TheLFB 2009 Forex Update

Weekly Forex Highlights
 

The Ultimate USD Hedge Week. 2009 Underway!
 

The first full week of trade in 2009 gets underway with a huge set of economic releases to come, from all regions, and the Sunday/Monday start belies what is to come on Tuesday through Friday; this really may be the calm before a perfect storm in regard to Usd and Jpy valuations. The U.S. economy was the first to signal that major swings were in place from expansion to contraction, and got from the top to the bottom of the cycle in a matter of 18 months, historically a very quick period of time to get from the peak to the trough of the American business cycle. The speed of the reversal from July 2007 seems to have taken the global markets by surprise somehow, and now we are seeing Forex valuations on the major pairs working off the slide in economic growth globally as the impact of the U.S. based credit crisis works its way through the fabric of global trade.

The value of international currencies is now very likely to be based on the ability of each region to react in quick time to the rapid deterioration in 2009/10 GDP growth, and how each regional central bank is going to deal with the further rate cuts that seem very likely to continue into the second quarter of 2009. The real test of the Usd based pair valuations will be seen in the fact that the Federal Reserve has no further to go in rate cuts, being this close to zero has historically meant a slow and steady move higher, albeit that cycle of increases may not be seen until 2010. It looks unlikely that another rate cut will happen, and looks instead as though quantative easing (open market operations to impact rates outside of overnight and discount rate cuts) will replace actual rate decreases.

Regional central banks all look to have plenty of room to still move lower on base rates, and as such we may see a period of Usd buying as the market adjusts to what is perceived to be impending cuts from the U.K., the ECB, Australia, maybe Canada, and even more to come from Japan in rate cuts or market intervention to sell the Jpy. The fact that the U.S. has the 'stimulus/rescue/bail-out' dirty laundry already aired in public may ironically empower the dollar as overseas investors and trade desks hedge the reduction in regional overseas rates with a long play on a flight to Usd safety. However bad the U.S. economic picture is the real question of whether any other region will be any better off until America turns the economic corner now comes to the forefront of major pair values.

If it is perceived that the Fed is done, that the new government will be investing heavily in growth, and that global demand for Usd based commodities will reduce, then we may need to accept that however smelly the long-term dollar outlook is, and whatever the size and weight of American debt, it may be a case of the market buying the currency that is trusted to be supported and bailed out, at any forward cost.

Whether 2009 proves to be a bullish Usd year is not the issue here, right now there is nothing more important that the perception of near-term safety, and therefore, in the near-term, the dollar may find enthusiastic buyers until one regional economy can print some forward growth numbers, or has a central bank that states that cuts in rates are finished; neither one of those looks likely to happen any time soon.

As the week progresses we will be looking at hedging the Usd with the weakest and strongest pairs against the greenback. The weakest looks to be the Jpy after the 20 day SMA area on Usd/Jpy was broken and held on Friday, and as such we will be looking for a test of support at around 91.00 that allows the pair to be bought. The euro looks as though it may now come under pressure from the market playing catch-up on valuations now that the economic picture, and ECB member jawboning, points to a cut in rates next week that may not actually be the last as intimated by Jean Claude Trichet recently. We will be watching the short side of the euro.

The strongest looking Usd based pair seems by far and away to be the aussie, and with the RBA not meeting again until February this pair may catch bids on the market looking at gold possibly being bought as a hedge against global growth reductions, and deflationary issues. The aussie looks as though it needs a pullback to support that may set it up for a test of 0.7500 over the coming weeks.

This period of trade is historically very good for forex trading, it tends to offer plenty in the way of short-term and longer-term opportunities, but the unique situation of the market reaction to the Credit Crisis hangover just needs to be respected in that intra-day volatility may still have a part to play in how the market gets to its valuation goals. We will look at the slow and steady growth rate that targets 10% a month, but also respect the fact that many January-March trading periods have produced a far higher return than that. Capital preservation is key, but there will also not be too many set-ups that get past us if the market does want to go for a run.