That makes it a little easier when we have mornings such as today which are a bit of a mixed bag.  I just watched the Aussie go from slightly positive to slightly negative; and the Pound and Euro are higher.

In news that is important to the global economy, inflation in China reached a 16-month high which should cause monetary tightening.  This means that there could a decrease in global demand.

As I am typing this, the US Initial Jobless Claims numbers came out and while the news was expected to have a benign market impact; it has flipped the market into risk aversion mode.  Maybe those fundamentals aren’t that important after all.

Let’s take a look at the individual currencies:

Aussie (AUD):  The Aussie started the morning in positive territory but then slipped to negative as risk aversion is starting to steer the market action.  There was “disappointing” news earlier as Australia reported the slowest amount of job gains in 6 months and unemployment stayed steady at 5.3%.  This may give the RBA a little bit of wiggle room at the next interest rate meeting and they may not have to raise rates.  I think it’s slightly amusing that this news can be viewed as negative, as just about every other economy would do anything to have such a “problem”.

Kiwi (NZD):  The Kiwi on the other hand started the morning negative and has stayed there now that risk aversion has been added to the mix.  The central bank left rates unchanged at 2.5% as was expected, but quashed hopes of a rate hike before mid-year.  Apparently falling housing prices and weak consumer spending are contributing to a slower than expected economic recovery.

Loonie (CAD):  The Loonie is down this morning on what I’m going to deem the “reverse Midas touch”.   Apparently the Bank of Canada appointed a Ben Bernanke disciple as deputy governor to potentially change the way the central bank looks at interest rate policy.  As of right now, the bank has a mandate which attempts to keep inflation at 2%, but they may want to change to a new system that targets prices rather than inflation.  All the market is seeing at this point is that Canada may get wrapped up in the nonsense that is US interest rate policy and that doesn’t bode well for higher rates.  Add that to lower oil prices, down slightly from yesterday’s move to above $82, and risk aversion.

Euro (EUR):  The Euro is mixed this morning as Greek labor strikes (riots) are causing a backlash against austerity measures.  In the meantime, the ECB maintains a cautious outlook and reiterated that interest rates are at appropriate levels.

Pound (GBP):  The Pound is higher this morning halting a three-day slide and is trading back to 1.50 vs. USD.  This much needed rest from selling came about as the Bank of England’s quarterly inflation attitudes survey showed that consumer price expectations rose to 2.5%, its highest reading since 2008.

Dollar (USD):   The Dollar is higher this morning after the 8:30AM Initial Jobless Claims report which came in higher than the expectation.  While the number 462K vs. the 460K expectation is not that significant, the market was clearly expecting a better figure and this provides pause to the notion that the US economy is in full recovery mode.  Stocks in Europe sold off on this number as traders ran to the safety of dollar and yen.

Yen (JPY):  Japanese GDP was revised lower to show growth rose at 3.8%, slower than the 4.6% reported in preliminary figures last month.  The Yen is higher on, yep; you guessed it, risk aversion.

As you can see from today’s entry, things in the forex can change pretty quickly.  That’s why is ultra-important to be aware of news events.  I should have known better than to tempt the risk gods.

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So, while one might look at this morning’s action and be inclined to say that today is risk-taking because commodity currencies are higher, a more appropriate reaction would be that are actually both good and bad stories out there which are driving individual currency pairs.

More specifically, in currencies:

Aussie (AUD):  One of the good economic stories out there is coming out of Australia which has had good gains as of late.  Tomorrow they will be reporting their employment figures, which are expected to gain for the sixth straight month.  In fact, the economy is buzzing along so well there that there is no an expectation that they may raise the benchmark interest rate again next month.  The Aussie is in a clear uptrend and I expect it to test 2010 highs very soon.

Kiwi (NZD):  The Kiwi is also another good economic story, though not as strong as the Aussie.  While the interest rate decision due out tomorrow is expected to be unchanged, overall Asian recovery will benefit the Kiwi.   The most important take-away from the rate decision will be the language used to give a clue as to a timeframe for further hikes.  And should they surprise the market with a rate hike (highly unlikely), then lookout above!

Loonie (CAD):  The Loonie is just kind of hanging out today, with no real news on tap in Canada.  Oil is higher so the Loonie is up; and also riding the coattails of the Aussie and Kiwi.  The only anomaly is USD/CAD, as there is dollar strength this morning.

Euro (EUR):  The Euro is mixed this morning.  On the one hand, now that the risk of a Greek default is mitigated, the focus is back on the fundamentals in the Euro zone.  On the other, news out of Germany is that German exports are down, but German CPI is up.  Traders are using this opportunity to cover some EUR/USD shorts, but otherwise the Euro is down vs. the commodities and up vs. the rest.  I expect EUR/USD to be range-bound for a bit.

Pound (GBP):  Another tough day for the Pound, which would be down across the board if not for the Yen.  The Industrial production figures and manufacturing came in negative, marking the first decline since last August.  This is likely to keep rates low in the UK for an extended period.  Meanwhile, the BOE’s Adam Posen stated that he hopes their bond purchase plan “has done it” with regard to stimulating the economy but he didn’t rule out further quantitative easing.

Dollar (USD):   There’s a bit of optimism about the dollar this morning as economic recovery appears to be going faster in the US than in Europe and Japan.  As risk of a global collapse is lessening, traders are looking more toward the fundamentals.  So the expectation is that we may see a rate hike in the US sooner than in Europe or Japan.  However, don’t be surprised to see Dollar weakness should commodity inflation pick up.

Yen (JPY):   The Yen is down across the board this morning in advance of the Japanese GDP report due out tomorrow as fears of deflation are warranted.  Combine this with good news from the commodity currencies, higher commodity prices, and “risk-taking” and you have a recipe for Yen weakness.  Carry traders are gaining more confidence and the Yen is the funding currency of choice.

As you can see, when global economic conditions become more stable, market fundamentals return to center-stage.  Under “normal” conditions, currencies from the best economies will flourish, while those not doing as well will be sold.

And that’s the basic idea behind forex trading; that you want to own the strong currencies and sell the weak ones, hopefully picking up interest along the way!

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Case in point: this morning.  The market had been moving along nicely then all of a sudden decides there’s too much risk in the world economy and then wham!—you get a market sell-off!  What has changed so much from last Friday, to yesterday, to today?

Frankly, not much.  You see, the financial markets are much like an expedition, venturing slowly into the unknown and then quick to retreat at the first sign of trouble.  So what is that trouble today?

Damned if I know.  Part of the role of market pundits is to “make sense of the chaos”.  Most of the time I find these attempts to be lazy and disingenuous.  So the top 5 I’ve heard this morning are (in no particular order): Greece, lower stock earnings, US healthcare legislation, the push for Chinese Yuan appreciation, and UK elections.  And if you don’t believe any of these, I’ve got one of my own for you:  it’s a technical pullback.

So be wary of attempting to try to “figure” the market out, and be sure to trade what you see and not what you think you know.

In currencies:

Aussie (AUD):  The Aussie has pulled back from near its 2010 highs as risk aversion is dominating the morning market action today.  However, the sell-off is not as bad as reports came in that Australian businesses are actively looking to hire and the business confidence index came in higher, prompting the market to believe that yet another rate hike may be coming next month.

Kiwi (NZD):  The Kiwi isn’t faring as well as the Aussie, as yesterday’s big winner is now one of today’s bigger losers.  Tomorrow’s rate decision and language may prove to be more exciting than previously expected, as the expectation is that it is the slimmest of slim chances that they will raise rates.

Loonie (CAD):  The Loonie is lower this morning primarily on lower oil prices that are down roughly 1.5%.  This snaps 7 days of gains, in what can be viewed as a welcome pause.  This appears to be mild risk aversion so the Loonie is mixed.

Euro (EUR):  The Euro is lower this morning across the board as stock earnings are lower and the ECB is saying that it potentially could accept lower rated bonds as collateral against new loans.  Also the call for regulation on credit default swaps (CDS) and the news of the “lender of last resort” card being played all highlight the problems for the Euro zone.  Notice I didn’t say Greece once—oops! Just did.

Pound (GBP):  The Pound is lower this morning as reports came in that the UK housing market may be slowing as fewer price gains occurred than what was expected.  This comes in advance of the UK GDP estimates due out tomorrow which could set the tone for UK rate policy going forward.

Dollar (USD):   The Dollar is higher this morning on risk themes as stock market futures appear to set to open lower, though it not a certainty that they will remain that way all day.  Look for some volatility as the markets trade back and forth, and definitely do not a rule out a reversal to the upside for equities which could be dollar-negative.

Yen (JPY):  The yen is higher this morning on general risk themes and speculation that Japanese companies are repatriating profits before the end of the Japan fiscal year which is in April.  This essentially means that demand for yen is higher as companies sell foreign currencies to buy yen, thereby increasing demand.  This could be the reason why the market perceives that today is a risk-aversion day.

As you can see, there can be many reasons why currencies move outside of the normal risk themes which can disguise what may be really going on in the marketplace.  When traders see these anomalies, they should be prepared to react.  It would not surprise me today to see US dollar weakness, even though then yen may stay strong.  Whether or not that is enough to push the US stock market and commodities higher remains to be seen.

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I’m not sure how this is going to sit with Germany, who I’m sure don’t appreciate France undermining its stance.  For all the talk of Greece leaving the Euro zone, what if Germany was the one to up and go?  I don’t see this as a likely scenario and see this as more of “good cop, bad cop” tag-team effort to keep the Euro from losing further value.  At the end of the day, German banks have huge exposure to Greece so it is definitely not in their interests to see Greece fail.  As of right now, for all the fear of monetary bailouts, the only thing on the table right now is allowing Greece to piggy-back on the good credit of Germany.  Meanwhile the EU is working to create a lender of last resort and limit credit default swaps to help prevent another potential catastrophe.

This is a pretty light week for news, which usually puts me on edge to “expect the unexpected”.  Barring any unexpected negative news, I expect to see a continuation of last Friday’s market action as moderate risk-taking should have the upper hand.

In the currencies:

Aussie (AUD):  There is no real news for the Aussie this week until Thursday, when they report their unemployment figures.  Right now the Aussie is still the dominant currency and destination for carry trades.  We’ll get a better idea of how the Aussie is going to fare going into Thursday but for now I expect the Aussie to move higher on risk-taking themes and commodity prices.  The Aussie should hold short-term support at .91 vs. USD.

Kiwi (NZD):  The big news of the week for New Zealand is the interest rate decision due out on Wednesday.  The Kiwi is higher this morning as home prices have advanced for the fifth straight month in what some traders may feel is the onset of inflation.  Personally, I don’t see a rate hike coming at this meeting so we’ll have to see how the market reacts but for now I expect the Kiwi to trade higher into the meeting on expectations of a rate hike and moderate risk-taking with the potential for those gains to be erased if the hike doesn’t happen.  Stay tuned.

Loonie (CAD):  The Loonie continues to “receive love” from the market as more and more people are starting to catch on to the economic story in Canada.  A report out this weekend claimed that the Loonie to could surpass the Aussie as the majority of options bets placed on the Aussie/Loonie pair are for the Loonie to strengthen.  While the Loonie may do better in the short-run as traders begin to expect a series of rate hikes, don’t lose sight of the impact of the interest rate differentials, as the Aussie is currently yielding 4% and the Loonie is yielding .25%.

Euro (EUR):  As mentioned the Euro got a boost from Sarkozy’s comments this weekend, but is trading marginally lower than the commodity currencies.  Financial stability is the name of the game for the Euro and I expect it to trade sideways for a while as the drama unfolds.  This is not the final word on Greece so I expect we’ll see it trade range-bound between 1.345 and 1.38 vs. USD depending on the “he said, she said” between Merkel and Sarkozy.  Not to mention German CPI, which is due out on Wednesday.

Pound (GBP):  The Pound is down against all but the Dollar and Yen, as mild-risk taking is the flavor of the morning.  On Wednesday we’re going to get the estimate of Feb. GDP and the Industrial production and manufacturing figures.  Should those numbers come in weaker than expected than we could see the Pound re-test last week’s lows.

Dollar (USD):   The major thing to look at this week is going to be Friday’s retail sales figures.  This is going to give a clue as to the behavior of the US Consumer, and well as the confidence figure due out the same day.  The US consumer represents some 70% of GDP so if these numbers are better than expected than it could compel further risk-taking and dollar weakness.  Leading up to those numbers, we have a couple of Fed speakers out to entertain us with their jaw-boning of the dollar.  Remember, forget what they say, and watch what they do!

Yen (JPY):  Japanese GDP is due out on Wednesday but frankly, the Yen is going to trade on risk themes this week.  Still considered the top funding currency for carry trades, I can’t foresee a situation that would cause this to change barring an interest rate hike which is unthinkable.

So, for a week with surprisingly little news, it seems kind of busy.  Watch out for the British GDP figures on Wednesday to be a key point, and this could be the week when the Loonie jumps the Kiwi on the risk scale.

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This should be positive for risk-taking today as the number was just good enough to show economic progress, but not great enough to bring about talk of US interest rate hikes.  However, anything can happen on NFP day so traders need to be on their toes!  Just take a look at any chart at 8:30EST to see what I mean.

In currencies:

Aussie (AUD):  No real news for the Aussie today as it is higher on risk themes and had a nice pop on the NFP report.

