The British Pound Gets Pounded

Tomorrow, I'll fly to London, a place I visit often on business. For many Americans, London has been as expensive place to visit during the past few years, but it's becoming cheaper by the minute as the British Pound has plunged beneath $1.63.

This represents a drop of 48 U.S. cents since the Pound peaked at $2.11 back in November. That might not sound like much, but in the highly leveraged world of Forex trading, it is a huge move of 4800 pips. A big chunk of that move, about 1000 pips, has occurred over the past three days.

What is wrong with the British Pound? Well, Prime Minister Gordon Brown has made it clear today that the U.K is heading into a recession, echoing comments made earlier this week by Mervyn King. King, the Governor of the Bank of England, also commented that the U.K.'s banking system was closer to collapse earlier this month than it has been since World War 1.

The amazing collapse of the British Pound has unwound most of the currency's gains for this decade against the U.S. Dollar. Measuring from the low point of June 2001, when the GBP/USD pair reached a nadir of $1.36, and the highs of November 2007, above $2.11, the pair has lost more than 60% of this decade's gains. It smashed through Fibonacci levels all the way down, falling like a piano pushed off of the top of the London Eye (see figure 1).

Figure 1: GBP/USD breaks all major Fibonacci levels on the monthly chart. Source: Saxo Bank

GBP/USD Chart

So where will the Pound go from here? Major support is located in the $1.55 area, which last acted as support in 2003. The rate of decline here is astounding, and traders who buy GBP right now might be catching the proverbial knife. I'll short rallies, if there are any to speak of.

If the entire civilized world is falling into a recession, why is the Pound taking it on the chin? The Bank of England's Monetary Policy Committee has simply been too slow to cut the U.K.'s benchmark interest rate, which remains at 4.5%. The MPC's reasoning is that it must control inflation, but with world markets collapsing and crude oil falling below $70 per barrel, the pendulum has shifted and the time for action has come. In my opinion, the MPC should immediately cut by another 150 basis points, but that's highly unlikely. I'm looking for more downside on the Pound.

One final note, I'm scheduled to appear live on CNN Business International on Monday, Nov. 27. See you then!

Ed Ponsi is the President of www.FXEducator.com and www.EdPonsi.com. He has appeared on CNN, CNBC, the BBC and Fox Business News, and is a frequent guest lecturer at trading events and seminars around the world. Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ponsi is featured on the FXEducator.com DVD series, Forex Trading with Ed Ponsi, and is the author of the best-selling book Forex Patterns and Probabilities

Using Stocks to Trade Forex

How can traders use recent stock market volatility to make money trading Forex?

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Light at the End of the Tunnel

Forex traders have been enjoying incredible volatility lately – provided that they’ve widened their stops and targets. Moves of several hundred pips in one hour are not uncommon, while similar moves used to occur over the course of a day. I’ve been trading the Japanese Yen against the British Pound (GBP/JPY) recently, taking advantage of the weakness in the U.K. economy (and by extension, the Pound) and the fact that the Japanese Yen Loves Misery. There have been plenty of opportunities to sell this pair, which has stabilized - at least temporarily – in the 170’s.

Figure 1: GBP/JPY downtrend has stabilized for the moment. Source: Saxo Bank

GBP/JPY Chart

Using this downtrend as a guide, I’ve been selling the GBP/JPY pair short when the 14-period Relative Strength Index (RSI) indicates that the pair is overbought in the short term. RSI exists on a scale that runs from 0 to 100, with readings above 70 indicating an overbought situation, while readings below 30 point to an oversold situation. A buy signal is given when RSI crosses above 30 after passing below, and a sell signal is indicated when RSI crosses below 70 after passing above. Since the currency pair is in a downtrend, I’m only interested in the sell signals, and I ignore the buy signals. This prevents me from trading against that fierce downtrend that is so clearly indicated in the daily chart (see figure 2).

