As we near the end of the week for trading in London, the forex markets are still lively after yesterday's volatile action.
First we saw the Yen strengthen on comments by G7 officials out of Germany. This was followed by an across the board firming of the US dollar as the pound and the FTSE were both sold off on the back of the political uncertainty caused by the "should I stay or should I go now" saga of the final act of the Rt Hon Tony Blair.
Bad as Blair has become, God save us from Gordon Brown!
Significantly none of the 4 major central banks meeting this week moved to tighten monetary policy. This is perhaps one reason why the dollar is ending the week on a much more positive note.
The comments today from Japan’s Fukui would certainly lend support to the idea that the BOJ is going to move very cautiously, and further tightening will be painfully slow. News that Japans reserves rose this week from $871 Billion to $878 Billion is testimony to the fact they have for some time resisted a stronger currency in an attempt to subsidise the countries exporters.
It should be no surprise to anyone that the BOJ and MOF between them, for years now, have manipulated the Yen. They've successfully kept their currency artificially weak. The upcoming meeting of the G7 Finance Ministers is unlikely to offer any definitive action on this.
But politicians will talk about it anyway...and that can faze the markets. Which brings us back to the Pound...
Sterling looks set to fall further. The pound is and has always been vulnerable to political turmoil, especially given the current high level of cable. This has to be viewed in light of a dollar that is all of a sudden given to firming.
The majority of old positions in the market look dollar negative, which probably explains the current move. As far as the Euro is concerned, any move below 1.2500 would be very negative for the European currency in the medium term.
Next week looks like seeing further dollar strength given the failure of all the other major currencies to hold up against it. Even the Canadian dollar is ending the week on the back foot despite very positive demand for the Looney as result of huge M+A flows.
I will be advising buying dollars on any dips especially versus sterling with one eye on any break above 1.8800 as spelling a possible turn around for the pound. Unless this happens we will see sterling lower over the next week.
Yours,
Tom Tragett
Forex Profit Alert
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
