Using the fundamentals to set up set up a trade goes beyond the regular economic reports. Comments from officials, especially in this environment, can be used with upcoming data releases when all point in the same direction. There was a good examp[le of this seen on Sunday soon after the forex market began trading.
On November 20, ECB President Jean-Claude Trichet discussed plans for the ECB to exit its quantitative easing strategy, saying that “gradual and timely phasing out” of Quantitative Easing (QE) measures would become necessary as the situation became more “normal.”
The ECB could even detail plans for phasing out its quantitative easing at the December meeting.
QE basically involves printing money to supply liquidity, which the ECB has been doing in unlimited amounts in terms up to one year. Implying that such measures could begin to be phased out requires a re-balancing of the supply-demand equation, with the key being reduced supply. Hence upward pressure on the “price” of the euro was bound to be applied by market strategists.
Next, comments from St. Louis Federal Reserve President James Bullard on Sunday supported expectations for low interest rates and weighed on the dollar. Bullard also said the Fed should keep alive its mortgage-related assets purchase program beyond a planned end date in March 2010 in order to help stimulate the housing market and therefore, the overall economy. Dollar negative factoid number 2.
Finally, it was a pretty good bet that sales of existing homes in the U.S. was likely to beat low-ball market expectations, especially because the $8000 tax incentive program had been working so well. It’s common to see traders “price in” this type of news way ahead of the actual release, which is pretty much what happened since the dollar reached its low of the day just about at the time the report came out.
Of course, once the dollar started weakening, oil and other commodities began to rise along with the S&P futures market. All of these intertwined assets basically feed on each other and each can cause the other to move. In this case, I would suggest that it was the overall bearish implications for the dollar which got the other two heading higher. Of course, if negative fundamentals regarding oil would have occurred, the dollar would have gone higher while S&P futures declined. And if there was something nice and positive regarding stocks, rest assured you would witness the dollar decline as oil, copper, etc advanced.
To those who may have started the week with a bullish bias on the dollar based on a continuation of the three day of stock market decline from the previous week, let us always remember that asset markets are for the most part forward looking mechanisms. So the idea in trading is always to lean towards discounting future value which, in plain terms, means to trade where the market is going and not where it’s been.