Figure 2: Two sell signals and one buy signal on GBP/JPY hourly chart. Source: Saxo Bank

GBP/JPY Hourly Chart

How long will this continue? Well, there may be a light at the end of the tunnel. For the first time in weeks, we are getting word that banks are lowering the rates they are charging each other for 3-month USD loans. If this keeps up, expect the credit crisis to ease, and the Yen to reverse. Also, there might be a double bottom forming on the GBP/JPY daily chart (see figure 1). But for now, it’s too early to call the top on JPY, so until the Yen shows some technical weakness, I’ll continue to buy it vs. GBP and EUR.

Ed Ponsi is the President of www.FXEducator.com and www.EdPonsi.com. He has appeared on CNN, CNBC, the BBC and Fox Business News, and is a frequent guest lecturer at trading events and seminars around the world. Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ponsi is featured on the FXEducator.com DVD series, Forex Trading with Ed Ponsi, and is the author of the best-selling book Forex Patterns and Probabilities.

Hang 'Em High!

Hang 'Em High!

By Ed Ponsi

Ed Ponsi examines the Congressional grilling of Lehman Brothers' former CEO, and asks the question: In 2008, is it a crime to have money in America?

The other day, I was placing a short on GBP/JPY, trying to determine the exact location of my stop, when I heard the voice of defeat bleeding through my speakers. It was Richard Fuld, disgraced former CEO of the now-bankrupt investment giant Lehman Brothers, explaining himself before a Congressional committee:

"I want to be very clear, I take full responsibility for the decisions I made and for the actions I took. I feel horrible about what has happened to the company and its effects on so many."

I think it's a great idea to have a committee to determine what went wrong and how a similar boondoggle can be prevented in the future. I sure would like to know the rationale behind the investment grade ratings that were placed on toxic subprime paper. But most of all, I'm interested in learning if Mr. Fuld and his associates at Lehman looted the company on their way out the door. But the committee didn't seem interested in getting to the truth, or in finding solutions. Instead, the committee seemed intent on punishing Mr. Fuld, well, for being wealthy.

Enter Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee. Waxman repeatedly asked Fuld if it was true he made between $400 and $500 million running the company since 2000 – as if Fuld's impressive compensation somehow implied guilt. Waxman listed Fuld's collection of property – including a $14 million dollar ocean-front villa in Florida and a home in the exclusive ski resort of Sun Valley, Idaho. "You and your wife have an art collection filled with million dollar paintings." Waxman said. The chairman seemed more concerned with outing Fuld as a rich guy, as opposed to exposing any wrongdoing.

What is the point of these questions? Are we trying to convict this guy of having money? If so, he's guilty! But in the America where I live, it is not a crime to have money.

There are rumblings of shady dealings in the final days of Lehman, most notably the steering of millions of dollars to executives as the firm was in full collapse. The company allegedly sought $23.2 million in "special payments" for three outgoing executives just days before the collapse, according to internal documents. This disgusting act is the equivalent of looting a gravesite. If that happened, then any and all of the Lehman perpetrators should be prosecuted to the full extent of the law. String em' up! If Fuld was involved, I look forward to seeing him take the "perp walk". He'll have an awfully hard time enjoying that ocean front villa from behind bars.

I'd just like to point something out – Fuld did not benefit from the collapse of Lehman Brothers. In fact, he lost a great deal of his own money, along with his job and his reputation. Fuld still holds about 10 million—now worthless—shares in the firm. Think about that for a second; he lost 10 million dollars for every one dollar decline in LEH stock, which traded near $70 per share about a year ago. That's a loss of nearly $700 million dollars! That had to leave a mark, even for a guy like Fuld. Don't get me wrong, he won't be dining in a soup kitchen any time soon, but that's got to hurt!

Fuld owned all of the wonderful things enumerated by Waxman long before Lehman fell. As far as we know right now, he did not benefit in any way by being the captain of a sinking ship, or by becoming the butt of a million jokes, or by becoming a dark footnote in U.S. financial history. Soon after the bankruptcy announcement, Fuld was allegedly punched in the face by a co-worker in the Lehman gym. Journalist Vicki Ward told CNBC, "He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold.” Ouch!

