Here’s Some Clarity On The Forex Markets Amid The Financial Chaos

The stream of news regarding bailout plans and credit markets remains endless, and market gyrations are still continuing, albeit to a much smaller extent. Today (Thursday) is one rare day this week whereby price swings are not that wild, and traders and investors actually have some time to digest all the humongous moves in the stock and forex markets, and to consolidate their fears. Yesterday central banks around the world including the Fed issued a joint statement regarding the cutting of benchmark interest rates in their respective countries - an unprecedented, never-before move.

Because of this simultaneous act of rate cuts around the world, some stock and currency traders suddenly do not really know what to do or what they can confidently expect; these are not normal market conditions, and indeed, the markets are pretty dysfunctional right now. Textbook guidelines are no longer helpful. Trading currencies based on the strategy of interest rate advantage is no longer relevant in these market conditions; for now, technical bias in currency charts will take precedence, with sentiment leading the way as per usual.

Out of the currency majors, USD/CHF and EUR/USD are the tamer pairs whereas GBP/USD and USD/JPY are pairs which are seeing the most volatile moves in forex trading, reflecting the strong bias of the underlying sentiment. One of the smartest things to do this week has been to exploit the aversion of risk by shorting carry pairs and buying the Japanese yen as institutions unwind their carry trades.

One currency that has one of the most bearish outlook is the British pound (GBP), mirroring that of its economy. The UK government’s £500billion plan to rescue the banking system will cost every UK taxpayer £16,000, and is likely to result in enormous tax raises and negatively impact pension funds as dividends are diverted to the Government. Meanwhile, a housing report from Halifax today showed that UK house prices posted the largest drop since 1983, declining 12.4% in September. In the forex markets, GBP/USD is trading below 1.7200 and still have the bias to fall towards 1.7000.

Meanwhile, the Euro, Australian dollar, New Zealand dollar and the British pound all rebounded against the Japanese yen today after the global rate cut stemmed the rate of decline in global stocks.

Stock traders are looking forward to the G7 meeting on Friday in Washington in the hope that perhaps there would be more coordinated actions from the G7 countries.

Economic Calendar For Friday:

Swiss unemployment rate 0545 GMT

Canada unemployment rate 1100 GMT

US trade balance, import price index 1230 GMT

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