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GVI Forex-Week ahead Outlook and End of Week Post-mortem October 31, 2009

Week ahead Outlook and End of Week Post-Mortem

The latest week has been a turbulent one in the markets. We have to wonder who the real players are now in the financial markets and if they have a firm grip on the fundamentals. In nearly four decades of forex market participation, we have never been as befuddled by the market analysis and commentary we see every day on the forex market. For example, we hear every day out of equity markets that USD prices have been leading stocks. Well we have tic-by-tic overlay charts that we watch all day every day and have observed that equities almost always move BEFORE the forex market.

Thus it makes sense that when there is a fiscal year end sell-off by equity mutual funds, as seen at the end of the latest week, that the USD should gain. Why the USD should gain when equity prices fall makes no sense to us. People trade that way because it works, and that is a sufficient reason. For the previous 35 odd years the USD would gain on constructive news for the U.S. economy. It is very hard for some of us to become accustomed to the notion that bad economic news is good for the USD and vice-versa. This state of affairs cannot last forever, but we have learned of the years that it is best to go with the flow.

Into the week ahead, it may be best to approach the markets flexibly. If equity sales were the result of equity mutual fund book-squaring, it might be logical to assume that in early November fund managers might be redeploying their cash holdings back into shares. On the other hand, many might be cautious about reinvesting their funds immediately and could choose to wait to see how far the current correction goes. Consider also for good reasons, the short USD trade already has a lot of company. Also, many official reserve managers around the globe have a long-term strategic objective of reducing the relative proportion of USD holdings. This is not going to change. In short, the cross-currents in the period immediately ahead are strong. Our view is the USD remains fundamentally vulnerable, but in the very short run it might have additional short-covering upside potential.

Post-Mortem follows…

GVI Forex Discussion Points.. Friday AM
Forex trading is off to a cautious start on Friday. Today is a month end more important than others with many retail equity fund managers in the U.S. at their fiscal year end. Also for many hedge funds, this is the final day for investors to file their intention to withdraw funds for the year. Some technical factors are in play today. U.S. advance 3Q09 GDP data, which showed growth of 3.5%, yesterday should quickly fade as a market factor. The data were stronger than most street forecasts which ranged between +3.0% and +3.5%. A top Wall Street firm weighed in Wednesday with a +2.7% forecast. Equities rallied on the news and gave the EURUSD a lift.

10/29/2009 19:20:20 john GVI Forex
GVI Forex Discussion Points.. Thursday Evening
As expected, the main focus for trading Thursday was advance 3Q09 GDP data, which showed growth of 3.5%. This was stronger than most street forecasts which ranged between +3.0% and +3.5%. A top Wall Street firm weighed in Wednesday with a +2.7% forecast. We never like GDP because swings in inventories can distort the results. In the end, equities rallied on the news and gave the EURUSD a lift. The end of October is the close of the fiscal year for many retail equity mutual funds, and it is possible that their activities have been influencing trade. Presumably they will be buyers of equities in early November.

10/29/2009 09:36:06 john GVI Forex
from GVI Forex Discussion Points... Thursday AM
The main focus for trade today will be the advance 3Q09 GDP estimate. Most street forecasts range between +3.0% and +3.5%. Much of the advance is being attributed to the “cash for clunkers” program, which has since been discontinued. We never like the GDP figure because swings in inventories can often have a distorting influence on the results. The key EURUSD pair might be in a bottoming phase. We continue to feel that there are a lot of USD on the sidelines waiting to be sold. Sellers are just waiting for the best time to move. When they move it will be sudden and sharp. One fly in the ointment is that recent U.S. economic data have not been supportive of higher stocks. Thus today’s GDP data is more important than usual.

10/28/2009 19:05:06 john GVI Forex
GVI Forex Discussion Points...Evening
The forex market correction that started late Monday has continued through Wednesday trading in NYC. The market had to decide if the EURUSD pair was headed higher or lower, and it took a while for the market to decide what to do. We had thought the lower USDJPY might influence its direction, but it didn’t. The pervasive supporting argument for the unit seems to be that it was oversold. That view is paired with a perception that equities are overbought and are in need of consolidation. U.S. economic data released over the day was not supportive of higher stocks.

10/28/2009 09:41:41 john GVI Forex
GVI Forex Discussion Points... Morning
-- I’m not a great forecaster, but the EURUSD is trading now exactly where I expected it would be at this hour. If I had traded it I would have made nothing as it is unchanged. The market now needs to decide if the pair is headed higher or lower from here, but I don’t think the market knows what to do. One hint might be coming from the lower USDJPY. The only supporting argument for the unit seems to be that it is oversold. That view is paired with a perception that equities are overbought and are in need of consolidation. This is an important time, as we will soon see if central banks will come in as sellers in size on the USD bounce. The USD will remain the carry trade financing currency as long as Fed policy remains excessively expansive.

10/26/2009 22:06:44 john GVI Forex
GVI Forex Discussion Points.....Evening
Headlines about USD weakness were prominent today even though it has not really moved very much. On the other hand, equity analysts don’t appear to be shy about expressing positive opinions about the USD. In general, they tend to be USD positive based on the length of time that it has been weak. Most seem to have little grasp of the fundamentals. A report that China is considering moving some or its massive dollar holdings into EUR and JPY has been denied by saying they were the opinions of none individual. China is trapped by the magnitude of its USD holdings. European clocks moved back one hour last weekend. The U.S. will change this coming weekend. The late USD surge is being blamed for the tumble in stocks.

10/26/2009 09:50:41 john GVI Forex
GVI Forex Discussion Points... Monday AM...
Headlines about USD weakness have been prominent today even though it has not really moved very much. Today is a light day on the data front. A press report that China is considering moving some or its massive dollar holdings into EUR and JPY has been denied. China is trapped by the magnitude of its USD holdings. European clocks moved back one hour last weekend . The U.S. will change this coming weekend. Central Bank reserve diversification away from the USD is a constant. Look for regular USD selling on rallies.

John M. Bland is an author and co-founder of Prior that, he was a senior forex dealer in a subsidiary of the Continental Grain Company in NYC. Previously, he was a member of the Chemical Bank corporate advisory service in NYC. He also worked in international liability management. John holds an MBA from the Hass School at the University of California at Berkeley and a BA in Economics from Berkeley.


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