Forexs Fundamentals In Focus

2011 has started out of the gate with a focus on the fundamentals and less on the risk themes that were so dominate in 2010. While this is not tacit approval of where prices may be, there is some semblance of individual data guiding the markets.Case in point—this morning has started out with stocks higher across the board, but commodities are lower. Under last year’s risk scenario, this would be more of an anomaly than anything. As a result, we are seeing a lot of mixed trading as the market is unsure how to proceed.

As commodity prices are lower, so are the commodity currencies. Yet there is individual strength in both the Euro and the Pound, as economic data has dictated strength today. In the Euro zone, CPI data came in higher than expected, showing signs that inflation may be rearing its ugly head. In the UK, better than expected PMI figures and mortgage approvals data has pushed the Pound higher across the board.

Later today, we will get the minutes from the Fed meeting as well as factory orders which will likely give support to the idea of a US economic recovery.

In the forex market:

Aussie (AUD): The Aussie is lower as manufacturing slowed for the 4th straight month, according to the performance of manufacturing index, which showed a decline to 46.3 from last month’s reading of 47.6. Higher borrowing costs due to rate hikes helped dampen consumer spending. Also, the flooding is affecting commodity production facilities, particularly steel and coal. (Click chart to enlarge)

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Kiwi (NZD): The Kiwi is following the Aussie lower, as it is apt to do. Lower commodity prices, particularly gold off nearly 2%, has reduced demand. In addition, Bloomberg reported that carry trade strategies made slightly negative returns last year, which may be fresh in the minds of investors.

Loonie (CAD): The Loonie is lower as oil prices have retreated to 91 as demand has seemingly lessened. It was reported this morning that Canadian bonds performed the best of all countries last year, which could help drive money flows to Canada.

Euro (EUR): The Euro is higher this morning as CPI data came in hotter than expected, posting a 2.2% increase vs. an expectation of 2%. Unemployment figures in Germany gained vs. an expected loss (jobs gains) and French consumer confidence came in worse than expected. With the ECB mandate to control inflation as its primary function, this could set up for some interesting action as the balance between Euro debt crises and inflation muddies the water. (Click chart to enlarge)

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Pound (GBP): The Pound is higher across the board as PMI figures came in better than expected, reporting a reading of 58.3 vs. an expectation of 57.2. In addition, mortgage approvals and net lending figures came in higher than expected as well showing signs that the UK may not be dead just yet.

Dollar (USD): The Dollar is mixed and showing some strength as economic data and conditions appear to be improving. The Fed minutes later will likely show no change in sentiment among policy-makers, who at this point are content to let QE2 play out. Yesterday’s manufacturing data rose to a 7-month high.

Yen (JPY): The Yen is weaker against all but the Pac Rim commodity currencies, as economic conditions in the US are driving Dollar strength. There is no news or data due out for Japan this week.

As you can see, it is possible for both the Dollar and the equity markets to strengthen at the same time. As I mentioned in my 2011 preview, this may be a recurrent theme that we see this year. If you take stocks out of the equation, then today looks like a risk aversion type day, with notable Pound and Euro strength.

However, I don’t think 2011 is going to be as easy as “risk on, risk off” types of trades. It is important now more than ever that you have a good understanding of the fundamentals that can drive forex markets.

Everyone wants to be a technician these days and read the charts; however to take your trading to the next level, a fundamental understanding of the big picture can help turbo-charge your results!