FOREX

CHARTS: Forex pairs vs 2-yr note spreads

EUR/USD is higher. The equity correlation trade has been working off and on recently. The ECB has been backing away gradually from extraordinary policy ease and worries about the weaker Eurozone economies have been a weight off and on.

EUR/CHF is steady. It has been established well below its perceived 1.50 SNB  floor. USD/CHF is lower. The SNB periodically has reconfirmed EUR/CHF support. The SNB made comments that it would continue to prevent excessive franc gains against the euro. The SNB periodically has been intervening in the EURCHF cross. 

USD/JPY is higher, and the EUR/JPY is stronger. Japanese forex policy is now aiming at weakening the JPY. The government and BOJ have reconciled their differences.

GBP/USD is steady. EUR/GBP is up. Mixed data have been triggering GBP instability. BOE King recently indicated that a weaker GBP could contribute positively to U.K. economy.

COMMODITIES and Commodity Currencies

The CAD is stronger. The Bank of Canada has been turning turned less dovish as the economy stabilizes. Canada could be one of the early major economies to raise interest rates, but not immediately.

The AUD and NZD are higher. Risk trades keep cycling in and out. The RBA surprised by holding rates steady. Some still expect an April RBNZ rate hike.

Gold and Oil are higher. Gold, oil, equities and the commodity currencies are all carry trades. Gold is another anti-dollar.

EQUITIES & INTEREST RATES

Far East equity markets closed lower amid ongoing concerns about a tightening of Chinese monetary policy and weakness overseas. European bourses are up. U.S. equities are better. 

The U.S. 10-yr note is 3.59%, +2 bp. Fixed income markets are vulnerable as they consider the prospect of an end to excessive Fed ease and large borrowing needs by the the U.S. government. Nevertheless. Fed Funds should remain low for an extended time period.

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 .

WEEKLY- Sovereign Crisis to Remain

21:00 GMT- February 5  (global-view.com) We will never apologize for our fundamental bias. Most professional traders use the fundamentals in conjunction with their technical studies. Many pure technical traders assert that the fundamentals are already in the prices. Well sometimes they are and sometimes they are not. The end of this past week saw a price move that caught most traders by surprise. What happened was that credit issues suddenly erupted in Portugal. They came on the heels of worries about the Greek budget and triggered worries about Span and then some other nations. 

This evolving story triggered a wave of liquidations in a broad range of markets. Both the USD and JPY gained against many instruments for flight to safety reasons as the two have extensively been used as funding currencies for all manner of carry trades. When institutions sell equities they use the proceeds of those sales to pay back the USD or JPY they had to borrow to buy them. The same goes for gold, oil, commodities, commodity currencies, etc. This process sets off a self-reinforcing cycle as the funding currencies become more expensive and carry trade investments fall in value.

We noted on Thursday as the details of the crisis dribbled out that those who followed the fundamentals recognized quickly that a basic change in the markets was under way. On the other hand, we noticed that many technical traders, rather than pulling out, tried to fade the move all the way down. A recognition of the fact that this was not a status quo move could have saved pure technical traders a lot of money and gotten them on the right side of the market. The bottom-line. it is a big mistake to think the all the fundamentals are built into the market. They are not now and never have been. This is not to say that the study of price patterns does not play a major role in successful trading, but traders must realize that they are only part of the puzzle that is trading.

Looking ahead, we are not confident that the sovereign debt issues in Europe will be resolved quickly or easily, they are structural problems that will have to be addressed. In one form or another these same issues will have to be addressed in most mature economies. In the trading horizon of most Forex traders, liquidation of carry trades are likely to continue to provide support for the USD and JPY and weigh on many of the favored investment vehicles.    

John M. Bland is an author and co-founder and partner of Global-View.com. Prior to Global-View.com, he was a Vice-President and senior dealer in a forex inter-bank and futures trading arm of a subsidiary (ContiCurrency) of the Continental Grain Company in NYC. Previous to that, he was one of the early members of the Chemical Bank corporate advisory service in NYC, and also worked in international liability management for that bank. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelors degree in International Economics from Berkeley.