Kiwi (NZD): Same deal for the Kiwi as the Aussie, though it’s bouncing much higher as it has been a bit over-sold the last few days.  Between Kiwi strength and Yen weakness, that pair is the largest gainer, up 2.18%.

Loonie (CAD):  The Loonie is also higher, as the market has decided that risk-taking is the flavor of the day as the market digests the impact of the NFP report.  Oil is also higher to just over 81, adding to Loonie gains.

Euro (EUR):  What more can be said about the Euro at this point?  The Greek crisis is center-stage, with Greek austerity measures angering its citizens, and the potential bailout and contingency plans upsetting the Germans.  Quite the balancing act going on there.  The Euro is down against all but the Yen.

Pound (GBP):  Producer prices came in higher in the UK, and commodity prices are suggesting that they may be experiencing the start of inflation.  The increase of 4.1% came in higher than the target rate of 3%, so it will be interesting to see how the BOE handles this situation.  The Pound is mixed this morning.

Dollar (USD):   I discussed the NFP report above but whether or not the risk-taking theme that has been pushed forward by the forex market continues will remain to be seen.  Stocks are expected to see an initial bounce as the futures are higher.  However, there is no improvement in the unemployment rate, so market bears may use this opportunity to establish shorts on signs that the economy may be stabilizing but is not improving.

Yen (JPY):  The yen is weaker for the second day in a row as it appears as though the market believes the Bank of Japan will boost credit easing.  So it appears as though the government may be winning the battle against the Bank of Japan which should weaken the Yen and make it even more attractive as the funding currency of choice for carry traders.  It is down across the board this morning.

So while it appears that the market is in a risk-taking mood so far, don’t be so certain that it won’t change its tune by the end of the day.  At some point, we are going to have to see actual good news, and not more “less bad”.  Unemployment is still extraordinarily high, which will translate over to reduced consumer spending, which makes up some 70% of US GDP.

In my opinion, it would be a fool’s folly to continue to buy stocks and commodities on interest rate policies alone and not fundamentals.  At some point this will catch up to the market.  It always does.

Good weekend to all!

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To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

In other news, US initial jobless claims came in as expected, though all eyes are on tomorrow’s Non-Farm Payrolls report.  I’m seeing some mild risk aversion this morning, and again am seeing Canadian dollar strength.  Commodities are flat after seeing some gains from the previous days.

In currencies:

Aussie (AUD):  The Aussie was down earlier but looks like a rebound may happen today, as news of a narrowing trade deficit and an expected US employment report may outweigh concerns out of the UK and Euro zone.

Kiwi (NZD):  The Kiwi is lower this morning as it looks like carry traders are dumping the Kiwi in favor of the Loonie in addition to mild risk-aversion.

Loonie (CAD):  The Loonie continues to advance as traders speculate that the economic situation in Canada is in good enough to begin raising rates.  The Loonie is fast approaching the 1.02 level to USD and we could see parity by mid-year if interest rates begin to rise in Canada.

Euro (EUR):  The sale of Greek bonds is going well this morning as higher yields are attracting investors and the issue is over-subscribed.  In the meantime, there is equal outrage in both Greece and Germany although the Germans haven’t taken to streets like the Greeks have—yet.  What is happening in Greece is a perfect example of what happens when a government grants its citizens entitlements and then has to take them away because they can’t afford it.  I hope the US administration is taking note.  Interest rates were held steady and the ECB has decided to not remove economic stimulus at this time.

Pound (GBP):  Interest rates have been held steady at .5%, which comes as no surprise to the market.  The BOE did make it clear that they will not increase bond-buying to help stimulate the economy.  It is clear that the UK sees the need for deficit reduction so the BOE is content to play the “wait and see” game to see if earlier measure have taken hold.  There is still increased fear that the UK could be headed for a slide back into recession, and the spring elections are also lingering as fears of a “hung parliament” could cause political non-action.

Dollar (USD):   Initial jobless claims came this morning as expected and pending home sales are due out later this morning.  We could see some volatility as traders position themselves for tomorrow’s NFP report.  The Dollar is mixed this morning.

Yen (JPY):  The yen is down across the board this morning as there is talk about a potential sales-tax increase coming from Finance Minister Kan.  This would be the first increase in over 10 years and could be a sign that the fiscal situation in Japan is worse than expected.  However, this may be a ploy to put pressure on the BOJ to increase bond-buying.  Any way you slice it, the Japanese would like to have a weak currency to help exports, and the Yen has been on a tear as of late.

So European themes are dominating the market right now; and Japan is trying to keep the Yen from strengthening.  Tomorrow’s NFP report is usually the biggest event for the currency market, as this will give clues as to where the US economy is or may be going, and what the economic response is going to be as a result.  This could affect the risk outlook for the rest of the month for as the Dollar is the world’s reserve currency.

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Also higher this morning is the British pound, which is bucking a 6-day slide.  Sort of like God, on the seventh day it rested!  The Canadian dollar is higher in a continuation of yesterday’s news.

So this morning is sort of a mixed bag.  More news driven than risk-oriented, it will be interesting to see if the currencies fall back in line.

In currencies:

Aussie (AUD):  Australian GDP came in this morning a little bit higher year over year, though not gangbusters as we may have been lead to believe.  While the economy has been moving along nicely and is well-positioned for growth, the lack of explosive growth means that we could see a pause to near-term rate hikes.  The forex market can be so greedy at times!  The Aussie is mixed this morning.

Kiwi (NZD):  The kiwi is down today across the board and is trading near a 10-year low to the Aussie.  It looks as though the market is attempting to re-define the Kiwi’s place in the “risk totem pole”.  Nevertheless, the Kiwi economy is still on track and they do provide 2.5% interest, making it a good destination for carry trades.  I think the market realizes that the economies of Australia and New Zealand are quite different, and the Loonie looks poised to replace the Kiwi, as traders speculate that rate hikes may be coming sooner in Canada then in New Zealand.  This makes the Kiwi/Loonie pair the largest loser of the morning, down some 1.15%.

Loonie (CAD):  The Loonie is benefitting this morning from yesterdays interest rate decision as the market is now starting to believe that Canada may be the next to raise interest rates.  The Loonie is up across the board this morning.

Euro (EUR):  The Euro is higher against all but the Loonie and Pound, as proposed Greek austerity measure are giving hope that the debt problem won’t spiral out of control.  This is coming ahead of the Euro zone GDP report and interest rate decision due out tomorrow.  Rates are not expected to change and any surprise to the upside on GDP would be viewed as positive by the market.

Pound (GBP):  The Pound is higher this morning after consumer confidence figures came in better than expected.  I’m not so sure why they are so confident but to each their own.  Tomorrow is the BOE’s decision on interest rates and quantitative easing.  Deficit reduction is a major priority in the UK so it will be interesting to see if they need to continue to stimulate the economy at the expense of increasing debt.  Stay tuned!

Dollar (USD):   The Dollar is down against all but the Kiwi as job cuts have fallen to their lowest levels since 2006.  All this means is that employers plan on firing less people.  They are still not in “hiring mode” so the “jobless recovery” continues as political uncertainty and Friday’s Non-Farm Payrolls report loom heavily over the market.

Yen (JPY):  The Yen is mixed this morning, giving back some gains against the European currencies yet higher vs. the Aussie and Kiwi.  As no real risk themes are presenting themselves today, the yen is benefiting from a little bit of carry trade unwind and it looks like some of that carry trade money is going toward the Loonie.  No real news out of the region today besides a reading of higher worker earnings, which could help push domestic demand.

The markets aren’t always dominated by risk themes so it is really important to pay attention to the overall economic news for the most widely traded currencies.  Slight changes can have large effects in individual currencies which can “break out” of the usual order.  In these situations, there is great opportunity as sometimes the market is slow to catch on.  My trumpeting of the Loonie over the last few weeks is one such example.

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As expected, the RBA raised interest rates today .25% to 4%, as the economy there has been humming along.  More hikes are expected throughout the year.  Later this morning, the Canadian interest rate decision is due out.  And while it is not expected that the rate will change, the Bank of Canada may provide clues as to when this may happen.

That’s the good.  As for the bad, there’s no shortage of negative news coming out of the Euro zone and the UK.  Potential political gridlock in the UK and the Greek debacle are weighing heavily on the Pound and the Euro.  Commodities are also higher in what can be deemed mild risk-taking.

In currencies:

Aussie (AUD):  The Aussie is higher this morning as the RBA did the expected and raised rates to 4% as economic recovery is more advanced than anywhere else on the planet.  Having just reported a surge in business confidence and explosive jobs growth, there could be up to another 1% in rate hikes as the year moves forward, depending upon whether or not inflation picks up.  As of right now, inflation appears to be within the targeted range, which could suggest a slowing of rate increases which is dovish.  This is why the Aussie is showing modest gains today and not explosive ones.

Kiwi (NZD): Surprisingly, the Kiwi is down this morning as there are dovish outlooks on economic recovery and inflation appears to be muted.  So while Australia is raising rates; New Zealand could be at a standstill for some time.

Loonie (CAD):  The Bank of Canada rate decision is due out later this morning and though the market is predicting no change, there may be some language hinting of future rate hikes which may come sooner than expected.  Fourth quarter GDP came in at 5% vs. and expectation of 3.3%, showing much faster growth.  Inflation is also very close to the target rate which could cause earlier than expected action.  The Loonie is the best performer this morning, higher against all heavily traded currencies.  Because the forex market is forward-looking, potential rate hikes usually trump actual ones.  This is why the Loonie is higher vs. the Aussie.

Euro (EUR):  The Euro is mixed this morning, trading lower vs. the commodity currencies but higher against the rest.  Germany is putting immense pressure on Greece to cut its deficit and is basically in charge of the Greek bond offering which makes them the “holder of the purse-strings”.  These austerity measures aren’t going over too well in Greece, as strikes are scheduled which usually lead to some sort of rioting.  Greece has a tough pill to swallow and the citizens there don’t want to take their medicine.  Stay tuned!

Pound (GBP):  The political wrangling is heating up in the UK as fears that a “hung Parliament” may prevent the UK from tackling their economic deficit.  With elections coming in a few months, the speculation that there will be no majority party could induce political grid-lock which will prevent anything from getting done.  Does this sound familiar?  It will be interesting to see the outcome of these elections, and whether the British actually vote to have the punch bowl removed from the party.  The Pound is down across the board.  Again.

Dollar (USD):   USD is down against all but the Pound, as the big news in the US is going to be Friday’s Non-Farm Payrolls report.  Expect the Dollar to trade on risk themes until then.

Yen (JPY):  Japanese yen is higher this morning as unemployment fell unexpectedly to 4.9% and household spending increased for the sixth straight month, showing signs that domestic demand may be improving.  However, yen strength is negative for exports and at this point it doesn’t seem like further expansion is in the cards.  Let’s see if they decide to rein in government spending to tackle further debt, or provide quantitative easing to try to keep yen low.

As you can see, some economies are doing much better than others and those that look to decrease their debt and may be targeted lower in the short-term, but may reap the benefits in the long-term.  Right now, look for the commodity currencies to lead the pack provided there is no global shock to the system.

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There is a lot of news out this week, with various readings from the UK contributing to Pound weakness today, as well as Canadian GDP due out later this morning.  If Canadian GDP comes in better than expected, then look for the market to bet that rates will be advancing sooner than later this year.

In addition, we are going to get interest rate decisions from Australia, Canada, and the Euro zone, as well as first Friday’s Non-Farm Payrolls report here in the US, which is ALWAYS a market-mover.  If overall global risk can be shown to be contained to a few areas, then expect to see some risk-taking this week.

In currencies:

Aussie (AUD):  The Aussie is higher this morning as corporate profits came in higher for the first time in 5 months and manufacturing expanded at its fastest pace since 2007, ahead of tomorrow’s interest rate decision.  It is widely expected that the RBA will raise rates at the meeting, though the market is trading cautiously this morning.  The Aussie is at a 25-year high vs. the British pound, making this pair the largest gainer of the morning.

Kiwi (NZD): The Kiwi is mixed this morning, as the N.Z. economy may have lost some momentum as retail spending and the housing market have slowed in 2010.  This may give the Reserve Bank reason to pause on rate hikes until GDP growth is definitive.  It is widely expected that rates will higher than the current 2.5% by June.

Loonie (CAD):  Congrats to Canada for winning Olympic gold in hockey yesterday over the US and for putting on one of the more memorable Olympic games in recent history.  Canada is also going to report GDP figures this morning and a higher reading may suggest higher rates.  Tomorrow will be the Bank of Canada interest rate decision, and while they are not expected to raise rates from the .25%, they could issue stronger language foreshadowing a hike to come.

Euro (EUR):  The Euro is hovering right around 1.35 vs. the US dollar and is down against all currencies but the Pound, trading at .906 at the moment.  The unemployment figures came in showing an official 9.9% unemployment rate which will all but guarantee that the ECB will not be raising rates at Thursday’s policy meeting.  However, even with subdued economic growth prospects, benign interest rate policy, and possible defaults, the Euro zone may STILL be in better shape than the UK and we could see Euro-Pound parity soon.

