This month in the FOREX

By Scott Nourse

November was a month of sideways trading for many FOREX pairs as the big move lower in the dollar saw consolidation.  This is normal after several months of a strong direction as fewer participants are left to help continue the push.  We have returned to a point where the dollar bears heavily outnumber dollar bulls and exchange rates are reflective of this sentiment.  However, because so many traders are already committed to one side of the market, it may take some new catalysts to propel currencies further against the greenback.  The flatness we have seen in pairs such as EUR/USD suggest that there is some uncertainty about whether buying around 1.5000 makes any sense right now.  On the other hand, the lack of any significant downside moves indicates that few traders are ready to square those dollar shorts that remain.  We are left in technical gridlock.

The strong correlation between high-yielding currencies and equities markets here and abroad has not left us.  Almost daily we see a strong tie between the markets as traders are either buying risk or selling it.  For the most part, buying risk has been the trade since March and only recently has that tapered off.  Data has been mixed in the US as well as in Europe and other developed regions of the world.  We have not seen consistent improvement in all areas of the global economy, but rather scattered reports that are being deemed “less bad” by the investment community.  This tells me that they are looking for reasons to buy rather than sell.  As I’ve often said, data can be spun a number of ways depending on what a majority of traders are really looking to do with it.

Some of the most recent fundamental developments that promote risk-taking include yet another pledge from the Fed to keep rates low for a long time, less job losses each month in the US, and big corporate profits coming with streamlined business.  On the other hand, we have seen unemployment soar past 10% in the US, a number of political leaders around the world attempt to discourage excessive risk, President Obama mention “double-dip recession” and the latest is a potential $80B debt default in Dubai.  As traders in the US were celebrating Thanksgiving, it was learned that Dubai World was struggling to pay its debts that are owed to European and US banks.  Amazingly, this was only a setback for a day or two before more risk-taking returned to the markets.  It really is unbelievable how quickly investors can forget.

Of course, when we look to the bond markets it is clear they have not forgotten so quickly.  Instead, aggressive buying in short-term Treasurys has driven yields into the ground.  This means investors in the bond market see a lot more risk than equities and forex traders.  Who is right?  Only time will tell, but I think the bond guys know a thing or two.

As we enter the final month of 2009, it seems very unlikely that any news will send stocks or high-yielding currencies significantly lower.  Money managers will make sure they don’t give back their handsome profits in the final days of the year.  The highs may not yet be in place, but upside looks rather limited.  I believe range trading is the most likely scenario for the next four weeks.  This does not mean we will see a flat market, but rather one that is confined to nice ranges worth trading in.  Still, this is only a forecast.

Moving into 2010 it still seems to me that as long as corporate profits are solid and government stimulus money is spent, Wall Street will ignore Main Street and spew the “jobless recovery” rhetoric that must infuriate anyone who is unemployed.  This could propel the risk trade even further in the first three to six months.  Beyond there it is really a guess at this point as we will have to watch closely what policy decisions are made in our government and the Federal Reserve.  Tax hikes, whether open or hidden, along with tighter monetary policy will undoubtedly dampen the risk appetite seen today.  We will watch all developments closely and adjust our outlook accordingly as we move forward.