Forex Investment and Currency Trading

The unexpected boost in the UK construction PMI survey helped EUR-GBP push below trend-line support (0.8889) from the October 20 low. The next major level of support is formed by the 50.0% retracement (0.8748) of the rally from October 2008 low from the December 2008 high.

For its part, EUR-USD has come off of Monday’s highs, a rally that was driven by significant gains in US equity markets inspired by optimism over the Fed’s stress tests. From a technical point of view, the present S&P rally could run about another 6% before encountering much resistance, which comes in around 962 in the form of the 200-day moving average and the 38.2% retracement of the decline from the 2008 highs to the 2009 lows. However, Monday’s USD sell-off driven by equity gains is not being supported on the interest rate front with the two-year EZ-US swap spread having drifted downwards over the last few weeks and down about 2.5bp since Monday alone. The five day moving average of the rate spread, an indicator of the underlying trend, has been declining for more than two weeks. In this context, the EUR/USD rally does not appear sustainable. Importantly, the pair’s rally on Monday did nothing to change the technical outlook, with the price action really having been only noise. A move above the 200-day moving average, currently at 1.3496, which would have to be confirmed by a break above trend-line resistance (1.3565) from the July 2008 highs, would be needed to signify that the EUR/USD down-trend has come to an end, from a technical point of view. Recall that the 200-day moving average halted the violent EUR/USD rally seen in December 2008.

Elsewhere, the RBA has decided to hang its hat on China — why not? — everyone else is. The Australian central bank left the cash rate on hold at 3.0%, as widely expected. The accompanying statement indicated that that there are signs of stabilization in several countries and specifically cited the Chinese economy as having “picked up speed in recent months.” Interestingly, the RBA has indicated a mode of data dependency (as opposed to an explicit easing bias) in stating that “in assessing whether further reductions in the cash rate are required over the period ahead, the Board will monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.” It would be difficult to call the statement dovish. The relative optimism from the RBA has left AUD supported, with AUD/USD now at its highest level since early October 2008, just ahead of resistance (0.7476) formed by the 38.2% retracement of the decline from the July 2008 high to October 2008 low. The rally is being corroborated by developments in the interest rate markets, with the key two-year AU-US swap spread up about 7bp from Monday and about 12bp since last Tuesday. Presently, the market is still pricing in another 50bp of easing from the RBA.

Follow through strength observed in EUR and JPY, as the former rose above 1.34 and the latter continued to stay below 99.0. Amidst all these, Asian currencies continued to appreciate and USD-RMB central parity was set just a pip away from 6.82 level from 6.8225 on Monday. With Japan, Korea and Thailand markets closed for a holiday, trading activities were more subdued. A lot of optimism has been building over the recent sessions and positive data played a part. While optimism and revival in risk appetite is expected to lead to appreciation in risky assets, the strong rally in the Asian equity markets also raises the question if there are signs that investors are overshooting the green shoots. In the near term, Asian equity markets will likely lead Asian currencies direction but further rally will probably escalate concerns regarding over-optimism.