Forex Investment and Currency Trading

There is a more red on the equity market screens this morning and the GBP slumped sharply in response to the rather downbeat assessment of prospects provided by BoE officials and the latest Quarterly Inflation Report; Governor King’s view that “risks are weighted towards a relatively slow and protracted recovery” was not as upbeat as the markets were expecting even though the central bank had just rolled out an increase to its quantitative easing programme (press reports earlier this week suggesting that the BoE may indicate that deflationary risks were easing perhaps set the markets’ expectations a little too high today). In addition, King stressed that there were some “pretty solid reasons” to question whether a recovery can be sustained. The comments have served to check, rather than reverse, risk appetite ahead of US retail sales data this morning, with the USD up marginally overall (in terms of the DXY) but hardly firm; note that a fair few measures of risk – from credit spreads to the TED spread (which is right on its post Bear lows) – continue to narrow, suggesting that while the economic situation remains suspect, the perceived threat of financial implosion is abating. Overall, this should help sustain risk appetite more broadly. In fact, the USD spent a good part of the overnight session on the back foot as the market picked up on an FT opinion piece which questioned the US’ AAA rating and comments from Japan’s opposition Democratic Party (DPJ) finance critic indicating that Japan would avoid USDdenominated Treasury debt if it came to power in lower house
elections that are due to take place by September. He later softened the comments to stress that the remarks were a personal view and it should be noted that the DPJ’s poll numbers have tumbled in recent months.

The JPY is the top performing currency in the session so far, with the spot market falling below key support points in the past 24 hours or so and the JPY picking up a little support on better current account data (at JPY902bn in adjusted terms, the surplus was the highest since October last year). The JPY is liable to pick up a little more support against the USD in the coming months and the technical risks suggest a drop back under 90 is on the cards. In the short run, traders expect resistance in the 96.45/50 area (H&S breakdown which targets the low 89 area) while retracement support in the 95.97 area is under pressure intraday. Speculation of heavy o/n JPY 95.00 call purchases today suggests the market may be gearing up for another lurch lower in the short term. In view of the above, short GBP/JPY may be the play for the next 24-48 hours.

EUR/USD set a marginal new high in the low 1.37 area overnight but the market is still looking rather heavy. Speculation that a large 1.3750 option barrier is being defended suggests limited upside for the market through the low 1.37s at the moment and the risk perhaps of a short-term slide in the
EUR back to the upper 1.34s/low 1.35s despite the improving risk environment.