As we are heading into the last month of the year, we take this opportunity to look a one of our favorite topics in forex, seasonality. We have long discussed how, during certain months, currency pairs show a consistent bias to rise or fall and December is clearly no different. Along with the chaos of the end of the year has come a very stable and significant pattern that may hint at further dollar weakness.
A look at the price action of the EUR/USD over the past 11 years reveals a distinct pattern. Since 1998, seven out of the last eleven Decembers the euro performed strongly. Of course, the first thing that strikes you when looking at the chart is the 10.0% jump last year. Even though one might think this was a bit of an anomaly, we see similar outperformance in past years. For instance, in 2000 there was a nearly 8.0% jump, while in 2002 we saw a 5.5% rally. When it comes to this seasonality study, it turns out that magnitude is more important than probability. Even though 7 out of 11 are not very trustworthy odds, it is more important to focus on the fact that if December did result in a loss, those declines were capped at -0.47%. This end of year flow may be indicative of foreigners selling dollars and repatriating those funds back home.
A number of factors may be behind these patterns including fiscal year end flows, demand for commodities, import and export trends or even travel. However, for whatever reason, pairs other than the euro, kiwi, and aussie did not show as significant results.
Trading Seasonality
As you can see from the charts above, seasonality does not hold 100 percent of the time, so the best way to incorporate it into your FX trading is to simply keep it in the back of your mind. For example, it may be better to look for opportunities to buy NZD/USD in the month of December than to sell it. Seasonal trades do not always duplicate themselves, which is why trading seasonality blindly by selling at the beginning of the month and buying it back at the end of the month may not always be the best thing to do, but what seasonality does show us is where the probabilities are skewed.
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Tokyo Hits 4-Month Low
Japan's Nikkei Average fell to a four-month closing low as financials, autos and a broad range of exporters lost ground.
Disappointing U.S. data renewed worries about the economic recovery and weighed on sentiment.
Financials came under pressure, after Mitsubishi UFJ said on Wednesday it would raise a massive $11 billion to meet stricter capital rules. MUFJ shares slumped 4.1 percent while Sumitomo Mitsui lost 4.9 percent.
Economic worries and a stronger yen hurt a broad range of exporters. Honda Motor lost 3.5 percent and Canon shed 3.1 percent.
The benchmark index declined 1.3 percent 9,549.4 points after falling as far as 9,496.07. The broader Topix fell to a six month low and was last quoted down 1.45 percent at 837.7 points.
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range bound, no real lower lows or highs .........just double tops and double bottoms. It would have been good trading this today, very obedient index.
61.8% Fib Retrace = 10410 .....watch this level carefully
10418 is gap down level which acts as resistance and we have failed to trade above it all day.
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This morning's mixed U.S. economic reports had a limited impact on the U.S. dollar. Based upon the consumer price index, inflationary pressures increased in October. However housing starts and building permits took a big tumble which indicates that one of the first sectors to bottom in the U.S. economy is beginning to show pockets of weakness. Housing starts fell 10.6 percent to the lowest level since April while building permits dropped 4 percent to the lowest since May. The market had anticipated increases in both releases, but as we suggested in our Daily Report last night, the sharp decline in builder confidence in October points to weakness in the housing market. There is a lot of inventory on the market and more set to hit over the next year and therefore the lack of demand is discouraging new projects.
Meanwhile consumer prices rose 0.3 percent in October with prices excluding food and energy rising 0.2 percent. On an annualized basis, prices are still slowing albeit at a much more moderate rate. In October, year over year CPI fell 0.2 percent compared to the prior year which represents a marked improvement from the -1.3 percent drop in September. With commodity prices rising, it is not surprising to see the upside pressure on consumer prices. However outside of the contribution from food and energy, there was also a notable increase in car prices and airline fares.
Although the reaction in the currency market to the CPI and housing reports were limited, gold prices continue to hit record highs. Gold bugs are bidding up prices to hedge against inflation and the U.S. dollar. This suggests that at least one group of traders or investors still believe the dollar could be headed lower. Treasury Secretary Geithner and Federal Reserve President Bullard are scheduled to speak this morning.
