With no major U.S. economic reports scheduled for release today, we want to spend some time talking about where the opportunities are in currencies. Over the past 36 hours, risk appetite in the financial markets improved as Russia’s proposal for Syria to turn over its chemical weapons gains traction. There also seems to be very little support in Congress for a limited strike as the Senate postpones its vote. The U.S. dollar is losing its safe haven bid as equities and high beta currencies enjoy another relief rally. While a final decision still hasn’t been made, there’s a growing chance the U.S. government will opt for a diplomatic versus military solution and that would ease demand for U.S. dollars. However as we’ve seen in today’s price action, selling dollars broadly may not be the best idea because USD/JPY and USD/CHF have also benefitted from improved in risk appetite while the EUR/USD and GBP/USD have not been able to join in on the action.

Look for Bounce in Emerging Market Currencies

This suggests that forex trades need to be extremely selective with trading the U.S. dollar. The greenback has fallen sharply against the comm dollars (AUD, NZD and CAD) and could continue to decline, particularly against currencies whose growth outlook had once been underwhelming but is now improving. We also feel that some of the most attractive opportunities to sell the dollar will be against deeply oversold emerging market currencies. Last month, the plunge in currencies such as the Indian Rupee, Indonesian Rupiah, Turkish Lira and Brazilian Real made headlines around the world but little has been said about their recent recovery. The Rupee is leading the gains, rising 7% against the dollar since the beginning of the month, the Brazilian real is up nearly 5% and the Indonesian Rupiah and Turkish Lira are up more than 2.5%. If tensions around the Syria continue to ease, we could see a further decline in the dollar and a more significant recovery in these emerging market currencies. G10 currencies should also benefit from dollar weakness but as we have seen today, the sell-off could be limited.

Attractive Opportunities in Euro Crosses

It is also worthwhile to look for opportunities beyond the U.S. dollar. Today’s decline in French industrial production highlights the vulnerability of the Eurozone economy. Between the drop in activity in Germany and France along with the risk posed by the Italian subcommittee discussions on expelling Berlusconi, there could be additional downside opportunity in euro crosses such as EUR/GBP, EUR/AUD and EUR/NZD.

Looking ahead, the U.S. dollar could still strengthen but gains will be selective and narrow which makes it exceedingly important for forex traders to remain tactical.

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