Thursday Update..Risk Off Dollar On

With Equities and Commodities turning negative again yesterday the US dollar continued to strengthen.EUR/USD has dipped under 1.42 although currently trades above and has shown the biggest falls as it did gains just a week or so ago. The 1.40/1.41 level would appear to be a bit of a line in the sand psychologically and technically. I would be staggered if we exceeded those levels and although I can handle being wrong I hate it when I don’t know why.
Equities though have hardly seen panic selling with US markets just 1% lower to put all the negativity into context. The same applies to some commodities with Gold just under $1500, hardly a rout.
All in all though the Euro still remains under a cloud where it has even lost ground against Sterling, back under EUR/GBP 87.00 from the 90 level a week ago. To my mind nothing has changed interest rate wise.The ECB will raise rates if inflation persists while the US and UK will not.The Bank of England have hinted that inflation might hit 5% without so much as a blush while in the US picking another gauge of inflation shows it several per cent higher.
Industrial production data in UK and Europe today may be the market moving catalyst .

Thursday Update…. Get Ready For Breakout

With EUR/USD all the way back at 1.4800 having failed at 1.4900 you do not need to be a forex guru to suspect that any break of the recent 1.4750/1.4900 range should have some good follow through.
That said 1.4650 or thereabouts could be a good level to buy and vice versa 1.50s a sell but just this time around.Longer term trend still intact.The push and pull on the US Dollar has been helped on the upside by weaker commodities which we’ve mentioned before as a possible catalyst. Also CNBC carried a story that the Fed had a significant discussion on exit strategy at the last FOMC. On the other side of the coin Euro strength helped by rising German Bond rates vs. the US and news that Portugal seems to have reached agreement on a bailout…so much for the Fins.
Of course we my have to wait another day for any break with the ECB the focus tomorrow.
Sterling continues to trade like a dog.

Wednesday Update…. EUR/USD hits 1.4715 on slow grind North

EUR/USD made it to 1.4715 overnight but has slipped back since to 1.4660. I make it 50/50 on where we go today but would be inclined to give long positions a trim between 1.4750/1.4800 and look to get something back cheaper. All a bit technical but just seems that it would be a little overextended in the short term.1.50s still very much on the cards but may require a shake out first.
Equity markets have performed well again across the world and I was reminded yesterday that in the US S&P index 50% of company earnings come from outside the country which helps to explain the continued improvement.
Elsewhere the AUS$ hit another all time high against the US$ as 1st QTR CPI came in at 3.3% against an expected 3%. The Ausies are having to live with a currency that has gained mini reserve status as Sovereigns continue to diversify.
In the UK today 1st QTR GDP numbers are due in less than an hour. 1.8% was the consensus although the figure is rumored to be worse. If it is then a test of 0.90 against the Euro looks likely.
US Treasury Secretary Geithner paid some lip service yesterday to the desire for a strong dollar which promptly continued falling.
The Euro continues to ignore the peripheral bond markets. Greek 13 week T Bills yield 4.1%, Germany 30 Year Bonds 3.8%. I know which one I would have in my pension fund.

Wednesday Update ..Yen and US Dollar rebounds turn out to be Dead Cat

Tuesdays reversal in the Japanese Yen and to some degree the US Dollar turned out to be the proverbial dead cat bounce. The Nuclear Crisis seemed to have sparked a panic in risk but today it seems more like business as usual. the JPY/USD is back over 84.00 EUR/JPY over 122.00 and EUR/USD 1.4500.
The Euro continues to find support from Sovereigns diversifying reserves and turns a blind eye to anything adverse on the peripheral country news. In the hear and now I still think mid 1.45s EUR/USD could prove a bit a a barrier but in reality I am just hoping for another correction to stock up.EUR/USD 1.50 still looks likely in the coming weeks together with EUR/JPY 130.
In the long run of course a stronger Euro will just add to the woes of PIG but for now markets seem to be happy to ignore what might happen some time in the future. The Politicians rule out restructuring as they did with bailouts while most knowledgeable commentators think the opposite.My own view is that in the end it will be the public in Portugal and Greece who will decide enough is enough. Certainly the appetite for austerity in Portugal just does not seem to be there. When months turn into years then patience will snap.
Elsewhere Sterling continues to look vulnerable following disastrous retail sales figures. A move over 90 against the Euro might be a bearish sign for a test of all time highs…….that should send the Irish shoppers back over the border in droves and prove a killer for the Irish economy.

