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A regular Forex spread trading update by Simon Denham of Capital Spreads. For the latest Forex spread trading update, click here.
Forex Spreads, 26 Feb 2010
Cracks have appeared in the recovery and FX markets in particular have shown alarming moves that indicate they are preparing for something bad.
Cable took a big blow yet again, smashing through support levels and it looks like there’s some panic selling.
There are calls for a possible return to the levels last seen in the 1980s – that’s almost parity, so a whopping 35% lower than where we currently stand.
That would seem a little extreme for this commentator, but as long as there’s speculation surrounding a default by Greece, the EUR/USD and Cable will continue to weaken.
Even if a possible default did actually occur then we might see a bounce as the news would have been fully priced in. However, then investors will fret over a complete collapse of the whole EU monetary union and any bounce would most likely be very short lived followed by some explosive selling.
This is why, if it comes to it, the richer EU nations will have to bailout the poorer ones or the European dream is over.
The Yen has been one of the main beneficiaries of this whole debacle which will really turn the screw on Japanese exporters, in particular Toyota who are already in dire straits.
Forex Spreads, 25 Feb 2010
Overnight action has hit the Euro and Pound with the Dollar and Yen roaring away.
News from the Greece/EU debate is turning nasty with Greek politicians doing themselves and their country no favours by slagging off the one nation that can come to their aid.
To drag up arguments from 65 years ago and pillory a nation over policies and events that no current living person had control over shows startling lack of judgement.
When this is followed up with an attack on the intellectual quality of the leaders of the other EU countries one is left wondering whether Greece is on a suicide trip.
No doubt wiser heads will rule in the end but still.
All the fun and games is making dealers wary of getting too committed to Euro longs especially when, on purchasing power parity, the currency is still overvalued by some 12%.
We might think that it has fallen a long way already but if the bears really get their teeth into it there is no reason to think that it could not go from overvalued by 12% to undervalued by 12%. For the moment though I am of course only joking.
Cable has dropped to a new nine month low on the back of renewed comment on further Quantative Easing programmes, one wonders how much one country can build up for future problems.
Let us not beat around the bush. QE is ‘printing money’ by any other name.
As a result, the BoE has printed £200bn and is intending to issue more. With the economy still in the mire it is not unreasonable to ask the question as to whether this has really had any impact at all.
Other countries within our economic sphere, who did not go in for this “build problems for the future”, are faring no worse than us. Not surprisingly the Pound is taking the strain.
Forex Spreads, 24 Feb 2010
The clear shift in the risk trade was made apparent yesterday after the blow to consumer confidence in the US actually led to a stronger US Dollar.
Bad news is continuing to hammer the Euro and Sterling, which in turn puts pressure on the likes of oil, gold and of course equities.
A continuation of such poor data and news flow could continue to strengthen the US Dollar as its traditional safe haven status comes back into play.
To think that only a few months ago there were calls for the Euro to replace the Dollar as the world reserve currency.
The focus today will be on Ben Bernanke’s testimony to Congress, which is due to commence at 15:00. For those Dow intra-day traders, and FX traders for that matter, there could be some volatility in this afternoon’s session.
More specifically, currency markets were once again extremely volatile with the main beneficiary being the Dollar. The Dollar index has gained some 4% so far in 2010 creating a bull trend that shows little sign of slowing at the moment.
The poor US consumer confidence data and German sentiment numbers knocked the wind out of the Euro and once again we see the early stages of what look like a recovery for EUR/USD petering out.
This morning’s German GDP numbers have done little to affect the markets. A test of the recent low in EUR/USD cannot be ruled out as there seem to be few willing buyers of the single currency at the moment. $1.3455 is a level to watch and if this is broken up the bears will be focused on $1.3000.
With the risk trades in FX continuing to be out of favour, Cable also took a hit and we’re testing the 9 month lows set on Friday. Mervyn King’s comments yesterday about the possible need to reintroduce QE really struck a blow for Sterling.
Like EUR/USD, Cable is hovering with bears looking to the next major support level of $1.5350 and then $1.5300, but below there could open up $1.4400.
Forex Spreads, 23 Feb 2010
As mentioned in yesterday’s comment, virtually every market was sitting just under the resistance levels with Indices, Gold and Oil all pressing to move higher.
