Forex Investment and Currency Trading

Upside momentum is waning as buying fades and the Fed decision to not increase Treasury purchases last week could lead to more profit taking. In addition, market fair value model shows EUR/USD overvaluation is close to its highs over the past year. The question is whether any EUR/USD sell-off is likely to be large given that, from a technical perspective, most of the major USD crosses appear settled into well-defined ranges. That said there are several data/events this week, outlined below, which could trigger a sharp move in EUR/USD.

FOMC speakers will likely reinforce that a policy tightening is a long way off, but at the same time point to improving economic conditions and less need for further stimulus. Data this week should support this point of view.

Market analysts expect the ECB to announce unchanged rates and for it to continue to consider that its “current’ stance is “appropriate” (Thursday) - which would imply that no policy rate cut is likely in August. The Governing Council is likely to continue to express the view that it does not envisage recovery until 2010, but also to express some satisfaction with the results of its 1y refinancing and the anticipation by financial markets of its forthcoming covered bond purchase programme

Local data to be supportive of the AUD this week

Domestic events this week should be broadly supportive of the AUD, but it will be difficult for the currency to rally much from here in the short term. The local rates market is already aggressively priced for a start to the tightening cycle early next year. More confirmation from the global economic data of the green shoots hypothesis is needed before the AUD break out of its 0.78-0.82 trading range. Waiting for a break of this trade range to the downside to establish medium-term long positions in the currency.

The risk of unwind in FX markets continues to remain subdued. The unwind index continues to suggest that a sharp unwind in carry is unlikely and that risky currencies remain well supported.