Forex Market Outlook: Will the Canadian Dollar Reach Parity With the US Dollar?

Dear Trader,

This is probably a question that many traders are curious about. Will the USD/CAD reach 1.0000? That is, will the Canadian Dollar reach parity with the US Dollar? Given the strong Canadian Dollar rally over the past few months, we may be inclined to think that the CAD is a raging bull on a warpath that is probably not likely to run out of steam.

However, I don't think the Canadian Dollar will reach parity with the US Dollar, at least not in the short to medium term, and there are reasons why I would suggest so.

(1) The Canadian Dollar rally is way overdone, with net CAD Longs at an extreme level. This is the perfect condition for a reversal (i.e. there is not enough buying pressure in the market anymore to drive the CAD up)

(2) Oil prices have a pretty strong influence on the Canadian Dollar. One of the reasons why the Canadian Dollar rally was so strong is because the increasing oil prices were supporting it, among other reasons. Oil has gotten so expensive lately that consumers are looking to other economical solutions to commute (i.e. carpooling, public transit, hybrid vehicles, etc.) . The increase in the supply of oil will definitely have negative pressures on the price of oil; this in turn will remove one of the pillars that are vital to a further Canadian Dollar rally.

(3) The US Central Bank rate is currently at 5.25%, still 0.75% over the Canadian Central Bank rate. Just this interest rate differential alone makes US assets more attractive than Canadian assets. Unless the Fed signals a rate cut and the Bank of Canada signals aggressive rate hikes, the USD/CAD will not hit parity.

Going long the USD/CAD right now would have a very high risk/reward ratio, given that prices are floating right around the 1.0510 price level, which is roughly the 20 Day Simple Moving Average. This has acted as pretty strong support in multiple sessions, despite the dip below that figure on Wednesday. Even if the USD/CAD revisits the all-time low at 1.0340 it will most likely not follow-through below that. I would recommend buying half your long position now and setting a buy order near the all time low at 1.0340 for the second half of your position. Place a stop around 1.0275, which if triggered then would indicate that USD/CAD is aiming for parity; but as I stated before, this is HIGHLY UNLIKELY.

The past week has been pretty choppy given the risk aversion environment in the markets right now, but as long as you give your trades a little more room to run their course then you should be fine.

Stay tuned for more Forex insights and tips, let's make some money!

To your trading success,

DC

Why You Should NOT Play the Japanese Yen..at Least Not Now..

Dear Trader,

There is good reason why you should NOT Play the Japanese Yen under the current market conditions....Volatility, and LOTS of it.

Volatility basically translates into risk, and LOTS of volatility means LOTS of risk, and unless you can stomach all that risk you should stay out of Japanese Yen positions, regardless of how confident you are.

You see, the Japanese Yen Carry Trade is fueled by the interest rate differential between the Yen and the other higher-yielding currencies. This is the main reason why people short the yen and go long other currencies; to capture the positive yield spread by holding the higher yielding currency and borrowing the lower-yielding currency.

Then, why doesn't everyone just do this? Simple....risk aversion.

When people feel that the market conditions are ripe for bearing risk, they will dump all their money into riskier, higher-yielding assets, such as US Dollar assets or New Zealand Dollar assets. But when there is trouble in the US Housing Market and credit market and some hedge fund suddenly has to liquidate all its assets, then people panic and start liquidating their risky assets and putting the money into lower-yielding, but safer assets (such as assets denominated in the Japanese Yen and the Swiss Franc). As a result, Carry Trades will be liquidated in mass quantities and will cause a ripple in the Currency Market.

In summary, at this time the market conditions are not really ripe for going either way, so it would be best to just stay out of playing the Japanese Yen for the time being and wait until the market conditions show a clearer direction of which way the Yen is going to go.

If you want to learn about a stress-free way of profiting from the Forex Market, without bearing all that risk and losing sleep at night, you would want to check this website out:

http://www.stressfreeforex.com

Stay tuned for more insights on the Forex Market!

To successful trading,

DC

After a LOOOONG absence, the Trader is back in the house!

Dear Fellow Trader,

I have seriously not posted on my Forex Blog for a LONG TIME because I had some issues with the log in and haven't really had time to go deal with it.

