Trading From Unreliable Numbers And Inaccurate Headlines

 |  Includes: ENZL, EWG, FXB, FXC, UDN, UUP
by: Ralph Shell

Markets, when responding to the fundamental economic numbers, can be quite fickle, especially in the forex markets. For the traders who rely entirely up technical inputs, this seemingly justifies their philosophy and their studies. But for others like myself, who think the technical side of a market is one input, and fundamental numbers must also be taken into consideration, it can be quite frustrating when the numbers are distorted, perhaps intentionally, or they are consistently inaccurate.

Earlier this month, for example, the initial reading of the German GDP was 0.6% lower, and the number for the entire EU was down 0.9%. These are not positive numbers. Today, surveys of the PMI (Purchase Managers Index) were announced for France, Germany, and the entire EU. These numbers were all less than expected, and down from the previous month's numbers in all but one category.

During the same period, we got a ZEW Survey of Economic Sentiment, which in Germany, went up from 31.5 to 48.2. For all of Europe, the number was up from 31.2 to 42.4. How can this be? All the other numbers are bearish, but the ZEW survey shows business is wildly optimistic. Perhaps the participants in the ZEW survey were taking ECB President Draghi's recommendation and displaying "positive contagion." This report was simply not believable.

In the U.S. each Thursday, we get the Initial Jobless Claims Report from the Department of Labor. The headline number, a census of the people filing for initial unemployment, is consistently understated. The initial number is an estimate, and can be readjusted later when it will not be headline news. Last week, for example, the headline was initial unemployment claims were only 341,000, less than expected and a sign our economy is improving.

Today, the number for last week was adjusted up by 27,000 workers, to 368,000. It seems the Department of Labor in the previous report did not have numbers from Illinois and Connecticut, so they underestimated the numbers. Continuing, today's report was this week's fable: 362,000. Missing from today's report, however, were the numbers from California, Virginia, Hawaii, and DC, so estimates were again made by the DOL. What are the chances this week's number will see an upward adjustment next week?

Sometimes the headline in the news reports incomplete information, and markets run with the limited information. A case in point -- yesterday were comments made by RBNZ Governor Graeme Wheeler, who mentioned the word intervention, which was reported in the news, and down the kiwi went, from .8460 to .8320.

Wheeler, a former banker from the World Bank in Washington, had this to say in the New Zealand Herald:

"Intervening directly in the foreign exchange market was something the bank would do, Wheeler said, 'when circumstances are right. We want investors to know that the kiwi is not a one-way bet.'"

But the bank's policy is to intervene only when it would make a difference.

Right now, the markets are dominated by the spillover effects of massive quantitative easing (QE) -- more than $5 trillion worth -- by countries worst hit by the global financial crisis.

"Given the strength of recent capital flows, we can only attempt to smooth the peaks of the USD/NZD exchange rate; we cannot determine the level," Wheeler said.

For traders who follow price action only, or trade first and analyze later, if at all, the headlines sound bearish. And the market was vulnerable, since according to the COT report, it is loaded with speculative longs. Perhaps the sell-off was long overdue, with Governor Wheeler following the leads of Draghi and Abe, and talked the market lower.

The NZ$ has sold off to near the bottom of recent trade, however, the "risk on" traders may be wary because of the behavior of other markets. Last night, the Asian equity markets were under pressure, and this trend continued in Europe with the Italian market down 3.13%, the French down 2.29, and the Euro Stoxx down 2.29. Equity markets in the U.S. continued the trend, and are joined by a mark down in energy prices.

Should some of these markets stabilize and the kiwi holds the recent range, it may be a buy. Markets, though, feel like there is the risk of a bearish contraction, which would take the NZ$ lower.

At the CME yesterday, we note almost a 10% increase in the open interest in Canadian dollar (USDCAD, FXC, UUP) futures, and an 8900 contract increase in the British pound (FXB, GBPUSD). Both the C$ and the pound were working lower versus the USD, and an increase in the open interest tells us there is new short selling. There are numerous opportunities in the forex markets currently, but likewise, there are risks. Proper money management is mandatory.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.