By the close most markets had drifted away from the top of the ranges but had definitely stayed within reasonable touching distance of making another attempt.
This morning has seen the currency markets take a break to the upside with resistance versus the Dollar giving way in early European action.
Dealers will be aware that over the past months Dollar weakness has tended to be, though not always, a trigger for higher prices. Bulls will be hoping for more of the same.
Currencies traded in a very restricted range yesterday but have already broken out in early European action with the Cable cross now up at $1.5560.
There is big resistance at $1.5570 to $1.5585 and $1.5615/1.5625 which may well cap us for the time being.
We have seen so many attempts to try to reverse the Dollar rally over the last few months, all of which have come to nothing in the end, so it is difficult to get too excited just yet.
But it must be noted that the Euro and Yen are also probing the up side so perhaps today is going to be a bad day for the US currency. Definitely a case for waiting on events.
Forex Spreads, 22 Feb 2010
All the woes in the newspapers and over the wires is mainly focused on sovereign weakness as nation state leaders spend to ensure re-election… sorry that should have read “spend to ensure growth”.
The point about the credit worthiness of countries such as Greece and Italy is that they are part of the whole EU bloc.
It is not credible to imagine that they will be forced out of the Union as the mere mechanics of recreating the Lira and Drachma is just not possible.
This means that they will remain in the Euro and will not be permitted to ‘default’ in the usual meaning of the word.
As with all nations they have what normal companies do not, namely a secure source of revenue, commonly called ‘taxes’. Times will be tough but a default scenario is not yet on the cards.
If we accept that Greece will not be thrown out, this is of course just following the thread of the argument above, this leads us to one inescapable scenario.
The Euro must eventually devalue from its current level.
Otherwise industry in Southern Europe will just be priced out of existence. German employees, with better productivity levels, are accepting zero wage increases and will leave the Spanish, Portuguese and Italian even further in the mire and in danger of slipping into a deflationary spiral.
Currency markets are showing a slightly weaker Dollar this morning with traders buying the Euro and Pound as we once again get into the strong everything/weak Dollar trading scenario.
Gold/Oil/Equities etc all seem to feed off any weakness in the US currency and dealers will be watching the wires for confirmation of the turnaround in the Dollar’s fortunes.
The Euro is struggling to break back above $1.3640/1.3660, which has proved something of a support/resistance over the last few weeks.
Clients seem confident that it will succeed, with Euro buying across our boards, but cautious traders will probably wait to see a confirmation of a break higher before getting involved.
The Pound has also bounced from the extreme lows of last week when we reached $1.5345 at one point but it must be admitted that the rebound has not exactly been of the convincing variety.
Dealers are more likely to focus on weakness than strength and we must beware the temptation to get long because “it has fallen so far already”.
This is not to say that a rally is not possible but that the downside has proved an easier direction for weeks and we will need more than just a cent or so rebound to confirm a turn in the market.
Forex Spreads, 21 Feb 2010
- GBP / USD closed last week down -$0.022 at $1.542 (down -1.41% week-on-week)
- USD / JPY closed last week up ¥2.0 at ¥92.0 (up 2.22% week-on-week)
- EUR / USD closed last week down -$0.010 at $1.351 (down -0.73% week-on-week)
- EUR / GBP closed last week up £0.007 at £0.877 (up 0.8% week-on-week)
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Forex Spreads, 19 Feb 2010
Currency markets were the big, big movers last night with both the Euro and the Pound hitting new recent lows.
Sterling broke through the really solid support of $1.5550 in a flash having satisfactorily bounced off it several times in yesterday’s session.
The hope for the Sterling longs will be that this level can be regained in quick time but there is precious little volume or technical support between $1.5550 and $1.5000.
Traders will be aware that currencies have a habit of moving in great swathes and the current momentum is definitely Dollar positive.
Versus the Yen, the Dollar did also move higher but in truth we have been oscillating between ¥93.00 and ¥88.00 for a while now. As a result, the current price of ¥91.90 can only be said to be close to recent highs rather than any kind of break out pattern.
Japan has surprised, to the upside, with its own GDP numbers in recent days so the impact of increased US activity is not so noticeable.
Forex Spreads, 18 Feb 2010
The short term rebound in the Euro failed to even last one session as dealers took one look at the new European deal and decided ‘no thanks’.