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IS OIL CONVINCED by the 0.9 mln draw in EIA crude inventories? Oil briefly touched a session high of 80.28 before retreating to the 79.80s. With oil traders aware of the effect of the storm, it is unexpected for oil to reverse its 4-week downtrend and close above $80.50. Dollar also somewhat supported by comments from Atlanta Fed president Bullard indicating that the memory of housing bubble may push Fed to start rate hikes MORE QUICKLY than after past recessions. In the event that oil closes below 79.40, the dialy candle could become a bearish doji, with a relatively high shadow, suggesting fresh downside. EURGBP breaks above the 4wk trend line of 0.8910, calling 0.8930. 0.8975 is the next target after the 61.8% retracment support at 0.8820 managed to hold.
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Markets do not like high inflation and 6-month lows in US housing starts. Dow futures move -16 pts from +20 prior to the data, USDCAD regains 1.05 from 1.0450s , while GBPUSD struggles to hold at $1.68. While the data are negative for risk appetite, markets will remain cautious, especially ahead of EIA report (15:30 GMt), expected to show a build of crude oil inventories +0.8 mln barrels following +1.8 mln barrels. But Tropical Storm Ida may have caused a drawdown of inventories (as did the API report showed -4.4 mln). CADJPY struggles at 85.15 trend line resistance, loking to regain 84.50, EURJPY capped at 133.70 trend line, eyeing 132.80
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The most anticipated event today was the minutes from this month's Bank of England meeting and boy did they deliver. Taking a look at the prerelease levels in the GBP/USD, the currency pair appears to be trading not far from those levels. However, a quick look at intraday charts (shown below) will reveal roller coaster like volatility. Initially the British pound dropped 60 pips against the U.S. dollar on the heels of the release but it recovered almost as quickly yet the gains failed to maintained. Although there was also a tremendous amount of volatility in EUR/GBP, the euro managed to hold onto its gains which suggests that ultimately traders interpreted the BoE minutes as bearish for the currency.
BoE Split 3 Ways
If you recall, at the monetary policy meeting earlier this month, the Bank of England increased their Quantitative Easing program by GBP25 billion. At the time, the market was divided on how much stimulus the Monetary Policy Commitee would deliver - some called for 25B but most called for 50B. Based upon the voting record at the meeting, we learned that one member (Dale) voted to leave the program unchanged while another (Miles) voted for a larger GBP40B increase. The remaining 7 members approved the GBP25B extension and no one voted in favor of a GBP50B move.
Tinge of Hawkishness from Monetary Policy Members
The tone of the Bank of England minutes also contained a tinge of hawkishness. According to the report,"A number of Committee members noted that one consequence of additional asset purchases would be to bring forward the point at which the extraordinary degree of stimulus could begin to be withdrawn, if the projected impact was realised." This can be interpreted two ways - the first being that the BoE is afraid that by stimulating too much, they would be forced to implement an exit strategy prematurely or second, that the 25B QE extension made earlier this month has already forced them to start working on an exit. Either way, additional stimulus from the BoE is becoming increasingly unlikely.
Also, one of the primary reasons why Dale, who is also the Chief Economist of the BoE voted to leave the program unchanged was because of his fears about inflationary pressures and he felt this way before the latest CPI numbers were released (and they were very strong). However at the same time, some members believed that there could be more downside risks to activity in the near term than suggested by the Inflation Report.
On the face of it, the voting record should be positive for sterling. However we are seeing a very reluctant rally in the currency pair because ultimately of all the G7 countries, the U.K.'s central bank is still the most dovish.
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The 20 MA has pierced the 50 MA, signalling short term bullishness. The market has not put in a lower low today so that need to be watched with interest as it can be classed as a bear flag negation.if we can out in a higher low then we have an intra-day bull flag.
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Argument for rise
Stock market is strong and it will keep rising especially after the breach of 5300
Bull flag on a weekly chart, higher highs and higher lows
The 50 MA is acting as support
61.8% retracement held from prev low to high
> 85p and it holds then next level is downward sloping trend line and horizontal trend line resistance in the region of 103p - 112 p
Argument for a fall
Stock market very top heavy and due a pull back
inside bar on a weekly chart with 96p being the upper body of the candle
It has broken out of the parallel channel, support now equals resistance
< 85p and it breakdown is confirmed then next target is 62p and possibly even 30p again
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