Sunday, June 14, 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



  • Almost every piece of data from the U.S. recently has shown that the weakening of the economy has been slowing. The economy is not clearly growing yet, but the U.S. is much further along the recovery path than other major economies.
  • Dealers are now focused on the bond markets again on fears of indigestion by investors having to absorb large amounts of U.S. bonds. There are situations now where the USD has been trading inversely with bond prices.
  • These realities have made forex trading more complex. Occasionally, there is still a USD carry trade, where asset purchases (equities, etc.) are financed in USD. That is why the USD often weakens when equities rise.
  • As for the U.S. equity bounce, bull trends feed off market skepticism. The real world economic recovery will take much more time, but markets move much faster than the real economy.
  • Fed has aggressively attacked the weak economy. USD constructive, but impact of policy moves takes time.
  • JPY-
  • Japanese economy is showing early signs of an improvement. China recovery would help.
  • JPY often the beneficiary of risk aversion plays.
  • Large repatriation inflows have supported the JPY as well.
  • Bank of Japan forcing funds into economy quantitative easing (QE). Fear of return to its old deflationary price pattern.
  • Nikkei correlates well with the USD/JPY. Equity prices improve when the JPY weakens.
  • North Korean saber-rattling a worry for he JPY as well.
  • Tokyo always wants JPY weaker. Carry trades returning vs. Aussie$.
  • Click on chart for two year history

  • EUR/USD has been a major beneficiary of Central Bank reserve diversification. Central bank reserve management a major factor in EUR price moves.
  • 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. Policy on hold at the moment.
  • Lack of a common E-Z fiscal policy a problem.
  • EUR is the only true reserve currency alternative to USD.
  • Click on chart for two year history
  • U.K. economy weak, but GBP oversold.
  • 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 major impact.
  • PM Brown government has been teetering. U.K. government support has slipped precipitously.
  • 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 (3.00%) due to overseas recoveries, but has left the door open to lower rates.
  • 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 BA in Economics from Berkeley.