Busy Week For Data Releases Should Result In Forex Volatility

Includes: FXB, FXP, FXY, UDN, UUP
by: Ralph Shell


Pending British economic reports may result in pound volatility.

Speculators are big owners of pound futures contracts.

Have a trade plan ready should markets get volatile.

The first week of every month is usually one of increased volatility for the forex market. Friday's US NFP Report is the highlight of the week, but there are other significant reports.

An example might be the reports coming from Britain which will impact the pound. These reports began Tuesday with the M/M Manufacturing PMI Report. This report fell short of expectations, 55.3 down from last months 56.9, and the expected 56.7. While the report has some importance, manufacturing is no longer a strong suit for the Brits.

On Wednesday the 2nd of April we get the PMI for construction. Last month the number was 62.6 and the one Wednesday is expected to be slightly better. Construction has become more important for the British economy as the bubble in their properties market had been of immense benefit to their economy. PMI numbers in the sixties have a lot of optimism priced into the market. A high number may be an indication the properties market remains solid.

The PMI for services is released Thursday. Since the British economy is heavily dependent of service income this will be the most important report. From a high of 62.5 in November 13, this index has been slipping. In February it was down to 58.2, where the forecasters are projecting it will remain.

Position traders abhor reports that hold surprises which go against their positions. If we look at the last few COT reports, speculators hold large long positions in the British Pound. The total spec long was 43.8K contracts. To compare, there are only two positions of the currencies we cover, which have bigger open positions. They are short positions of 100K yen and 49.7K in the Canadian Dollar.

Until Tuesday, the GBPUSD had six days of solid advances and was probably due to consolidate the gains. The pound traders, however, might be too committed to the long side. Should we see disappointing numbers, a quick retreat from the top side of the 1.66 handle versus the USD, could result.

We are hopeful there will be some bearish numbers to give us a break in the pound. This would set up a better entry level to buy the GBPJPY, a trade we proposed in a note last week. Since proposing the trade, when the pair was slightly over the 170 handle, it has raced out to 172.50. This was primarily yen weakness, and the pair has retreated little from that high.

In the event the pound weakens, and perhaps the selling of the yen stops or reverses, we want to buy the GBPJPN in the 170.50 area. This, we view, as a longer term position trade. We think the Brits will be able to muddle through, and keep their economy growing faster than their neighbors Euro community. Further, we think the plan of PM Abe in Japan is destined to make a terrible mess. Eventually we think the number of yen needed to buy a pound is headed to 200.

This will be a wild one so manage your money carefully.

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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.