Volatility continued last week as traders are seemingly split in their outlook for the future. On one hand are the traders that see value in stocks and riskier currencies after a month-long slump. On the other side of the fence are those traders that are pointing out that new risks continue to emerge. The question is no longer if credit contagion from Europe will continue to occur as much as how far reaching will it be?
Also, political uncertainties that have swept the world have been replaced with military tensions as seen first in North Korea and last week in Israel. This split sentiment has led to sharp moves across all asset classes. This is especially seen in stocks which seem to have been moving up and down over 1.0% on an hourly basis.
Looking at the dollar, the usual trends are continuing with dollar gains during times of risk aversion and weakness during risk rallies. Looking ahead, this trend may be tested this week with the release of US Trade Balance and Retail Sales numbers. Recently, Forex traders have been paying more attention to the Trade Balance figures, specifically to the growth in exports. If export growth continues to outperform imports, and Retail Sales are better than expected, we could see both the dollar and US stocks both move higher, as an improving US economy may pressure the FED to raise its FED Funds Rate.
The Euro continued to be in the defensive last week as the EURUSD traded to another new four year low of just above 1.2100. Forex traders and analysts seem to believe that it is a forseen conclusion that the EURUSD will break below 1.2000. With so much of the Forex market taking a negative opinion on the Euro, this should be an ideal time for contrarian traders to be loading up on the currency.
However, with the EURUSD allready down 20% from last year's highs, it seems that buyers are taking a very passive approach to the EURUSD and are in no rush to take positions. Another possibilty is that Euro bulls have tasted defeat repeatedly and there is limited fresh money on the sidelines that is waiting to jump in.
Looking ahead, the ECB meets on Thursday for its monthly interest rate policy meeting. In the past all eyes would be keyed in on ECB President Trichet during his press conference. However, Trichet has lost credibilty in the past few months over his handling of the Greek debt problem. Specifically, Forex traders were turned off when Trichet stated that the ECB wouldn't accept Greek Debt as collataral or resume its asset purchase facility, and than within a week retracted on both of those policies. Therefore, any pro-EU rhetoric is expected to be met with a grain of salt from the Forex community.
News was pretty light from the UK last week as no news was good news for the pound. As such, the GBPUSD rallied from around 1.4450 to highs of 1.4765. Looking ahead, things should start to heat up as the Bank of England holds their MPC meeting on Thursday. The previous two meetings were mostly ignored by Forex traders as no policy changes were expected with the UK's election occurring. This week, though, the Bank of England may begin to become more proactive and its Governor, Mervyn King, has hinted that he may restart asset purchases again to avoid a double dip recession.
Therefore, if once again no changes occur, Forex traders may take the inaction as a vote of confidence in the UK economy, which could lead to pound gains. Currently, 1.5000 resistance for the GBPUSD is the main barrier that the pair must trade above to prove that positive sentiment has returned.
The big mover of last week was the yen, which weakened considerably after the resignation of Japanese Prime Minister Yukio Hatoyama. The move wasn't a complete surprise but shook up the ruling Democratic Party and has created a cloudy political outlook for Japan.
Although Hatoyama advocated a weaker Yen, Forex traders are worried that his replacement may increase pressure on the Bank of Japan to start aggressively intervening. This uncertainty has caused the USDJPY to trade about 400 pips higher to around 93.00 (from last week's lows of 89.00). Looking ahead, the yen may get some relief this week when the political outlook becomes clearer.