Changing the forex rules


Data/Event Risks

  • EUR: The M3 data is not usually a market-mover, but it does provide more detail regarding loans from the household and business sectors so can give some indications of the health of the banking sector.  Italy auctions government bonds today, so that could knock the euro if sale goes badly, but risks are low.
  • USD: The Fed chairman speaks again today, answering questions to the House Financial Services Committee.  Yesterday the reaction in currency markets was muted, so this reduces the risk of volatility today.

Idea of the Day

One of the few rules of forex is that nothing lasts forever.  What’s important in driving a currency over a period of days, weeks or month can suddenly become obsolete as a new factor takes over. We’ve certainly had that feeling this week, as the euro has moved from being the favoured ‘loser’ in the current currency wars (appreciating against sterling and the yen) to being a lot more sensitive to the gyrations of the sovereign crisis.

The ECB head Draghi had pushed this to the background last year when he promised to do “whatever it takes” to save the euro and Monti’s technocrat government in Italy gave us a holiday from the drama of Italian politics.  For now, they momentum appears to be avoiding further elections and trying to stich a workable solution from the current situation, which could take some time. As a result, the euro is likely to trade tighter to move in peripheral bond market spreads, in contrast to the end of last year when the established inverse correlation (1-month) turned positive.

Latest FX News

  • EUR:  Managed to hold its ground after Tuesday’s sell-off on the back of the Italian election results, but the underlying tone remains fragile as the market has to once again deal with political uncertainties.
  • JPY:  Behaved like a true safe haven currency late Tuesday but flat-lined for most of Wednesday below the 92.00 level. Path for Kuroda to be the new Bank of Japan head is looking fairly strong. USDJPY still in longer-term bull channel, but break below 90.80 would break this.
  • GBP:  The charts suggests a strong case for some corrective activity higher, but the fundamentals are still bearish, so for now there is something of a fight going on beneath the price action.  Support for cable at 1.5073, then 1.5000.

Further reading: Forex Analysis: EUR/USD Approaches Head-and-Shoulders Downside Target

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