Forex Investment and Currency Trading

With USD11bn in 30-year bonds on tap today, the US treasury auction will remain in focus; inflation-leery investors are keeping longer rates elevated and while the 10-year sale went OK yesterday, the general characterization of the auction was that it was a little “sloppy”. Fed Governor Lockhart, who suggested last week that further Fed Treasury purchases were possible, is speaking at 13.05ET, just after the auction is over. Inflation worries, Treasury supply and broader asset diversification concerns should keep the USD on the defensive for the moment and, as the recovery focus gets a little sharper, investors are liable to home in on the relatively cheap currencies of the better positioned economies where easy policy withdrawal is likely to come soonest. We think the GBP is a candidate here and like the GBP’s prospects on the crosses (EUR/GBP below the 200-day MA, GBP/CHF extending its rally above the 200-day MA) as well as against the USD. Confident sounding comments from BoE Governor Sentance late yesterday contrast with his very downbeat outlook just a couple of weeks ago when he suggested it was too early to talk of green shoots. The BoE’s inflation survey noted that inflation expectations rose for the first time in three quarters in May.

For the majors overall, it seems that intraday flows are being dictated by the larger and generally directional traders. Eastern European central bank demand in the upper 1.39 zone is providing support for EUR/USD at the moment though a large, directional European investors has been a notable buyer of USDs this morning. The underlying trend is higher for EUR/USD – even though there are some potentially rather negative short term price patterns forming up on the charts. We suspect there is very limited downside for EUR/USD beyond the low 1.38 area at the moment given the focus on US debt markets, government debt levels and gradual central bank reserve asset diversification.