Forex Trading - Market Update

Market Update
The Aussie sold off today with the daily candle closing roughly 100 pips lower. The Euro strengthened across the board, and GBP/USD closed almost flat on the day - (Check EUR/GBP.) The S&P 500 and Nasdaq closed slightly up on the day and the DJIA closed slightly lower.

EUR/USD
Rajoy (the prime minister of Spain) announced that Spain would not be seeking a bailout soon. He will ultimately be forced to ask for a bailout from the ECB when Spanish bond yields rise to unsustainable levels. For now, the 10 year Spanish government bond is trading at 5.748% (8.0% is the level considered unsustainable.) It appears that Rajoy is attempting to hold off on requesting a bailout until after the Spanish elections scheduled for Oct. 21st. (Spain being bailed out is not a popular notion among the people.) I think this comment from Rajoy was a mistake as it gives Spanish bond yields scope to the upside and the Euro scope to the downside. It intensifies Euro derived "risk off" moves. Right now, the Euro is trading at 1.2910. I think it's very possible that we could see a sell-off down to 1.2740 this week. (high of June 18th)

AUD/USD
The move lower in the Aussie was mainly triggered by the RBA cutting rates by 25 basis points. As I discussed in the previous post, market participants were pricing in a 25 bps rate cut at about 60%-65%. As consensus estimates by economists was for no rate cut, a significant amount of people were surprised by the rate cut, leading to a bigger sell-off. I think the Aussie has a long way to fall due to a slowdown in China and a future 10% drop in the S&P 500 (I think it's coming soon), but I will be extremely careful about trading it. If the Chinese announce a large stimulus package it could cause the Aussie to rally and provide it with underlying support. Also, the country of Australia is actually in fairly good shape compared to most debt-burdened western countries. You can check out economic statistics of the Australian economy here. (Their Debt to GDP ratio is less than 23%)

Looking Forward
I currently favor shorting AUD/USD, EUR/USD, and GBP/USD on any moves up.Wednesday, Thursday, and Friday are packed full of high level event risk that could spark major moves in either direction. While my bias is to the downside, one of the main things that I'll be watching is the U.S. equity indices. I'll be very skeptical about any significant move down in the currency markets if U.S. equity indices don't follow suit. If the stock market does start to fall, I'll be a lot more willing to let my short positions run.

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