Trading Lessons from Today's US-GE World Cup Game

• Trading Lessons from US-GE World Cup Game
• Sterling Traders Unimpressed by BoE's New Housing Measures
• EUR Retraces but Recovery Remains Intact
• NZD Soars to 1-Month Highs but Beware of Intervention Talk
• USD/CAD Breaks 1.07, Hits 5 Month Lows
• AUD: Moodys Warns About Housing
• USD/JPY Breaks 200 SMA for First Time Since 2012

Trading Lessons from US-GE World Cup Game

I want to start by saying that the U.S,' failure to win or tie today's World Cup game with Germany was not the reason why the dollar traded lower against most of the major currencies.  Yet how the U.S. played the game provides us with an important trading lesson.  Germany is one of the strongest teams in tournament, having won in 1990, 1974 and 1954 and placed either second or third in 2010, 2006 and 2002.  The U.S. on the other hand has not made it into the Top 4 in the past 80 years.  Therefore going into today's game the odds were stacked high against them.  It didn't matter that the U.S. is playing extremely well this year, making every American proud or they are coached by Juergen Klinsmann, a former star of the German team in 1990, when they won the World Cup title and the coach who guided Germany to a third place finish in 2006.  Knowing that either Ghana or Portugal would need to win their game by a large margin to prevent the U.S. from advancing in the World Cup, the smartest tactic was to play defensively. This is exactly the reason why Americans celebrated today's loss because the U.S. advances to the second round.

How does this relate to trading?  Germany played to score today and the U.S. played to stay alive. The U.S.' decision to trade defensively kept them alive.  Volatility has been extremely low in financial markets, making it difficult for many investors to turn a profit.  Breakouts fade quickly and extensions are limited. If you find the odds stacked against you in this type of environment no matter what the fundamentals say about the long-term outlook for a currency pair, the best option is to trade defensively and stay in the game until currencies catch up or fundamentals adjust.

The greenback was under pressure throughout the North American trading session.  Jobless claims and personal income were generally in line with expectations but personal spending dropped 0.2% in the month of May. Even though Fed President Bullard said the markets should be pricing in rate increases based on Yellen's recent comments, Treasury yields declined, indicating that investors are not convinced that the central bank is ready to tighten.  With only a revision to the June University of Michigan Consumer Sentiment survey scheduled for release tomorrow, we expect trading ranges in the FX market to remain intact. 

Sterling Traders Unimpressed by BoE's New Housing Measures

The Bank of England announced a series of steps today to cool the housing market and while the announcements were enough to drive GBP/USD above 1.70, they were not aggressive enough to push sterling to fresh 5.5 high highs versus the U.S. dollar.  The new restrictions boil down to a tougher affordability test on how the borrower would fare if rates increased 350bp instead of 50bp and restricting lenders to only making 15% of mortgages to borrowers who are borrowing over 4.5x their household income. This second measure is not a big deal considering that in the first quarter of 2014, mortgages to these borrowers accounted for only 11% of total loans, which is less than the BoE's restriction.  The bank also failed to reduce the Help to Buy program and increase capital requirements on high-risk mortgages.  While the market was not impressed by the central bank's announcements, these new measures do little alter the market expectations for tightening.  Unfortunately Mark Carney failed to clarify his recent change in views and as a result we are skeptical of sterling's ability to extend higher.  GBP/USD needs a sustained break above 1.7063 to avoid another setback. Revisions to first quarter GDP numbers are scheduled for release tomorrow - unlike the U.S., the Brits tend to do a good job of estimating GDP growth and revisions are therefore limited but if GDP is revised upwards, it could be just what sterling needs to hit new highs.

EUR Retraces but Recovery Remains Intact

Euro was the only currency that failed to benefit from the decline in the U.S. dollar today but thankfully the pullback was not significant enough to undermine the pair's recent recovery.  EUR/USD still ended the day above 1.36 and is trading comfortable above its 1.3475 support level. France continues to be the trouble spot for the Eurozone with the latest economic reports showing further deterioration in the labor market.  Jobless claims rose by 24.8k to its highest level ever last month.  This far exceeded the market's 6k forecast.  Consumer confidence improved in June but without an increase in jobs, it will be very difficult for the France to recover.  The euro was also driven lower by EUR/GBP selling.  This month's high of 1.3677 is still the main resistance level for the EUR/USD and based on the pair's overall uptrend channel, this resistance level could be tested.  German consumer prices are scheduled for release tomorrow along with Eurozone confidence and French consumer spending. The recent easing by the ECB could drive up sentiment while price pressures are expected to improve. 

NZD Soars to 1-Month Highs but Beware of Intervention Talk

The New Zealand dollar extended its gains against the greenback, rising to its strongest level in more than a month. Today's rally stopped just 3 pips shy of the 2-year high set back in May.  There was no specific catalyst for today's move but the prospects of RBNZ tightening is a strong reason to be long kiwis.  If NZD/USD breaks its 2-year high of 0.8780, the next stop could be its 3-decade high of 0.8843. However the chance of verbal or physical intervention by the Reserve Bank increases with the appreciation of the New Zealand dollar.  If the RBNZ wanted to curb the rally in the NZD before next month's meeting, they could do so easily by suggesting that the recent rise in the currency reduces the need for tightening.  Whether they follow through and pause is a completely different story. According to the RBNZ's latest report on LVR lending, their loan to value restrictions helped to cool the housing market.  Their recent rate hike is also filtering down to mortgage rates.  New Zealand's trade balance is scheduled for release this evening followed by a speech from Finance Minister English.  The Canadian dollar also extended its gains against the greenback despite a decline in oil prices.  After having broken below the 200-day SMA last week, USD/CAD has now fallen through 1.0700. Today's sell-off was driven by a strong rise in average hourly earnings. Unlike the New Zealand and Canadian dollars, the Australian dollar ended the North American trading session unchanged after rating agency Moody's warned that house prices could face a correction.  RBA Assistant Governor Kent will be talking about foreign investment into Australian real estate this evening.

USD/JPY Breaks 200 SMA for First Time Since 2012

The sell-off in U.S. equities and decline in Treasury yields drove the Japanese Yen higher against most of major currencies.  Risk appetite has been the primary driver of Yen flows and today's sell-off in stocks erased the gains that Yen crosses experienced earlier this week. For the third time this year, USD/JPY attempted to close below the 200-day Simple Moving Average and failed. From a technical perspective a close below the SMA would be significant because it could mark the beginning of a broader downtrend for USD/JPY.  However in this low volatility environment, we expect the moves to be closer in magnitude to 2012 than 2009 to 2011. Last year, when USD/JPY broke below the 200-day SMA, the declines ranged between 0.3% and 2%.  Between 2009 and 2011, the declines ranged from 1.6% to 13% with two periods of moves in excess of 8% but the difference is that this was a period of greater volatility in USD/JPY.  Furthermore U.S. yields are still expected to head higher when the Fed ends Quantitative Easing and this prospect should limit the decline in USD/JPY to its February low of 100.75.  Tonight is a busy night in Japan with the jobless rate, overall household spending, consumer prices and retail trade scheduled for release.  These reports are expected to show continued improvements in Japan's economy. According to last night's Ministry of Finance report, foreign investors bought Japanese stocks for fourth consecutive week.  Japanese investors on the other hand bought the largest amount of foreign bonds since August 2013.