Trade of the Week | July 9-13, 2012

Famed British economist John Maynard Keynes once said that, "Successful investing is anticipating the anticipations of others." I am reminded of that quote when I see conditions in the foreign exchange market that are ripe for profit-taking by traders with bets on a theme that has been working for days, weeks, perhaps even months.

During the Friday 13 July Asian session, I covered the release of China's second quarter gross domestic product (GDP) report in the FX Bootcamp News Room. Although the headline number of 7.6 percent was marginally lower than the consensus forecast of 7.7 percent [based on the median estimate of 35 economists surveyed by Bloomberg], one could rightfully conclude that the China growth figure did not represent a surprise for the global financial markets. I told our members attending the live coaching session that markets might have feared something much worse than 7.6 percent for China Q2 GDP. If that was the case, a figure generally in line with expectations could set the stage for a risk-on theme -- generally accompanied by weakness in the US dollar and/or Japanese yen -- sometime during the European trading day.

During the first half of 2010, the EUR/USD had been subject to extreme selling pressure on concerns about the unfolding Greek sovereign debt crisis. Following major policy moves made by European leaders in early May to calm markets, the euro found support in the 1.2150 area on multiple trading days over a six-week period between mid-May and late June of that year.

On Thursday 12 July, the greenback established a new two-year high against the Europe's common currency less than 20 pips above the 1.2150 level. About eleven hours after the release of the China GDP report, the euro matched the two-year low established the previous day.

By contrast, the British pound had already challenged the 1.55 level -- some 110 pips above its Thursday low -- just before the open of the New York trading session. At 9:00 a.m. New York time on Friday, while the euro was positioned near its Thursday low against the dollar, the pound was re-testing its London session high just above the 1.5460 level, as illustrated on the chart below. Just a smidge below that same 1.5460 level was the 50 percent Fibonacci retracement level of the prior cable rally from the Friday London session low labeled (1) to the high near 1.55 labeled (2).

As I've discussed in numerous 2011 New York session video reviews and during countless live coaching sessions, volatility in the currency market -- particularly on the EUR/USD currency pair -- has tended to increase during the 9:00 a.m. hour in New York. Not every day, but often, the euro shows greater price movement starting within about 15 minutes of the opening bell on the American stock exchanges. Immediately following Friday's opening bell, the EUR/USD rose sharply. Many suspect that the move [highlighted in yellow on the chart below], covering more than 60-pips over 15 minutes, was a short-covering rally.