Pound (GBP):  In addition to the impact that a change in government might have on the UK economy, mortgage approvals dropped to an 8-month low.  The UK may be heading for the dreaded double-dip recession as their housing-market recovery may be losing momentum.  On Wednesday the UK will report consumer confidence figures which are expected to be low in light on conditions, and Thursday will bring the decision on interest rates (expected to remain unchanged) and the BOE decision on Asset Purchases which could put further pressure on the Pound if continued and expanded.  The Pound is currently at 1.493 vs. USD.

Dollar (USD):   The Dollar is mixed this morning as the market digests all of the weekend news and is looking ahead to this week’s action.  The US ISM Manufacturing Index is due out this morning, which will show if we are seeing any type of economic expansion.  Aside from that, we are seeing mild risk-taking this morning, though problems with the Euro and Pound are causing the dollar to advance.

Yen (JPY):  The Yen is lower this morning as the battle between the Bank of Japan and the government over quantitative easing continues.  Tonight, Japan will be reporting their unemployment figures, which are expected to show 5.5% unemployment.   We could see some yen weakness on the Australian rate decision as carry-traders become emboldened if the RBA raises rates.

Oil is back over $80/barrel and gold is roughly 1118/oz.

The Euro zone must be thrilled with the problems in the UK which hopefully will shift focus away from their problems and on to the Brits.  While some are likening the situation in the UK to that of Greece, it should be noted that these two economies couldn’t be more dissimilar.   The UK has many more options than the Euro zone regarding how to grow the economy, so while we may see some temporary Pound weakness, the UK economy is still in better shape than the Euro zone.

But always remember; trade what you see, and not what you think you know!

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

This morning, news out of the UK regarding their GDP figures was seen as positive by government officials but not so much by the market as the Pound is lower across the board this morning. Also this morning, the revised US GDP figures are do out as well. So keep an eye out for any downward revisions that could reverse this morning risk-taking themes.

The markets reversed nicely yesterday, turning what could have been an ugly day into nothing more than an over-reaction. Today the currency market is continuing that trend, as there is US dollar weakness.

In the currency market:

Aussie (AUD): The Aussie is higher this morning as it is the leading gainer of the morning vs. the Pound and Dollar. It is widely expected that the RBA will raise rates at next week’s meeting so barring any further risk-aversion, the Aussie should move higher. Yesterday’s dip-buying has paid off.

Kiwi (NZD): The Kiwi is also higher this morning on risk-taking as it bounces of yesterday’s lows. The good business confidence figures are contributing to this mornings Kiwi strength.

Loonie (CAD): Getting a boost from that big Women’s Hockey win over the US yesterday. Risk-taking is on this morning and oil prices are flat so the Loonie is drifting higher.

Euro (EUR): The Euro is mostly higher except against the commodity currencies but there are still concerns lingering over the common currency. Euro zone CPI figures came in as expected and are still benign enough to allow the ECB to keep rates low. This is actually seen as positive for the Euro as higher rates would exacerbate the debt problems in the PIIGS countries.

Pound (GBP): GDP figures came in this morning that showed that GDP grew from the 3rd to 4th quarters of 2009, but year over year the figure was less than expected at –3.3% vs. an expectation of 3.1%. Consumer confidence figures came in at a better than expected –14, which for those who still care is “less bad”. They still have a lot of work to do in the UK, as the market reflects this morning.

Dollar (USD): On tap this morning is both the GDP revisions and US personal consumption, the latter which could be a more prescient indicator of how the economy is faring. The Dollar is down against all but Yen as risk-taking is the theme so far today.

Yen (JPY): Japanese retail sales figures came in at a much better than expected 2.9% vs. an expectation of .3%. Japan has one of the highest savings rates in the world and so domestic spending is a good sign for the nation that relies so heavily on exports. However, deflationary pressures still weigh heavily on the Japanese economy as CPI fell 1.3%. It looks like this further the argument of the government in calling for the BOJ to do more to stimulate the economy through monetary policy. This means “game on” for carry traders.

In overnight markets, stocks were higher in Asian trading and currently in Europe. US stock futures are higher so far and gold and oil are basically flat. In other words: a classic risk-taking day.

Expect trading to be light today as the weather prevails over profit-seeking. When trading is light, you can sometimes see “break downs” in the usual correlations as the market is slow to react to the disparities.

Be safe out there and good trading to those who can!

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Combine this with disappointing European consumer confidence figures and rising unemployment in Germany, and you have a potentially explosive situation.
What this all adds up to is risk-aversion, which means that we’re seeing Japanese yen and US dollar strength, to go commodity currency weakness.  Equity markets are lower across the globe and both gold and oil are trading lower.

In the currency market:

Aussie (AUD):  The Aussie is down this morning on risk-aversion despite the fact that business investment rose 5.5% on China demand.  This bodes well for the Australian economy and has increased the chances that the RBA will hike rates again next week, marking the fourth time in 6 months they have raised.  However, global risk themes are heavy today and the un-wind of carry trades has the Aussie down 2.5% vs. the Japanese yen.

Kiwi (NZD): The Kiwi is down today as well on risk even though business confidence surged to a 10-year high in February, further fueling economic recovery.  Now either residents of New Zealand are completely “off their rockers” or there actually is a good growth and recovery story going on there.  I’m going to go with the former.  As long as the entire global financial system doesn’t collapse, I’m looking to buy Kiwi on pullbacks.  It will however be a challenge to overcome global risk themes.

Loonie (CAD):  Well I guess everyone’s not quite as enamored with the Loonie as I am as futures trades are indicating that the Bank of Canada may be less aggressive with its interest rate policy in light of the weakening global recovery.  In addition, the Olympics end this weekend and there is usually an “economic hangover” as the stimulus provided by this one-time event is effectively removed from the Canadian economy.  With oil prices lower and general risk-aversion, the Loonie is now at a two-week low.  I still like the Loonie to strengthen later in the year, but we may need to deal with some global risk first.  Today the Loonie buys 93.5 US cents.

Euro (EUR):  The Euro is down today on German unemployment and economic sentiment, yet is higher against the commodity currencies as risk-aversion is dominating the market today.   We know about Greece and I mentioned the possible downgrades above which could move them closer to default, if the Euro zone actually allows that to happen.  The Euro is fast approaching 1.34 vs. USD.

Pound (GBP):  The Pound is lower this morning, as deficit fears and political uncertainty are shedding light on the dire economic situation in the UK.  The delicate balance between reigning in spending and stunting economic growth may too much handle going into upcoming elections.  The Pound is at a 9-month low to the Dollar trading at 1.5275.  There was a note out yesterday that the Pound could reach parity with the Euro if economic conditions worsen.

Dollar (USD):   Thank you risk-aversion is what the US dollar is saying this morning, as unemployment came in higher than expected.  The durable goods numbers came in higher, which is positive for manufacturing.  However, the economic picture is still not rosy here in the US.  The Dollar is higher against all but the Yen.

Yen (JPY):  Demand for Yen is much higher today as carry trades are un-wound due to global fears about economic recovery.  The Yen has been strengthening as of late, and it will be interesting to see what the Bank of Japan does to prevent this from getting out of hand.  The Japanese are no strangers to intervention in their currency; and they will not be making any moves on interest rates anytime soon.  A strong yen hurts Japanese exports, which in turn will hurt economic recovery.

Stock markets are down across the globe, gold is trading at 1093 and oil to 77.75, down roughly 2.75%.

It was only a matter of time before all of the risky elements floating around the market converged and today might be that day.  While there is definite fear in the marketplace, there are some growth stories out there.  So be patient, and remember that in general, you want to own the currencies of strong economies, and sell those of weaker ones.

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In other news, German GDP came in flat as in they had no growth—which is actually positive in that their GDP is not negative from the previous quarter and meeting analyst expectations.  Asian markets were down big overnight, taking their cues from yesterday’s US stock market sell-off.  Commodities are lower yet I’m seeing general US dollar weakness.  So today is a mixed bag yet again.

In currencies:

Aussie (AUD):  The Aussie is mixed this morning as wage growth slowed at the slowest pace in close to 10 years, up .6% vs. analyst expectations of .8%.  The RBA is monitoring this figure closely to see if inflation pressures are mounting.  With Chinese demand expected to pick up and Australia to benefit greatly, the RBA is not afraid to raise rates if necessary.

Kiwi (NZD):  The Kiwi is down this morning in a case of “less-good” news than some of the other regions around the globe.  Tomorrow we will get a reading on New Zealand business confidence so that could hint at the consumer spending numbers and GDP which will also give a clue as to inflation.  While the Kiwi is “along for the ride” with the Aussie and is a destination for carry trades, its economy is not nearly as strong as its neighbor to the west.

Loonie (CAD):  The Loonie is higher this morning due to “Olympic Fever” and investors starting to catch on to the economic story in Canada.  Canada flies under the radar a little bit and sometimes gets too caught up in the US economy and oil correlation.  Incidentally, oil is off of its lows of the morning and is just barely negative.

Euro (EUR):  The Euro is bouncing back nicely from oversold conditions and is taking a break from all of the selling we’ve seen as of late.  German GDP figures came in as expected, thereby not providing cannon fodder for short-sellers.  Tomorrow is the real test for Germany though, as unemployment figures are due out.  Unless risk-aversion comes into play later today, I expect to see the Euro remain positive.

Pound (GBP):  Political uncertainties in addition to economic struggles are plaguing the Pound as of late.  A UBS report claims that the market is worried that the conservatives in government will push for deficit reduction pre-maturely before the British economy is in full-blown recovery mode, thereby adding additional pressure to Sterling.  In the meantime, additional bond buying has not been ruled out by the BOE—yet!

Dollar (USD):   The Dollar is mixed this morning, showing neither major gains nor losses vs. other currencies.  New home sales are due out this morning but at this point unless the number is ridiculously bad I can’t see it having any impact on the market.  Bernanke will be testifying for the next 2 days so expect the Dollar to trade cautiously unless Big Ben says something to upset the market.

Yen (JPY):  The Yen is seeing a bit on strength as of late, showing four days on gains in a row vs. USD.  Recently, the government spat with the Bank of Japan may be on to something as the former claims that the latter isn’t doing enough to prevent Yen strength.  As an exporting nation, we know that the Japanese want just the opposite—Yen weakness.

In overnight trading, the Asian markets were down, following the sell-off here in the US.  European markets are currently higher on the German GDP news, and stock futures are higher here in the US.

It looks like oil has climbed back to near flat from being down earlier trading at just a smidge under $78, and gold is lower trading at roughly 1095, higher than its lows of the morning but now under $1100.

Look for light trading in the forex market as all ears are glued to the Bernanke testimony.  As painful as it may be to listen to politicians make fools of themselves, this could be an important if indeed there is going to be a policy shift.  My gut tells me it won’t be.

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While I can’t imagine that they will be “good”, one never knows how the market will react.  Also to note is that the US Housing Price Index will also be out a little earlier, giving a glimpse into the whole inflation/deflation debate.  Combine that with the political landscape here in the US and the malaise surrounding it; and the market could be in for a wild ride today is this could be a recipe for disaster.

In currencies:

Aussie (AUD):  The Aussie is holding up surprisingly well this morning despite the general risk-aversion themes we’ve seen this morning.  This is more of a case of being “less-bad” than actually good.  With problems in Europe (Aussie nearing 10-year highs vs. the Euro) and the UK, investors may start catching on to the fact that owning Aussie over Euro and Pound is LESS risky regardless of what the correlations say.  In my opinion, the Aussie is THE place to be for both risk-taking (commodity plays) as well as risk-aversion.  Now if the market would just begin to see it.  In the meantime, I will continue to buy dips.

Kiwi (NZD): While lumped in with the Aussie and Loonie as commodity currencies and known as a “risk-taking” vehicle, the Kiwi is not nearly as strong as the Aussie yet sometimes benefits from Aussie strength.  Until economic conditions improve in New Zealand or rate hikes seem imminent, the Kiwi will continue to trade on risk themes as it is not strong enough on its own to “buck trends”.

Loonie (CAD):  I’ve been seeing a lot more of Canada lately (probably because my wife makes me watch ice-dancing in the Olympics) but I’m starting to come around to being positive on the Loonie.  Despite record low interest rates and its close ties to the US, the Canadian economy is strong and recovering much faster than the US.  Because of the Loonie’s tight correlation to oil, it will continue to trade as a proxy for the commodity as the market determines whether or not recovery will drive further demand for oil.  The Loonie is lower this morning.

Euro (EUR):  Is anyone surprised that Business Confidence figure in Germany are down this morning?  No?  Me neither.  In fact, this prompted German Chancellor Merkel to lash out the banks that “created the problem” for speculating in the Euro—driving it lower naturally.  It looks like she’s at stage 3 (anger) in the seven stages of grief. It’s starting to look more and more like the Euro zone actually knew about the derivatives that helped Greece obfuscate its debt to the point that it was allowed to gain entry to the Euro zone.  In my eyes this is akin to going to a “jackets required” restaurant jacket-less, then taking off with the loaner they give you, rather than just being denied access in the first place.  Any way you slice it, the trend for the Euro is clearly down.

Pound (GBP):  The Pound is lower this morning as speculation abounds that the UK will continue its bond purchase program to help keep their currency lower to stimulate their economy.   People forget that the UK is still an industrial power and a BOE Deputy Governor reminded the markets of that fact when he said that a “weaker currency will boost exports”.  Should the current situation continue, the Pound could be near 1.50 vs. the US dollar in no time flat.  This would also represent the 61.8% Fibonacci retracement that technical analysts love so much.

