FOREX: How to Determine Appropriate Effective Leverage

To get started, let’s look at what leverage is and why it is important to generally use less leverage rather than more leverage. Later on, we will explain the simple calculations needed to determine the effective leverage on your trading account. What is leverage? Leverage refers to using a small amount of one thing to control a larger amount of something else. As individuals, we use leverage to some degree in a portion of our daily lives. For example, when you buy a house on credit, you are actually leveraging your personal balance sheet. Let’s say you wish to buy a $200,000 house but you don’t have that much cash on hand. So you put a 20% down payment of $40,000 on the house and make regular payments to the bank. In this case, you are using a small amount of cash ($40,000) to control a larger asset ($200,000 house). In the stock market, many margin accounts allow you to lever up your purchases by a factor of 2. So if you have a $50,000 deposit into a margin account, you are allowed to control $100,000 of assets. How is Effective leverage calculated? To determine the amount of effective leverage used, simply divide the larger asset by the smaller instrument. So in our housing example, we divide the value of the house by the equity in the house which means the house was levered 5 times. ($200,000 / $40,000 = 5 times) In the stock market example, our leverage is 2 times. ($100,000 / $50,000 = 2 times) There is simple formula to determine your account’s effective leverage. This formula is printed below: Total Position Size / Account Equity = Effective Leverage EXAMPLE: Now, let’s take a hypothetical trader and calculate their effective leverage in their forex account. Let’s assume that a trader with $10,000 equity has 3 positions open noted below: 20,000 short the EURUSD 40,000 long the USDCAD 10,000 long AUDJPY The traders total position size is 70,000. (20k + 40k + 10k) Using the formula noted above, the trader’s effective leverage is 7 times. (70,000 position size / $10,000 Account Equity = 7 times) How do I know how much leverage to use? There is a relationship between leverage and its impact on your forex trading account. The greater the amount of effective leverage used, the greater the swings (up and down) in your account equity. The smaller the amount of leverage used, the smaller the swings (up or down) in your account equity. In our trading courses, we frequently talk about using less than 10 times effective leverage. Just because you have access to a higher amount of leverage in your account does not necessarily mean you want to use all or any portion of it. Think of it like an automobile or motorcycle. Just because the machine could run at speeds of 200 miles per hour, that does not mean YOU necessarily need to drive it that fast. You see, the faster you drive it, the more likely you are to get into an accident. Therefore, you are in greater risk of bodily injury driving at higher speeds and leverage is similar to that analogy.More leverage puts your trading account at risk. When you use excessive leverage, a few losing trades can quickly offset many winning trades. This is evident through AvaFx profitability statistics on how much capital to trade forex with. To clearly see how this can happen, consider the following example. Scenario: Trader A buys 50 lots of AUD/USD while Trader B buys 5 lots of AUD/USD. Questions: What happens to Trader A and Trader B account equity when the AUD/USD price falls 100 pips against them? Answer: Trader A loses 50.0% and Trader B loses 5.0% of their account equity. Example TRADER A TRADER B Account Equity $10,000 $10,000 Notional Trade Size $500,000 (Buys 50, 10K lots) $50,000 (Buys 5, 10K lots) Leverage Used 50:1 (50 times) 5:1 (5 times) 100 Pip Loss in Dollars -$5,000 -$500 % Loss of Equity 50.0% 5.0% % of Equity Remaining 50.0% 95.0% By using lower leverage, Trader B drastically reduces the dollar draw down of a 100 pip loss. For these reasons, that is why in my trading I choose to be even more conservative and oftentimes use less than 10 times leverage. The appropriate amount of leverage for you will be based on your risk appetite. An aggressive trader may utilize effective leverage amounts closer to 10 to 1. More conservative traders my utilize 3 to 1 or less.

