20:00 GMT- Apr 20 (global-view.com) We have been zeroing in on the risk trades recently as they can be a very useful indicator of general USD sentiment. By risk trades we look at the three commodity currencies (AUD, CAD, NZD), gold, oil and equities. When they are all moving together, they are supportive of USD movements in the opposite direction vs. Europe. If they are not moving together, they might not provide a lot of directional support. On Tuesday, the risk trades were mostly higher but did not provide much support to the Euro-currencies because the risk trades were not universally strong.
Fundamentally we are in political markets. Political markets can be difficult to trade because decisions and the timing of those decisions can be very hard to predict. The Goldman Sachs fraud investigation regarding mortgage backed securities boils down to a political or administrative matter that could drag on for a very long time. We also don't know where it might go next. Also, other firms might become involved, etc.
The Greek debt situation is similar in that its ultimate path is not obvious. We had thought that the bailout plan would have been put in place months ago, but it continues to drag on, This week there has been talk that Portugal is going to require some sort of help next. The financial and forex markets are having difficulty digesting these events and to a certain extent have pulled back into their shells. German ZEW data were stronger than expected. Even the Icelandic volcano has had a dampening impact on trade.
The EURUSD is down on the day while the EURGBP is down. The GBPUSD is up. The solidity of the EU accord to backstop the Greek finances is being questioned. IMF issues are being raised as well. There is an outside chance that the apparent accord could unravel with negative consequences for the EUR.
In the GBP, markets are zeroed in on the May 6 U.K. general election. An expected a close vote has traders waiting for new election headlines at any time. Latest polls suggest that the odds of a hung Parliament are rising. This is the worst case scenario according to some. With no party winning a clear majority difficult decisions that must be made could be deferred. This uncertainty has the GBP in play with negative implications.
Our bias for the EURUSD and GBPUSD remains cautiously bearish. The outlook for the EURGBP is a toss-up.
The EURCHF is continues to trade a narrow range. Some are noting that the SNB has changed intervention tactics. The talk is the SNB has has been in the markets supporting the EUR vs. CHF a lot of the time. Weakness of the EUR vs. the CHF is a bad omen for the EUR.
The USDJPY pair is higher, and the EURJPY cross is stronger. More Toushin bonds are set for issuance this week and should undermine the unit. The Hatoyama government favors an easier exchange rate and continues to pressure the Bank of Japan to stimulate growth. Junior ruling party lawmakers (DPJ) have called on the government to push USDJPY to 120 to combat deflation. Some traders focus intently on the Japanese vs. U.S. 2-yr note spread (only the U.S. 2-yr moves much).
The risk trade is back on today. The commodity currencies (CAD, AUD and NZD) are higher. The Bank of Canada decided to keep rates stable today, but in its text sent a signal that rates could be hiked as early as its next meeting on June 1. Canadian FinMin Flaherty recently suggested little concern about CAD strength. A strong currency eases the pressure from the central bank to tighten policy aggressively. Oil and gold are up along with the other risk trades. We favor the AUD and CAD fundamentally.
Far East equities closed mixed. European bourses closed higher. U.S. equities are better. U.S. Treasuries are still watching the psychological 4.00% level in the 10-yr note. The U.S. 10-yr was last 3.81%, +1 bps. Bonds are used as a counter to risk trades because risk investments must somehow be financed. When the cost of money moves up (higher interest rates), the return and allure of risk trades falls.
UPCOMING DATA HIGHLIGHTS:No key data are due Wednesday from the Far East . In Europe , U.K. Average Earnings and the latest Bank of England policy minutes are scheduled. In the Eurozone, the Belgian Leading Economic Indicator is often used as a predictor of the German IFO Survey due Thursday. In North America , weekly mortgage statistics and energy inventory data are slated.
See ECONOMIC CALENDAR for a complete list of future forex market events and consensus data estimates. Go to the forex forum for up-to-date market developments and technical trading ideas.
John M. Bland is an author, and co-founder and partner of Global-View.com in 1996. Before that, he was a Vice-President and senior dealer in the fx inter-bank and futures trading arm of the Continental Grain Company in NYC. Previous to that, he was an early member of the Chemical Bank (NYC) corporate advisory service. He also worked in international liability management. John has an MBA from the Hass School at the University of California at Berkeley and a bachelors degree in International Economics from Berkeley.
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