Dollar (USD):   Home prices in the US are expected to rise for the seventh straight month, though incrementally and down over 3% from the previous year.  Should the figures meet the expectation, then expect risk-taking to pick up as this would be a sign that inflation is nowhere to be found and confirming that interest rates will most probably remain unchanged for a long time.  Consumer confidence is out at 10AM, if anyone is confident in this environment, then they need to have their head examined!

Yen (JPY):  The Yen is higher on risk-aversion this morning despite the fact that the Japanese government and the Bank of Japan are in dispute over what is to be done to combat the deflation they are experiencing.  Not surprisingly, government wants more liquidity to encourage inflation, and the BOJ wants fiscal discipline and reduced deficits.  Sound familiar?

In overnight markets, the Nikkei was down while the Hang Seng was higher.  In current trading, the European markets are lower though off of their lows.  US stock futures are lower, and oil is down roughly 1.25% to 79.3, with gold following suit down to 1111 and change.

With the problems facing Europe, rampant deflation in Japan, and trouble in the UK, the markets may be re-assessing which currencies are actually “risky”.  In fact, the reason why I introduce the currencies in this blog in the order that I do is based on the “hierarchy” of the risk themes.  As the economic recovery picture becomes clearer, I would not be surprised to see this pecking order change in the not-so-distant future.

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The markets immediate reaction was to buy dollars and cover dollar shorts, and stock futures tanked.  Asian equity markets were down big last night and Europe looks to be bouncing back from earlier lows.

This move was the dominant theme in the overnight market, as retail sales figures in the UK and Canada are taking a back seat, as is the US CPI report which came in less than expected showing that inflation may still be at bay.

The two major things to take away from this move are: 1) the Fed is stressing that this move is not to tighten credit on consumers and businesses, but is merely trying to remove some over the overly-accommodative measures they have taken, and 2) investors need to be wary of the fact that the Fed may continue with these “sneaky” off-hours moves to try to avoid inter-day market Armageddon.  It will be interesting to see how the market reacts to this move once trading begins today.

In currencies:

Aussie (AUD):  The Aussie is down this morning as it is the currency that is most likely to be affected by this move, all other factors being equal.  While I wouldn’t classify today as a risk-taking or aversion day, this is the third day in a row that the Aussie is down against USD.

Kiwi (NZD):  Like the Aussie, the Kiwi is down 3 in a row.  In addition to being affected by the discount rate hike, New Zealand has just reported the widest budget cash deficit in almost 9 years on lower tax receipts and increased government spending.

Loonie (CAD):  The Loonie is lower this morning on lower commodity prices and the US discount rate hike.  Also, Canadian retail sales figures came in slightly less than expected, but were at least positive.  This could be a sign that economic growth is not as strong as investors may think, and everyone is anticipating the inevitable “Olympic Hangover” as the one-time economic windfall goes away.

Euro (EUR):  The Euro is at nine-month low to the Dollar after the discount rate hike in addition to all of the problems coming from the Euro zone.  Now speculation is heating up that perhaps Italy used the same sort of derivative maneuver to conceal debt that allowed them to enter the EU as well as Greece.  There’s a lot of tension and in-fighting right now among EU members.  This could put further pressure on the Euro in weeks to come.

Pound (GBP):  The Pound is also at a nine-month low to the Dollar as fiscal concerns continue that the UK may need to continue accommodative measure to revive their economy.  Retail sales figures came in at a disappointing -1.2% vs. and expectation of -.5%, showing further economic weakness.

Dollar (USD):   It is going to be interesting to see how the market reacts to the discount rate hike today.  Personally, I think that this move shows that the Fed is trying to get the market to believe that economic recovery is taking place.  This move is sort of a red herring, which induced a knee-jerk reaction from the market as soon as everyone hears “rate hike”.  This move does not affect the Fed Funds Rate so it shouldn’t affect either businesses or consumers.  So by the end of the day I expect that we’ll see some risk-taking as economic strength in the US is good for world economies and inflation is lower as reported by the CPI.

Yen (JPY):  The yen is higher on risk-aversion, however I think the market may “have it wrong” as its gotten used to the risk-on, risk-off mentality.  Let’s see if the Yen gives back some gains by day’s end.

In overnight markets, the Hang Seng and Nikkei were down over 2% and European markets have reversed prior losses and are trading higher.  US futures are still negative, but trading well off their lows in the overnight session.  Oil has reversed earlier losses and is trading around 79.5, and gold is back to around 1115.

When I saw the charts last night immediately following the Fed move, my initial reaction was similar to that of much of the market—sell everything, buy dollars and yen.  However, as I thought about the implications of the move, I’m actually quite impressed with the timing of the move and think the Fed did a great job implementing this.  And I haven’t been a big fan of the Fed as of late!  In my view, this is positive for world markets.

Also, watch out for volatility as today is options expiration.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

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This morning, we had an interest rate decision in Japan, Consumer Price Index reported in Canada, and Producer Prices Index reported here in the US.  In Japan, the BOJ held interest rates steady at .1%, which was no surprise to anyone, but Canadian CPI and US PPI came in a little hotter than expected.   This could signal some potential interest rate hikes here in N. America, thought the economic recovery is still fragile so it is a fine line policy makers are walking.  So far this morning is showing mild risk-aversion tendencies, though that could change once the US stock markets open.

In world currencies:

Aussie (AUD):  The Aussie is lower this morning on risk aversion as data from the US shows signs that the economy is heating up and that accommodative measures may be removed.  There is no further news specific to Australia on tap for this week.

Kiwi (NZD):  New Zealand consumer confidence came in lower this morning than last month’s reading, though the Kiwi economy is still viewed as strong.  With commodities lower this morning and risk aversion, the Kiwi is down across the board.

Loonie (CAD):  The Loonie is showing strength this morning as Canada reported CPI that was 1.9% higher than a year ago.  This was a little higher than the expectation, but more importantly is showing economic strength which may cause the Bank of Canada to move on rates sooner than expected.

Euro (EUR):  The Euro is pulling back this morning as the debate over Greece lingers over the Euro zone and is becoming a game of “pin the blame on somebody”.

Pound (GBP):  The Pound is markedly lower this morning as a report came out that last month the UK ran a deficit of 4.3 billion pounds, when economists were forecasting a 2.6 billion pound surplus.  This comes on the heels of yesterday’s negative employment report which contributes to the belief that economic recovery in the UK may be further away than previously thought.  The Pound is down across the board.

Dollar (USD):   The Dollar is higher this morning as US PPI came in higher than expected, prompting the inflation hawks to start chirping.  But Initial Jobless Claims also came in higher than expected; thereby negating the thought the Fed will need to move on interest rates.  The dollar is beginning to give back some of its earlier gains on the employment number, though I’m not sure how the market can see this as positive.  Stock market futures are lower, as are oil and gold, though well off of their morning lows.

Yen (JPY):  As expected, Japan did not change its view of interest rates remaining at .1% which is no surprise to anyone.  Japan is battling some serious deflation, so any sort of inflation there would be welcome.

In overnight markets, the Nikkei was higher though the Hang Seng was lower.  Europe is mixed as well with the FTSE higher on the UK deficit report, but Germany and France marginally lower.  US stock futures are lower as are gold and oil though they’ve given back gains and today looks like its reverse from risk aversion to risk taking.

With the numbers reported today, it sometimes baffles me that higher unemployment and potential inflation is “good” for the market and encourages risk taking.  It looks like the market is betting that the US is going to be content to let inflation occur in order to continue the monetary stimulus it believes is leading to economic recovery.  However, the employment figures tell us otherwise.  How this is going to play out down the road is anyone’s guess but in my mind it ain’t gonna be pretty.

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This has buoyed forward further stock gains in a continuation of yesterdays market action.  As a result, we are seeing further risk-taking in the markets, with world stock markets and commodities higher, and the US dollar and Japanese yen lower.  Whether or not the market can hold on to these gains remains to be seen.

In world currencies:

Aussie (AUD):  Predictably, the Aussie is trading higher this morning, particularly against the yen as higher risk takers seek yield.  Notes from the RBA meeting referenced higher rates were only a matter of time and that they were close to pulling the trigger at the last policy meeting.  Thus traders have increased their bets that this rate hike could take place in March.

Kiwi (NZD):   The Kiwi is also higher on risk-taking and higher commodity prices, though the economy in New Zealand is not as strong as its neighbor Australia.  Rates are seen as being stable until the second half of the year, so expect the Kiwi to continue to fluctuate on the market risk themes.  New Zealand will be reporting its consumer confidence numbers tomorrow so this could give some insight into retail sales and possible inflation or lack thereof.

Loonie (CAD):  The Loonie keeps chugging along near its highest level this month, helped higher by oil prices over $77 and an overall good economic picture.  However, Canada eased pressure on potential rate hikes by tightening mortgage requirements, trying to prevent a housing bubble through regulation rather than interest rate hikes. If Canada can stave off further housing gains, they may be able to contain inflation without having to move on rates.

Euro (EUR):  The Euro is mostly down this morning, trading higher vs. only the Japanese yen.  I could continue to beat this Greece theme to death but the market will be moving in and out of confidence in the common currency as more and more “news” comes out.  There is still great structural risk to the Euro, and fears of contagion to the other PIIGS countries always keep investors on their toes.

Pound (GBP):  The Pound is mixed this morning, as the BOE voted unanimously to suspend its Bond-Purchase (QE) program on optimism that inflation will return to their 2% target rate.  Recall that just yesterday, inflation came in hotter than expected at 3.5%.  The British are famous for their “wait and see” approach and conservative measures.  In the meantime, unemployment jumped to its highest level in 13 years, against an expected decline.

Dollar (USD):   The dollar is showing strength this morning despite the stock futures and commodities markets trading higher.  I expect some sort of “reversion to mean” to mean to take place today, with either stocks or the dollar pulling back, or a combination of both.  US housing starts came in higher than expected this morning, showing that the economic recovery may be getting stronger and increased demand for housing may be picking up.

Yen (JPY):  The Yen is at a 2-week low, trading at over 91 per US dollar, further cementing itself as the fuel for carry trades.  The yen is down across the board ahead of tomorrow’s interest rate decision, where policy makers are expected to keep rates at .1%.

In overnight markets, Asia was up big with the Nikkei leading the way up 2.72%.  European stock markets are also currently higher, all nearly posting better than 1% gains at the moment.  In commodities, oil is just under $77 and gold is around $1118.

Overall, today is a bit of a mixed bag, with US dollar strength competing with the stock market for investor dollars.  While risk-taking seems to be en vogue today, this could change at any point in time.  While there is no real news that should derail this theme today, anything is possible.

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Also to note is that commodity prices are higher as which is consistent with an increase in risk appetite.

On to the currencies:

Aussie (AUD):  The Aussie is higher on new from the RBA minutes.  Analyst expectations are for the Aussie to gain to .91 vs. USD by the end of March.  Should the economy continue to expand, then further rate hikes could be in order.  The current benchmark rate is at 3.75%, making the Aussie a popular destination for carry trades.

Kiwi (NZD): The Kiwi is moving in tandem with its South Pacific partner the Aussie.  While growth has not been as robust in New Zealand, the Kiwi will also benefit from increased commodity prices and a higher benchmark interest rate as well.  That rate is currently 2.5%.

Loonie (CAD):  The Loonie is trading higher this morning on the risk trade as well as the fact that oil is back over $75.  Canada is in the spotlight right now as host of the 2010 winter Olympics as sometimes they get lost in the shuffle in the risk trade hierarchy.  The Loonie is up to 1.043 vs. USD this morning, its highest level this month.

Euro (EUR):  The Euro is higher against all but the commodity currencies, paring back some of its losses from the previous week.  There is tough talk coming from the EU finance ministers regarding Greece, as news has surfaced that Greece may have used derivatives to “fudge the numbers” in order to gain entry to the EU.  The fact that Goldman Sachs was involved should come as a shock to no one.  Also contributing to the Euro gains this morning is the reading from the German Sentiment Index this morning which was lower than previously reported, but ahead of analyst expectations which net-net is positive for the Euro.

Pound (GBP):  The Pound is lower this morning across the board as consumer prices rose 3.5% from a year earlier.  A deviation of more than 1% from the target rate of inflation (2%) requires a letter from BOE Governor King as to how he intends to get back to the goal rate.  Inflation volatility is to be expected, and this reading was not a surprise to analysts.  This could put more Quantitative Easing back on the table for the UK, which would be Pound negative.

Dollar (USD):   The Dollar is down this morning as risk-taking is the flavor of the day and stock futures and commodities are higher.  The dollar is down 1% vs. the Kiwi and Aussie.

Yen (JPY):  As is expected on a risk-taking day, the Yen is down against all but the Pound as the threat of deflation keeps rate hikes off of the table and provides the fuel for carry trades in Aussie and Kiwi despite the good GDP numbers from yesterday.

In overnight markets, the Nikkei closed higher but the Hang Seng closed lower.  European markets are higher as are US stock market futures.  Oil is back over $75.25 (+1.5%) and gold is up to around 1115 (+1.38%).

As you can see, there is always something happening in the currency market that can influence sentiment and thus market direction.  Following the news is extremely important in understanding how market participants view world events.

