US Interest Rates Rally
For whatever reason, US interest rates at the front of the curve have rallied sharply over the last couple of days from a low close to 60 bps last week. The
CAD on the Ropes
USDCAD continues to push up against its 55-day moving average, which it has been doing for the last 5 days in a row without being able to close above it after dropping below early last week. The freefall in energy prices continues, with the February contract already having fallen 10 dollars from the highs early last week. This could continue to keep CAD on the ropes, though again, the pair needs to work its way back above 1.2300 and even 1.2500 to get out from under the shadow of the latest steep sell-off.
GBP Recommendations
GBP got whacked again yesterday by dovish comments from a BOE official, this time Gieve, the departing BOE deputy governor. He admitted that the bank failed to understand the seriousness of the crisis (admirable honesty, as few did...) He also stated that rates are a "blunt instrument" for managing the situation and argued for "new instruments which sit somewhere between interest rates...and individual supervision and regulation of individual banks." The market's interpretation of this is that the Bank is leaning toward the US Fed's model for dealing with the problem (hyper-expansive monetary policy, etc...), which could lead to a further pound devaluation. We think the pound is beginning to get a bit cheap vs. the Euro in the big picture, even as many are begin to call for parity. We suspect that EUR will be one of the big losers in the early part of the coming year if not for the full calendar year, as the market has failed to price in the EuroZone's potential for further weakness. Technically, we're not there yet for a EURGBP short, but options are always an option....
Equity Updates
Equities did crumble through short term support after trading heavy recently, but the sell-off so far doesn't look like a capitulation and we have to wonder about the potential for much volatility over the next couple of days in equities with holiday trading more or less the rule until the New Year since Christmas and New Years fall in the middle of the week. If equities try to find a little holiday cheer, we might expect USDJPY to continue to drift toward 91.00 and even higher as that pair still has plenty of room to continue to consolidate the recent sell-off. USDJPY managed to rise despite yesterday's equity sell-off.
General Forex Recommendations
As always, beware that poor market liquidity can result in exaggerated moves if enough participants have a bone to pick, so we must remain on guard, especially in currencies with end of the month/year fixing and the low liquidity. EURUSD may remain capped around 1.4000/1.4100 for now, with support coming in at the recent 1.3830 low area and then possibly 1.3720, the 100-day moving average.
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