Forex Investment and Currency Trading

After one of the best months for equities in years, the primary question for the markets is whether it will be a case of the old stock market adage “sell in May and go away” remaining pertinent or whether risk appetite continues to grow. It’s early days (or hours) but on the face of it, May is off to a decent start, with US equity futures are up and, in FX land, strong intraday performances for the ZAR, NZD and AUD. The risk switch, it would seem, is still in the “on” position. We note that (aside from the CAD) a number of currencies are close to or trading through their 200-day MAs versus the USD, suggesting scope for further USD weakness/currency strength; the most notable developments have perhaps been in the Asian currency space (AUD, KRW, TWD, IDR); equally, USD/JPY has pushed back above its 200- day MA, suggesting less safe-haven demand for JPY. Global investors appear to be happier about global growth prospects – something that the further rebound in China’s PMI data earlier today may reinforce – despite the ongoing concern over a possible ‘flu pandemic, US bank stress tests etc. We think risk appetite has perhaps room to build a little more momentum before a correction is seen.

Meanwhile, US yields continue to nudge higher, with the 10- year bond yielding reaching 3.15% or so yesterday. We are not sure whether it is supply worries, “green shoots” or the Fed’s failure to announce additional measures at this week’s policy meeting that is bothering the market but from an FX perspective, the interesting thing is perhaps that higher rates and the squeeze that is putting on interest rate spreads are not helping the USD; euro zone-US 10 year yield spreads have dropped from about 32bps over for euro zone debt to about 1bp over (today) since the start of April. The spot market followed the decline in the EUR’s yield advantage for a while but the past 10 days or so has seen a quite obvious divergence, with the yield gap continuing lower while EUR/USD has pushed higher. The last time the spread was this narrow, EUR/USD was around 1.26.

EUR/USD is closing out the week off its best levels but still relatively well positioned. Trading remains choppy and from a directional perspective, April was a write-off. The longer term technical position for EUR/USD remains positive though and fundamentally, market remains bearish on the USD more broadly. Despite the chop over the past few days, EUR/USD remains within reach of securing a breakout from its recent consolidation range (above 1.3310 on a daily close basis now). Short term momentum remains positive – support now in expected in the mid 1.32s in the next day or so – but we need to see a little more obvious follow through soon to get the market moving up towards the 1.3500/50 area.