Snapshot Overview of Overall FX Market Price Action in Final Days of 2010

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We are in the final days of trade for 2010, and the price action is not disappointing, with the market trading in a very choppy, directionless, unpredictable manner. Any Euro bids have been quickly sold to keep the major locked in some consolidation, while price action in Sterling has been similar. Meanwhile, the Swiss Franc has broken to fresh record highs against the buck, but at the same time has failed to hold onto to those gains with Usd/Chf immediately rebounding back above 0.9500 and holding above the previous record lows from September by 0.9560 to still suggest that a material base could be carving. Usd/Jpy has also broken down through critical short-term support by 82.00, but as per our analysis, inability to close below 82.00 keeps the multi-day consolidation intact and leaves the door open for a bounce back to retest and break the range highs by 84.50. Fundamentally, the latest Yen surge has also ramped up Yen rhetoric from local officials which should also serve as a prop for Usd/Jpy.

The commodity bloc continues to outperform, although, Aud/Usd has stalled out ahead of the post-float record highs from November, while Usd/Cad has once again failed to sustain any declines below parity. On the cross front, we continue to pay close attention to the Swiss and Aussie crosses, with both currencies standing out as the major outperformers. Eur/Chf and Gbp/Chf trade by record lows, while Eur/Aud and Gbp/Aud are also at major long-term cyclical lows. As such, we anticipate some form of a material catalyst into 2011 which will reverse these trends and offer some very compelling trade opportunities. Elsewhere, the Yen crosses have come back under some intense pressure with Eur/Jpy breaking to fresh multi-day lows below 108.00 and Gbp/Jpy dropping back into the 126.00’s. However, here too, we see risks for bullish reversals over the short-term at a minimum.

Moving on, there has been an escalation in talk over the direction of Fed policy going forward, with a number of notable hawks set to move into the FOMC voting rotation in 2011. Fed Plosser and Fisher are the key names, and given the current state of hyper-accommodation, we could start to see some major resistance with these views playing an influence on price action in the markets. Clearly the addition of these members makes a stronger case for broader USD upside, as they focus more on the need to raise rates to offset very real longer-term inflationary threats.

Looking ahead, it will be interesting to see how the markets respond to the return of the UK and Canadian markets after their holiday time away. The economic calendar for the day is not all that busy with German inflation readings, the Swiss KOF leading indicator, and BOE housing equity withdrawal number in the European session, followed by US mortgage applications and Canada Teranet/National Bank HPI in North American trade. US equity futures are marginally higher while commodities have been consolidating their latest gains.

Written by Joel Kruger, Technical Currency Strategist

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