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Also, Chinese New Year is being celebrated to mark the Year of the Tiger, so Asian markets (that were open) closed lower.  The Chinese have much to celebrate this year as their economy is expected to continue to grow at a double-digit rate despite the government’s efforts to slow it down by curbing lending.  One of the other ways China can attempt to slow its growth is by letting its currency appreciate, according to Goldman Sachs economist Jim O’Neill who claims that, “something’s brewing”.

Here’s how the currencies are faring this morning:

Aussie (AUD):  The Aussie is up on risk-taking and the China growth story in addition to reduced fears out of the euro zone.  In addition, news out of Japan that the economy grew more than expected is good for the region’s recovery prospects.

Kiwi (NZD): Like the Aussie, the Kiwi is benefitting from improved risk outlooks primarily from Japan.  The Kiwi has been one of the worst performers vs. the US dollar over the last month as risk appetite decreased due to the Greek situation.

Loonie (CAD):  The Canadian dollar is higher this morning as risk themes are playing out and a boost from the Olympics which started this weekend.   Investors gave the Loonie a vote of confidence as Bank of Canada Governor Mark Carney spoke this weekend about maintaining fiscal prudence and highlighting the fact the Canada has the lowest debt-to-GDP ratio of all of the G-7 countries.

Euro (EUR):  The Euro is down this morning going in to the meeting to take place in Brussels later today.  The market is expecting more details over how the rescue plan that was announced last week is going to work.  The European stock markets are currently higher as risk-taking investors seek gains.

Pound (GBP):  The Pound is lower this morning ahead of a slew of economic data due out tomorrow and on the heels of a worse than expected CPI data from last week.  The UK has its own set of financial problems which have largely been overshadowed by Greece and the Euro.

Dollar (USD):   The Dollar is mixed this morning, as light volume and mild risk-taking are moving the currency.  With markets closed here in the US, less inter-market activity means lower volumes which decrease both supply and demand for long or short positions.  Expect volume to pick up tomorrow when the markets resume normal trading.

Yen (JPY):  The yen is performing as expected today, with risk-taking dominating trading.  Japan reported better than expected GDP figures, showing annualized GDP grew at 4.6% vs. the expectation of 3.5%.  This is good for stability in the world economy and has lessened the impact of the negative news out of the Euro zone.

Tomorrow could be a more volatile day as more markets re-open after the long weekend and the news out of the Euro zone meeting.  Watch for the economic data out of the UK for any signs that the recovery may be weaker than expected.  Absent of that, I expect investors to proceed cautiously as they gain confidence and resume risk-taking.

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In addition to this, China announced it would be raising its bank reserve requirements again for the second time in a month as they attempt to tame growth and prevent asset bubbles by curbing bank lending.  This had little effect last time around as record loans were reported recently.  This could have a major impact on the world economy if China deliberately slows its growth.   As a result of these developments, this morning is clearly a risk-aversion day.  Also to note is that Monday is a US bank holiday.

As to the currencies:
Aussie (AUD):  The Aussie is down right now due primarily to risk aversion and the news out of China.  China is the largest importer of Australian raw materials so this could be seen as negative for the Australian economy despite the fact that they reported its biggest job boom in 5 years.  This may make it hard to pause on interest rates as had previously been the plan.  Futures are indicating a 44% chance that rates are hiked to 4% in early March.
Kiwi (NZD):  The interest rate situation in New Zealand may be more stable than in Australia as weaker retail sales, high unemployment, and a slowing housing market should keep rates steady at 2.5% until at least mid-year.  The Kiwi is also down on risk-aversion this morning.
Loonie (CAD):  The Loonie is falling in line on the risk totem pole as global fears dominate this morning.  There is no news this morning from Canada except that today is the start of the Winter Olympics in Vancouver.  The economic windfall from having the Games should help the economy although they need to be careful of the “hangover” that sometimes occurs from these one-time events.
Euro (EUR):  As mentioned above, weaker than expected GDP figures have pushed the Euro to a 9-month low vs. the US dollar, trading as low as 1.3530.  Fears of a double dip recession have the EU on heightened alert and the measure they’ve announced to bailout Greece are being compared to the US Treasury’s “bazooka” used to stabilize the US.  Now all eyes will be on the other PIIGS countries to see if they are going to require bailouts as well.
Pound (GBP):  The Pound is down on risk aversion though it is higher vs. the commodity currencies.  Its holding support at 1.56 vs. the US dollar as it has been trading in a tight range recently.   The pound may be benefitting from “less ugly” syndrome than its neighbor, the Euro.
Dollar (USD):   Lost this morning in all of the risk talk is that US retail sales came in at .5% for January which was better than the .3% expectation.  The Dollar is higher on risk fears and the flight to safety trade, as US stocks are lower before the long weekend.
Yen (JPY):  The yen is higher on risk aversion plays this morning, though the news out of China is affecting its strength.  Consumer confidence figures were higher in Japan this morning and its GDP report is expected on Monday to show it probably grew at its fastest pace in more than a year as exports surged.
Overnight Asian equity markets were mixed and Europe is currently mixed as well, as the US retail sales figures helped pare back gains.  US futures are set to open lower and it will be interesting to see if the market can claw back today as it goes into the long holiday weekend.  Gold and oil are also down this morning, contributing to US dollar strength.
Well, nothing comes easy.  For every bit of good news out there, there is bad news as well.  Financial markets will continue to be volatile as long as there is global economic uncertainty.
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As major snowstorms move across the US, the forex market keeps chugging along. In what’s likely to be a low volume day today, we are seeing some mild risk-aversion this morning. Earlier, reports out of the UK show lower than expected inflation and a lower revision to GDP, as the retail sales figures accurately predicted yesterday.

This morning, both equity futures and commodities are giving back overnight gains, which may mean a lower opening in the US. Today could be volatile if traders in the US are enjoying the snow and not the “order flow”. With the only major news out of the way already today, the persistent theme of Euro zone uncertainty could also come into play.

On to the currencies:

Aussie (AUD): Trading lower on risk-aversion themes. Tomorrow Australia reports their employment figures so this could be the gauge that the markets have been looking for if the number comes out better than expected. The Australian economy has by far been the strongest throughout the Great Recession, so any weakness could trigger risk-aversion trades.

Kiwi (NZD): Trading lower with the Aussie on risk aversion and flat commodity process.

Loonie (CAD): Down as well, but showing some strength against the Euro and Pound.

Euro (EUR): The proposed bailout of Greece has lead to speculation over the size and scope of the plan and whether or not contagion will occur with the other PIIGS nations.

Pound (GBP): The Pound is the big loser this morning, most notably against the Yen and USD. As previously mentioned, UK inflation is forecast to come in short of the BOE’s target of 2%, and now GDP is predicted to be lower, taking monetary tightening off the table for perhaps the rest of the year. Translated: no rate hikes. Definitely a pound-negative report.

Dollar (USD): Trading higher on risk-aversion as would be expected. The trade deficit figures came in a little larger than expected, but nothing earth-shattering. Tomorrow retails sales figures come out which should foreshadow GDP figures, as the US consumer makes up some 70% of US GDP.

Yen (JPY): The yen is higher on yep– you guessed it—risk aversion themes and carry trade unwinds ahead of tomorrow’s Australian employment report.

Overnight, equity markets were up in Asia and are currently up in Europe. US stock futures are trading slightly lower pre-open.

Oil and gold are flat today, and it’s interesting to note that Wednesday’s usual API oil inventories report had been pushed to Friday because of the weather. Amateur oil traders may presume that the snowstorm here in the US will mean increased demand for oil, but today’s delay of the report may push any temporary strength off until Friday.

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This morning, markets are trading higher as hope is coming out of the Euro zone that the other European nations may be coming to help Greece in tackling their budget deficit. As you would expect, this is causing some risk-taking this morning.

Let’s look at what this means for the currencies:

Aussie (AUD): In addition to general risk themes this morning, the Aussie is trading higher as comments from the RBA’s Governor Stevens said that keeping rates low “may help cause bubbles and credit booms.” Also to note that Central bankers from around the globe are meeting in Australia to discuss the fallout from the credit crisis and to proceed going forward. It will be interesting to see if anything of substance comes out of this meeting, or is more of just a show.

Kiwi (NZD): The Kiwi is the largest gainer this morning, up 1.4% vs. JPY and 1.15% vs. USD. Higher commodity prices and risk-taking are fueling buying in the Kiwi. The Kiwi was also one of the biggest losers last week so it is also benefiting from some technical buying, as it holds near-tern support at .68 vs. USD.

Loonie (CAD): As mentioned yesterday, the Loonie is going to trade primarily on risk themes and commodity prices and today is the day that higher prices are lifting the Loonie, which is up against all but the Kiwi and Aussie, assuming its position of “3rd rung” on the risk-taking ladder.

Euro (EUR): The Euro is higher this morning on speculation that Greece is going to be bailed out by the rest of the Euro zone countries. Apparently ECB President Jean-Claude Trichet has left the policy meeting taking place in Australia to return home to conduct EU business. This has lead to traders bidding up the Euro in anticipation of a solution being realized. Also the Euro is benefiting from its status as the “anti-dollar”, which is down today.

Pound (GBP): The bound is down this morning on a weak retail sales report that climbed at its slowest pace in almost 15 years. Traders are positioning themselves ahead of the UK inflation report due out tomorrow which could be weaker than expected if the retail sales figures are indicative of slow UK growth, keeping inflation tame and not giving the BOE any reason to raise rates in the near future.

Dollar (USD): The Dollar is giving back some gains after a going on a four-day tear as the risk aversion was the dominant theme last week. The Dollar is down vs. all but the Yen, and could strengthen to 90 vs. JPY is risk themes hold up today.

Yen (JPY): The Yen is the biggest loser this morning as risk appetite is driving carry trades this morning. Should any news come out of the Euro zone regarding a solution for Greece, then we could see some further depreciation as it would be “game on” for further risk-taking.

This morning is going to be a big open as US stock market futures are significantly higher. The Dow could open up some 100 points and oil and gold are also trading higher, with oil at 72.5 and gold at 1075.

In overnight markets, Asia was up primarily with the exception of the Nikkei which was down slightly, and Europe is currently up across the board on Greece bailout hopes.

Should the market hold onto and not give back gains, then I expect to see further dollar and yen weakness.

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On to the currencies:

Aussie (AUD):  No real news on tap until the end of the week when Australia reports its employment figures.  Look for the Aussie to trade solely on risk themes and commodity prices this week.  The Aussie is up across the board.

Kiwi (NZD): Expect the Kiwi to trade in similar fashion to the Aussie.  New Zealand’s economy is still “fragile”, according Reserve Bank Governor Bollard in response to last week’s unemployment figures.  There will be some figures coming out later this week that may help gauge inflation, but don’t expect any major moves outside of risk themes.

Loonie (CAD):  Canadian housing starts came in better than expected this morning, but expect the Loonie to trade more on US themes and commodity (particularly oil prices) this week.  No other news this week.

Euro (EUR):  By now if you’re not aware of the pending debt crisis in Greece, then you’ve had your head in the sand for some time!  Seriously, reports coming out of Greece suggest labor strikes as unions are dead-set against the government’s debt reduction plans.  In the past, these strikes have become violent which could further highlight the problems and decrease confidence.  On tap this week is Germany’s Consumer Price Index and at the end of the week we get Euro zone GDP figures.  The trends on the chart clearly look down and we could see the Euro test 1.35 vs. USD.  Stay tuned!

Pound (GBP):  The Pound is down again after surveys showed the opposition party’s lead over the incumbent party narrowing, which would result in an election to be held in June.  Furthermore, British GDP and the BOE quarterly inflation report are on tap, which could show weaker than expected growth.  The pound is just under 1.56 vs. USD.

Dollar (USD):   The Dollar is weak this morning, paring back after gains last week from risk-aversion themes.  Toward the end of the week retail sales will be reported which should be a gauge of how recovery is going.  The consumer in the US represents some 70% of GDP so weaker sales could foreshadow slower growth.  Friday is the UM Consumer confidence number.

Yen (JPY):  The yen is weak today mainly on risk-taking and a pullback from strength last week.  Economic slowdowns are predicted as problems in the Euro zone hurt exports and the Toyota recalls hurting the economy in general.

After last week’s scare, expect the market to trade some sideways as market capitulation digests the news.  Barring any major economic “disasters”, expect traders to dip their toes back into the risk trade very slowly.   However, if stocks continue to sell of today, then we could be in for more dollar strength.
Overnight, Asian markets are down while they are trading higher in Europe.  US market futures are down, and oil is up slightly to 71.25, with a better rebound in gold, up 1.25% to 1065.

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So the markets were grasping for any positive news to reverse this down-trend and they “may” have found it in this morning’s NFP report.  The NFP, which measures job loss, came in at -20K.  Expectations for this number were all over the place but the fact that there wasn’t job growth would normally be seen as negative.  However, the ray of hope in this report is that the unemployment rate dropped to 9.7% for the month, down from 10%.  Now I’m no mathematician, but it seems highly suspect to me that the unemployment rate can go down, even as we see continued job losses.  But whatever, in early trading it looks the market is going to “take the ball and run with it” as futures have bounced off of their lows.  It would not shock me to see the market wake up at some point and realize it didn’t get what it is looking for.  Today may be a continuation of Thursday’s bloodbath.