Tuesday Update… Trichet gives Euro a leg up

Comments from ECB president Trichet were enough to turn the tide for the Euro yesterday as he again signaled the almost nailed on certainty of a rate hike in April. The EUR/USD had fallen as low as 1.4020 but subsequently moved above 1.41 and has pushed on this morning to 1.4140. Forex markets have now associated the word vigilance with rate increase as soon as it is mentioned. Technically the retest of 1.4250 is on the cards again although that looks a tall order and if we reach there today I would be a seller. Irish bank stress tests are due on Thursday and are expected to be bad maybe horrendous. Portugal’s bail out while pretty much discounted by the markets could yet cause a stir as the lack of government authority means they could literally run out of cash in a few months.
Sterling continues to suffer as the Bank of England is still seen to be stalling on any rate moves with its split board remaining on the side of no change. EUR/GBP 88.25 this morning and any further Euro strength could see it test 88.80
Libyan Dinar continues to tank…………….sorry

Friday Update…. No-Fly Zone and No-Buy Zone

Two important stories overnight. Firstly the United Nations on an agreement for a No-Fly zone in Libya which may just have happened in time. However, it remains to be seen how this will operate and whether this will lead to more protracted conflict.
The other news was the announcement from the Japanese Finance Minister that the G7 had agreed to concerted intervention to halt the rise of the Japanese currency.

The BOJ has already intervened to the tune of an estimated US$35 Billion and the Japanese Yen is back to last weeks levels, JPY/USD 81.80 and EUR//JPY 115. There was also rumors that the ECB bought EUR/JPY through a French Bank but I would be a little surprised by intervention other than against the US$.Japanese equities closed almost 3% higher and European markets have opened better This will obviously not be the end of the story but I think it might be dangerous this time to back against the Central Banks and traders for sure will be wary of getting caught long of Yen. The EUR/USD seems to have established a footing at last over 1.40 currently 1.4070 and a close above the former level should see progress to the 1.4250 level. The Swiss franc which hit an all time high of 89.35 against the US dollar yesterday looks likely to bear more weight as a safe haven currency with the Yen being restrained adding to the headache for the Swiss National Bank.
Sterling has struggled to keep up with the Euro recently weakening to 87.30 this morning.
No further developments on the Nuclear power problems in Japan but if that is resolved without any more major problems then a further relief rally in Japanese stocks might be seen.
Elsewhere Bahrain may become more of a market focus and Oil is close to 2% up this morning. Other commodities too should rally eventually.
Still not sure mind you how you keep the flies out of Libya

Weekly Review…Will Olie Rehn in the Dollar Revival.

It turned out to be a recovery week for the US Currency as a number of events conspired to provoke shorts to capitulate.Firstly we had the press release from the ECB. While this said nothing different from the previous meeting, its lack of further hawkish comment was viewed as bearish for the Euro.

In truth the markets were wrong to have expected any more for the time being. However, the next few months inflation readings will be key. If by the end of March we have a comprehensive Euro package and inflation is worse then I believe the ECB will change tack. They will be anxious to reestablish their credibility and focus on their one true mandate,inflation control.
On the United States side of events Fridays employment data while disappointing on the Non Farm Payroll ( NFP) of just +36000 was overshadowed by the dramatic fall in the headline unemployment rate to 9% from 9.4%. US Treasury yields raced higher and this in contrast to German yields which declined added more ammunition to the US dollar rally. However, I think any thoughts of the Fed changing tack are well premature.
Technically the US Dollar is still hanging on to the bearish trend However,if the the Dollar Index were to move above 79 ( currently 78 against a low of 76.88) then things might change. In EUR/USD terms below 1.3470 level would be damaging and 1.3300 probably capitulation.
I do believe though that the single most important factor over the coming weeks will be the emergence of details of the Euro area stability package. As Olie Rehn the President of the EU put it, ´No more phony-baloney economic union´. The German and French inspired package ( Although mainly Merkel) is intended to produce a comprehensive package to co- ordinate Wages Taxes and Pensions.
This for the peripheral EU members will if you like be their premium for a truly watertight Economic Insurance.
If this package does not materialize in such form then of course we could see a massive Euro fallout. It is for these reasons that the pressure to agree will be compelling.
There will be sticking points, most notably the Irish and their hallowed level of (12 1/2%) Corporation Tax. That will certainly be a tester for the new Government. The upshot maybe a fazed increase. If they refuse then it could give us some interesting times. Certainly the mood in Ireland is that taxpayers have bailed out their own banks to support the European banking sector.
Events in Egypt have cooled a whisker and hopefully a peaceful transition can worked out. Of course events will stay on the Forex markets radar but perhaps diminishing.
Equities hung on in again while Bonds did exactly what I think they will do.US Treasury yields have not affected the Yen thus far but may yet do so at some point.
Elsewhere,commodity currencies still looking bid and Sterling benefitting from data puts it back in the middle of its recent trading range vs. the Euro

