Currency Trading Update

The contestant that grasped the top spot and stayed there from December 18 finally fell back in the rankings on Friday, becoming contestant number 3. It was contestants 2 and 3 from Wednesday that bumped him out (there was no trading on Thursday), as both aggressively traded EUR/USD. This is still the most popular currency pair in the contest by far, as 43% of executed trades on Friday were in EUR/USD, compared to 13% in USD/JPY, 6.5% in GBP/USD, and less than 5% in the rest of the pairs available.
Focusing on the new contestant number 1, he seems very likely to hold on to his position based on the floating profits he has accumulated. At the time of writing, there were four short EUR/USD trades still open worth over $190,000, as this contestant was well positioned for this morning's plunge in EUR/USD. There will be quite a bit of event risk on hand for both the euro and US dollar on Tuesday, though, so traders should beware of the increased risk of high volatility in the forex markets:

Asian Trading Session
*No key indicators due to be released.

European Trading Session
01/06/09, 05:00 ET
Euro-zone CPI Estimate (DEC) - Eurostat estimates for Euro-zone CPI are projected to show at 5:00 ET that inflation growth eased to a 1.8 percent pace in December from 2.1 percent. Given European Central Bank President Jean-Claude Trichet’s more bearish stance on economic growth, dovish comments by ECB Vice-President Lucas Papademos on Sunday, and the bank’s total of 175 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again on January 15, and weigh on the euro. On the other hand, if CPI manages to hold at or above the ECB’s 2 percent target, the currency could gain as the markets assume the central bank will not be as quick to reduce rates.

US Trading Session
01/06/09, 10:00 ET
US ISM Non-Manufacturing (DEC) - Conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to have worsened in December as the Institute for Supply Management index is estimated to fall to another record low of 37.0 from 37.3. Indeed, consumer confidence remains exceptionally weak, as the Conference Board’s measure also fell to a record low of 38 during the same month. We already know that the US economy fell into recession in December 2007, but this data will help to gauge how long the recession will drag on for. A weaker-than-expected result could weigh on the US dollar, but the long-term impact should be limited since the Federal Reserve as already cut rates to a all-time low range of 0.0 percent - 0.25 percent and has few additional options from a traditional monetary policy perspective.

01/06/09, 14:00 ET
Federal Open Market Committee (FOMC) Meeting Minutes (DEC 16) - The release of the FOMC’s meeting minutes at 14:00 ET from December 16, when they slashed rates to a record low target range of 0.0 percent - 0.25 percent, should draw some attention, especially if they highlight the Committee’s plans to support the financial markets via measures that “sustain the size of the Federal Reserve's balance sheet at a high level.” Many have accepted this as an indication that the Fed is pursuing quantitative easing, if it does seem that they will pursue buying “longer-term” Treasury securities, the US dollar could pull back as this would suggest that interest rates in the US will continue to fall. Discussions about how long the US recession will last could impact the market as well.

Terri Belkas
Currency Strategist
Forex Capital Markets LLC