The Greeks have now decided that the way forward is to have an enquiry about what went wrong in the past rather than actually get their hands dirty in cleaning up the mess in the future.
It almost sounds British. This may leave any actual remedy to some indeterminate point in the future and explains the reaction of the FX markets.
Trading continues to be fast and furious in all the major asset classes and our clients seem to be confident of rebounds in most.
The Pound, like the Euro, is under pressure as the fiscal situation in the UK deteriorates even further. Figures out this morning have shown a dramatic increase in the budget deficit, with the first January shortfall since serious data numbers have been released.
This may be the first major indication of the underlying feeling in the economy that things are not ‘turning around’. Figures showing that Public Sector employees gained pay increases of some 3.7% last year versus nothing for the private sector were also hardly helpful.
When you add into this equation the fact that productivity gains remain a foreign country for the Public Sector as well it is apparent how far this or any subsequent government is going to have to travel to make any impact on the deficits being created.
The Pound has now fallen below $1.5600 and traders will be wondering if the support at $1.5550 which has held so well over the last few weeks will come under pressure again.
It is pertinent to point out that if this support is broken there is not much to hold us up until $1.5000 hove’s into view. A far cry from yesterday morning when we were pushing to break higher.
Forex Spreads, 17 Feb 2010
The little Dollar squeeze seems to be continuing as the risk trade returns so the Dollar is a little out of favour this morning.
EUR/USD is just flirting with resistance around the 20 day moving average near its current level of $1.3775, at the time of writing. Above here further resistance is seen at $1.3800 then $1.3845.
Another bear squeeze could easily see us return to $1.4000 where there’s major resistance and possibly beyond, but the trend is still firmly against the Euro.
Euro and Sterling continue to battle it out, having been fluctuating between £0.8800 and £0.8600, or €1.1340 and €1.1600 for those who prefer it the other way round. It seems that investors are continuing to mull over which is the worst of a bad bunch.
Forex Spreads, 16 Feb 2010
On the currency front the activity is somewhat less interesting than for indices but for the Euro there is at least some reprieve as the sub $1.36 level has been rejected once again.
The markets have tended to rally on Dollar weakness over the last month or so and vice versa. As a result it is not surprising to see the Euro move higher on the break out for equities and Gold.
The move higher though is still quite restrained, just getting us to $1.3675 as I write, and there a couple of potential fears for dealers. For example, new revelations of the sums required for the Southern States, or of the understandable intransigence of the Northerners, may deal another blow to sentiment for the currency.
Resistance for the Euro is at $1.3690/1.3710, just above the current level. A breach through here may give hopes for further strength to the $1.38 level.
Failure through today’s session to make any further headway may be taken negatively and traders will be eying the market for possibilities of a late sell off if we are still at the current levels later in the day.
Forex Spreads, 15 Feb 2010
In the currency markets, the Euro continues to flirt with the lows underneath $1.3600 against the Dollar.
The situation for the European currency does not look particularly rosy at the moment.
On the one hand, a bail out of the PIGS is likely to cause a devaluation of the whole currency by throwing vast amounts of good money after bad.
On the other hand, there is the more drastic variant of allowing the Greeks to sink, thus risking contagion that might cause multiple sovereign defaults.
To be fair, there is no remit for the ECB to come to the aid of any one country. As a result, the default of Greece et al may not harm the currency in the long run quite as much as a never ending blank cheque.
Unfortunately, most of the debt is owned by financial institutions across the globe in pension funds, insurance funds, banks and sovereign funds etc. The sudden failure and default of all this debt may well cause yet another financial crisis.
The various combinations of whatever decision is finally made will live with the EU for possibly decades to come.
Forex Spreads, 13 Feb 2010
- GBP / USD closed last week unchanged at $1.564
- USD / JPY closed last week up ¥0.6 at ¥90.0 (up 0.67% week-on-week)
- EUR / USD closed last week down -$0.006 at $1.361 (down -0.44% week-on-week)
- EUR / GBP closed last week down -£0.004 at £0.87 (down -0.46% week-on-week)
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Risk Warning: Spread betting and CFD trading carry a high level of risk to your capital and you may lose more than your initial investment. Spread betting and CFD trading may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
'Forex Spread Trading February 2010' by DB, updated 26-Feb-10
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