Play Foreign Currencies Against The U.S. Dollar And Win

For decades, if not longer, the U.S. dollar has been known as the world's reserve currency. Foreign investors and central banks have gobbled up greenbacks and debt issued by the U.S. government on the premise that the dollar is the world's dominant currency and American economic strength will bolster returns on dollar-denominated investments. While the conventional wisdom regarding dollar strength has proved to be true over the years, it is important that investors remember that currencies act just like stocks or other financial instruments. They enjoy runs of success and suffer through periods of doldrums. And while the dollar has been a highly desired currency for the international investing community, it experiences periods of decline. A fall in the dollar isn't cause for panic, though. Savvy investors can exploit the mighty greenback's decline when it happens and profit from it. Best of all, the avenues to profit from a dollar drop continue to increase. Where to Turn When the Dollar Tumbles There are generally a few key warning signs that indicate a decline in the dollar is on the horizon. A consistent pattern of key interest rate cuts by the Federal Reserve, a surge in the national debt and rising commodity prices, especially among gold and oil, can all help investors identify potential peril for the dollar. And when the dollar falls, that likely means other key currencies are rising, because investors are flocking to perceived quality. For example, a tumble in the dollar combined with rising exports and economic growth in Japan would lead investors to the Japanese yen. On the other hand, if U.S. economic growth is stagnant, but Europe and the U.K. are performing well, the euro and British pound become safe havens for currency investors. (For more insight, read Top 8 Most Tradable Currencies.) Another avenue to consider is the Swiss franc. While Switzerland is in Europe, the country doesn't participate in the common currency and likely never will. In addition, the Swiss government and central bank take almost painstaking efforts to keep the franc strong relative to competing currencies. As such, in 2009 the franc ranked as the world's fifth most-traded currency behind the U.S. dollar, euro, pound and yen. (For more, see What are the most common currency pairs traded in the forex market?) Watching the Dollar? Watch Commodities, Too Because many commodities are denominated in dollars, meaning their quoted price is in dollars, investors should watch certain commodity markets to get a sense of where the dollar is headed. For example, rising oil prices have generally resulted in dollar weakness because the dollar's purchasing power suffers and consumers get less gas for their cars and heating oil for their homes when crude oil prices rise. To hedge against the dollar's fall when commodities are in a bull market, look toward commodity-based currencies such as the Australian and Canadian dollars. When precious metals, such as gold, are in high demand, the Australian dollar often benefits. Likewise, Canada's dollar rises when demand for crude oil surges. Another more recent play on a commodity currency is the Brazilian real. Formerly an emerging market, in 2009 Brazil stands as the 10th largest economy in the world and is rich with natural resources, particularly oil. (For more, see Commodity Prices And Currency Movements.) Plenty of Options to Profit From the Dollar Decline Trading in the foreign currency markets can be daunting as the daily dollar volume in these markets dwarfs that of U.S. equity markets. Investors need to be aware that playing in FX markets is not for the faint of heart and they can lose more than their initial investment. For many, the best choice is to leave this arena to the professionals and seek out other methods for profiting from a fall in the dollar. Fortunately, there is no shortage of products to help investors do this. One is the U.S. Dollar Index, which tracks the dollar against a basket of foreign currencies. It is updated 24 hours a day, seven days a week and trades on the New York Board of Trade. There is also a plethora of mutual funds that track foreign bonds or short the dollar against the other currencies. These funds give investors the international exposure their portfolios need without the headache of directly tracking wild intraday swings in the currency markets. (For more insight, see Taking Advantage Of A Weak U.S. Dollar.) Equities, both international and domestic, provide another area for investors to profit from a dollar slide. If the forecast appears grim for U.S. equity markets, certain foreign markets may be poised to benefit. Of course, there are U.S. stocks that can benefit from a fall in the dollar, too. Large multinational firms that count on overseas markets for a fair amount of their profits benefit when the dollar is weak as they convert a British pound or Japanese yen back into a greater amount of U.S. dollars. Names like Procter & Gamble (NYSE:PG), General Electric (NYSE:GE) and PepsiCo (NYSE:PEP) come to mind. (For further reading, see Currency Moves Highlight Equity Opportunities) Conclusion Investors need not suffer at the hands of a weak dollar. The methods to protect one's dollar-based investments are plenty and effective hedging can serve as more than just protection: it can boost a portfolio's bottom line. In addition, the global economy means there are global opportunities to help investors sleep a little easier when the dollar drops.

