Forex Investment and Currency Trading

An eventful long weekend for the currency markets, with the EUR falling heavily in very thin and illiquid trading; the peripheral euro zone and the Eastern European economies have provided the basic drag on the EUR over the course of the past day or so and while the USD looks broadly higher as a result, it has really only cut fresh ground against the EUR and the JPY; most other major currencies are lower against the US unit but within their recent ranges. Press reports focusing on Ireland’s burgeoning public debt and the increasing cost of protecting against a sovereign default got the EUR rolling lower yesterday but these reports were quickly followed up by news of more banking problems in Poland and a broader look at how much the Western European banks might be on the hook for their weakening Eastern European subsidiaries; ratings downgrades may result for the parent banks. Risk aversion is back on the agenda – driving the USD higher and the EUR sharply lower through a cluster of stops around the 1.27 line.

While the USD is benefiting, the other, typical safe havens are a little less in demand it would seem. USD/JPY is nosing above 92 line to its highest level since early January. Asian currencies broadly have been on the defensive this morning after a Chinese official suggest that the CNY was under no pressure to appreciate due to the weak domestic economy. A softer CNY should help the floating Asian currencies retain a generally softer bias for the moment. Look for USD/JPY to remain supported in the short term above the 90 level; key resistance at 94.59 (double bottom trigger for a move to 102).

On the chart, EUR/USD slide under support in the low 1.27s leaves this market exposed to further pressure in the near to medium term; short term support ahead of the 1.26 line is reportedly linked to the defence of a large option structure and may prove temporary; there is little in the way of a renewed test of the late October lows around 1.2320/30 from here. Traders expect short term resistance now on gains through to the low 1.27s (buy stops are clustering in the upper 1.26s) but a deeper retracement cannot be excluded at this point with weekend price action leaving some large open gaps on the short term chart between 1.2810/60 that may have to be filled at some point soon.

Gold remains well supported as investors continue to seek alternative safe havens; equities remain weak – early week focus here is likely to be on the Big Three bail out proposals – while US bonds traded heavily late last week but may bounce if safe haven flows pick up further. Keep an eye on this morning’s TIC flows for December; November saw quite weak net long term inflows (actually, an outflow of USD21.7bn) and another weak result may trim the USD’s gains a little overall.