Thursday, February 20, 2014

What we are watching in Forex right now | The climate for trading

The Forex pairs we are keeping an eye on at present include the Yen (USDJPY), The Euro against Sterling (EURGBP), Cable (GBPUSD), the Swissie (USDCHF), the Aussie (AUDUSD), the Aussie against the Kiwi (AUDNZD), Spot Gold (XAUUSD) and the Single Currency (EURUSD). Most of these have a US dollar component, as can be seen.

And we are expecting US dollar strength, although we will be waiting for other technical and fundamental indicators before we act on this. The severe weather that has pummelled many parts of the USA is held by many to be responsible for soft numbers Stateside in everything from employment through Purchasing Managers’ Index (PMI) to manufacturing output. This is all having a bad affect on the US currency.

A case in point is the Yen against the US dollar (see chart above). A great many market participants were expecting the high marked by the horizontal dotted line to have been well and truly breached by now, but the pair failed to oblige. For that to happen requires either US dollar strength or Yen weakness, or both of these together. As is discussed below, US dollar strength is at least on hold while the correction in equities has resulted in extensive buying of the Japanese currency, which is regarded as a safe haven and often moves inversely to the equity markets for that reason.

The climate for Forex

Foreign Exchange trading has been in one of those periods that come along from time to time when it seeks direction. This is down to a number of factors. One is the transition between chairs of the US Federal Reserve, without doubt the single most influential body on global Forex markets, not only those that affect the US dollar. Janet Yellen was always perceived as someone who would be amenable to the continuation of Quantitative Easing (QE) but it looks now as if it will finally meet its total demise on her watch.

The economic indicators that seem to have convinced the FOMC to end QE have stalled somewhat, most notably those that deal with employment in the US. In the meantime the market is not sitting on its hands and has well and truly begun the process of withdrawing what will be cheap capital for only a while longer from high yielding emerging markets, much to their discomfort. Equities seem to have had their correction, which was coming.

But the real biggy in terms of trading is China. That massive nation has begun its transition to a more consumer led economy. This was always set to lower growth which should have effects everywhere, but most notably in Australia and New Zealand. One disconcerting note regarding China is the persistent feeling that the integrity of the data is less than perfect.

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