Yes, he has a lot of money, and that seemed to be the point of Waxman's line of questioning. Fuld would have a great deal more money right now if Lehman hadn't gone under. Why was money the focal point of Waxman's questions? Perhaps Mr. Waxman believes that the public is bloodthirsty and wants revenge, that we can be lured into class warfare, and that we are not concerned with the facts. And while Waxman set the tone, this "Hang 'em high" mentality is also evident in the questions of the other members of the committee. If Fuld committed any crimes – if he was involved in the heinous act of steering millions to executives as Lehman fell – then could we please talk about that, and not simply beat the guy up for being rich? If any crime was committed, then that should be the focus of the discussion. Let's not pretend that it is a crime to have money in America.

Investment Terminology 2008: It's a very good time to be a trader, but maybe not such a good time to be an investor. Still, with the way markets are behaving, those of us who wear both the trading and investing hats could use a reason to smile right about now. On that note, thanks to one of our readers for sending this to me via email:

CEO = Chief Embezzlement Officer.
CFO = Corporate Fraud Officer.
VALUE INVESTING = the art of buying low and selling lower.
P/E RATIO = the percentage of investors wetting their pants as the market keeps falling.
BROKER = what my broker has made me.
FINANCIAL PLANNER = a person whose phone has been disconnected.
STANDARD & POOR = description of an investor's life in general.
INSTITUTIONAL INVESTOR = a frustrated investor who's now locked away in an institution.
MARKET CORRECTION = something that occurs the day after you invest in the market.
CASH FLOW = the movement your investment makes as it disappears down the drain.

Have a question about Forex trading? Send an email to info@fxeducator.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.

When Central Banks Attack

By Ed Ponsi, President, FXEducator.com

New York City - After yesterday's barrage of rate cuts, today we are seeing salvos fired by the central banks of Hong Kong (50 bps to 2.00%), Taiwan (25 bps to 3.25%), and South Korea (25 bps to 5.00%). This comes hot on the heels of yesterday's simultaneous cuts by the ECB (100 bps), the Fed, the Bank of England, and the Bank of Canada (50 bps), and many others.

All of this cheap money is wonderful, but even if all of the world's central banks cut rates to zero, banks would still be reluctant to lend money. As the old saying goes, you can lead a horse to water, but you can't make that horse lend money to banks at reasonable rates. Or something like that. Nobody is going to put a gun to a banker's head and force him to lend money. Nobody wants to be the last person to lend money to the next victim, the next Bear Stearns or Lehman Brothers.

For evidence of this, take a look at the Ted Spread, a fear gauge that climbed to its highest point in a decade just after the announcement of the joint central bank action. The Ted Spread is the difference between LIBOR and the yield of the 3-month US Treasury, and yesterday it climbed above 4%. This means that banks are demanding 400 basis points above what they would receive from the Treasuries, which have no risk. For most of this decade the Ted Spread has lingered beneath 1%. Banks are demanding higher rates to compensate for the perceived risk of lending to financial institutions.

One final thought; the cover of Time magazine features a Depression-era photo of men crowding in line beneath a sign that reads "Free Soup". I'm not one to call tops and bottoms, but if history is any guide, this could be an early sign of a bottom. Historically, excessive exuberance or excessive pessimism, as reflected by magazine covers and other forms of pop culture, are signs of a market turn. In late 1999, as the Nasdaq was rocketing to a gain of over 80% for the year, magazine covers featuring bulls were all the rage. There were even two prime time TV shows about Wall Street and the stock market. Needless to say, one year later, nobody wanted to talk stocks.