I hope that you have all been successful so far with your trading.

It has always been hard to come across a system(or create your own) to CONSISTENTLY be profitable in the Forex Market. Right now I am doing a lot of research and trial-and-error to my own system, and when I have perfected it I may consider making it into a mini-course.

Meanwhile, I would like to recommend a VERY good forex trading system that I have tested and reviewed. It is unlike ANY OTHER forex trading system out there because it is a PRICE DRIVEN FOREX TRADING SYSTEM. Most systems out there are indicator based or fundamental based, and I'm not saying that they're not good, but it's just that it lacks the simplicity of a price driven forex trading system. In a price drive forex trading system you don't have to learn about technical indicators, support/resistance levels, etc. It's simple and it's based on PRICE ACTION.

With this system you can easily make hundreds per trade, considering that you are adequately capitalized (Starting with about $3000 - $5000). Most people will not have this kind of money sitting around, but if you follow the system you can easily grow your account by 1.5% each day (which you can compound by reinvesting your profits).

I would personally give this Price Drive Forex Trading System an impressive 9.5/10, simply because I don't give like to give 10's (I always believe there is room for improvement). Trust me, it will save you tons of money in expensive trading lessons and flatten the learning curve. It's worth every single penny of it and you will make the cost of the system back in a few trades.

Check it out HERE

To successful trading and bigger profits,

Dickens

Time to Short the Dollar!

Dear Friends/Fellow Traders,

Today I decided to cite an article from Jack Crooks, Editor of The Money Trader and Crooks on Currencies, because I couldn't have expressed my view on the US Dollar any better than he has.
So here it is:

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I previously explained the dollar would likely fall if the U.S. economy enters a "muddling through" stage. That seems to be where we're headed.

Last week the U.S. dollar broke down sharply from a seven-month trading range. The buck literally tanked overnight while here in the U.S., we were all still digesting our turkey and stuffing. But the big question is does this set the stage for a new low in the U.S. dollar? It's definitely possible. Let's take a look at the fundamentals.

Yesterday, the U.S. durable goods orders report for October showed a plunge of 8.3% for the month. So that means that most of us aren't running out to buy a new washing machine, refrigerator, or a new car... the way we used to. This news provides more confirmation to the market that the U.S. economy is decelerating, more quickly than many had believed possible.
This is terrible for the U.S. dollar because while the U.S. economy slumps, the European economy is taking off. European growth is proving stronger than expected right now, and the relative comparison is killing the dollar. That's why we are seeing a sharp rally in the European currencies against the buck. It may be a bit early to say this dollar move is the continuation of a its multi-year bear market, but it something to consider.

Long-term Trends in the Currency Market

It's always difficult to pinpoint where we are in terms of a trend. Long-term trends in the currency markets have historically ranged from six to ten years. Dollar trends have been measured by the various bull and bear markets since President Nixon made the dollar a free-floating currency market back in 1971.

Here's the pattern of long-term bear and bull markets in the dollar as measured by the US$ Index:

1971-1978: Seven-year bear market (President Nixon closes the gold window closed)
1978-1985: Six-year bull market (Fed Chairman Volcker squeezes inflation)
1985-1992: Seven-year bear market (Triggered by the Plaza Accord)
1992-2002: Ten-year bull market (Tech boom and money flow to U.S. assets)
2002- ? : Presently the dollar is in the fifth-year of a bear market

No one can say when the current multi-year bear market in the dollar will end. The best we can do is keep these price moves in perspective so we can better evaluate conditions as they develop that may indicate the potential for a change in the trend. I use the boom/bust cycle of price action to put these longer-term moves into perspective.

The dollar, especially from a longer term perspective, moves in waves. These are discernable waves based on human emotion and supported to differing degrees by the underlying economic fundamentals at various stages along the way. It sounds complicated but it's not. Here's an example of the waves or stages of the dollar in a boom/bust price cycle...

Stage 1: The unrecognized trend - This is the early on stuff. It represents the beginning of a new trend that is recognized by only a few of the major players.

Stage 2: The beginning of a self-reinforcing process - This is the stage where the consensus begins to realize there are real underlying fundamental reasons why this "new" trend has legs. This is the most powerful and longest leg or wave of the trend.

