How Greece bailout is affecting the Canadian markets

Parity, parity, parity. That's all I hear about in Canada these days. The media is saying (Businessweek) that the strength in loonie is due to a higher than expected inflation data and so a possible rise in our interest rate by the Bank of Canada this year is in the cards. But that's just part of the story. As I was saying in my previous post, markets don't operate in a vacuum. The biggest news so far this year on the global economy is the Greece bailout. Or more specifically, is there a bailout (WSJ) and by whom? Greece is the 27th biggest economy according to Wikipedia. Their GDP is 24% of Canada's. They are by no means a small country. A default of this magnitude would have a domino effect on the weak PIGS (Portugal, Ireland/Italy, Greece and Spain) countries and beyond. Traders will lose confidence if Greece is not saved. Then everyone will unload their holdings in those PIGS countries and massive selling will drive their markets even further down. A vicious cycle of downward spiral is thus formed in the short term. Given that even a small time trader such as myself is aware of the grim consequence, it is likely that Greece will be saved. So the next question is, by whom? That is the big question which is still up in the air and fiercely debated this month. The two candidates are the European Central Bank (ECB) and the International Monetary Fund (IMF). As far as we know, the ECB doesn't seem to want to take the burden upon itself. The European Union isn't doing exactly well lately, in case you haven't noticed. Its best performing country, Germany, doesn't want to penalize their hardworking taxpayers for the mistakes of Greece (CIA World Factbook). So that leaves the IMF, the last line of defense for troubled economies. If the IMF bails out Greece, that means the United States is on the hook too as they are the biggest economy and backer of the IMF. Europe's problem will become an American problem too. More bailouts for the U.S. means more spending. Having spent trillions already pumping up the financial markets (U.S. debt clock) in the past couple of years, this would tank the U.S. dollar into the abyss. Likewise, if the ECB confirms that they will contain the problem and that IMF isn't involved. The Euros will tank and the dollar will rise. But that's just guess work for now. The one thing that's for sure is that a massive amount of money will be spent to save Greece. Excessive money means inflation and higher cost of commodities in the long run. Seeing that the Canadian market is heavily commodity-related and that our loonie is even known as a commodity currency, that is the reason behind why inflation is rising fast and our economy is being propped up. Not necessarily because we are doing terrific, but because we are sitting on a pile of gold and oil. Real, tangible wealth in any kind of economy.

Posted 18 March 2010 in stocks.

A lesson on the importance of fundamental awareness for a technical trader

I paid a price last week in trading EURCHF for not knowing the fundamental analysis about the currency pair. First of all, here's how my trade played out. The support between 1.500 and 1.510 is apparent if you look at Figure 1. So I went long as shown in Figure 2 (second blue triangle from right) based on a positive divergence at a strong support of 1.510. EURCHF stayed range bound for a over a day while my other positions were having roller coaster rides. That's when I decided to tighten up my stop on my EURCHF long from 1.508 to 1.5095 to limit my risk exposure. As you can see in Figure 2, that was a bad decision. On October 30, EURCHF made a swing downward to take out the nearby stops and then launched upward right past my target. That would have been a quick and low risk play if I hadn't micro-manged the trade and moved my stop up while the daily setup was still sound. While getting stopped out is part of the game, as there is never absolute certainty in a trade. But in this case, the probability of this up move was substantially greater than I would have guessed. The extra bit of information lies outside of the chart. It seems that there is a well known secret that the Swiss National Bank (SNB) has been intervening in the market to keep the Swiss Franc from being even more overvalued. In particular, it's well known that the SNB has their eyes on the 1.50 and 1.51 levels in the EURCHF pair. SNB publicly announced their intention to intervene on March 12. Immediately following the news, the EURCHF pair exploded up 470 pips in 20 minutes that day. If you look at Figure 1, you can see that gigantic bar on March 12. The DailyFX has an article on this monumental event. Since then, the SNB has been coming to the rescue of EURCHF in very obvious ways as shown in Figure 1 with the regular spikes in prices. Prior to this October 30 move, EURCHF had an identical price action exactly a month before on September 29, as shown in Figure 3. Back then, EURCHF also had a positive divergence on a test of support at 1.5080. Then next thing you know, the pair popped over a 100 pips. Obviously, the SNB is trying hard to paint the tape on the monthly chart of EURCHF. As I was saying, the SNB is intervening in the market to keep their currency from further over-valuation, which is hurting their local economy. In both cases of Sept 29 and Oct 30, if the support was broken, EURCHF would have stepped into a grave on the chart. Just look at that huge vacuum below 1.50 on Figure 1. In this recent case on Oct 30, even though I did go long because of the chart, I didn't have the edge of knowing this information. Which led me missing this easy ride because I didn't have as much conviction in this trade as I should have. Coincidentally, as I have been aggravating to improve the win rates of my trades, this came hitting me right on the head. So while I'm no economist, I should at least be aware of the fundamental forces at play in the currencies that I trade. At the end of the day, technical analysis may provide guidelines to the mass psychology behind price actions, but it is the fundamental and economic forces that are ultimately driving the market. [caption id="" align="aligncenter" width="580" caption="EURCHF"][EURCHF]EURCHF[/caption] [caption id="" align="aligncenter" width="580" caption="EURCHF, 3-hour"][EURCHF, 3-hour]EURCHF, 3-hour[/caption] [caption id="" align="aligncenter" width="580" caption="EURCHF, 3-hour on Sept 30"][EURCHF, 3-hour on Sept 30]EURCHF, 3-hour on Sept 30[/caption]