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There are times when the major FX rates present problems for a trader in that the fundamental backdrops appear to have drivers that are negative or positive for both pairs. I feel we are currently at that point for most of the major pairs (cable aside). My previous posts highlighted the potential turning point in the dollar and there was nothing in last week’s price action last week to question that view.

What has changed is that the euro received a boost this week due to the 1 year refunding, which did not tap the full allocation. However, reading between the lines showed that while the absolute tap was lower, the number of institutions participating nearly halved. This means that each one took nearly double the amount of funds as a year before. I can think of two reasons why this may be. First, they need the funds, or secondly, they feel the need to raise their capital base as a result of concerns over future counter party risk. Neither scenario is positive, and points towards further banking woes later this year.

French and German banks are said to be particularly exposed to peripheral Euro Zone sovereign debt. When analyzing comparable price action, what is clear is that there is a divergence between equity markets and the currencies that are most correlated to it. We have already seen the dollar fail to get benefit, but looking at the Australian and Canadian dollars show that both are still some distance from making new breaks of this year’s high or lows.

A more surprising pattern is the Aussie/Yen which normally tracks equity weakness slavishly. That has also yet to make new lows. This means that for the equity to break to be confirmed the currency markets must follow.

The other main area of interest is the emergence of vertical trends in the euro and pound cross rates against the risk currencies. The reasons for the fundamental bullishness I have on the pound have been documented before, but last week I received strategic weekly and monthly positive signals as well with similar signals on the euro. Even the traditional weak relationships for the euro against the yen and Swiss francs have posted positive signals as well.

However, one of my mantras is buy the strongest, sell the weakest. My bias remains to be positive towards the pound and euro against the risk currencies. Any breaks of those to new highs or lows against the dollar would provide another positive argument that the cross rate trends could have considerable longevity.

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