Forex Investing Blog

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This morning has seen some “flip-flopping” on risk themes as the overnight session was trading on risk aversion due in part to some economic figures out of the Euro zone.  However, those themes had pulled back and we actually saw some risk-taking, only to set-up for risk-aversion again!  Can you say volatile?
The back and forth nature of the forex market is what traders thrive on.  As of right now, we are seeing some Japanese yen strength, but not all of the risk aversion plays one might expect to see.  While the Kiwi is noticeably weak, the Aussie is holding up against all but the yen.  This looks like its setting up to be a back and forth day, as the market attempts to re-align itself according to risk themes.  I will probably play today short-term, and wait to see what the market reaction is to the US Consumer Confidence figures due out at 10 AM EST.

While I can’t imagine that they will be “good”, one never knows how the market will react.  Also to note is that the US Housing Price Index will also be out a little earlier, giving a glimpse into the whole inflation/deflation debate.  Combine that with the political landscape here in the US and the malaise surrounding it; and the market could be in for a wild ride today is this could be a recipe for disaster.

In currencies:

Aussie (AUD):  The Aussie is holding up surprisingly well this morning despite the general risk-aversion themes we’ve seen this morning.  This is more of a case of being “less-bad” than actually good.  With problems in Europe (Aussie nearing 10-year highs vs. the Euro) and the UK, investors may start catching on to the fact that owning Aussie over Euro and Pound is LESS risky regardless of what the correlations say.  In my opinion, the Aussie is THE place to be for both risk-taking (commodity plays) as well as risk-aversion.  Now if the market would just begin to see it.  In the meantime, I will continue to buy dips.

Kiwi (NZD): While lumped in with the Aussie and Loonie as commodity currencies and known as a “risk-taking” vehicle, the Kiwi is not nearly as strong as the Aussie yet sometimes benefits from Aussie strength.  Until economic conditions improve in New Zealand or rate hikes seem imminent, the Kiwi will continue to trade on risk themes as it is not strong enough on its own to “buck trends”.

Loonie (CAD):  I’ve been seeing a lot more of Canada lately (probably because my wife makes me watch ice-dancing in the Olympics) but I’m starting to come around to being positive on the Loonie.  Despite record low interest rates and its close ties to the US, the Canadian economy is strong and recovering much faster than the US.  Because of the Loonie’s tight correlation to oil, it will continue to trade as a proxy for the commodity as the market determines whether or not recovery will drive further demand for oil.  The Loonie is lower this morning.

Euro (EUR):  Is anyone surprised that Business Confidence figure in Germany are down this morning?  No?  Me neither.  In fact, this prompted German Chancellor Merkel to lash out the banks that “created the problem” for speculating in the Euro—driving it lower naturally.  It looks like she’s at stage 3 (anger) in the seven stages of grief. It’s starting to look more and more like the Euro zone actually knew about the derivatives that helped Greece obfuscate its debt to the point that it was allowed to gain entry to the Euro zone.  In my eyes this is akin to going to a “jackets required” restaurant jacket-less, then taking off with the loaner they give you, rather than just being denied access in the first place.  Any way you slice it, the trend for the Euro is clearly down.

Pound (GBP):  The Pound is lower this morning as speculation abounds that the UK will continue its bond purchase program to help keep their currency lower to stimulate their economy.   People forget that the UK is still an industrial power and a BOE Deputy Governor reminded the markets of that fact when he said that a “weaker currency will boost exports”.  Should the current situation continue, the Pound could be near 1.50 vs. the US dollar in no time flat.  This would also represent the 61.8% Fibonacci retracement that technical analysts love so much.

Dollar (USD):   Home prices in the US are expected to rise for the seventh straight month, though incrementally and down over 3% from the previous year.  Should the figures meet the expectation, then expect risk-taking to pick up as this would be a sign that inflation is nowhere to be found and confirming that interest rates will most probably remain unchanged for a long time.  Consumer confidence is out at 10AM, if anyone is confident in this environment, then they need to have their head examined!

Yen (JPY):  The Yen is higher on risk-aversion this morning despite the fact that the Japanese government and the Bank of Japan are in dispute over what is to be done to combat the deflation they are experiencing.  Not surprisingly, government wants more liquidity to encourage inflation, and the BOJ wants fiscal discipline and reduced deficits.  Sound familiar?

In overnight markets, the Nikkei was down while the Hang Seng was higher.  In current trading, the European markets are lower though off of their lows.  US stock futures are lower, and oil is down roughly 1.25% to 79.3, with gold following suit down to 1111 and change.

With the problems facing Europe, rampant deflation in Japan, and trouble in the UK, the markets may be re-assessing which currencies are actually “risky”.  In fact, the reason why I introduce the currencies in this blog in the order that I do is based on the “hierarchy” of the risk themes.  As the economic recovery picture becomes clearer, I would not be surprised to see this pecking order change in the not-so-distant future.

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