How To Talk Like An Investor

When it comes to understanding the long and short of investing, most beginner investors must learn what seems like a new language. In fact, the phrase "the long and the short of it" originated in financial markets. In this article we discuss certain key terms that will help you better understand and communicate with other market participants. These terms are used in the equity, derivative, future, commodity and forex (or currency) markets. You will learn what buying, selling and shorting really mean to investors and how they can use certain terms interchangeably with more confusing words like bullish and bearish. To compound the issue, options traders add in a few other terms like writing a contract versus selling one. When you can communicate properly, you will be better informed and can make wise investment decisions. The Long and the Short of It The financial markets allow you to do a few things that are really common in everyday life and a few things that aren't. When you buy a car, you own that car. In the stock market, also known as the equity market, when you buy a stock, you own that stock. However, you are also said to be "long" on the stock or have a long position. Whether you are trading futures, currencies or commodities, if you are long on a position, it means you own it and hope it will increase in value. To close out of a long position, you sell it. Shorting will likely seem somewhat foreign to most new investors because shorting a position in the equity market is selling stock you don't actually own. Brokerage firms allow speculators to borrow shares of stock and sell them on the open market, with the commitment to eventually return the shares. The investor will then sell the stock at the day's price in the hope of buying it back at a lower price while pocketing the difference. Catalog companies and online retailers use this concept daily by selling a product at a higher price, and then quickly buying it from a supplier at a lower price. The term originates from the situation where a person tries to pay a bill but is "short" on funds. You may be interested to know that some people consider shorting to be unpatriotic or "bad form." During the Great Depression, John Pierpont Morgan (J.P. Morgan) was famous for the phrase, "Don't sell America short." He was attempting to influence short sellers from pushing stocks lower. (The debate against short selling rages on to this day. See Short Selling: Making The Ban and Questioning The Virtue Of The Short Sale.) The Currency Caveat When trading foreign currencies in the "spot" market (currencies and many commodities are traded in the futures or spot markets), you are usually long one currency and short another. This is because you are exchanging one currency for another and therefore, various world currencies trade in pairs. For instance, if you think the U.S. dollar is going to rise but the euro is going to fall, you could short the euro and be long on the dollar. If you feel the dollar is going to rise and the Japanese yen will fall, you could be long on the dollar and short on the yen. (Also check out our Forex Tutorial for more in-depth explanations.) Sentiment Speak Other terms that are often new to beginning investors are "bullish" and "bearish." The term bullish is used to describe a person's feeling that the market will go up, while bearish describes a person who feels the market will go down. The most common way people remember these terms is that a bull attacks by ducking its head and bringing its horns upward. A bear attacks by swiping its paws down. Chicago is the home of commodity and futures markets; these markets are so ingrained within the identity of the city that the professional basketball team is the Bulls and the professional football team is the Bears. In fact, the Chicago Cubs' mascot is a bear cub. Only the White Sox seem to be the odd one out in this correlation. (To learn more, see The Wall Street Animal Farm: Getting To Know The Lingo.) It is also common for investors to use the terms "long" or "short" to describe their market sentiment. Instead of saying they are bullish on the market, investors may say they are long on the market. Similarly on the downside, investors may say they are short on the market instead of using the term bearish. Either term is acceptable when describing your market sentiment; if you are bearish, you may also say you are short; if you are bullish, you may also say you are long. It is important to remember that short and long usually imply that you have a certain position in whatever market you are trading, but as you can see, that isn't always the case. Derivative Dialects The derivative market is also known as the options market. Options are contracts in which one party agrees to buy or sell a certain security (security is a generic term for any financial product) at a set price and set time to another party. Options are very common in the equities market but are also used in the futures and commodities markets. The forex, or currency, market is known for very creative derivatives known as exotic options. For our purposes, we'll refer to options in the stock market since it is most investors' first introduction to derivatives. Options come down to calls and puts; call options give the contract buyer the right to purchase stock shares at a set price on or before a set date. Usually another investor will sell a call contract, which means they believe the stock will stay flat or go down. The person who buys the call is long on the contract, whereas the person who sells the contract is short. A put option allows the contract buyer to sell stock at a set price before a set date. Like a call option, there is usually another investor willing to sell the option contract, which also means that investor believes the stock will either stay about the same price or rise in value. So the person who buys the option contract is long on the contract and the person who sold the contract is short. Selling options while using the derivative dialect also gets more complicated because not only do they use the terms "sell" or "short" regarding the contract, option traders will also say they "wrote" a contract. Today, the contracts are standardized and no one really "writes" the contract, but the term is still very common. Covered calls are often one of the first option strategies investors learn; these involve the purchase of a stock and the sale of a call contract at the same time. The stock purchased acts as "collateral" in case the call is exercised by the option buyer and the seller can relinquish the shares while keeping the premium gained for selling the option. Because investors are buying a stock and selling a call at the same time, they use a "buy-write" order. (Refer to our Options Basics Tutorial to explore these topics in more detail.) Market Double Talk At this point, you may find yourself going back to reread some of the vocabulary that was just discussed. Let's do a quick recap. Investors will either say they are bullish, or long, on the market, or bearish, or short, on the market. If we are long one currency in the forex spot market, we are short another currency at the same time. This can be confusing but not nearly as confusing as the options market. In the options market, we can say we are bullish on a stock and then short a put because while being bullish, we can either buy a call or sell a put. We can be bearish on a stock and be long on a put because if we are bearish, we can either buy a put or sell a call. This may also mean that we are short on the market by going long on a put or long the on market by shorting a call. You can imagine the linguistic laughter that comes from a group of option buyers talking to each other. In many cases, and not just in the financial world, overcoming the language barrier will be one of the vital keys to success. Investing carries with it its own language barricades that must be broken down by translating the terms and subduing the syntax.