Here’s how the currencies are doing this morning:

Aussie (AUD):  The Aussie was up in early action this morning paring back some of yesterday’s losses, as the initial reaction to the NFP was positive, encouraging some risk-taking.  Whether this can hold throughout the day is another story.   With all of the fear and uncertainty out there, investors may flee to safety over the weekend.  Contributing to Aussie strength was the RBA’s Quarterly Monetary Policy Statement that stated that “economic growth will continue to accelerate, even if the policymakers are forced to raise the benchmark interest rate by ¾ of a point.

Kiwi (NZD): The Kiwi is up this morning vs. the Dollar and Yen, as mild risk-taking is still the theme at this point in the morning.  No major news out of New Zealand.

Loonie (CAD):  It’s a good morning in Canada today, as the Canadian economy gained 43K jobs last month, reducing the unemployment rate to 8.3%.  This makes the Canadian dollar this morning’s big winner, as it is also benefiting from mild risk-taking and the bounce in oil.  It is up across the board this morning, most notably against the Japanese yen.

Euro (EUR):  Yesterday was a tough day for the Euro, as the flight to safety trade sent the common currency to a 6-month low near 1.365 vs. the dollar.  The Euro is also known as the “anti-dollar”, so it gets hit particularly hard when there is major risk aversion.  Throw in the problems with the PIIGS countries, and it’s no wonder ECB President Trichet was out this morning trying to defend the Euro and instill confidence that the potential contagion from the Greek “tragedy” will not spread throughout the region.  It looks like the Euro may re-test that low as it currently sits near that low.

Pound (GBP):  The pound is down this morning against all but the yen on the risk aversion theme.

Dollar (USD):   The dollar had a huge rally yesterday and is mixed this morning, down against the commodity currencies but up against the Euro, Pound, and Yen.  We could continue to see some near-term dollar strength, as heightened sensitivity to risk is occurring around the globe and market trends are pointing in that direction.

Yen (JPY):  The yen is also mixed this morning, following the same themes as the US dollar, though down against USD.
In world markets, the Asian stock market got clobbered and closed down.

European stock indices are currently down as are the US markets, although it looks like we may have a reversal here in the US as the media monkeys try to put as much lipstick as possible on that NFP pig!

Gold and oil are flat, waiting for stocks to decide which way they want to go.  Commodities were down roughly 3% yesterday.

As you can see, there still is MAJOR fear out there as economic recovery is not taking place as quickly as anyone would like.  What I really want to stress here is that on a day like yesterday, when nearly EVERYTHING was down, the only 2 places to park your money that went up were in the currency market.  If you had bought dollars or yen yesterday, you were a happy camper while everyone else was crying in their coffee.

Isn’t it time you see what this market is all about?

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Here’s the rundown of world currencies:

Aussie (AUD):  The Aussie is down this morning as expected.  The major news for the Aussie will be made overnight as the RBA will come out with its quarterly monetary policy statement.  There was a bit of new this morning that retail sales figures in Australia were down (MoM) to -.7%, showing a negative figure as consumers are starting to become more interest-rate sensitive.

Kiwi (NZD):  The Kiwi is getting smacked this morning with the double whammy, losing value due to risk-aversion but also contributing was their unemployment report.  Unemployment in New Zealand rose to 7.3%, the highest level in over 10 years, dampening hopes for any rate hikes in the near future.

Loonie (CAD):  Building permits in Canada increased in December, showing signs that there may be hope for economic growth.  However, the Loonie is down this morning, suffering from its correlation to oil and the general risk-aversion theme.

Euro (EUR):   The Euro is down this morning against all but the Aussie and Kiwi, assuming its rightful place in the risk pecking order.  The ECB voted to keep interest rates unchanged at a record low 1%, as concern about Greece stills weighs heavily on the common currency.  There is a fine line the Euro zone countries are walking, attempting to encourage growth while at the same time reduce deficits and rein in budget shortfalls.

Pound (GBP):  The BOE also kept rates unchanged at .5% and has also announced plans to not expand its bond purchase program (QE) for the first time since the program was initiated last march.  The UK is trying to balance the threat of inflation at the expense of economic growth.  It is also important to know that general elections are coming up in May and the “throw the bums out” mentality has made its way to the other side of the pond and is not only popular in the US.  So the BOE is also taking potential political change into account.

Dollar (USD):   I’ve already touched on the bad news about initial jobless claims, and tomorrow’s Non-Farm Payrolls Report (NFP) is weighing heavily on the US economy.  Readers of this blog know that of course that means the dollar is up, as the flight to safety trade takes hold.  Lost in the mix are pretty decent earnings reports coming out of the stock market, though as a most likely result of cost-cutting and firing workers.  See the irony here?

Yen (JPY):  Lastly, the Japanese yen is the big winner this morning, benefiting from the risk-aversion trade.  Because of its status as the reserve currency for the carry trades, when risk aversion takes place, demand for yen goes up as traders flee riskier currencies.

As I scan the different news wires, I can’t help but notice that I haven’t seen one piece of encouraging news out there that would lead me to believe that economic recovery is gaining traction.  The only silver lining I found, decent corporate earnings, is a joke compared to what’s going on out there.

At the US market open, stocks are down.  Europe is down currently and Asia closed down overnight.  Not to be Debbie Downer here but today could be ugly with a capital ‘U’.  Oil is down to 76 and change, and gold is down testing 1100.

Remember, in order to benefit from a strengthening dollar, you have to sell a different currency and buy dollars to make gains!  Just having dollars in your bank account does you no good except potentially influence your purchasing power.  The only way to take advantage of these moves is through the forex market.  When you’re sitting there looking at a red screen (because everything is down) and have no idea where to put your money, the forex market can give you a safe haven.

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This morning the markets can’t seem to decide which way they want to go.  News out of the Euro Zone that Greece’s debt reduction plan has been accepted caused the Euro to rise above 1.40, though it has backed off and is now trading below.  The US ADP Jobs report came out this AM, showing better than expected job loss numbers, yet the stock market futures sold off and the dollar advanced.

Tomorrow’s big news is from across the pond, with both the UK and the EU coming out with their interest rate decisions.

Here’s how the individual currencies are faring this morning:

Aussie (AUD):  The Aussie is up this morning vs. all currencies, as mild risk-taking is the general theme this morning, despite a bit of US dollar strength.

Kiwi (NZD):  The Kiwi is mixed this morning, down against the Dollar and Loonie, but up against Japanese yen.

Loonie (CAD):  The Loonie is showing a bit of weakness, paring back recent gains as commodities, particularly oil, traded higher.

Euro (EUR):  As mentioned earlier, the Euro is showing strength as the Greek debt reduction plan was viewed as acceptable.  However, rumors still persist that a bailout may be forth-coming, which is preventing institutions from flocking back as an alternate to the Dollar.

Pound (GBP):  The pound is trading down slightly as all eyes will be on the rate decision tomorrow as well as the BOE’s actions regarding its quantitative easing program.

Dollar (USD):   The Dollar is showing mild strength on the heels of the ADP jobs report.  Stock futures are down, high-lighting the inverse relationship.

Yen (JPY):  The yen is weak this morning across the board, as risk-aversion is abating and yen carry trades are in higher demand.

So expect sideways trading throughout the day as the market oscillates back and forth waiting for the next piece of news that will cause one risk theme to dominate the other.

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So this morning is a risk-aversion day in the currency markets, however equity futures in the US are up slightly this morning, as are gold and oil.  At some point today, I expect some sort of mean reversion.

Here’s a look at the currencies:

Aussie (AUD):  As mentioned, the Aussie is down this morning as the RBA left rates unchanged.  There was also a comment made about sovereign debt concerns that is also weighing on the Aussie.  It’s currently the biggest loser on the morning, down 1% vs. the US dollar and 1.3% vs. the Japanese yen.

Kiwi (NZD): The Kiwi is down this morning trading in sympathy with the Aussie, and there was also news that wages in New Zealand rose at their slowest pace in 9 years.  This demonstrates that the labor market is weak and is a sign that rate hikes may be off the table for some time.

Loonie (CAD): The Loonie is down this morning as a result of risk-aversion, though it has been trading higher recently as oil prices have been moving higher.  There’s no real market making news on the Loonie until the end of this week when they report the unemployment change on Friday, so look to oil prices to give clues about where the Loonie may go.

Euro (EUR):  The Euro is up slightly this morning as it’s taking a much needed break from the pounding it’s been taking.  By now you are familiar with all of the negative news from the region regarding the PIIGS countries, so today, no news is good news.  The trend though is still clearly down.

Pound (GBP):  The pound is lower this morning as market sentiment over the health of the UK economy is still negative.  The pound tested 1.59 vs. the US dollar and is near a three-month low.

Dollar (USD):   US home sales figures come out at 10AM EST and could serve as a barometer to the health of the economic recovery in the US.   Coming on the heels of the biggest federal budget EVER proposed, there are increased worries that the administration’s plans, “just don’t add up” and that proposed tax hikes on businesses and the wealthy will further stall jobs growth.

Yen (JPY):  The yen is higher this morning as the global risk-aversion theme is taking place.  This may leave the BOJ in a conundrum as their attempts to weaken the yen to improve exports could be undermined by global risk aversion themes.  Stay tuned on this one.

Overnight, Asian equity markets were up and European markets are up as well, though off their highs of the day.  US stock futures are slightly higher, though I suspect that this existing home sales data at 10 may be the catalyst for a stock market reversal if they come in worse than expected.

Currently, oil is up almost a full percent to over 75, and gold is trading just higher than 1100 to 1113.

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All eyes are on the US ISM Manufacturing number due out this morning at 10AM EST.  The market is hoping to see a rise in this number as that would indicate business activity is picking up.  So far this morning, we are seeing mild risk-taking as the Euro has rebounded from 4 days of selling. 

US stock market futures are up as are gold and oil.

Let’s examine how this is affecting world currencies:

Aussie (AUD):  The Aussie is currently trading down this morning despite the risk-taking tone this morning as traders are gearing up for the RBA rate decision due out overnight.  The market is expecting a 25 basis point hike to 4%, but this could trigger a bearish scenario.  If they do raise rates, it is extremely likely that they will take another rate hike off of the table going forward.  There is also a chance that they don’t raise rates this time, as news that China is paring back economic stimulus could affect the Australian economy.

Kiwi (NZD):  The Kiwi is up slightly this morning benefitting from the risk trade. 

Loonie (CAD):  The Loonie is up this morning as oil prices recover and stabilize as well as a general risk-taking mood this morning.  The market is waiting for confirmation from the ISM data so it trading in a tight range until that release.  The Loonie should strengthen today if the number comes in better than expected.

Euro (EUR):  The Euro is the biggest gainer this morning as it rebounds from 4 days of weakening.  The market is gaining confidence that the plan to manage the debt crisis in Greece is acceptable and plausible which generally ties in to the risk-taking trade this morning.  Over the last four days, the thought that Euro could serve as an alternative to the US dollar as a reserve currency was largely debunked as Central banks pulled cash out of the Euro at a record pace.

Pound (GBP):  The pound is down this morning against all but the Japanese yen as housing prices slid in the UK and banks granted fewer mortgage applications last month.  The Bank of England rate decision is on tap next week but traders are more interested to see if they continue with their quantitative easing program.

Dollar (USD):   The US dollar is down this morning as part of the risk-taking trade.  Stock market futures are up as are commodities and all eyes are on the ISM Manufacturing number.  There are some figures out this morning that show that US personal incomes are up slightly, and personal spending is higher than the prior reading but missing expectations by just .1%.

Yen (JPY):  The yen is down across the board this morning as the BOJ’s top economist said that Japan’s economy is far from “achieving self-sustaining growth” as their export led recovery failed to induce consumer spending.  This also falls in line with ministers calls last week for a weaker yen.

As we can see the big news of the day is ISM Manufacturing number which will be viewed as a proxy for global economic recovery.  The only currency that is trading “out of the ordinary” is the Aussie, as the market prepares for the rate decision. 

In global markets, stocks in Asia closed generally higher and Europe is higher at the moment.  US stock markets futures are higher pre-open and oil is up to 73.47, with gold slightly higher to 1088.

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This morning, the US Q4 GDP figures came in at a better than expected 5.7%, the fastest growth since 2003.  While this is seemingly good news for the US economy as it marks the 2^nd straight quarter of growth providing further evidence that we moved forward from recession.

However, we’re not out of the woods just yet.  There are still global concerns weighing heavily upon the markets, such as the Greek debt problem in the Euro Zone, as well as China’s restrictions on lending.

This morning’s currency action is rather neutral, as it can’t be described as either risk-taking or risk-aversion.

Here’s how world currencies are trading this morning:

Aussie (AUD):  Gains in the Aussie have slowed down as the global slowdown, particularly in China, is expected to slow growth in Australia.  This morning is a mixed bag for the Aussie, as it’s higher vs. the Japanese yen and British pound, but down vs. the US dollar and Euro.

Kiwi (NZD): The Kiwi is trading higher across the board and is showing the highest percent gain vs. the yen this morning, up 1%.  They just reported a budget deficit for the first time in 9 years, as tax receipts have slowed and government spending picked up last year.

