The LFB's  Instablog

The major currency pairs continue their February and March sideways crawl, with very little in the way of sustainable price action. Intraday price movement, in general, is only coming in reaction to a miss on regional red-flag economic releases. As recent client notes have highlighted, there is very good reason for the major pairs to remain in a period of consolidation, as the global market tries to battle the constant reevaluation lower of the US dollar.

Most major currency pairs are backed by economies that have strong exporting components, and a much weaker dollar index, below the current 76.50 price point, has historically led to relatively strong bounce higher to test 82.00. A technical move of that nature would equate to approximately 400 pips of movement for the dollar against each of the major pairs.

The breakdown in correlations between the main global equity, commodity, and currency markets has been well documented by TheLFB trade desk over the course of the last four months, with very good reason for the historical norm to now be challenged. What have been created are patterns of trade that are very strong on a day-to-day basis. These patterns have led to three 8-hour periods of trade in each 24 hour futures trading session that now all have as much price action potential to create very strong tests of both support and resistance on the major pairs, in very quick time.

Unlike the historical norm that had European markets dominating currency movement, and the US having the weakest currency flows, as per the Bank of International Settlements data, now the markets contain enough cause and effect in each regional 8-hour session to have consistent price movement, 24 hours a day.

However, each regional session does not seem able to create enough momentum to break, and importantly, then hold the range through the subsequent 8-hour regional period, which is then seeing central banks and financial institutions force values back into the previous ranges.

The Federal Reserve, and specifically the quantitative easing programs, have empowered this pattern of trade by allowing commodity prices to move higher on the strength of a weaker dollar, and also with dollar liquidity flooding the global market via the POMO auctions. What is not happening however, is Fed-backed liquidity transposing itself into inter-bank liquidity, which in turn is holding the cost of inter-bank activity higher, allowing commercial lending to be impeded, and negating the whole concept of the QE2 program.

These are indeed unique times, with a major central-bank playing a game that has no rules, in an arena that has not being seen before, with the reaction over the course of the last four months sending precious metals, soft commodities, and global reserve values much higher than may have been expected. The QE2 move has also driven equity markets higher, albeit on low-volume that suffer the indignity of slow and steady ramps higher which are then followed by high-volume price drops in short time.

Although the US administration is carrying huge debt liabilities, it will likely be regional headline breaking news from outside the US that will instigate moves on the dollar index. A prime example is the one hundred pip reaction in Eur/Usd trade the moment that the ECB press conference at 8.30am ET on Thursday discussed the reasons for holding interest rates at 1%, which was followed by another 50 pip move when Jean Claude Trichet noted that an increase in interest rates in April will be possible.

These smash and grab moves may be a precursor to Friday's Non-Farm Payroll release, which historically had determined the direction of trade of equities for the subsequent month, following a miss or hit the expected number. In general, Forex traders will be looking for price action to break, hold, and be partially banked, within one of the 8- hour regional trading sessions, and then to be free and clear as the new session unfolds.