Forex Investment and Currency Trading

A busy and potentially choppy week is in store for the markets with the next few days chock full of event risk – most of it back loaded into the back end of the week. Thursday’s ECB meeting, Friday’s NFP data and the G-20 meeting in the UK should provide the market with plenty of additional short term volatility at least. Overnight price action has been characterised by renewed risk aversion amid reports that the Obama administration has indicated that bankruptcy may be the best option for Chrysler and GM (whose CEO stepped down over the weekend) though it’s not sure that the possible demise of a couple of national manufacturing icons is reason enough to load up on dollars again on a sustained basis. The draft communiqué from the G20 gathering suggests no additional fiscal stimulus measures are likely at the moment (though the statement did agree to avoid competitive devaluations). These developments favoured the USD and the JPY generally and curbed riskier/growth currencies. The JPY is the top performer on the session so far and after the market’s recent struggles in the 99 area, a retest of the lower end of the current trading range around 94.50 – the break out point of the mid-February rally – may be in order. Fundamentally, the JPY should remain at significant risk and the JPY gains is expected to be relatively limited in terms of scope and duration.

The market is looking for the ECB to cut the repo rate 50 bps Thursday though President Trichet’s post meeting press conference will, as per usual, be the main event; comments from some ECB policy makers recently suggest a recognition that non-conventional monetary policy may be required as interest rates approach the zero bound and the global economy remains mired in recession. More feet dragging on QE will likely pressure the EUR though equally, a clearer move towards QE policy can hardly be a currency positive either. EUR is liable to trade more defensively ahead of the ECB meeting but with NFP looming, losses should be limited versus the USD. Technically, there is a chance that the EUR slips back to the 1.30 area in the short term – though if equity markets, which remain a significant driver of broader risk appetite, continue to struggle, the downside may open up further.