Happy New Year

Canadian dollar, Yen and Dollar all advanced in the last day trading of last year. I will write down my analysis of the market for next week before Monday. And in this weekend, I prefer to introduce a very nice website eurusdtrader.com, which was the best site for news trading research in last year. Combined with one article in the Currency Trader Magazine, I would like to give out a review of news trading, which was ever the most effective strategy in 2004. Wait it!

Happy New Year!

Narrow range trading

Euro was in a narrow range trading between 1.3590 and 1.3640 on Tuesday, no big jump. Better than expected US's Dec Consumer Confidence (102.3 vs consensus 94.0) weighed euro from 1.3635 down to 1.3588, but euro managed to brake there and held above 1.3600 later. I tried to buy a small euro's corrective low around 1.3600 in European session as I planed, but failed. Euro was bought from the beginning of this session and then didn't came back to 1.3600 until 20 minutes after the Consumer Confidence data. Unfortunately, I bought euro relatively high at 1.3635 because I saw the price was steady in the first two 5 minutes after data. In a normal market, a deviating from expected data seldom receives response of the market for more than 10 minutes so that I thought the neglect of the good data would lift euro. But this time, the market responded 20 minutes later.

Euro jumps in a thin market. Why?

EUR/USD Daily Chart

London markets closed on Monday. After a quiet range trading in European session, euro suddenly jumped at 10:00 EST. One and a half hours later, it touched 1.3640 and rised almost 100 pips! In my previous analysis of euro's possible action in year-end holidays, although I did agree euro would continue its rise, I totally didn't expect such a ferocious rise. Besides, normally Monday is the most silent day for fx market.

I try to figure out who is behind buying euro in the 1 1/2 hours. As I have written, I am inclined to believe short term players are mostly top pickers who always prepare to sell euro at that high level. Short term players may also include momentum traders who want to buy/sell along the direction of price change when there is a sudden move out there, but it is rare they produce such kind of sudden move in the markets by themselves. Momentum traders are parasites. And if we suppose ECB would do something when euro is very close to 1.4000, the r/r ratio for medium players to long euro at 1.3550 is obviously relatively low. Now the long term players. Originally, I thought if long term players want to build positions in a thin market, their costs would be very high. So I got the conclusion that long term players would not buy euro in the year-end holidays. My assumption was long term players to build positions. The assumption may be wrong. Let's look at the daily chart above. There is possibility that the fresh long positions of long term players had been built when EUR/USD consolidated between 1.3100 and 1.3400. Long term players had at least two opportunities to buy euro when it dipped below 1.3200. The cost of their fresh long positions should be about 1.3250, as the horizontal black line shows. If I was the long term players, when the first mission had been accomplished, I would had prayed for a rising euro. :) Well, when there is no outside force to help fulfill my wish, I have to rely on myself. However, if I can successfully practise my plan by only paying a little additional cost, I will be satisfied. Let me draw the new conclusion. Considering current fundamental factors, e.g. so called US twin deficits crisis, US government's weak dollar policy and ECB's inaction, maybe only a small portion of players will think of buying dollar/selling euro. A year-end thin market reduces the number of this group of players further. Thus, to use a small amount of money to push euro 100 pips higher can be not only feasible but also easy. It just adds a little to the total cost of long term players but their unrealized profits of outstanding positions now increasing 100 pips more for each lot! A good deal, isn't it?

I reckon euro will also move aggressively higher in the last 4 days this year, based on my deduction above. I will buy EUR/USD in European session's low (despite London market continues to close on Tuesday) and set up tight stop loss order. Let's wait and see what will happen in next US session.

A nice digital magazine

Currency Trader Magazine

Currency Trader Magazine is a nice digital magazine. I found its link in Elite Trader's currency trading forum. So far you can get free downloads of its current and back issures. I have read the Dec's and a half of the Oct's. There are really articles worthy of reading. I may write some comments later on some articles I am interested in.

Euro hit new high and long term futures player bet higher euro in 2005

COT Charts -- Euro FX, Dec 17, 2004

In Christmas Eve, EUR/USD touched 1.3547, highest level since euro was born. I didn't expect this move for my opinion was euro longs would break through 1.3500 at the beginning of Jan, 2005. Traders also need to have rest and enjoy their holiday, right? I am inclined to believe this move purely aimed at options above 1.3550 which will expire next week, by short term players, as media reported. In a year-end thin market, if long term players are behind this move, their costs to build positions will be very high. As to medium term players, if their profit objective is not at 1.4000, their longs r/r ratio will be merely 1 because their support level is far at 1.3140.

From the chart of Euro FX COT report on Dec 17 (the latest one should have been published at 3:30 pm ET Dec 24, but I understand CFTC's clerks might be in the planes back home at that time), one can see commercial traders (blue line) reduced their short euro positions dramatically as 1.3000 was breached and turned their net position into long on Dec 14. Short takers must have been passively cut their massive positions by stop loss orders and at the same time, more and more commercial traders bet euro would run higher in 2005 because commercial traders are hedgers and long term traders. Large speculators and small traders all pare their long positions to lock in profits so that they will have more ammo to produce another wave of euro's climbling. This analysis doesn't mean I think fx futures players move the spot fx rates, the volumn of fx futures market only holds a small share of the total fx transaction volumn so far. But it still make some sense to regard fx futures market as a proxy of spot market. Obvious discrepancy between futures market and spot market will induce arbitrage naturally.

The coming week's market will be even thinner. Please refer to http://www.dailyfx.com/calendar/FXCalendar.html to see which day the market will still keep open. Japan's Nov consumer prices, UK's nationwide house prices, and US's NAPM-Chicago may shake the market a little bit. Especially poor UK's data may weigh the already sluggish pound sterling down further.