Forex Investment and Currency Trading

The New Year has seen the USD revert to its old ways to some extent; the late year gains in the USD were temporary in nature, and while the slide in EUR/USD extended further than expected, some still do not think the late year rebound in the USD represented a significant turning point. While long term rates in the US have been rising, shorter term rates remain very low; it has been noted before that very steep yield curves are not usually USD-supportive and the exceptionally low levels of short term rates remain a significant restraint on the USD – especially as Fed policy makers appear to be doing their utmost to dispel any notion that policy could be tightened soon. The conditions for “carry trade” plays remain favourable and the clear “funding” currencies of choice remain the USD, CHF and JPY.

Beyond the carry trade issue that will drag on the lower yielders, the JPY also has the burden of a very weak economic outlook and a very poor fiscal situation to shoulder; despite the focus on US and euro zone sovereign debt problems, Japanese sovereign credit default swaps remain the largest relative mover over the past year. Fundamental pressures suggest that the JPY will be a significant under-performer this year.