How To Trade In Challenging Times

How To Trade In Challenging Times

By Ed Ponsi

Okay, so things are rough out there. Bear Stearns, Lehman Brothers, Washington Mutual, American International Group, B&B, Freddy and Fannie and the rest of the gang have all either gone to that Big Vault in the Sky, or are on life support. The proverbial "other shoe" has dropped so many times that we've all lost count – and the carnage isn't yet complete. But just because the world is facing financial Armageddon, and long-term investments are falling apart faster than the New York Mets in September, that doesn't mean your trading account has to suffer. In fact, some traders thrive in this rock 'em, sock 'em environment. Just take a look at the volatility in the Great Britain Pound – U.S. Dollar currency pair (symbol GBP/USD). Note how the candles on the left side of the chart are much bigger than on the right, indicating that the daily range has expanded dramatically. Also, take a look at the Average True Range indicator (ATR), which shows us that the average daily range of GBP/USD over the past 14 trading days now exceeds 300 pips! (See figure 1).


Figure 1: GBP/USD's average daily volatility has risen to over 300 pips. Source: Saxo Bank

This level of volatility hasn't been seen since the year 2000, and the type of wild action it creates will be welcomed by some traders and avoided by others. Here are three key thoughts to help you trade safely and securely during these challenging and historic times.

Nimble – Things are happening quickly out there, and the wide swings in volatility are causing markets to move faster and farther than before. In fact, volatility in the currency markets is at its highest point since the year 2000. What's a trader to do? Traders looking for quick intraday moves need to keep their finger on the trigger at all times – especially when they are already in a trade. The game changes quickly, so be ready for action at a moment's notice. Put your mouse cursor directly above the exit button, and keep your finger poised above the mouse. That way, you'll never be taken by surprise, and you'll always be ready to close your position.

Pip Slip – Prepare for slippage, as fast moving markets may cause some surprising fills. This is a common occurrence in the stock markets, but currency traders have been largely immune to slippage - that is, until the recent spike in volatility changed the game and turned the trading world upside down. How to deal with this problem? Plan ahead and don't be surprised when you get a bad fill; in fact, make it part of your game plan. When performing your calculations, assume that the price you receive for both buys and sells will be slightly worse than you would normally anticipate. Not only will you be prepared for a bad fill, but you may find yourself pleasantly surprised when you get a good one!

Park It - Trading in this fast-paced environment isn't meant for those with a nervous stomach. In fact, many of us would be better served by simply staying out of the trade and watching from the sidelines until the markets settle down. Always remember that part of our jobs as traders is to know when to avoid trading. The truth is you should never feel as if you absolutely have to place a trade, and you should only place trades when you feel that the odds are in your favor. Selectivity is the key; you will make more money from one good trade than you will from ten mediocre trades, so maintain your focus and only take the best trading opportunities.

Question of the Week

Q) Ed, I keep hearing about LIBOR in connection with the bailout but I'm not familiar with this term. Can you please explain what it means and why it is important to traders?

Ed Ponsi) Thank you for your question. LIBOR is short for London Interbank Offered Rate, and it represents the cost of borrowing dollars overnight in London. On September 30th, the last day of the third quarter and the day after the bailout plan first failed to pass through Congress, LIBOR spiked an incredible 431 basis points to 6.88%. Let's think about that for a minute; banks are charging each other an annual rate of 6.88% for overnight loans! They must be pretty frightened to charge such a high rate, perhaps because no bank wants to lend money, only to find out later that the borrower has evaporated.

In a way, you could say that LIBOR is a "fear gauge", and it is telling us right now that banks do not want to lend money to other banks except at ridiculous rates. This is despite the fact that the Fed and other central banks are constantly pumping liquidity into the system, jamming the banks full of cash so that they'll be more willing to lend. Many of the banks are just hoarding this added capital for their own needs instead of lending it out to others, defeating the purpose of the Fed's actions.

Right now we are seeing strength in the U.S. dollar, and that is because the USD tends to perform well when fear is high. But this will pass; fear is a temporary condition, and as bad as it may seem right now, things will eventually get better. When they do, watch out – the bill will come due for this mess, and when it does, it will weigh heavily on the greenback. Enjoy the USD rally while it lasts.

Have a question about Forex trading? Send an email to info@fxeducator.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.

Ed Ponsi

ATR and the TED Spread

Greetings from New York! This week, we have answers to your questions about Average True Range, the TED Spread, and more.

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