CURRENCIES ARE NOW AT CRITICAL CROSSROADS
DIRECTOR OF CURRENCY RESEARCH, GFT
AS THE trading world returns from the holidays, capital markets find themselves at a critical juncture. The key question facing participants in the currency and equity markets is whether the economic recovery will continue into the year-end. Traders want to know if this is a sucker rally or just a pause in a long-term downtrend for the dollar. With many currency pairs range-bound, FX traders are keeping an eye on key levels.
For the euro-dollar, the 1.4450 top has become a ceiling with the pair repeatedly unable to break through the 1.4400 barrier and challenge the yearly highs. It will be interesting to see how the pair trades after most of the North American participants return this week. However, the longer it fails to retake the highs, the stronger the chance that a test of the 1.4000 level is likely.
Cable has been drifting lower for several weeks and remains well off its highs of 1.7058 set on 5 August. The pair was the first to turn upwards during the depths of the recession in the first quarter and may now be the first to correct, as UK data no longer shows signs of significant improvement. If the UK results begin to disappoint, 1.6000 could easily give way and open the path towards a more serious correction to 1.5000 in the fall.
Dollar-yen has been the steadiest of the majors finding equilibrium at the 95 level. However, the recent change in Japanese politics and the return of risk aversion has pushed the pair below 93 and a test of 90 looks probable. A rule of thumb is to measure the yen against the Dow. Although the correlation is far from exact, a move in the DJIA above 10,000 could take the dollar-yen closer to 100 while a drop towards the 9,000 level will likely push the pair towards 90. Equity traders remain bullish at the moment, but if the Dow drops through 9,000, then dollar-yen could follow its example.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their daily commentary at www.GFTUK.com/commentary or e-mail them at BorisandKathy@gftuk.com.