Loonie (CAD):  Canadian GDP came in this morning at .4%, a smidge higher than expectations.  Canada is showing slow but steady growth, which is a positive for the economy.  The Loonie has been weakening against the US dollar as global risk appetite has abated and oil prices are down almost $6 this year. 

Euro (EUR):  The Euro is trading higher against the yen and the pound, but down against the rest this morning.  Consumer prices rose 1% showing that inflation is starting to pick up in the region.  Also to note is that fears over the Greek debt crisis are weakening as region considers all of its options. 

Pound (GBP):  The pound is down this morning against all but the yen, experiencing a technical pull back from its recent strength.  Housing prices were up the most in 5 months and consumer confidence is improving.  BOE policy-maker Andrew Sentance cautioned that the recovery can continue, “especially if interest rates remain low.”

Dollar (USD):   The dollar is showing strength today after the GDP figures that were reported this morning.  The fastest growth since 2003 is stoking thoughts that inflation may be closer than the Fed thinks. 

Yen (JPY):  The Japanese yen is down across the board today as the CPI index showed that deflation is still very prevalent in the Japanese economy.  Finance Minister Kan called for the Bank of Japan to take a powerful approach to combat falling prices and a strengthen yen. 

The stock markets closed down in Asia, but are currently higher in Europe and the US.   Gold is down slightly and oil is up this morning.

So today is a bit of a mixed bag.  Keep an eye on the correlations to watch for break-downs or irregularities to see if there are reversals or reversion to mean.  Today seems like it will be a range-bound day going into the weekend.

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This morning, it looks like risk appetite has returned to the forex market after yesterday’s FOMC meeting has been fully digested.  The only thing “unexpected” from the meeting was that the decision was not unanimous, as KC Fed Chief Thomas Hoenig dissented and raised concerns about possible inflation.   While this view will most probably be discounted for “an extended period” to use Fed parlance, it is interesting to see someone break from the pack.

Also, additional problems from the Euro zone have increased downward pressure on the common currency, as Portugal has now joined the mix and is showing up on the watch lists as their fiscal budget is drawing attention from the ratings agencies.  In light of these problems, the market is still in a risk-taking mood.

The other big news came from last night’s Presidential State of the Union Address, where the President issued a renewed commitment to fixing the employment problem here in the US and pledging to help put Americans back to work which overall is positive for economic growth.  Whether or not the follow through occurs is another story, but for now, the markets are satisfied.

Here’s a look at the currencies:

Aussie (AUD):  Benefitting in early trade from risk appetite, the Aussie traded as high as 90.45 vs. the US dollar.  In addition, commodity prices are higher as well.  There is much debate over whether or not another rate hike will be in order at the next policy meeting as inflation concerns abound.  Watch out for a mid-morning reversal if equity markets sell-off.

Kiwi (NZD):  Yesterday, the New Zealand Central Bank left interest rates unchanged at 2.5% as inflation is likely to stay in its target range.  However, the bank is expected to move on rates sometime before mid-year.  Also up this morning, but off of its highs.

Loonie (CAD):  With oil prices holding above $74 (for now), the Loonie is showing decent gains this morning against the risk averse currencies.  The Loonie is showing some strength today vs. the US dollar, as it bounced back against technical resistance at 1.065.

Euro (EUR):  The Euro is down this morning after having broken support at 1.40 vs. the US dollar.  While EC economic sentiment was up this morning vs. an expected decline, the news that the first of the PIIGS countries, Portugal, may be following Greece’s lead down the road to fiscal uncertainty.   S&P is saying that Portugal’s current budget leaves the country economically “frail”.  Remember that when trading often times support becomes resistance so keep that 1.40 level in mind.

Pound (GBP):  The Pound is strong again this morning, extending yesterday’s gains.  The prevailing thought is that interest rate hikes may be on the table for the foreseeable future.

US Dollar (USD):  The dollar is down today against the commodity currencies as risk appetite has returned.  US durable goods orders came in lower than expected, and initial jobless claims came in slightly more than expected.  This lends credence to the FOMC stance that rates should remain low for “an extended period”, much to KC Fed Chief Hoenig’s chagrin. 

Yen (JPY):  The yen is down against all but the Euro currencies, as the bottom rung on the risk-taking ladder.  The uptick in risk appetite as a result of the State of the Union Address last night has helped propel Asian stock markets higher last night and the yen lower.

In world markets, the Asian stock markets closed higher than 1.5% from the previous day but stocks in Europe are mostly lower with news out of the Euro Zone.  US stock markets are down, and gold and oil are higher, to 1093 and 74.12 respectively.

What’s important to take away from all of this news is that no single instrument trades in a “bubble” and that news from around the globe can affect any market.  By having and maintaining an understanding of global events, investors and traders can better position themselves.

To learn more about how these markets are ALL inter-related, be sure to check out our extremely affordable currency trading courses!

This morning, the broader currency markets are trading in a slight range, with the Japanese yen (JPY) and the British pound (GBP) showing gains against the US dollar.  There is a mild risk-aversion theme this morning as all eyes are on the US FOMC policy meeting today at 2:15 EST.

As far as news-worthy currency events go, this may be the one which has the largest impact on the market.  It is almost 100% certain that the Fed will not be raising rates from .25%, however the market will be looking for clues for any change in language that may suggest a shift in policy.

The markets here in the US have been on edge recently, as political pressure and rhetoric have picked up because of what many see as a rejection of the current administration’s policies.   This has caused some in Congress to pull their support for Fed Chairman Bernanke, whose term is up at the end of January.

Let’s take a look at how specific currencies are faring so far:

Aussie (AUD):  Earlier today the Australian Consumer Price Index (CPI) number came in at .5% for Q4 and at 2.1% YoY, which was slightly higher than expectations.  This sent the Aussie initially higher and above .90 against the US dollar, though it’s now trading below on the move to risk aversion and fears that the moratorium in Chinese lending may affect the Australian economy. 

Kiwi (NZD):  The Kiwi is trading down on the risk aversion theme, most notably against the Japanese yen around .5% on the morning.   The Reserve Bank of New Zealand is coming out with its rate decision later today and is expected to maintain rates at 2.5%, which is a record low.  This could weigh heavily on the Kiwi as the market has priced in a 50 basis point rise by mid-year.

Loonie (CAD): The Loonie is trading near a 5-week low as world markets and commodities have sold off recently and the flight to safety trade has been in effect.  One of the major factors affecting the Loonie is the price of oil, which is off some $10 from recent highs.

Euro (EUR): The Euro is off slightly this morning, as it attempts to shake off the problems it’s been having related to the debt crisis in Greece.  European stock indices are down today, as comments from ECB council member Weber said that the bank may take additional steps to withdraw liquidity from its banking system.  With today’s FOMC decision on tap, the Euro could test 1.40 which has been an area of psychological support for some time.

Pound (GBP): Reports are out this morning that the quantitative easing measures that the Bank of England has taken may be working.  Although UK GDP came in lighter than expected, it did come in positive which is a step in the right direction.  BOE policy-maker Sentance warned that the bank may need to act quickly if the recovery strengthens and inflation picks up.  The pound is up to 1.62 vs. the US dollar.

US Dollar (USD):  The dollar is weak against the pound and the yen this morning, but otherwise is up slightly against the commodity currencies and the Euro.  The market is waiting on the FOMC decision and more importantly if there is a change is language which may give hints about a change in policy.  Keep an ear out for a continuation of the “extended period” language.  The dollar has been gaining recently, as risk-aversion has heightened around the globe.

Yen (JPY):  The Japanese yen is at a 5-week high vs. the dollar, as the Japanese yen benefits the most from the risk-aversion trade.  With interest rates at .1% and not moving any time soon, the carry trade is back on with the yen as the funding currency of choice.  Also to note is that Japanese exports have risen for the first time since mid-2008, a sign that economic recovery may be taking place.

In world markets, stocks are down in Asia and Europe and the MSCI world stock index is experiencing its largest losing streak in almost a year as concerns that developed economies may be preparing to scale back which affects emerging markets.  In the US, the stock markets are down slightly as are gold and oil, which are trading below 1100 and 75 respectively.

Look for a reversal today if the Fed does as expected and maintains uniformity of language with its previous rate decisions.  The world markets are looking for some vote of confidence that will allow risk-taking to resume again.  Despite all of the political wrangling coming out of Washington, if Bernanke can project confidence that the recovery in the US in taking place, then it may signal game on again!

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Will policy makers see this growth as a sign that the economy is still fragile, or will they be inclined to believe that recovery is under way?  My experience tells me that that the British tend to err on the side of caution, which means that they could leave the stimulative measures they took in place for an extended period.

Had growth come in as expected, then most analysts were expecting a withdraw of quantitative easing.  As a result of this shift in sentiment, the British pound (GBP) is down against all but the commodity currencies, as risk-aversion is the play of the day.

As can be expected, stock market futures are down pre-open, and it looks like there’s some pressure on gold and oil.

Adding to the mix is the strength in Japanese yen (JPY).  Their growth outlook was cut to “negative” by S&P, which essentially means that interest rates will remain extraordinarily low and stable for a long time, helping the yen to reassert its dominance as the funding currency of choice for the carry trade.  This causes demand for the currency which helps it to strengthen, even though this seems counter-intuitive to most investors.

Also contributing to yen strength is the fact that China is trying to slow its own growth and has restricted lending to attempt to prevent asset bubbles, though they may be too late.   Should the Chinese restrict growth, then the possibility of a global double dip recession increases.  This also plays into the risk aversion play.

So not surprisingly, the largest movers are the AUD/JPY and NZD/JPY pairs, down 1.6% and 1.9% respectively which of course, show yen strength.

As I mentioned yesterday, this is a heavy week for economic data so should it continue to come in worse than expected, we could see some serious moves in the broader markets.

So remember to stay nimble when volatility picks up!

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Realizing the consequence of their actions, politicos this weekend conceded that Bernanke will most likely be re-confirmed so it was game on for the markets again.  As a result, the theme so far this morning is mild risk-taking.  The Aussie (AUD) and Kiwi (NZD) are up, the Japanese yen (JPY) is down.

The yen drop also comes as a result that “people familiar with the situation” claim that the Bank of Japan will expand bond buying to keep the yen from strengthening too much and encourage weakness to help exports.

The British pound (GBP) is also showing strength this morning, as the UK GDP report is expected to show an expansion of .4% in Q4 vs. a previous contraction of .2% in Q3.   The pound is also near 5-month highs against the Euro (EUR) which is currently under pressure from problems with the PIIGS countries, particularly Greece.

Also on tap this week is GDP reports from the UK on Tuesday and Annualized GDP from the US on Friday.

Consumer Price Index (CPI) reports from the Euro Zone and Australia on Wednesday and Japan on Thursday.

Interest rate decisions from Japan on Tuesday and the US and New Zealand on Wednesday.

That plus a smattering of consumer confidence numbers from various regions plus the US and President Obama’s State of the Union address should make for a volatile week!

When trading markets that are expected to have a higher degree of volatility, it is important to stay nimble and not “get married” to a position.  Remember to cut your losers short and let your winners run!

Happy trading!

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After the employment figures came out yesterday and the Philly Fed announcement, the stock market began to tank and we saw a rapid shift to risk-aversion.  Combine that with the uncertainty created by Obama and we saw a volatile confluence of events.  The sad part of all of this is blame game going on between Washington DC and Wall St.

The American people responded in Massachusetts by pushing back against the political machine and its a shame that the administration feels the need to pile on with the timing of this proposal.  The “be careful what you wish for” line of thinking in Washington is disgusting, and the fear and bully tactics won’t gain them any political goodwill.

In general, I can’t stand politics but unfortunately this needed to be addressed as government actions can have a MAJOR effect on the market place.

This morning, I’m seeing a brief respite from yesterdays move but that doesn’t mean it won’t continue.  Japanese yen (JPY) is strong this morning and the US dollar (USD) is weak.

Also this morning there was weaker than expected retail sales figures coming from both Canada and the UK.  Both the Loonie (CAD) and the British pound (GBP) are down this morning.  The Loonie is seeing added weakness as the price of oil has pulled back to around $76 on weak demand.

So if you’re an investor, I would lighten up on the risk-taking and keep an eye on news coming out of Washington DC.  Either way expect market volatility to pick up.

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As a result, the equity markets did an about face and proceeded to sell despite the fact the Goldman Sachs reported “record earnings”.   Don’t lose sight of the fact that this comes on the back of the US taxpayer, but what’s a few billion dollars among friends?

So now that the stock market is down considerably, we have switched from mild risk-taking to risk aversion.  This means that both the US dollar and Japanese yen are now the favored currencies of the day.  Let’s take a look at a chart of the Aussie/Yen (AUD/JPY) to show the extreme volatility of this move.  (click chart to enlarge)

As you can see, the market is still VERY skittish regarding any bad economic numbers that will show the recovery is not moving along as may have been previously thought.  In markets as volatile as these, it’s important to keep tight stops and to look for reversals.  As the new year is just starting, the markets are trying to find some sort of direction in what can only be described as “rudder-less ship trading”.  In other words, extreme volatility.

As a quick aside, this AUD/JPY pair is down another 30 pips to 82.35 in just the time its taken me to put up this post.  Wow.  If you own stocks, today might be an ugly day.

