Sunday, May 31, 2009

Forex Forecast of Major Currency Pairs

The Month Ahead Currency Outlook is prepared weekly by the trading professionals at GVI Forex. For information on the GVI Forex Service Click Here

May 27, 2009



  • Forex trading is becoming a lot more complex. Following a S&P threat to downgrade the U.K. credit rating, attention turned to the credit status of the U.S. Worries about the potential size of future borrowings saw prices on U.S. government bonds fall sharply. These worries were a weight on the USD, and other big borrowers.
  • The U.S. equity bounce is being tested.. We recall a saying from the late 1990�s that prices climb a wall of worry. Bears remain but have started to capitulate. The risk after everyone gets long prices can only go lower. Bull trends feed off market skepticism. The real world economic recovery will take much more time. Markets move much faster than the real economy.
  • Fed has aggressively attacked the weak economy. USD constructive, but impact of policy moves takes time.
  • USD still tied to stocks. Risk aversion/risk assumption play ebbs and flows.
  • JPY-
  • Japanese economy starting to show early signs of improvement. China recovery could help.
  • JPY often the beneficiary of risk aversion plays.
  • Bank of Japan forcing funds into economy quantitative easing (QE). Fear of return to its old deflationary price pattern.
  • Bank of Japan ZIRP (Zero Interest Rate Program) with overnight rate target +0.10%.
  • Nikkei also correlates closely to USD/JPY. Equity prices improve when the JPY weakens.
  • Tokyo wants JPY weaker. Carry trades returning vs. Aussie$.
  • Click on chart for two year history

  • ECB well behind the curve. EUR negative. Hawk vs. dove split in ECB governing council.
  • May 25bp cut to 1.00% was as expected. ECB a reluctant participant in quantitative easing.
  • Lack of a common E-Z fiscal policy a problem.
  • Worry about vulnerable German banks and overvalued EUR.
  • EUR remains the only reserve currency alternative to USD.
  • Click on chart for two year history
  • U.K. economy weak. Financial sector hit hard. GBP weight.
  • Bank of England aggressively easing. Quantitative Easing (QE) policy.
  • GBP vulnerable vs. the EUR. GBP helped when markets in risk assumption mood.
  • S&P threat to downgrade U.K. credit rating had impact beyond the U.K. and further undermined political support for government.
  • Click on chart for two year history
  • Swiss economy slowing. Inflation below target.
  • Swiss National Bank for all practical purposes has cut rates to zero. SNB would love to see a return of the carry trade.
  • SNB periodically follows through on intervention threat (selling CHF vs. EUR).
  • CHF should trade weak vs. the EUR.
  • Click on chart for two year history

    Business Cycle Currencies
  • CAD heavily influenced by energy demand.
  • Canadian manufacturing and energy economy tied to U.S. which is still soft.
  • Bank of Canada monetary policy aggressively easy. Quantitative Easing decision in motion. Inflation within BOC target range. BOC promises to hold o/n target rate at 0.25% through 2Q10.
  • CAD trades mostly inversely with USD. Range trading
  • AUD/NZD-
  • Australia and New Zealand characterized as business cycle currencies. Both are dependent on external commodity demand.
  • Talk �Japanese housewives� have been back buying Aussie $.
  • RBA pausing on policy ease due to overseas recoveries. Market skeptical.
  • RBNZ cut by 50bps to 2.50% and also talks down kiwi.
  • Both banks have already eased aggressively; additional stimulus in the pipeline.
  • Key inflation measures contained.
  • Even more than CAD, expect AUD and NZD to trade inversely with the USD.
  • John M. Bland is an author and co-founder of Prior that, he was a senior dealer in a subsidiary of the Continental Grain Company in NYC. Previously, he was a member of the Chemical Bank corporate advisory service in NYC. He also worked in international liability management. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelor�s degree in International Economics from Berkeley.