Forex Trading Tips: Does Dollar Dominance Continue?

FX Market Outlook

Will the stimulus succeed? That will be the central question driving the currency market in the next few weeks. With Senate late Friday agreeing to the $800 Billion bill its all over but the shouting for the Republicans, but for the rest of the country the economic future remains cloudy as ever.

For the past month the FX market has given the greenback a huge benefit of the doubt bidding it higher despite deteriorating economic conditions. In a complete reversal of the typical dynamic of FX trade, speculators actually punished those currencies that maintained high interest rates and rewarded the ones whose governments were most aggressive in pursuing an expansive monetary and fiscal policy. Witness the trade in EUR/GBP this week. With BoE lowering rates by 50bp while ECB held rates steady, the natural inclination would have been to sell pounds, but in reality the cross was crushed as traders ran away from euros on fears that ECB was doing too little too late.

As we noted last week it's a global ZIRP world baby, and in an environment where rates are minuscule all over, yield loses its value. Reflation becomes the dominant trade and to that end the market believes that US economy is far more flexible and aggressive in its policy response and therefore is much more likely to rebound first.

Are the dollar optimists right? We have huge doubts. So far the policy direction from the Obama administration has been flawed to say the least. In times that call for revolutionary change he has been a technocratic incrementalist. The banking sector which is the core our economic problems screams for bankruptcy and recapitalization, but the Obama policy prescription has been to keep a terminally ill patient on life support in hopes of a miraculous recovery. Miracles however, happen only in children's fairy tales and these are decidedly serious adult times.

So in short, no we don't think that the stimulus will stimulate anything and at best may simply keep things from getting worse. That however, may be enough for now. As we've been saying for a long time, the long dollar trade is not really being fueled by optimism over the US economy, but rather by a complete lack of confidence in the EZ region.

Unless US runs into funding problems for its new spending packages the dollar will continue to attract investment flows as the least worst of the bunch,

--------------Top 5 Stories in FX This Week----------------

-----------------Profit From Patience---------------
What is the most difficult part of trading? Technical analysis? Hardly. You can learn chart pattrens in a week. Fundamental knowledge? Not at all. A month’s worth of watching CNBC Europe will make you an instant expert on macro-economics. Ask anyone who has traded for a while and the universal answer you’ll get is that patience is by far the most difficult skill that a trader must master.

No one is more guilty of being impatient than I. Being the hyper kinetic New Yorker that I am, I hate to wait for anything. I prefer Jetblue checkin computers rather than counter help, BJ self checkout lines rather than cashiers, and if given a choice to rule the world I would eliminate cash completely so that we never have to fish for change again. Yet when it comes to trading I’ve learned the hard way that a trade rushed is a trade lost.

Take a look at any long series of losses in your account. What’s the one unifying factor to those losing runs? Usually it’s overtrading. And what is overtrading but simply lack of patience and discipline to wait for the proper set up.

We rush trades for a myriad of reasons. We are excited about the news that just hit screen. We want to get back the loser just made. And my very own personal favorite. We are bored and just want some market action - its rallying on the 1 minute chart – let s buy ‘em!

The truth is that there isn’t a single good idea for a trade amongst all those reasons listed above. The old saying in Vegas is that if you are sitting at a poker table and can’t figure out who the sucker is, that sucker is you. The market loves nothing more than to make suckers of us all and there is no easier way for it achieve this task than by forcing you to rush a trade,

As speculators we have only one advantage in the market. We can choose to stand down. In fact the longer I trade the more I am convinced that a trade passed is much better than a trade rushed. Think about it. It takes two winning trades to overcome a loss, but only one winning trade to go to positive from neutral. Trading at its core is not so much a game of winning as the art of not losing.

For someone like me who loves to be in the flow, the lesson of patience is very difficult one to learn, but for anyone who wants to succeed in speculation it’s what separates winner from losers.

Now on to this week's video

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