FOREX TRADING

News and Events:

EURUSD finds itself under relentless selling pressure this week (touching a low of as Greek bond yields continue to rise and the cost of insuring against sovereign default in Greece creeps further upwards. The yield on Greek Sovereign 2yr bond has surged to 4.96% having been around 1.70% at the end of September, and the cost of CDS (insurance premium to protect against default) has risen to 344 basis points. In layman’s terms, that means for every EUR 1m of Greek government bonds, an investor would have to pay EUR 344k to insure their investment. And unlike the Dubai debt crisis, this problem will not have any quick or simple solutions. Indeed, it seems that the worries over sovereign default are starting to spread within the Eurozone. With other economies like Ireland, Portugal, Spain and Italy also seeing increasing distrust from CDS markets and the contagion even beginning to affect UK and French CDS, we may be beginning to see the emergence of a new driver of FX markets for 2010. Currencies are often noted to follow the performance of other asset classes, and often currency markets will tend to track certain markets more than others. In 2008, commodities were the predominant focus as oil soared higher above $147 per barrel, and EURUSD powered to new highs above 1.6000 – indeed the correlation of the two assets was over 0.9. In 2009, equities and credit markets took the reins as the driver of USD trends. For 2010, it seems plausible that the single most important driver of currency trends will be sovereign credit spreads. The extraordinary measures that were undertaken by governments around the globe to prop up the economy during the financial crisis have certainly stabilized equity markets, but at the cost of monstrous budget deficits. Government debt will be under scrutiny this year, raising the possibility of sovereign default to significant levels, and investors will likely shift their attention from analyzing so-called ‘risky assets’ as they did in 2009, to analyzing ‘risk-free assets’ i.e. government bonds in 2010.

Today Key Issues:

• 13:30 USD Initial Claims exp: 440k prev: 444k
• 13:30 USD Continuing claims exp: 4598k prev: 4596k
• 15:00 USD Philadelphia Fed exp: 18.0 prev: 22.5
• 15:00 USD Leading Indicators exp: 0.7%, prev: 0.9%

The Risk Today:

EurUsd Those looking for a minor wave 5 to take us to at least 1.4100 have now reached that target this morning as we have touched a low of 1.4044. With the 4 hourly RSI sitting at deeply oversold levels, the chance of going to the 1.38 region without having some sort of bounce first is unlikely. Other positives for EURUSD this morning are the divergences on the RSI and stochastics on both the hourly and daily charts so I personally favour a bounce here to 1.4260 where intraday shorters may well re-appear in force.

GbpUsd Cable’s minor wave 5 looks like it is well underway but is yet to be confirmed by a breakdown of the wave 4 uptrend at 1.6078. In light of the fact that EUR USD looks much further along in the wave 5 than GBP USD, the profile of a EUR GBP long may well be considered by those looking for a hedge against any other USD longs that they may hold in case of a short term USD pullback.

UsdJpy The action continues to look favourable for USD JPY as it carves out its wave 5 or a wave 3 of 3. Either way the pair looks set to go higher and for those who positioned themselves on the long side yesterday should consider holding tight until the 94.78 level. Bids should come in around 91.10.

UsdChf At time of writing the pair is testing the medium term downtrend at 1.0475 whilst simulataneously exhibiting many signs of an overbought condition. That said, assets can remain in an overbought condition for some time and we are still looking for USD CHF to make it to 1.0556 at the very least but at these levels I would take some of the profits off the table and re-enter after a pullback to 1.0360

ACM FOREX

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