Forex Investment and Currency Trading

It’s hard to achieve a 15 percent EURUSD move over a short period of time. To reiterate the major drivers:

1) US rates taken essentially to zero

2) An open ended commitment to use quantitative easing to end the US economic and financial markets downturn

3) Several months of massive risk aversion accumulation of USD assets

4) A likely flood of US Treasury issuance in coming years

5) ECB indications of a slowing pace of rate cuts

6) Some easing of risk aversion that renews interest in yield differentials

7) Positions having gone to very flat

It is also even possible that the losses among European institutions and investors in poorly regulated US hedge funds is generating some year end repatriation, although there is little immediate data on this. It is very tempting to argue that with these USD negatives there is no reason not to expect EURUSD to rocket upwards back towards old highs.

Except that the European economy is in no shape to deal with the recent appreciation against other European currencies, EM currencies and the USD. So we have a major capital flow USD negative working against a major EUR economic negative. If global markets were hitting new heights of renewed optimism the EUR gains might be sustainable but oil and other commodity prices have not shared the EUR gains to the same degree. Also, somewhat surprisingly global equity markets did not share in US equity market gains from Tuesday. The combination of weak activity and unenthusiastic equity markets is not one which supports currencies moving into heady ranges.

ECB officials have not commented yet on the EURs gain and we have to see how the market reacts to their commentary. Equally euro zone activity remains at risk and a flatter rate profile may have been more attractive at 1.25 than at 1.45. While there is nothing immediate to reverse the euro’s recent gains it is also the case that it is hard to see incoming economic data making the move sustainable till there is a generalized improvement in global sentiment.