Forex Investment and Currency Trading

Quiet trading conditions continue in the run up to the Christmas holidays - and Japan was closed overnight for the Emperor’s birthday to add to the overall sense of inertia. The majors are holding in tight ranges, with the Scandi currencies out performing and the GBP is a relative under performer on the back of weak UK data reports. Yesterday’s 2-year auction went off well enough, with USD38bn
of product shifted at a record low yield of 0.922%; there was a decent bid/cover ratio of a little over 2.00 and a strong-ish 30% indirect bid; good overall but not spectacular seems to be the verdict considering the still evident “safe haven” bid for US Treasuries.

In the longer term, one is concerned that the massive government borrowing in the US will drag the USD lower. In the shorter term, euro-US spreads are compressing again; even as US yields tumble, euro zone government bond yields are plunging, taking the 2-year yield gap to a new low for this cycle at 89bps this morning; perhaps German bonds are seeing an even more significant safe-haven bid over the holiday period so it remains to be seen whether this is sustainable in the longer term but the shift does nudge the balance of risks back in the USD’s favour in the short run as the market consolidates the big run up in EUR/USD seen over the past couple of weeks. The short term retracement support just above 1.38, which may come under some pressure in thin trading conditions over the next week or so.

Meanwhile, Belgium’s constitutional problems are rumbling on; the king accepted the government’s resignation yesterday, ostensibly due to accusations of meddling in the sale of Fortis though the Belgian government has looked increasingly fragile (or ineffective) for a number of months amid rising regional tensions. While the issue is not something that is liable to weigh on the EUR in and of itself, these developments plus the sharp slowdown in growth in the “Club Med” economies and the obvious sovereign credit differentiation between core (read: German) and non-core government bonds (e.g. Italy), suggest some longer term challenges may lie ahead for the EUR.