Forex Investment and Currency Trading

The markets continue to vacillate between risk-seeking and risk-averse strategies, with risk aversion remaining the underlying theme broadly in the overnight session following the USD’s recovery in the aftermath of the FOMC decision.

Equities are on the defensive again broadly – though earnings numbers out so far today are mildly better – suggesting that the main themes in the overnight session (which have favoured the JPY and the CHF over the commodity currencies generally) is liable to continue in the near term at least. There is a window for the broader risk appetite in the market to improve though; US law makers are inching closer to passing a massive stimulus bill (the House passed the USD819bn stimulus bill last night and the vote now goes to the Senate), credit conditions –
while still far from normal – continue to improve and equities are so far out of favour with investors that a modest rally would hardly be a surprise (Reuters’ asset allocation survey today
showed that investors are more underweight equities than ever). VIX index continues to fall this week after last week’s spike back through to the 57 area.

It probably won’t happen today or next week but a rebound in risk appetite remains possible in the next few weeks and one tends to think that the JPY crosses are liable to be where the
market expresses its renewed risk appetite more obviously; typically, an improvement in credit has been linked with an improvement in EUR/JPY, for example, but the cross seems to have missed out on the most recent improvement in credit in the past few weeks and a catch up seems somewhat overdue.

The short-term charts suggest are range trading environment may persist in the near term at least; the rebound from the overnight lows suggests a short term low may be in and while the market seems to be short of incentives to ramp up positioning, one favours a modest push up
in the EUR (and a little more general softness in the USD) towards the 1.3200/50 area in the next few days.