It is rare in the financial markets that one event can dominate and influence the outcome of so many diverse instruments, but at present this is most certainly the case, with the US economy teetering on the brink and the FED now increasingly backed into a corner with regard to its policy of a second round of quantitative easing (QE2 as christened by the media). In the last few months we have seen the paradox of equities, commodities & bonds all surging higher as the markets wait for the FED to confirm that it is now taking action to support the US economy and prevent a rapid decline into a double dip recession.
Last week's employment figures have simply accelerated this decision with Wednesday's ADP numbers causing early alarm, followed by Friday's awful non farm payroll data which came in at -95k against a forecast of +1k, and worse than last month's -55k. The knock on effect of this uncertainty, has now triggered the so called "currency wars" (aka the race to the bottom) as beleaguered central banks wrestle with the problem of a strong currency and falling export demand with countries such as Japan, China, Korea and Taiwan leading the way. The problem at present is that every developed economy around the world is trying to protect their export markets in a desperate attempt to prevent their particular economy nose diving & in the case of China (according to Premier Wen) massive social unrest. Each is approaching the problem in a different way, either by direct intervention or by quantitative easing.
The fear from investors and the reason that we have seen the strong bull trends in commodities and equities is simply that they are now seeking safe haven assets on the premise that paper based currencies could be trashed, which certainly seems the case with the US dollar. The meeting over the weekend which was supposed to garner some worldwide agreement over the "currency wars" achieved very little, other than a few lukewarm words and the motto is now "everyman for himself". The irony for the euro is that the ECB considers the European economy to be in better shape than most and is currently involved in a war of words with the US who it is now accusing of manipulating its currency whilst President Sarkozy maintains a tougher tone on QE2 considering it to be inappropriate at present.
The forex markets this week continue to be dominated by chronic US dollar weakness as evidenced in the usd index which remains heavily bearish having broken through the 200 week moving average with both the 9 and 14 week averages also having crossed the 40 week average. Should these ultimately cross the 200 week average this should add further weight to any move lower and as such we can expect to see a re-test of the 74.17 low of late 2009 and any breach here will send the index to re-test the low of March 2008 at 70.79. With the prospect of QE2 now almost certain from the FED and likely to be implemented in the next 2 to 3 weeks, the longer term trend for the US dollar remains negative and, as such, we can expect to see the major pairs react accordingly.
Pairs to watch in forex trading this week: (Based on the weekly charts)
EUR/USD
Having broken above the 200 week moving average last week, still remains bullish & despite the minor pullback over the last few days still looks set to break higher with the 9 & 14 week crossing the 40 week adding further to the bullish tone. Expect some further consolidation at the present level but any break over USD1.4029 should see the pair re-test resistance at USD1.4273.
USD/JPY
Trading once again with a heavily bearish tone with both the 9 and 14 week averages adding immense pressure. We currently trade at 82.01, well below the last intervention by the BOJ but expect them to step in again soon, as the pips are really beginning to squeak!
USD/CHF
Another heavily bearish pair which has now broken below the 0.9635 region, and with all four moving averages weighing heavily there seems little prospect of any reversal as investors continue to pile into the Swiss Franc.
GBP/USD
The pound dollar has reached a critical point as the pair runs into deep resistance at the USD1.60 price handle. Sustained dollar weakness may propel cable higher which is continuing to trade well above the three shorter term moving average giving us a bullish signal, but it may run into resistance anywhere between USD1.60 and the upper level at USD1.6746 and could ultimately stall in this region.
USD/CAD
The usd cad continues to move inexorably towards parity and a re-test of the low of early 2010 at 0.9930 seems likely with all four moving averages turning sharply lower. If this level is breached then expect to see 0.9707 in due course.
GBP/JPY
The yen continues to strengthen in the crosses as the pair continues to slide lower towards a re-test of 127.64 and any break here will open the way for a re-test of 126.71, last seen in May 2010. Again watch for BOJ intervention.
AUD/USD
The strong bullish trend for the aud usd continues as we now wait for a breach of parity with all four moving averages pointing higher with both the 9 and 14 week offering excellent support.
NZD/USD
The nzd usd has reached an interesting point, having breached resistance at the 0.7527 last week and providing this breakout continues expect to see the pair climb to re-test 0.7706 and possibly even to 0.8214 in due course. The trend is fully supported by all four moving averages.
EUR/GBP
The eur gbp continues to trend sharply higher, having broken above the 40 week moving average, and now looks set to test the 0.8862 region and possibly on towards 0.9149 in due course. With the 200 week average sloping higher this is giving the pair some bullish momentum.
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