Posted by Allison on 24 March 2009, 09:38
If you are an active currency trader February provided many more opportunities to make serious money as we had yet another month of big moves that were well telegraphed in advance and fresh record highs and lows all over the place.
Forex is all about international trade, and with so many commodities priced in USD dollars, the strength and weakness of the USD is crucial, and the thing that influences the strength and weakness of any currency the most in the short term is that country's base rate.
A sign of the times for the Euro – US rappers have started incorporating Euro notes into their music videos. Briefcases full of money now appear as Euro. Several of the big-name retailers on 5th avenue in Manhattan have started to accept Euro as a form of payment. If this kind of shift is happening on the small scale, what may be happening on the Marco level?
Perhaps the biggest shock of February was that the Federal Reserve did not alter the US interest rates. Granted, this was after pounding rates dramatically in January of this year, and February is a short month ... and the Fed may wish to gauge the impact of past cuts before making any further moves, but based on the level of tinkering with interest rates before February the fact that US rates didn't budge at all during February was a surprise.
One of the main developments of the month was the records set by the Euro EUR against the US Dollar USD. It wasn't all one way traffic though. At the start of the month €1 EUR would buy you approximately $1.48, but this had slipped back into the 1.44s by the 9th. If the Fed wasn't cutting rates, surely someone would? But the European Central Bank didn't and by the end of the month The Euro had rallied up to $1.52.
XAU had another bumper month of trading. Gold Stared the month strongly at $925 per ounce, but some weakness crept in and by the end of the first week gold had gone as low as $884. Normal service was, however, resumed, and XAU continued its steady march upwards to reach a height of $972 by the 29th. The projections of some pundits of $1,000 price tag for gold during 2008 are looking more and more like a sure thing.
The Japanese Yen JPY was probably one of the more stable trading currencies with the USD for the month. This was in part because there were no interest rate movements; in part because the JPY is already quite high vs the USD. Without fresh stimulus this ratio of about 107 will remain as-is, but in the current climate “fresh stimulus” is a near certainty.
The same could be said of the UK Pound (GBP) versus the Yen (JPY) – the trading for February was for the most part within narrow ranges compared to recent months, barring one or two spikes as high as 213 and as low as 205.
On other fronts the Pound (GBP) did move into new territory vs the Euro as the ECB's stance on economic stability versus inflation concerns landed in favour of keeping interest rates higher to keep inflation lower. The month did not see too many dramatic moves, but nevertheless by the 29th £1 was buying only €1.31
Looking forward most people expect a steep cut by the US fed in March. This is by no means a done deal though. What people fail to note is that the Fed is going to run out of interest rates if they continue to cut as aggressively as they have in the past. A more likely option is to pump more liquidity into the system to try to make the cuts already enacted more effective.