Thursday, January 17, 2008

Market Frenzy To Calm?

Market Frenzy To Calm? Last week the Dow Jones poked past the psychologically important 14,000 level. However this push could falter as traders question the strength of the post summer rebound says Betonmarket s Michael Wright. While last week s economic data was still important, most traders are focusing their attention on the FOMC (the US central bank). The minutes from the last FOMC meeting will be poured over word by word on when they are released on Tuesday. The main questions are: Will the FOMC actually cuts interest rates again? Is a rate cut actually needed now with wheat and oil prices still soaring. Is it too late to avoid an economic slowdown? A man who is credited with fixing the last credit crunch was quoted last week as saying that most of the credit damage has been done. Any move from the FOMC now could be more for show rather than effective. In fact it could actually be counter productive, as it will allow inflation to eat more of the consumers purchasing powers. The man quoted? None other then Alan Greenspan. We are beginning to see the frenzy calm down, the former chairman of the Federal Reserve told a conference in Lisbon. Unless we get secondary effects the worst is over. While Greenspan has no decision making power anymore, his ideas and remarks are widely followed. This crunch affected banks world wide, as Germany s largest bank Deutsche Bank wrote down more than $3 billion in the wake of the liquidity crunch. A recent survey showed that the Euro zone service sector growth suffered its biggest slowdown in at least nine years in September, as the credit squeeze hurt business and new orders. U.S. service sector growth also stumbled to the weakest rate since March. The big question of course is whether the worst is indeed behind us as Greenspan implies. Over the coming weeks there will be ever more attention paid to interest rate sensitive data, such as inflation, debt auctions consumer and corporate spending. Also there may be less pressure on the USD. If a country is on a rate cutting streak its currency tends to lose value and vice versa. Some argue that the extra rate cut that Greenspan is warning against is priced into the price of the Euro/USD over the last few weeks. The weakening Dollar and strengthening Euro has pushed the pair past record high after record high. If the rate cut were not to happen, the dollar could recover some of the ground recently ceded to various currencies. While Greenspan s thoughts carry a lot of weight, they are no longer the final word. So there is potential that while he is predicting no rate cut, one could actually still happen. Intense speculation on the decision could result in a huge spike up or down on the day of the announcement. Thankfully using you can take advantage of this potential volatility without having to know which direction the spike will be. An up or down trade compensates you if the market touches either a higher or lower trigger. It only has to touch either level once and you win. An up or down trade on the EURO/USD with 25-30 day term and 200 pips (2 cents) each way potentially returns 8% ROI. This means that you are predicting that the EURO/USD will move significantly in either direction before November.

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