Stage 3: The successful test - This is the pull-back that challenges the consensus view, it represents a significant retrace of the prior wave "self-reinforcing" wave. In the case of the dollar, the bear market correction we witnessed during 2005 is an example of a "successful test."

Stage 4: The growing conviction, resulting in a widening divergence between reality and expectations - This represents the last major leg or wave of the trend. It is supported by real fundamentals or expectations of how the fundamentals will play out. But it also represents the stage in which the currency is either overvalued" or "undervalued" on a pure fundamental basis.

The current example is the leg-up we are seeing in the British pound. It is supported on strong growth in the UK economy and an aggressive Bank of England. But on a purchasing power parity basis (a key long-term indicator of real value) the pound is very "overvalued," relative to the U.S. dollar. But that doesn't mean the move is over. We still have the climax stage before it ends.

Stage 5: The flaw in perceptions - This is the stage in the cycle when some of the major players begin to realize the currency cannot be supported by the fundamentals, as highlighted above.

Stage 6: The climax - This is the final stage of the move, and represents the "overshoot" we often see in currency markets because they tend to be more sentiment driven and price-led than other asset markets.

Stage 7: A self-reinforcing process in the opposite direction - The trend begins in the opposite direction.So where are we now in terms of this dollar bear market? I think we are late into Stage 4. On a fundamental basis the euro and pound appear "overvalued" against the dollar. But, there are still very good reasons why it makes sense to be short the dollar. And after all, this bear market is only 4 1/2 years old.

When the "climax" stage is reached you will know it. That's when everyone in the world will hate the U.S. dollar everyday all the time. Shoeshine boys will be playing the FX market, and making a killing. That's then you know we are very close to Stage 7, time to start looking in the other direction.

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The Dollar looks like it's going to undergo a medium-sized correction, as Dollar shorts rake in their profits and reposition themselves for another downside move. I advise not to go too aggressively short on the Dollar at the moment and wait for the correction to finish. That's when the real move should be happening.

Stay tuned for more!

To Successful Trading,
Dickens

Thanksgiving was all but calm..

Dear Friend/Fellow Trader,

Most thought that the Thanksgiving holiday was going to be a period of calm and serenity for the US markets, but what happened this morning told us a whole different story.

The EUR/USD finally broke through 1.3000, the all important psychological level that failed to break earlier this year, and rallied all the way up a little past 1.3100 before losing momentum. The pullback after the rally was quite limited, however, as the pair closed around 1.3095. The GBP/USD also staged an impressive 200+ point rally, tripping large stops and taking the pair past 1.9300.

There was also massive carry trade liquidation as the USD/JPY was brought down to the 115's and the USD/CHF down to the 1.20's, most likely with even more liquidation coming up after the Thanksgiving weekend.

Anyone who went short the USD against the majors would've made a killing in the past week, which was particularly surprising given the lack of US data due to the Thanksgiving holiday. This is another case where capital flow totally dwarfed the fundamentals.

The question now is, how much more USD selling will there be in the upcoming week? I would caution anyone who is considering going long EUR/USD at this stage to keep stops a little tighter than usual as a strong Euro is anything but beneficial to businesses in the Eurozone, being a net export region. We may see some central bank intervention if the EUR/USD continues to rally. The GBP/USD would probably be a little safer to go long, because the UK is less export dependent, so the strength of the currency wouldn't have as large of an effect as it does in the EuroZone or Japan, which are very net-export.

Just remember to keep proper risk management strategies in place and you'll save yourself from being wiped out by sudden trend reversals.

I'll try to be posting a little more in the upcoming weeks, but I've been tied up with some personal issues lately, which explains the huge time gap in between this post and the previous.

Stay tuned!

To successful trading,
Dickens

In the Heat of the Mid-Term Elections..

Dear Friends/Fellow Traders,

If you've been keeping track of the mid-term elections in the US, then you would know that the Democrats have won a comfortable majority in the House of Representatives (Specifically 227-193). Now the Democrats are eyeing the Senate as well, with a hard-earned 49-49 tie at the moment. In the case that the Democrats does a clean sweep of both houses, then we could see some significant changes in the political realm as the Democrats will be given the power to overturn some of Bush's admistrative policies. But if the Democrats only take the House and not the Senate, then their power against Bush's policies will be very limited. However, with Bush's approval ratings in the red, the chances are in favor of the Democrats taking both houses, but we'll have to wait until all of the votes are ratified in order to get the final resolution; this will likely be after the Thanksgiving holiday as the newly-implemented technology utilized in the polling process was a little overwhelming for everybody (kind of funny, given that the US is one of the most advanced nations in the world).

