Continuing with the marathon week we’re having. A quick evaluation of price movements since Monday suggests that the 450 pips up in EUR/USD that started late Wednesday and during Thursday was a MEGA stop loss hunting. We’ve been saying this since around two weeks; they need to take stops above 1.4000 and 1.4100 in order to be able to crash it down. That’s what exactly happened! A little variation to the scenario we had was the positivism of the EU summit deal that gave the Euro more room to move up making a top at 1.4246.
The Forex market is a non-linear market (in opposition to linear). That means that a rally would take a lot more time then the time it needs in order to fall for the same length. There’s a good reason for that. Let’s take the EUR/USD pair as an example;
The Euro is the “base currency” while the USD is the “quote currency”. For the time being, the base currency represents risk taking currency opposed to the quote currency that represents risk aversion. As human beings, we act on emotions whenever there are risks and use our minds whenever there are opportunities. Let’s illustrate it this way; I come to you and present a business project which I assume it will make a lot of gains in the future months or years. I need you to partner with me in order to raise the needed capital. The first answer you would give me would be that you need to think of it. You take all your time to study all the aspects of the project, maybe hire a specialist that would evaluate the business plan, we spend hours and hours to discuss all the details of the business until you decide whether you want to partner with me.
Now, let’s say that you accepted to start this business and few months later on I come to you and say that for some reason, we should close the company otherwise we risk losing all of our investment. How much time will it take you to take your decision? Not as much as the first time. Will you verify every single reason I gave you that says the business is at risk? Not probably (unless you don’t trust me and you think I’m cooking something) But you trust me, actually you trusted me in the first place when I proposed that business to you. So, what changed? Why did you need more time to think after the first proposal but quickly believed in me at the second?
The answer is easy, when you open a company, you are taking risks. As human beings, we hate taking risks. Since you have all the time in the world to consult your brain and experts, you simply do it. But, the second time, the risk is coming to you, so your decisions are more based on your emotions. In the first process, you were the master of your decision, but in the second, you were the receiver.
That is why the Forex market is non-linear. Taking risk is a slow process while switching to risk aversion is a very quick and emotional process. Buying the Euro is an investment because it involves a risk but switching from Euros to US dollars is a quick escape from the risk.
Maybe one day, the world reserve currency will be the Euro instead of the USD (fiction). At that time, the move of the EUR/USD to the upside would be quicker than the move to the downside. But, until that happens (if) we’ll stick to the opposite.
There’s a reason why I’m explaining this. There’s also a reason that I didn’t buy the EUR/USD a single time during the past month or two. There’s also a reason why, I’ve been preaching not to buy Euros. It was obvious that once the hype in the markets faded, we’re going to see a very big and most importantly a very quick reversal. That’s what happened! Getting caught in such quick moves is the last thing you need your trading account to suffer from.
Now, let’s go back to the markets:
We still have the FOMC and ECB rate decision respectively today and tomorrow in addition to the Non-Farm Payroll on Friday. But that’s not all! We have the Greek referendum too.
Bernanke will not come with anything new in my opinion. I think the FOMC would need to see how it will play out in Europe before taking any quantitative easing decision. It’s too early to take any decision. Furthermore, the markets are already playing a pure risk-on / risk-off game it won’t listen to anything that wouldn’t be a shock. It’s the time where ironically, any negative news for the Euro would send the EUR/USD down and any positive news for the Euro would send the EUR/USD down too. and vice-versa for news from the US.
With Mario Draghi’s replacing old Trichet for the first time and the turmoil in Europe, there’s a very big probability that we see a rate cut tomorrow but we will talk more about this in tomorrow’s update.
When the Arab revolution started in Tunisia and Egypt few months ago, I was impressed on how Ghassan Salameh explained it. Salameh is a professor of International Relations at the Sciences-Po, Paris and Columbia University, New York. He worked as a Senior Advisor to the United Nations Secretary General between 2003 and 2006. I won’t get too much into his biography, but I’ll just say that he’s one of the rare intellectuals I have total respect to him. He’s one of the rare personalities I would take the pain to turn on my TV to watch him whenever he’s on a talk show.
Salameh said that when the Egyptian people were left with nothing to lose, they transferred the fear from the people to the government. In other words, when the people was left with nothing to the point that some of them were ready to burn themselves just to protest and make themselves heard, the fear changed its direction from the people fearing Mubarak to Mubarak himself being scared of the people. It was the initiator of any change that could happen later on.
Why I’m mentioning this? Well this is exactly what is happening with Greece right now. Greece was the weakest link the euro zone. Greece was in fear of whether the euro zone would bail them out or not. But, with a simple surprise declaration of a referendum the fear has switched to the core euro zone countries. Papandreou’s message is very clear; if I do a referendum, people will remember that I’ve asked them to take that decision in the next elections. On a personal level, he wins. Furthermore, the fear that the European Union would partly bailout Greece for the sole purpose of saving French and German banks exposed to Greek bonds and “forgetting” about the rest of the problem is not an option now. He has turned Greece from the poor country that asks for money (and gets insulted by Sarkozy – don’t forget that) to the strong country that can dictate its conditions. Instead of Greece being scared, now it’s the turn of Germany and France. Good job Papandreou! I take out the Noble prize I gave to the EU summit last week and give it to you!