Forex Market Going Through The Motions

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 |  Includes: FXA, FXB, FXC, FXE, FXF, FXY, NZDS, UDN, UUP
by: Dean Popplewell

The confrontation in Ukraine, which has upset markets over the past week, is keeping investors on edge heading into the Easter long weekend. Expect forex ranges to be tight, volatility kept to a minimum, and liquidity becoming thinner while watching for any developments on the geopolitical front. Already, the four-party talks (Russia, Ukraine, US, and EU diplomats) on the conflict starting in Geneva today have the US officials admitting that they do not have much confidence of a breakthrough. The delegations are supposedly focusing on a blueprint towards de-escalation. However, in anticipation the US seems to be already preparing for additional sanctions against Russia if the situation remains unchanged.

Yellen spoke and nothing new has the dollar continuing to trade within its current range. The Fed head reiterated yesterday that she expected interest rates to remain very low until the recovery is on a "more secure footing and the American economy is more fully involving available workers and other resources" - a robust and healthy job market still appeared to be "more than two years away." The "lower for longer" talk had probably more to do with clarifying her remarks last month during her first news conference as Fed chairwoman that suggested the central bank might begin backing up rates as early as the middle of 2015. It seems that a significant dollar movement is probably going to have more of immediate reaction to the release of fundamental data as they come in - if so, the key will still be employment data.

Even verbal intervention from Eurocrats, especially the French over the past 24-hours, is having little effect in downward price action of the 18-member single currency. The EUR has tried the downside but dovish Yellen's remarks somewhat have the USD on the defense as we wrap up this holiday shorten week. Rhetoric is not dissuading the "long" positions and the longer that the market does not go down the higher the chance that weaker "short" positions will be squeezed on the topside. For most techs, the scope is to test that psychological €1.4000, as the failure to breakdown through €1.3775 with gusto puts the overall bias on the upside for now at least. This year's €1.3967 peak still beckons.

Japan's PM Abe and his government have not got it easy; if anything, the mountain that they have been climbing has just got that bit higher. Earlier today, the Japanese government has amended their country's economic view for the first time since November 2012. This was done on the back of the recently implemented consumption sales tax impact. They have cut their overall views on consumption, housing investment, factory output and imports. Despite all of this, Japanese officials still feel confident in the stimulus measures that they have put in place. The government continues to indicate that there is "no gap" in view with the BoJ. Governor Kuroda continues to reject the need for immediate easing action despite government data signaling a sharp pullback in consumption. Their stance will certainly disappoint the "short" JPY positions that have been hoping to see the BoJ act early to pop up tentative growth. The JPY does seem a bit rudderless for now where immediate direction is geopolitical and option demand related.

The currency of the moment is still sterling. The pound continues to advance against most currencies, hitting a four-year high against the dollar in overnight trading (£1.6839) as expectations for an early rate hike by the BoE continues to gather momentum. Robust Jobs data this week (UK unemployment rate fell to 6.9%) has many beginning to shift their interest rate sentiment from neutral to hawkish. Mind you, Yellen's comments yesterday emphasizing her focus on low inflation and economic slack are also supporting GBP (£1.6818). For many, the BoE seems to be leading the pack of central banks in starting to raise benchmark interest rates as the UK economy is expected to expand at a faster rate of growth than the US this year (2.9%). Canada will tell you that Governor Carney is not a central banker to sway easily.

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