All Eyes on the Dollar, Euro and the Yen

Successful Forex traders know that it pays to stay abreast of the politics and economic policies of the countries whose currencies they’re interested in. Due to the financial upheavals and political instability across multiple nations over the past few years traders have plenty to keep track of at present.

The Portuguese Question

While the sovereign debt crisis in the Eurozone (EZ) hasn’t made as many front pages of late it is far from resolved and the situation in Portugal is certainly a thorn in the Euro’s side. Having recently lost two ministers; Minister of Finance, Vitor Gaspar, and Minister of Foreign Affairs, Paulo Portas, the incumbent Prime Minister, Pedro Passos Coelho, is faced with the considerable challenge of re-establishing political stability, and getting the country back on the road to reform as the nation battles with, what the Financial Post refers to as, its worst economic slump since the 1970s.

Andrew Speakman, market analyst at Hantec Markets, believes that, should Coelho fail “the Prime Minister could see the country further alienated from international capital markets and risk unwelcome debt restructuring. Should we reach this eventuality; the Eurozone will find itself well and truly back in the mire”.

Speakman explains that previously Portugal has been held up as the Troika’s poster country; having achieved two thirds of the fiscal consolidation required by the bailout. Should it fail now it would be a massive blow to investor confidence in the Euro.  However, Andrew states that; “Wider impacts of the growing unease in Portugal have yet to come to fruition and any implications for EUR/USD have, for the most part, been overlooked up to now”.

Britain Embraces Forward Guidance?

Both the ECB and the BOE have seemingly opted to embrace forward guidance; in a rather shocking move the normally dovish Mark Carney, the new Bank of England governor, made a strong statement during his first monetary policy committee meeting recently; by persuading members to vote against further quantitative easing in the third Quarter.

For better or worse, Speakman believes that once you begin using forward guidance it becomes very much a game of interpretation and that this will always lead to uncertainty.

Abenomics Gets a Chance

As widely expected Japanese Prime Minister, Shinzo Abe, has won the upper house election of the Diet, pulling off what The Economist called “one of the most remarkable political comebacks of modern times”.

Mr Abe now has the opportunity to implement what has been dubbed Abenomics: his three-pronged strategy consisting of monetary loosening, fiscal stimulus and pro-growth reforms. Speakman believes that the JPY is undergoing a complete political and economic revamp to try and snap its stagnant economy out of a two decade deflationary trap.  “If Shinzo Abe really is as committed to hauling Japan out of this as he has implied so far, then the next few years will be intriguing to watch. The task he faces truly is Mammoth”, he says noting that it will probably take a few months before discussions of new policies take place.

Ben Bernanke and Non-farm Payrolls

Speakman believes that the recent bout of Bernanke rhetoric makes it clear that any amount of economic tapering will be solely data dependent – especially on the Non-farm payroll data released on the first Friday of every month. “It is likely the Fed will pursue tapering in one quantity or another before the year-end as they will want to dislocate sooner rather than later. However, with the ‘Taper-O-meter’ swinging as violently as ever, I think they will hold off until the October meeting to be sure conditions have sufficiently improved”, he predicts.

Andrew advises short-term traders to be careful around such release dates as movements will become increasingly erratic and any big surprises may well lead to the kind of moves seen on the 10th of July when the EUR/USD surged over 400 pips.

Where Does this Leave Forex Brokers?

Speakman highlights EUR/JPY and USD/JPY as pairs to keep an eye on going forward; mainly due to their popularity and the fact that the USD and JPY are two of the most liquid currencies around. However, he also notes that the EUR/JPY bares a double edged sword in the sense that its sensitivity to factors outside Japan makes it quite volatile. “Often we see clean moves of over 100 pips upwards with the pair generally dragging the USD/JPY around with it, so it’s not a currency pair for the faint of heart”.

When it comes to the USD/JPY, Speakman remains bullish for the near future and will target 103 initially before likely grinding higher towards important resistance at 105.50, which represents the 62% retracement of the June 07 to October 2011 sell-off.

Bernanke and co clearly wanted to realign market expectations and reaffirm the conditions linked to tapering. They managed this, albeit in a roundabout fashion, with contradictory minutes and a surprisingly dovish comment from Big Ben recently that: ‘highly accommodative monetary policy is needed for the foreseeable future’.

Throughout, the Fed has pegged labour market conditions as a key variable in their conditions. This has given even greater emphasis to the already overhyped Non-Farm Payrolls data and this will likely be a determining factor.

The dollar is likely to strengthen as conditions on both sides of the Atlantic favour the greenback. Conditions in the EZ seem to be stagnating bringing with it a continuation of the growing divergence in central bank policy. Speakman believes that the rhetoric will be more neutral in the meantime as it seems transparency from the Fed hasn’t had the desired effect.  Markets will become more data driven as they realise that the Fed has said all it can and its agenda really is as dynamic as they have suggested.

Political instability is a fact of life, one which savvy Forex brokers pay heed to; making it their business to know what’s happening in the nations linked to their currencies of choice. The situation in Portugal and the actions of Japan’s Prime Minister stands to make waves over the coming months while the forward guidance policies of the US and UK could well add to the mix. Forex traders seeking to succeed will do well to stay abreast of any developments in these countries. 

About Hantec

Hantec Markets is a UK based FCA regulated Forex, CFD and bullion broker offering 100% uninterrupted No-Dealing-Desk execution and competitive spreads on MT4 and Currenex to retail and institutional traders worldwide. Hantec clients benefit from tight spreads, fast and fair trade execution, 1 hour account processing and credit card funding. All this is backed by a professional and dedicated client services team who speak over 15 languages.