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If this number is for real (some would argue that’s always a question when dealing with China), then its pretty clear that their growth will be leading the globe out of recession.  As a result, we are seeing a bit of risk-taking in the market today, with both the Aussie (AUD) and the Kiwi (NZD) benefiting.  After all, China does import a lot from those countries so when the goings good in China, its probably going well in Australia and New Zealand as well.

The yen (JPY) is also down the most, as it is resuming its status as the world’s funding currency for carry trades and risk-taking.

Coming out of Europe, the Euro (EUR) is down slightly against the US dollar (USD), having been down lower during the Euro session to its lowest levels in 6 months.  However, it is still holding support at 1.40, an important psychological level for the Euro.   Rumors are floating that the Euro Zone may offer an emergency loan to Greece, but this is being vehemently denied as that would set a bad precedent for the other PIIGS countries.

The British pound (GBP) is down as well, as the UK budget deficit widened the most in almost 15 years.

So the overall tone today is mild risk-taking, which could also just be a rebound from yesterday’s increased appetite for risk-aversion.

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What this means is that it is highly doubtful that that the Bank of Canada will raise rates anytime soon.  As I mentioned yesterday, this all but takes a rate hike off of the table until at least the second half of the year.  As a result, the Canadian dollar (CAD) is down the most today, especially against the US dollar (USD) and the Japanese yen (JPY) -1.7% and 1.3% respectively.

Also to note is that today is a risk-aversion day.  News out of China that they are going to restrict bank lending is a sign that they may be trying to slow down growth and are growing concerned about a potential real estate bubble.  As a result, both the Aussie (AUD) and the Kiwi (NZD) are down as well.

The US stock market is also down on China fears, as is both oil and gold.  So the Loonie is getting hit with the “triple whammy” today between risk aversion AND CPI numbers.

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The problem in the Euro Zone is two-fold: either the other Euro nations come to Greece’s aid and bail them out which will in turn send the wrong message to the other PIIGS countries, or they allow Greece to exit and risk possible defaults as credit spreads widen because of the increased risk.  Either way, the solution for the Euro is not easily rectified and how this plays out will be interesting to say the least.

In either event, I expect continued Euro weakness and if the Euro breaks psychological support at 1.42, then the next stop could be 1.382, back to its 50% retracement levels against the US dollar.

Because of the lack of viable alternatives to the Euro, the British pound (GBP) is seeing some strength today, up across the board against all other currencies.

Until clarity emerges from the Euro situation, the pound appears to be ready to strengthen against the Euro.

Let’s look at 2 quick charts:  (click charts to enlarge)

The first chart is of EUR/USD and illustrates the different Fibonacci levels  which can act as support or resistance within larger trends.  When trends reverse, these levels an act as “magnets”– pushing the prices toward those levels.  So if the problems with the Euro persist, then keep an eye on these levels.

The second chart is of EUR/GBP and it shows the current action of the Pound vs. the Euro.  The pound provides a viable alternative to the Euro, so even though the UK has their own set of problems, the market may deem the Euro’s to be worse so I’m expecting continued pound strength against the Euro.   I’m looking for a move down to .85 for this pair.

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Part of the reason to remain flat is due to Canada’s reliance on a US economic recovery, as the US is the largest market for Canadian exports.  So it is quite possible that we won’t see a rate hike in Canada until we see one in the US.  While the recovery is taking place in Canada, its not strong enough to warrant rate hikes at this time.

According to Bank Governor Mark Carney, the economy will operate with “slack” throughout the middle of next year as the Canadian dollar’s 20% gain versus the US dollar has hampered exports.

So barring any unlikely rate hikes, I expect the Loonie to trade sideways until inflation becomes a problem in Canada, and the Loonie will continue to benefit from its status as a commodity currency.

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While there appears to be heightened risk in the world markets, the dollar is not responding that way– yet.  This week all eyes will be on the quality of US earnings reports, as well as any news out of the Euro Zone in regards to the mounting situation in Greece.

This week is somewhat quiet as far as news events go, with the Bank of England policy meeting minutes, Canadian CPI, and the US Philly Fed highlighting the potential market movers.

When the US markets reopen tomorrow, I expect to see risk-taking trends continue unless/until some news hits the tape.  But without decent volume today, I’m on the sidelines.

I’m actually going to do some testing of some automated trading systems we are going to be offering so stay tuned for teh results!

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This all but closes the door on any US rate hikes until at least the beginning of Q3 this year, if they happen at all this year.  Normally, I would expect to see some dollar weakness after a number like this, but the flavor of the day is risk-aversion.

Between the problems in the Euro Zone and the Consumer Confidence Numbers coming in a little worse than expected, traders are taking a bit off the table going into the weekend.  Because the US stock market is closed on Monday for the observance of Martin Luther King Day, there is a heightened sense of risk for the long weekend.

So we’re seeing US dollar strength,  Euro (EUR) and the commodity currencies (Aussie, Kiwi, Loonie) weakness.  Also to note is that the stock markets are down roughly 1% on the day, as are oil and gold.

Another factor weighing on the stock market is the earnings report from JP Morgan.  While they did report higher overall profits, investors were concerned with their mortgage and credit card loan losses.  Should this problem expand to the other banks and become unmanageable, this could derail economic recovery.

However, should we make it through the weekend “unscathed”, namely no systemic breakdowns, then I expect we will see US dollar weakness return as risk-taking returns to the market.

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So what happened?

Well its clear that consumers are not confident in their own fiscal health which in turn affects their consumption patterns.  With “official” unemployment figures at 10%– the reality is much higher and record housing defaults, its no wonder people are concerned.  Not to mention the mounting debt the US is incurring that will have to be paid for at some time in the future.  As tax receipts continue to decline, it won’t be long before everyone is called upon to “do their part”.  Yep I’m talking about higher taxes.

So why is this disappointing figure so important?  Well consumer spending in the US makes up close to 70% of US GDP!

Whoa.  So if consumer spending is declining, foreclosures and unemployment are rising, it may be a VERY long time before we see an interest rate hike out of Bernanke and the Fed.  And it looks like the markets have picked up on this, as the stock market has shook off this figure and has gone from an initial negative to positive.  So that means the dollar is down against all but the Euro (see earlier post) as it is clear that the only thing driving world markets right now is the US zero interest rate policy (ZIRP).

So the risk-taking trade is on so far this morning.  It will be interesting to see if stock investors come to their senses at all today– though I doubt that will happen in what’s become the bizarro world of investing!

Trade carefully!

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As it turns out, Greek debt is more than 4 times the EU’s limit as a percentage of GDP.  ECB President Trichet has repeatedly stated that the EU will not bail out individual countries that have been fiscally irresponsible.  So all eyes are on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain) to see if any further problems may arise.  While its no secret that these countries are not in good shape, it will be interesting to see who can turn it around and how it impacts the Euro going forward.

The basic “tug-of war” on the Euro is between the structural problems of the Euro Zone countries, and the Euro’s status as the “anti-dollar”.  If global stock and commodities markets continue to rise, then the Euro may benefit if the “normal” risk-taking plays continue despite their fiscal problems.

In the meantime, news out of Australia is that their employment figures were much better than expected, putting the possibility of a future rate-hike back on the table, contrary to earlier statements from the RBA.  The Aussie (AUD) is showing strength this morning as a result.

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So what’s left to do?

Sit back and wait.

This is a refreshing stance in world where instant and immediate gratification need to happen to keep the public at bay.  What this policy-maker is essentially saying is that its OK to let market forces happen and to see how the policies they put in place will work out.  All too often governments are quick to react to any negative news regarding their economic situation and are always trying to “tinker’ with policy, rates, statements, intervention, etc.

I’m not certain where they dig up some of these people charged with setting policy, but its almost as if they have completely forgotten that economies move in cycles.  What goes up, must come down.  Basic laws of gravity.   The fable of the Ant and the Grasshopper.  I could go on and on.

So kudos to Andrew Sentance, BOE policy maker for keeping it real.  While the UK is not yet back on firm ground economically, the “wait and see” approach is better than the overkill that we see here in the US.

So let’s take a quick look at a chart of the British pound vs. the US dollar (GBP/USD): (click chart to enlarge)

As you can see from the chart, the pound has been up for the last four days in a row for the first time since last November since we’ve seen dollar strength in December.  1.59 is a good support level.  As this pair has broken through the 38.2% fibo retracement level, it looks like the next stop could be 1.636 at the 50% retracement level.  This could happen sooner than later as the US CPI numbers come out on Friday.  If this figure comes in lower than expected, then that could send this pair higher on dollar weakness.   So I expect we will be at the 1.64 level in short time.

If we should breach that 50% fibo level, then I would move my stop up to the 23.6% fibo level at 1.612 for those who are long this pair.  While it is important to find trades that look like they are at the start of a trend or in a trend, it is equally important to know how to manage trades and place stops to limit losses.

Happy Trading to all!

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As a result of this report, stock market and commodity futures have sold off and the Japanese yen (JPY) and the US dollar (USD) are showing strength this morning in what looks like a risk-aversion theme for the day.  With commodity prices off, we are seeing the Aussie (AUD), Kiwi (NZD), and Loonie (CAD) showing the biggest losses.

One of the problems with this earnings report out of Alcoa is that it is hinting that recovery from recession may not be as robust as traders (and government) had hoped.  Much of the “good earnings” from last year were due to mass lay-offs and cost-cutting and NOT due to growth.  Combined with the massive government stimulus programs that may or may not have been effective in doing anything,  the stock market could be in for a near-term correction.

Should this occur, then I would expect strength in the risk-aversion currencies and weakness in the commodity currencies and the Euro (EUR).

However, this is only ONE report out of many to come.  Also to note is that traders will be focusing on this Friday’s US CPI data.  Any significant rise in prices could put a Fed rate hike back into play and cause more equity selling and USD buying.

While I don’t expect Bernanke to due anything on the rates until at least the summer, this could prompt increased jaw-boning as he attempts to keep the dollar from total collapse.  If the equity markets can come out of earnings season relatively in tact, then I expect risk-taking plays to be back on the table.

What we should expect is volatility in the markets, as traders push markets back and forth based on the “data du jour”.  So I’m going to keep my trading short-term,  but with a long-term bias toward risk-taking plays.  This means I’ll be selling dollar rallies, and buying commodity dips.

Until I actually see something credible that would support a Fed rate-hike, I will keep this stance.

Short-term trading in range-bound markets can be extremely profitable and low risk– provided you know what you’re doing!!!

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The Euro, otherwise known as the “anti-dollar”, should strengthen unless sovereign default issues come back into play.  Not to mention the strength in oil, which has shown a strong positive correlation to the Euro.  This also benefits the commodity currencies (Aussie, Kiwi, and Loonie) in that order due to the interest rate differentials.

So, it appears to be back to a “risk-taking” day with the dollar down, everything else up.  Look for this theme to continue well into the first half of this year.  The only way this gets derailed is if the Fed makes a move on interest rates or if there is some sort of global crisis.

So the million dollar question is what is going to cause the Fed to act?  Normally, I’d be inclined to say that an improving employment picture or the threat of inflation would be the catalysts, but I’m not even sure that these will be enough.  With the catastrophe that is US national debt, Bernanke is begging for any type of inflation to help mitigate this, so it could be some time before we see rate hikes.  Economists are now looking at mid-year as the most realistic chance of this occurring, but if then employment picture and by proxy demand doesn’t pick up, then this could be entirely off of the table.

Also to note today is the employment figures coming out of Canada, which showed a small loss vs. a gain in the month of November.  The Canadian dollar (CAD) is down across the board.  While the Loonie benefits from commodity gains, it should lad both the Aussie and the Kiwi due to lower interest rate differentials.  The Loonie is also somewhat dependent on US recovery as the US is the largest recipient of Canadian exports.

If US dollar weakness continues to be a theme well into 2010, then we are going to see MAJOR commodity inflation.

This means that if you hold US dollars you could see a MAJOR reduction in your purchasing power.  There are ways to protect yourself from this happening, but you have to know what you’re doing.  And that’s why we offer our currency trading courses!  They are affordable, convenient, and could help you save your nest egg from dollar destruction!

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So what does this all mean?  Well in a word: trouble.

The US economy is not adding jobs nearly as quickly as the government had hoped.  With all of the enormous amounts of stimulus spending, we have little to show for it.   As a result of this figure, the US dollar reversed course and immediately began to weaken.  If anyone had any delusions about a US rate hike in the first quarter of the year, they can pretty much forget about it as its now off of the table.  Unless the dollar tanks so badly that Bernanke HAS to do something.

My guess is that we’re going to be looking at Japan 2.0 here in the US, our own version of their “lost decade”.

Just to illustrate the volatility that can occur around this figure, take a look at this chart of EUR/USD: (click chart to enlarge)

Close to 100 pips in a few minutes!

This could make an interesting year for the US dollar.  There are 2 basic ways that we will see dollar strength this year; either through interest rate hikes or risk aversion plays.   So while this logic may be a bit counter-intuitive to some, it’s going to be very important to take our clues from the other markets to see which theme is playing out.

And of course don’t forget that the dollar can continue to weaken well into this year, the question is going to be that if things don’t get better on the employment front, at what point does that filter through to the other markets?

Only time will tell.

To learn more about how these government figures can affect your savings, be sure to check out our forex trading courses!