Thursday, November 09, 2006

Thursday, November 9, 2006

The BOE raised rates to 5.00% and yet the Cable drops. Although this was probably already priced in the market I would've expected the Cable to rally on this announcement. That wasn't the case. In fact, the Cable dropped after the interest rate announcement. An hour and half later, the US trade balance comes up narrower than expected (bullish for the dollar) and the Cable dropped some more, which seems logical. However, the crazy thing is that an hour after that, the Cable then proceeded to rally higher and ended up spiking to almost 9100 again. Talk about a roller coaster day for the dollar!

Explanation? I wish I had one. One of the things I've learned in this market is that a lot of times it is very difficult to understand the exact reasons why the market moves the way it does. However, I do have some theories:

Regarding the dollar rally after the BOE's interest rate statement-- This was probably just one of those cases where the market already priced in the rate hike and the news announcement sparked traders to take some profits. This may have been the cause for the initial drop in the Cable.

An hour and a half later, the US trade balance comes in at -$64.3 billion compared to the forecast of -$66.0 billion. This narrower balance was primarily caused by lower oil prices, but US exports have also been rising and helped the deficit. This surprise is what caused the 2nd wave of the dollar rally.

So why did the dollar end up losing after another hour and half? I think it has something to do with what China said regarding their reserves.

The Bank of China Governor, Zhou Xiaochuan, said he has a clear plan to diversify their foreign exchange reserves. China's reserves have exceeded $1 trillion which is the most ever held by one country. Most of those reserves are US dollars. While it's a smart move to have their reserves in the dollar, too much of a good thing is not always "good". The fact that they are saying they have plans to diversify may have played a part in why the dollar dropped against all 4 majors at the end of the day.

Coming Up:

Nothing dramatic is happening tomorrow. However, Big Ben Bernanke and Trichet are speaking at 8:45 ET tomorrow. These could be potential market movers if they say anything out of the ordinary.

Chart Analysis:


The Euro halted it's drop and didn't quite make it down to 2730ish like I thought it would. Instead it only went back down to 2750 before rallying as high as 2847. At this point it's hard to pick a direction for the pair because the rally has caused the daily stochastics to cross back up. The 4hr stochastics is also heading up and is not overbought yet. I honestly have no idea where this pair is headed tomorrow.


This is the 2nd day in a row that the Cable is showing indecision. If you take a look at the daily chart you'll notice that the past 2 candles have told almost identical stories. The market pushes in each direction but at the end of the day, it ends up right back where it started. Stochastics on both the daily and 4hr chart aren't helping me either because both of them aren't moving in a clear direction. Right now it's a coinflip but tomorrow might be another range bound day for the Cable. Watch for it to move in between 9000 and 9100 tomorrow.


The past few days I've been saying that the Swissy is stuck in a range. The daily chart still shows the price bouncing in between 100 and 200 SMA. I expect for it to move in between these 2 moving averages tomorrow.


The Yen is doing the exact same thing as the Swissy except it's bouncing between the 50 and 200 SMA on the 4hr chart. Look for the Yen to trade between 117.80-118.50 tomorrow.


Tomorrow looks to be a dangerous day to trade as none of the pairs are showing any clear directions. It's not that suprising to me as there haven't been any major economic catalysts to propel the market to move this week. I will most likely stay on the sidelines tomorrow and hopefully I'll be able to find some direction after tomorrow's trading ends.

Happy trading!


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