A Primer On The Financial Market

With the increasingly widespread availability of electronic trading networks, trading on the currency exchanges is now more accessible than ever. The foreign exchange market, or forex, is notoriously the domain of government central banks and commercial and investment banks, not to mention hedge funds and massive international corporations. At first glance, the presence of such heavyweight entities may appear rather daunting to the individual investor. But the presence of such powerful groups and such a massive international market can also work to the benefit of the individual trader. The forex offers trading 24-hours a day, five days a week, and the daily dollar volume of currencies traded in the currency market exceeded $3 trillion in 2007 (according to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivative Market Activity), making it the largest and most liquid market in the world. (To learn more about the forex market, be sure to check out our Forex Tutorial.) Trading Opportunities The sheer number of currencies traded serves to ensure a rather extreme level of volatility on a day-to-day basis. There will always be currencies that are moving rapidly up or down, offering opportunities for profit (and commensurate risk) to astute traders. Yet, like the equity markets, forex offers plenty of instruments to mitigate risk and allows the individual to profit in both rising and falling markets. Forex also allows highly leveraged trading with low margin requirements relative to its equity counterparts. Perhaps best of all, forex charges zero dealing commissions! Many of the instruments utilized in forex - such as forwards and futures, options, spread betting, contracts for difference and the spot market - will appear similar to those used in the equity markets. Since the instruments on the forex market often maintain minimum trade sizes in terms of the base currencies (the spot market, for example, requires a minimum trade size of 100,000 units of the base currency), the use of margin is absolutely essential for the person trading these instruments. Buying and Selling Currencies Regarding the specifics of buying and selling on forex, it is important to note that currencies are always priced in pairs. All trades result in the simultaneous purchase of one currency and the sale of another. This necessitates a slightly different mode of thinking than what you might be used to. While trading on the forex market, you would execute a trade only at a time when you expect the currency you are buying to increase in value relative to the one you are selling. If the currency you are buying does increase in value, you must sell the other currency back in order to lock in a profit. An open trade (or open position), therefore, is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position. (Learn more in Common Questions About Currency Trading.) Base and Counter Currencies and Quotes Currency traders must become familiar also with the way currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, U.S. dollar is considered the base currency, and quotes are expressed in units of US$1 per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are quotes in relation to the euro, the pound sterling and the Australian dollar - these three are quoted as dollars per foreign currency. Forex quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread. The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 134.85), the final digit of which is referred to as a point or a pip. For example, if USD/JPY was quoted with a bid of 134.85 and an ask of 134.90, the five-pip spread is the cost of trading this position. From the very start, therefore, the trader must recover the five-pip cost from his or her profits, necessitating a favorable move in the position in order simply to break even. More About Margin Trading in the currency markets requires a trader to think in a slightly different way also about margin. Margin on the forex market is not a down payment on a future purchase of equity but a deposit to the trader's account that will cover against any currency-trading losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade. Rollover In the spot forex market, trades must be settled within two business days. For example, if a trader sells a certain number of currency units on Wednesday, he or she must deliver an equivalent number of units on Friday. But currency trading systems may allow for a "rollover", with which open positions can be swapped forward to the next settlement date (giving an extension of two additional business days). The interest rate for such a swap is predetermined, and, in fact, these swaps are actually financial instruments that can also be traded on the currency market. In any spot rollover transaction the difference between the interest rates of the base and counter currencies is reflected as an overnight loan. If the trader holds a long position in the currency with the higher interest rate, he or she would gain on the spot rollover. The amount of such a gain would fluctuate day-to-day according to the precise interest-rate differential between the base and the counter currency. Such rollover rates are quoted in dollars and are shown in the interest column of the forex trading system. Rollovers, however, will not affect traders who never hold a position overnight since the rollover is exclusively a day-to-day phenomenon. (Learn more in Understanding Forex Rollover Credits And Debits.) Conclusion As one can immediately see, trading in forex requires a slightly different way of thinking than the way required by equity markets. Yet, for its extreme liquidity, multitude of opportunities for large profits due to strong trends and high levels of available leverage, the currency market is hard to resist for the advanced trader. With such potential, however, comes significant risk, and traders should quickly establish an intimate familiarity with methods of risk management.

