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North American Data Overshadowed

Last updated 10/9/2012 4:12 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Germany and Greece Sittin’ in a Tree

North American trading opportunities were limited to short opportunities as event risk from the other side of the pond weighed heavily on risky assets. The Dow is struggling to finish without a triple digit loss for the day, the EUR/USD is down more than 100 pips, and other risk type trades are taking similar paths. Only a short covering bounce toward the end of day saved an all-out selloff for the day.

Much of the negative feeling was related to a variety of events from Europe. First of all, the International Monetary Fund warned the world that their crystal ball isn’t showing them pure kitten whiskers and puppy dog tails in the future. They warned that the outlook is pretty bleak by downgrading their expectation of global growth, specifically calling out political leaders in Europe and the US.

Then German Chancellor Angela Merkel’s plane landed in Athens for a meeting with Greek Prime Minister Antonis Samaras amid protests opposing German inspired austerity measures. Yesterday, the rumor was that Merkel was there to organize an exit of Greece from the Eurozone, but those rumors were unfounded as Merkel reiterated that Germany’s desire is for Greece to remain.

Merkel’s proclamation did little to appease investors as protestors reportedly numbering in the tens of thousands stole the headlines, some dressing in Nazi uniforms and burning German flags. So despite the typical relief rally we see when Germany reaffirms their desire for a unified Europe, and Samaras even going so far as saying, “All of those who made bets that Greece would fail... will lose;” the markets sold off anyway.

How much longer the selloff lasts will largely depend on what the next headline will be out of the Eurozone. If the Greek protests encourage Spaniards to protest as well, we could be in for a long week of headline risk dominating price action.

North American Data Overshadowed

While most itchy sell fingers were fixated on Europe, Canada and the US actually brought some good news to the market today. Canadian Housing Starts beat estimates with the previous month’s figure being revised upward as well. The US’ IBD/TIPP Economic Optimism Survey showed that US consumers are becoming more optimistic, falling in line with the UM/Reuters and Conference Board’s Consumer Sentiment indices released last month.

If both North American powerhouse economies can continue to provide good results to economic releases, both of their respective central banks can start to scale back their easing measures.

The Bank of Canada has been hinting for months that they would consider beginning to raise interest rates once again. The CAD would be the only highly traded currency whose interest rates would be going up, as the rest of the G-10 universe has been cutting rates. That could encourage some investors to look at Canada as a potential safe haven.

Due to Canada’s rather healthy economy, AAA rating respect, and close ties to the resource hungry monster that is the US, things couldn’t be looking much more appealing to investors. Particularly if they begin to raise rates vigorously to contain any semblance of a housing bubble, the CAD may end up being the new favorite currency for carry trades.

Granted, the BoC may not like their potential newfound popularity due to the increasing value of their currency if it does come to pass. Just like Australia, Canada is highly dependent on exporting resources, and the more value their currency enjoys, the less Canadian businesses will earn by selling their resources outside their own borders.

Australia has battled that front by being dovish and lowering interest rates along with expectations. However, Canada may not be so lucky. The US’ Federal Reserve is expected to continue to pump more liquidity in to the economy via Quantitative Easing for the foreseeable future, and some of that liquidity will inevitably leak its way Up North.

If you add hot sauce to an already spicy burrito, it makes it even hotter. The same principle applies to economies, where if you add liquidity to an already growing economy, it could start to run away from you. Canada may have no choice in having to raise interest rates to contain a runaway housing market that just keeps spitting out good results.

Looking Forward

Tonight’s economic report docket is rather light with Australian Consumer Confidence being the only release of note. This is typically a volatile release that swings from positive to negative quite often and last month’s result was positive 1.6%. If past results are any indication of what this number will be, then we can expect to see either a small positive or small negative release. Either way, it will likely be lower than the previous month’s number and would encourage even more selling of risk during the Asian trading session.

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner).

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.