What does this mean for the FX markets?

In the short-term, if the Democrats does a clean sweep of both houses, then we will most likely see the Dollar sell-off as political upheaval usually does not bode well for investors. If the Democrats only takes control of the House of Representatives, then we probably won't see much of a move in the US Dollar.

Long-term, though, I think a Democratic win would probably be more beneficial for the Dollar, as they could possibly force a change of policy in Iraq, therefore lightening on the Trillion Dollar deficit that the Bush Administration has brought upon the nation. What has this caused? Well the Dollar dropped from around 1.5 down to where it is now against the Canadian Dollar (holding at around 1.13 currently), and also lost value against all of the other major currencies. This devaluation in the US Dollar has been very hard on US consumers, as they see their hard earned dollars become more worthless by the day.

We could see a pretty big move in the US Dollar in the upcoming weeks, so position yourself!

To successful trading, Dickens

Outlook for the Dollar..

Dear Friends/Fellow Traders,

As I have stated before, the US Non-Farm Payroll numbers are the biggest market movers for most financial markets. It is a reflection of the overall health of the economy as the NFP states how many jobs are created in that particular month. Friday morning was a big surprise for many as the NFP actually surprised to the upside for the Dollar. The October numbers were a little bit under expectations (at least triple digit) at 92k, and the market went wild and started selling off the Dollar in the first minute or so. Following the October number was a revised September number, from 51k to an astounding 148k, bringing the two month average to 120k. While the October number alone may have suggested another month of weak job growth, the September revision shot down that pessimistic outlook and everyone started buying Dollars like crazy. So basically in the two minutes following the NFP release, the EUR/USD shot up to 1.2795 from 1.2770, then plummeted to 1.2710. The originally overjoyed Dollar Bears were consequently disappointed as the revision came in really strong.

On Halloween I stated that I was Dollar Short and that I expected a weak NFP number for October, which was true, but I didn't expect such a strong revision for September. Following my strategy by always planning for the worst, my positions was stopped and reversed at my stop-loss points, and I quickly netted a small profit. For those of you who may be confused let me explain exactly what happened. I had 2 EUR/USD long positions open at 1.2763, with stop losses at 1.2740, risking 23 pips per position for a total of 46 pips. In the first minute following the NFP release, the EUR/USD rallied to 1.2795, which means that I would have had a floating profit of 32 pips per position for a total of 64 pips. That made me very happy as my expectations were met. But the revised figure came out right after and the EUR/USD plummeted to 1.2710 within one minute (from 1.2795). My stops were run at 1.2740, but I had a reverse order to SELL two lots of EUR/USD at 1.2740. That means my position changed from Long EUR/USD to Short EUR/USD at that point, taking the 23 pip loss at 1.2740. But since the EUR/USD fell further to 1.2710, I would have a 30 pip floating profit following the 23 pip loss, which means I am still 7 pips in profit, for a total of 14 pips (because I had two positions open). True, it is a very small profit compared to what could have played out to be a large rally in the EUR/USD (which could possibly have netted me 100+ pips profit per position); however, having the stop and reverse strategy in place I not only protected myself from large losses, but also netted a small profit. The worst-case scenario played out and I was lucky to even net a small gain in that respect.

What does this all mean? It means that the US economy may not totally flop as suggested by the previous string of weak data, at least not in the near term, because job growth is still relatively strong. The short-term Dollar Bears are throwing in their towels for now, and positioning themselves for the mid-term elections coming up later in this month. The US mid-term election is a pretty rare event (just as the US presidential election is), since they occur only once every 4 years. In the past these events have led to very big market moves, so brace yourselves. We will see whether we have a divided congress or not. A divided congress does not bode well for the US Dollar, and we may see a sharp drop if this is the case.

Stay Tuned!

To successful trading,
Dickens