Weekly Forex Outlook—The Trend Continues

10/28/2008 10:02 am EST

Focus: FOREX

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

The market continued its trend in favor of a stronger USD and JPY last week, which has continued to benefit longer-term trend traders. The daily issues that seem to be driving the market appeared to be amplified each day during the last week. Panic finally reached extremes around the global financial markets on Friday and pre-market trading in the US was largely blocked as prices dipped very quickly. Fortunately, the underlying trends are likely to benefit from an escalation of worry and panic. However, the fact that trading is being driven by a change in sentiment does minimize the impact of planned announcements. Next week's breakouts in stocks as well as in the forex are likely to continue to be driven by the unexpected and the unknown rather than the planned.

One announcement that is likely to push things around is the FOMC release on Wednesday. I think most traders and analysts are expecting a quarter-point rate cut to 1.25%, but a half-point cut is not out of the question. Interestingly, the Fed has recently been draining reserves from the market. I have been somewhat surprised to see them do this so frequently over the last two weeks. This opens the possibility (very small) of no rate cut at all. The Fed drains reserves to raise the overnight rate. Is this a signal that the credit market is beginning to ease? I think that it is, but rather than solving the issue, it will likely just push traders' attention to the probability for a global recession and the risks of inflation.

A global recession is likely to continue benefitting currencies that are considered a shelter against uncertainty. Besides the USD, this includes the CHF. CHF quoted forex crosses are likely to see additional downside as the franc strengthens. For example, the AUD/CHF broke out of its recent consolidation on Friday, and the franc may be good for a fresh round of gains against the commodity currency.

By John Jagerson, of PFXGlobal.com and LearningMarkets.com.

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