FX Market Update

Market Conditions
Equity indices in the US and European session closed slightly down today. Anti-American sentiment across the world rose as protests increased following the release of an anti-islamic film. Tensions heightened between China and Japan as their disagreement over a group of small islands escalated into broad nationalistic anger across both countries. There are also growing concerns that Israel may attack Iran. I personally think that there is a high probability of such an attack occurring before the end of the year.

Looking Forward
When I have a clear picture of where I think the market will go, I will clearly lay it out here for all to read (as I did last Friday.) Currently, I'm not sure where the market will go tomorrow or for the rest of the week. Here are a couple of points to note though:

1. Market participation is continuously increasing at this point. (It was very low this summer) As participation picks up, volatility will increase.

2. I think we are currently over-extended at these prices. That doesn't mean we can't move higher; but I think the more likely scenario is to consolidate or move lower. The market is currently trending upwards though, so I will play any moves to the downside with caution. (dollar based pairs)

3. If we do see moves lower in the currency market (risk off) it will be important to classify what the risk off sentiment is being derived from. If it's the U.S. fiscal cliff, the Iran-Israeli conflict, Anti-American sentiment, any sort of global fears, the China-Japan dispute, or the Chinese Economy, I favor playing risk off derived from the above sources against the Australian dollar and New Zealand dollar to the downside. The demand for these currencies stems from risk appetite trends, as the main reason for buying these currencies is because of the high interest rates in their respective countries. I'm currently playing them against EUR and GBP, and I favor continuing to do so unless we see an substantial increase in "risk off" sentiment derived from Europe. Of course, any risk off behavior can be played against the USD, but playing a high yielding commodity currency against the EUR & GBP is attractive to me at the moment because it somewhat protects against a "risk on" scenario as well - (and because EUR/AUD & GBP AUD tend to trend well.)

4. There's going to be a lot of important information coming out of Japan this week, so I'm trading the Yen pairs with extreme caution. I think it's likely that the BOJ may forcefully intervene in the currency markets so I favor only playing the yen pairs to the upside (yen weakness.)

US Fiscal Cliff

I could write about it, but Tyler Durden has already posted an excellent article on the subject located here: http://www.zerohedge.com/news/goldman-fiscal-cliff-worse-it-gets-better

I expect it to be a prominent theme splashing across media headlines in the near future.


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