US Dollar Back to Square One as Euro Stages a Relief Rally

When we were up we were up and when we were down we were down as the song goes. Yes the US Dollar retraced all of its gains since the New Year as the Euro rallied. Sparked off by the relief in Bond markets as first Portugal and then Spain and Italy managed to get small Bond Auctions away at marginally better levels. Of course in the context of what is to follow it is just a few weeks pocket money for these guys and buys a bit of time.
The EUR/USD extended gains from around 1.29 to a high just above 1.3450 before settling back in the 1.33s and closing around 1.3390.Whatever news came out it tells you as much about the short positions that were held than anything else.The Euro also enjoyed a good rebound against the Swiss Franc and Sterling. The later which had enjoyed some heady days against the Euro demonstrated that it was Euro weakness not Sterling strength that fuelled the whole movement.

Looking to next week there is a far less exciting economic calendar to fire up the forex markets and I suspect the markets generally will be more occupied with the technical levels. Here as recently the EUR/USD will be the focus of attention. Fridays move from the mid 1.34 level was back from the brink and not least because of the distance travelled. Anything above 1.35 will probably trigger more stops. With one Investment bank going for 1.27 after a Friday sell recommendation ( mind you with a pretty close stop at 1.35 I understand) and another talking 1.37 from earlier that is what you call a market.
Something that may attract attention is the European Finance Ministers meeting in Brussels to discuss increasing the bailout fund. Anyone banking on something for the Euro there will be disappointed. Despite Angela Merkel´s reiteration that Germany will do whatever is required to stabilize the Euro she stated yesterday that this has to come as part of a complete package. Germany seems intent on waiting until a summit of European leaders in March……..if they can I assume.
So with all this uncertainty I would shy away from any predictions this week. It is ´seat of the pants´ trading at the moment. A time to be disciplined have smaller positions unless something comes along to convince you.If we cannot break 1.35 then we could be in for a quieter week.
Outside forex land Equity markets held in there well and particularly the US markets which seem to be attracting good demand not least least from Bond Markets
.
Inflation is suddenly beginning to turn a few heads.Trichet mentioned it at the ECB meeting as a short term only problem at this time. It helped an already rallying Euro but reminds us that the ECB´s mandate concerns Inflation foremost, nothing else.China too unexpectedly raised bank reserve requirements again by 1/2 % in response to inflation at 5.1%. With food prices beginning to cause unrest in some countries ( not least the catalyst in Tunisia) it is a worrying development. If I was in any extreme camp it would be stagflation not deflation as a worry.
Some of the more speculative Hedge Funds seem to be betting on the demise of China. A recently publicized one calling for minimum Investments of US$ 1million will leak 20% a year if it doesn’t materialize. There seems to be plenty of takers……..now that really is a punt. If Chinese growth did collapse then woe betide us all. Watch out AUS$ and CAN$ for sure.

Finally France´s President Sarkozy gets the prize of the week for being, well a typical politician.He said this week,¨Ireland cannot seek European aid while keeping low Corporate Tax Rates¨. On November 20th at the time of the Irish bailout it was stated Ireland would not be required to raise those tax rates. Although he hinted at it being desirable he stated, ¨That is not a demand or condition just an opinion¨.If you have any doubts how that might go down check out any Irish press you care to last week.To the Irish it is sacrosanct and would slaughter their fragile economy. Threatened with that they would rattle the Euro cage to the core. Oh no boys and girls the Euro problem is far from solved…

Euro Area Bond Market Worries Continue.

The Euro suffered badly last week as worries about peripheral bond markets came back into focus.Technically the EUR/USD retreated from good resistance levels around 1.34 closing just above 1.29 and paints a more bearish picture now. The Euro faired worst of all losing ground also against Sterling and touched record lows again against the AUS$ despite what was going on in commodities and gold.
The strengthening of the US dollar was aided and abetted by the commodity and gold weakness. Indeed that sort of move can be self propelling with one leading the other and so on. It is certainly one to watch for online forex traders as far as further dollar strength. I think Gold could be the key as it has so many investors long at the present time. If that continued much below 1350 then the correction could be more severe and thus help the US dollar. However, in the big picture any correction in Gold and commodities can surely only be viewed as just a healthy correction before the next move up.

