Forex Investment and Currency Trading

The USD is on the back foot again this morning as equities pick up a little ground, investor risk appetite picks up and the markets reverse course after the broader USD short-covering that characterized the immediate aftermath of last Friday’s US non-farm payroll data. USD is more likely to head generally lower over the course of the next few months, reflecting mounting US debt levels and investor concerns about extending exposure to USD-denominated assets at the moment. While reports suggest that developing and emerging market countries intervened in their respective markets quite aggressively in May (Bloomberg reported that growth in currency reserves last month was the fastest since the credit crunch), that did not translate into USD strength – in fact, May was one of the weakest months for the USD in some time, suggesting that even as reserve assets grow (substantially), the USD may not benefit.

Rising short term US yields are not having as much impact on the USD at the moment as they have in the past. The sharp rise in US 2-year yields over the past few days has compressed the EUR/US yield spread to a little over 30 basis points; the last time the EUR had such a shallow yield advantage, EUR/USD was trading closer to 1.30. Absent major data releases today, the focus will remain on US asset markets and the Treasury auctions (USD35bn in 3 year notes today, ahead of a 10s and 30s reopening later in the week). EUR/USD looks to have found a short term base in the upper 1.37s (the 1.3740/80 area is key support for the EUR now) and may be poised to test higher towards the 1.4050 area again in the near term which should help push the USD generally lower.