Forex Trading - Market Update

EUR/USD
The Euro has been weak since coming off of its recent swing high on the daily chart at 1.3140. Risk remains to the downside as Spanish bond yields begin to rise again and there seems to be little scope for positive developments in the near term. Rajoy seems unwilling to request a bailout until the markets force him too; which only makes the overall problem worse for Spain.


AUD/USD
The primary driver of the Aussie should be general risk trends and developments out of China this week as there is no big ticket items for the Aussie on the economic calendar. So far, China's better than expected trade balance (Actual: 32.0B, Exp: 27.1B, Previous 27.7B) released over the weekend has propelled the Aussie higher. On Thursday, we should find out who the new members of the Politburo Standing Committee will be. The committee is likely to consist of seven members, who will make major economic policy decisions over the next five years. The members who are elected could have a major impact on expectations about future economic stimulus in China which in turn could impact the Aussie.


USD/CAD & CAD/JPY
These are my preferred pairs for trading expectations about the fiscal cliff. The Canadian dollar is a commodity based currency that trades similarly to the Aussie and the Kiwi in terms of risk on/off sentiment. However, while the Aussie (and to a lesser extent the Kiwi) are impacted by the economic factors of China, the CAD is heavily affected by economic factors in the U.S. If you trade the CAD you should take a look at this table. You can see that Canada does the majority of it's exporting and importing with the United States. Looking at this table, you can see that a lot of the Canadian exports are intermediate products, or "inputs" into U.S. production processes.

This information tells us that if expectations about U.S. production processes change, then the demand for Canadian exports should change as well. For example, when a U.S. New Home Sales print comes in much lower than expected, the CAD should weaken significantly as a decrease in demand for materials from Canada is priced in. On the other hand, The University of Michigan confidence survey should not have a strong effect on the CAD because it's a sentiment indicator. The trick to trading the CAD is understanding expectations about U.S. demand for Canadian industrial and manufacturing materials. As the Fiscal Cliff will have a major impact on economic growth in the United States, the Canadian dollar should be the most sensitive to developments.


USD/JPY
The recent round of stimulus from the BOJ didn't cause a substantial change in the expected level of inflation (and thus the expected real rate of return.) This means that during periods of "risk off" we should still see a negative yield change on the 10 year U.S. treasury note and downward movement in USD/JPY. This dynamic may change in the future as we anticipate the BOJ trying to increase inflation; but for now we must trade the dynamics as they are.