Forex Investment and Currency Trading

The USD is broadly higher this morning, with the EUR seemingly punished for the euro zone’s inability to thrash out a comprehensive bail out for Eastern Europe (preferring instead to take a case by case approach to the issue) while investors continue to buy the USD despite a piece-meal approach to supporting the domestic banking system; AIG reported another larger than expected loss this morning (USD61.7bn for Q4) but got another USD30bn in government financial aid over the weekend. We are not sure that all this makes that much sense but the market continues to prefer the USD overall amid the general uncertainty; equities are getting drilled again, with US futures off sharply, and while that may support the USD in the short term, analysts still wonder if this bout of USD strength is really sustainable. US payroll data Friday should hold some risks for the USD, considering the very weak employment signals coming from the weekly claims figures and the employment sub-components of the regional activity surveys suggest some risk at least of another large very drop in employment
(consensus calls for a 598k drop in payrolls).

Not that the EUR is not without fundamental risks; ECB policy makers are liable to trim rates again this week, a widely expected 50bps cut taking the overnight rate to 1.50% (in the UK, the BoE is also expected to ease 50bps to take the repo rate to 0.50%). Rather than push the USD significantly higher from here, the markets are more likely perhaps to range trade until prospects become somewhat clearer. In the short term, that should mean EUR/USD support around the 1.2550 area and a push up intraday towards the 1.2660/70 area (to fill the gap opened up in the overnight session). More broadly, a payroll “shocker” Friday could perhaps help put a more solid cap on the USD.

The JPY is the top performer in the overnight session, prompting some to ponder whether the markets are “recoupling” to the former risk bellwethers. Some remain unconvinced and expect Japan’s fundamental weakness to sustain pressure on the JPY in the medium term. Analysts expect strong support on dips in USD/JPY through the upper 96s in the short term and expected the JPY to sell off again if USD/JPY pushes above 97.60/70.