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Forex Market Outlook 10/25/11

By Mike Conlon, ForexNews.com on Oct 25, 2011

Well it looks like the market is unaware that there is major risk potential in the marketplace as stocks and commodities took off yesterday and it was “game on” for risk appetite. As a result, the Euro as well as the commodity bloc currencies moved higher despite the Euro debt decision due out tomorrow.

Does the market know something that we don’t? As often is the case, the answer is simply “no”. What the market does know is that it wants to take on risk and wants to buy stocks (especially large fund managers who have posted less than stellar returns) as corporate earnings have been largely better than expected. Throw in higher Chinese PMI data that showed that they aren’t slowing entirely and you have a recipe for gains.

But should the market be paying more attention to the risk? I think the answer is a resounding “yes”. For the devil is in the details, as they say, and what we may hear from the EU tomorrow could be detrimental to market stability. For example, how big of a voluntary haircut will Greek bond holders have to bear? 50? 60? At what point does it no longer become voluntary and trigger a technical default which in turn triggers Credit Default Swaps and then starts the game of musical chairs that is inevitably going to leave someone exposed and with massive losses?

How large does the EFSF have to be to handle these problems and prevent contagion? How will they get it there? Leverage? Partial guarantees?

The point I am trying to make here is that there are MANY questions that need to be answered and I’m not certain that there is a “right” answer. It is more likely that we are at acceptable and unacceptable viewpoints and how the market reacts will be telling. But don’t forget, the market has been rallying in a big way heading into this news. Its not like it is unaware of the issues. Yet people are buying like its just another day. And by and large it is, and I believe the hope is that the cloud of uncertainty we have been dealing with will be lifted.

What is exactly is going to happen tomorrow is anyone’s guess, but the contrarian in me tells me that when everyone is bullish, I should be bearish. We are reaching certain price levels on many currency pairs that will likely induce volatility heading into tomorrow’s announcement that is showing to be released at 10EST, though not confirmed.

If I had to guess what is going to happen (and I hate to do that because I am a trader and not a prognosticator), I think the markets will spike higher on the news, and then start a sell-off as the news trickles out. This will likely represent a pullback on what has become a “ V-bottom” reversal into an up trend for most of the pairs. However, I am going to trade what I see and not what I think will happen and I advise you to do the same.

In other news, last night New Zealand reported CPI data that was lower than expected, showing 4.6% inflation vs. the expected 4.9% which may mean that the RBNZ will be on hold for tomorrow’s rate policy meeting.

Later this morning, the Bank of Canada will issue its rate decision and are not expected to change rates, which could mean a bounce off of parity vs. USD.

In the US, home prices and consumer confidence figures are likely to have little impact, and recent rumors being floated that there could be “QE3” in the works may have been the catalyst for the market’s recent rise.

While the Fed has a dual mandate to contain inflation and promote job growth, they may feel compelled to act if nothing comes out of the Super-committee in Washington that is charged with reducing our deficit.

However for now, I am waiting on tomorrow and will not be taking any positions into the release of the “resolution”. There are just too many uncertainties at this point.

Regards,

Mike Conlon,
Senior Forex Mentor
Forexnews.com