Next week there are bond auctions for Portugal, Spain and Italy and these will definitely be a big influence on Forex markets. Portugal as I have stated before has to take a bail out at some point and would probably do better to do it sooner than later. The real defining moment for the Euro will be how things pan out in Spain. If things go badly then I would expect to see the EUR/USD test at least 1.20. If the markets believe at some point that they will survive without forcing a crisis then it could well be a defining moment for the EURO in terms of a low .

In the short term the US Dollar strength may be a little stretched but that said much of a rebound could be hard to come by. The EUR/USD as I mentioned could take its lead from the bond auctions and a push below 1.28 is quite possible although you should get a better chance to sell it than 1.29 and bits.Economic data in the US and elsewhere continues( with the exception of Employment data) to be reasonably good while Companies are performing well as apposed to Countries, a theme that will continue.
Sterling has been pretty resilient thus far against the US Dollar and rallied to 1.2050 ( 82.95) against the Euro. While that might continue (Technically now pointing to better levels) I continue to believe that baring any major Euro crisis that these levels and better are on a medium to long term view levels where shorts will eventually pay off.

There are a few things to remember of course. Firstly the a stronger US dollar does not suit the US in terms of a stronger Economy while the weaker EURO likewise suits the Europeans. The Japanese will also have been relieved that the YEN also lost ground against the US dollar helping exporters and their Stock market. US Bond yields still look set to go higher and that will help US$/Yen.

Finally the Chinese Inflation chatter was more off than on the radar last week but could yet have a major impact on markets.

I mentioned I have spent some time in Ireland and frankly its a pretty depressed place. The outlook for the Economy is nowhere near good enough to support longer term the tough repayments they have to endure. The outlook for the housing market is still pretty dire with the prospect of foreclosures and higher rates weighing on it.I would suspect that given a referendum now they would prefer the short term shock of a Euro exit and default rather than what looks like a prolonged lingering demise. It will not happen but shows that along with Greece the current arrangements are unsustainable, there is only so much austerity that can be dished out.

Will it be shock ,will it be awe,will it be less or will it be more

The long awaited quantative easing or money printing as it could be known should finally be announced this week.
The Federal Reserve will announce any details after its meeting this week on the 3rd of November. There has been limitless conjecture on the size of this easing but pretty much full consensus that something will happen. In terms of ranges anything from 500 billion to 2 trillion dollars of bond purchase could be announced as a follow up to the original 1.2 trillion.

The markets seem to have moved away from the real shock and awe figures and have been leaning towards the lower end with the economic statistics really not suggesting a double dip but neither too much improvements on modest growth.As far as the forex market is concerned the US dollar finished the week in the middle of its recent trading range and has potential in either direction. I feel the Fed should ere on the side of caution but they may not. I do believe if they announce a figure approaching the original number around 1 trillion dollars you should close your eyes and sell the dollar. If it were even more, then frankly sell even more when you open your eyes.

In terms of EUR/USD something close to 500 billion could help the dollar short term ( I use 1.33 as the bottom of the range still) and on the other side 1,45 remains a target.
European statistics have continued generally better but it has to be noted that it is Germany where most of the optimism exists. Last week it was employment figures which came in at a 17 year low for Germany. Further out the gap between them and the struggling Euro members will only get bigger

Sterling had a very good week prompted by 3rd Quarter GDP figures which came in at +0.8 % way above expectations. This has put talk of UK quantative easing on hold and should allow for the pound to continue supported and certainly with any dollar weakness leave 1.60 behind. Further out the cut backs announced will take its toll and I favour selling into any further strength against the Euro (short EUR/GBY mid term).

The Japanese Yen had a late surge against the dollar but I struggle to understand that one. Noticeably the Bank of Japan (BOJ) have brought forward their meeting to allow them to react very quickly to the FEDS decision.I continue to prefer the EURO against the YEN (EUR/JPY) and have not given up hope yet of a move above 120.
All in all the only surprise would therefore be a quiet week and it could be a very very volatile week. US elections, terror threats are all in the mix. Equity markets have held up thus far but their reaction to events may be the first guide to the US dollar.
If you are not an experienced trader then stay small and be disciplined or even do nothing until the dust settles
I would rather be short US$ than long going into the week as I remain bearish on a medium to long view.