Currency markets are absorbing a unique period of global trade that will set the tone for how central banks value exposure to the Usd, and how each regional currency is valued. In the post-subprime environment the inter-bank is still not functioning correctly in regard to the flow of credit; spreads are wide and the cost of insuring risk is historically expensive.
Central banking is now all about holding the base currency lower in an attempt to challenge the Federal Reserve which seems determined to re-value the Usd one way or another. A cheaper Usd will aid the U.S. administration in their search for a way to balance deficit books in the near-term, but that cannot be relied upon historically in the long-term as a solution that global participants will be happy to accept.
Therefore, traders will be in for a volatile period of trade that will be extremely reactive to 24 hour ebbs and flows in sentiment, and will drag Usd and cross pair valuation in different directions, to varying daily trading rage degrees.
Toxic assets on bank balance sheets have no choice right now other than to be protected by whatever means, in an effort not to have to reveal the depth and breadth of liability that most financial institutions have to the Federal Reserve, and to bad-debt that is yet to be publicly valued and assessed.
Until the new financial rule book is re-written, until stress-test results add in a little more credibility, and until the massive redemptions by investors from global equity markets are stemmed, the one mandate that will be in play more than any other on a daily basis will be Primary Open Market Operations by the Federal Reserve, and in particular the Plunge Protection Team activities at the Federal Reserve Bank of New York.
The fact that exchange traded floor activity consists most days of electronic algorithm trading front-running the Fed’s auctions of Treasury notes does not help in regard to investor confidence, nor does it help to draw in volume that would allow some stability to form. The new normal is a market that has become very reactive to sound-bite headlines and very reactive to regional open and closes that allow the futures markets to set the tone for cash market trade to come.
Bank early, bank often, do not get too attached to long or short direction for any length of time, and be prepared to buy support and sell resistance at the previous session high or low. This upcoming week is likely to offer more price action than at any other time this year, and with month-to-month S/P 500 movement anywhere from +10% to -10% the likelihood is that October will set some records in regard to volatility.
Long or short, the direction of trade may well be determined by this week’s Non-farm Payroll report and subsequent market direction and sentiment, which have set the tone for the following three weeks of trade, going back to December 2009.
Eur/Usd is becoming very reactive to regional equity market trade, especially as the German Dax futures market comes to life at 02:00 ET, and is a pair that is holding support on the strength of global market interest-rate and equity trade, rather than in a desire to be long the European growth story ahead of the ECB rate decision on Thursday.
Traders will be monitoring the 1.3750 test of resistance that is underway, and looking to see if S/P breaks 1150 resistance at the same time. A test of 1.3250 Eur/Usd support may be easily seen if S/P 500 trade falls under 1125.
Gbp/Usd trade is back to the price points from the beginning of August around 1.5800, having been unable to break huge support at 1.5250. The pair has 1.6000 sitting as a very strong area of upside resistance ahead of the Bank of England rate decision on Thursday, and a constant stream of economics coming most days this week will likely test support and resistance in equal measure.
The U.K. growth story is not strong, the economic outlook is mixed, and U.K. Gilts are in a holding pattern; fair value has been found on the pound.
Aud/Usd moved off 0.9350 support albeit in a trading pattern that worked higher only off red-flag economic releases and reactions. The 400-pip move has not been without retracements that on an intra-day basis have been more than capable of reversing the whole session moves. The Australian bank holiday on Monday may allow traders the chance to re-test support at 0.9600, before moving up and through 0.9800.
There have been four 1-hour chart candles that house virtually all of the aussie moves, and that will be an issue for those looking for a clean break of 0.9750 resistance. The pair is overbought going into a heavy set of economic news this next week ahead of the Reserve Bank of Australia’s interest rate decision.
Usd/Cad has held a trading range from 1.0390 resistance down to 1.0190 support for the entire month of September, with ugly looking near-term charts that reveal speculators are selling resistance and buying support, with few days having any moves that break and hold the previous session high and low. Ahead of the Friday employment data from Canada, the channeling pattern of trade may be hard to break.
The pair has found fair value, and now has a road-block of resistance at the 200 and 50-day SMA areas at 1.0390 which will require negative Canadian economics, or crude oil dropping under 73.50 to easily break and hold.
Usd/Chf and Usd/Jpy are holding 1.0000 and 86.00 resistance with ease, with both pairs dominated by Primary Open Market Operations (POMO) by the Federal Reserve Bank of New York that each day looks to ramp equity or Treasury trade with impunity. So long as the Fed continues the low-participation ramp-ups in global trade, these pairs will continue being bought against the Usd.
The Bank of Japan and the Swiss National Bank have been active in attempting to get each currency value lower, but as a hedge against low interest rates and global market starvation regarding yields these pairs have not gone the way that either party would have liked.
Trade may become volatile over the course of the next ten days, especially as the Bank of Japan may use the upcoming interest rate decision and statement as a way to deflate the value of the Jpy, pushing Usd/Jpy higher.
Bank early, bank often, do not look back, and keep an eye on the economic calendar; this is likely to be the busiest month of the year.
Disclosure: None
