Forex Investment and Currency Trading

The markets are in a happier place (sentiment wise) generally this morning though the huge swings of the past couple of days in FX in particular has left a lot of blood on the streets which will leave investors even less inclined to get “married” to any particular view of position than they were before. For the moment, however, higher equities and lower risk signals suggest that risk appetite is on the rise; equities have been encouraged by reports that some of the large US banks are looking to repay TARP money. In addition, positive comments from RBA Governor Stevens, suggesting the global economy may start to show signs of recovery towards the end of the year and a better than expected ZEW report from Germany earlier today helped the general mood. Reports that the UK government exploring sales of partially nationalized banks has added to the buoyancy in risk appetite and helped propel the GBP sharply higher; officials have, however, cautioned that it was too soon to speculate about sales. Meanwhile, LIBOR rates continue to fall (three-month USD LIBOR was fixed at a record low of 0.7525 today) and the “TED spread” has dipped to its lowest level since 2007.

With risk appetite improving, the USD and the JPY have slipped back since late last week. The move in the JPY has especially sharp yesterday, with positioning (market was long JPY on a number of fronts), verbal intervention from the MoF indicating discomfort with the JPY’s recent gains, and a move to align Japan’s foreign and local current debt rating yesterday (to Aa2) all combining to produce a hefty sell off. Note though that despite the huge rally in USD/JPY (as well as other cross/JPY markets), USD/JPY has done little more than test the technical breakdown point in the upper 96s; if resistance at 96.75 continues to hold, we should expect another assault on the downside (we still target a test of 89). Note, however, that Japanese GDP data is released tonight and is not expected to be pretty. Elsewhere, the USD is suffering and after the dust from last week’s moves has settled, it is apparent that many of the longer term USD-sell signals held up to a fairly stiff test. EUR/USD bounced from a more or less pinpoint retest of the 200-day MA at 1.3420 yesterday (ditto NZD/USD). Reports today that China and Brazil are discussing ways of avoiding the USD in trade transactions and news reports from Russia that the EUR share of central bank reserves had overtaken that of the USD (47.5% and 41.5% respectively) will add to the rather morose tone of the USD. Look for a renewed test of the low 1.37 area fairly quickly.