much higher than the other two markets.

After testing all the possibilities of application of the technical tools, I feel comfortable using a simple tool for day trading using 15 minutes time frame for my dominant trend and 1 or 5 minutes time frame as a trigger for entry and exit. For 1 to 5 minutes time frame I utilized a few of more sophisticated technical tools.

Here is my rundown on EURJPY cross during the US session to determine the prevailing trend using the 15-minute time frame.

The tools that I used are: S/R lines, Pivot point, Fibo retracement , 00 S/R level and moving average (20-green, 50-blue and 200=red).

The US session started one hour after the V3 vertical blue line.

Before the 8.30 economic news on Friday, the cross is gyrating around the 117.00 level and the 8.15 candle inched downward from the 7-8 am candles range. After the announcement, price moved violently up and down within 150 pips. The chart showed that the cross hit resistance at 50 EMA and find support at downtrend line A3 and also the psychological level 116.00. A Fibo retracement is placed using the swing high of previous day and swing low of previously moved downward. It moved above the Pivot Point Support (S1 Pp) and find resistance on downward slopping 20 EMA and the 117.00 price level. At 1.45 pm price broke trough the range forming at Fibo retracement 23.6% and S1 Pp as Wall Street was showing a strength of moving upward.at around noon.

The moved upward was impressive. Crossed over all the EMA’s, Pivot Point, the 118.00 price level and was stopped by the upward slopping trend line A2 at about the mid point between the Pivot Point and Resistance Pp (R1).

The rebound of Wall Street and the fall of Yen (considered a safe currency during the current financial crisis) after an extremely weak US employment report look like a sign of risk aversion appetite subsiding.

Next week we get somewhat of a reprieve from US, with economic data in the Pending home sales will be of some interest on Tuesday and retail sales of major interest on Friday.
Federal Reserve news is sprinkled throughout the week while ECB President Trichet is scheduled to speak at least three times next week. Expect him to keep the door open for further rate cuts ahead.

Bad news….good result

It was a crazy week for Wall Street.

The market kicked off the week with a nearly 700-point drop in Dow Jones Industrial Average then gave way to a series of sessions that moved upwards on seesawed back and forth. On Friday the Dow rose 259.18 points, or 3.1%, to close at 8,635.42 but still recorded a loss of 2.2% for the week.

Monday heavy fall in the Dow was due to Asian stock markets trading lower on profit-taking and concerns about Japanese factories and real estate. The market opened above the daily Pivot point and from the word go, it fall downward breaching all moving average. The fall contributed to the blue and red Laguerre (lag) indicators to breach the 85 level indicating a bearish situation.

On Tuesday, in early trading hour RSI indicator moved above 30 level indicating possibility of market reversal and subsequently the blue lag crossed the 15 level after one hour trading with the red lag follow one half hours later. This signified that Monday bearish mood has been arrested. The weekly short term bull reached its resistance on the monthly Pivot point on Thursday. A double top was formed with daily Pivot point and a breached under the pivot point started the fall that found support at matching low candlesticks at 10.30 am. After the matching lows, the RSI inched above 30 and the blue lag above 15 which denoted a changing trend to the upside.

The Dow is now up after adsorbing an extremely weak US employment report. U.S. nonfarm payrolls plunged by an astonishing 533,000 in November -- the worst job loss in 34 years. It was only the fourth time in the past 58 years that payrolls had fallen by more than 500,000 in a month. and the 25th worst decline. As if that was not bad enough, the September and October were also revised sharply lower. The September number was revised from -284K to -403K (-119K) and the October number was revised to -320K from -240K (-80K). Since the recession began 11 months ago, a total of 1.9 million jobs have been lost.

Let see, how Bursa Saham Malaysia performed this week.

EWM

Bursa Malaysia (KLCI)

On Monday the Bursa Saham fall heavily in line with other Asian markets. On Tuesday it opened gap down but recovered with the gap still unfilled. Wednesday and Thursday interest in the market was low and the two days market almost opened and closed at the same level (doji). Friday with long weekend as next Monday is market holiday, and the general feeling of apprehension for the stock market in Europe and US the stock market closed lower for the week.

EWM that is traded in New York reacted after the Bursa Malaysia is closed for the day. With Bursa Malaysia performing badly on Monday and the Dow started moving southward, The EWM moved in different direction. It gap up and then the price just hobbling up and down between high of 6.90 and low of 6.65. On Friday it took the cue from Bursa Malaysia and also the Wall Street. It fall and hovering at 6.55-6.60 before at lunch time when the RSI rose above 50 and the upward moved started. At the lash hour of trading, prices spiked up ward and closed higher.

I expect that for the coming weeks, the Bursa Malaysia will react positively on any positive news in New York but any negative stance in New York has less bearing on the Bursa.