Avail The Utility Of Profits

EUR/USD: Trading the FOMC Interest Rate Decision

Trading the News: Federal Open Market Committee Interest Rate Decision

 

What’s Expected:

Time of release: 12/13/2011 19:15 GMT, 14:15 EST

Primary Pair Impact: EURUSD

Expected: 0.25%

Previous: 0.25%

DailyFX Forecast: 0.25%

Why Is This Event Important:

The Federal Open Market Committee is widely expected to maintain its current policy in December, and the rate decision could spur a bullish reaction in the U.S. dollar as market participants scale back speculation for another large-scale asset purchase program. As Fed officials expect economic activity to gradually gather pace in 2012, the committee may see limited scope to expand monetary policy further, and the USD may appreciate further against its major counterparts as the fundamental outlook for the world’s largest economy improves. However, as Fed Chairman Ben Bernanke maintains a cautious outlook for the U.S., the central bank head may keep the door open to conduct another round of quantitative easing, and increased expectations for QE3 is likely to weigh on the USD as interest rate expectations falter.

Recent Economic Developments

The Upside

Release	Expected	Actual
Consumer Credit (OCT)	$7.000B	$7.645B
Pending Home Sales (MoM) (OCT)	2.0%	10.4%
Advance Retail Sales (OCT)	0.3%	0.5%

The Downside

Release	Expected	Actual
Change in Non-Farm Payrolls (NOV)	125K	120K
Average Hourly Earnings (YoY) (NOV)	2.0%	1.8%
Gross Domestic Product (Annualized) (QoQ) (3Q P)	2.5%	2.0%

The ongoing expansion in consumer credit paired with the faster rate of private sector consumption may encourage the FOMC to soften its dovish tone for monetary policy, and we may see the EUR/USD trade lower heading into the following year as the central bank conclude its easing cycle in 2011. However, the Fed may continue to highlight the protracted recovery in the labor market along with the slowdown in wage growth, and Chairman Bernanke may show an increased willingness to expand monetary policy in an effort to stem the downside risks for growth and inflation. In turn, we may see the EUR/USD reverse course following the rate decision, and we may see the exchange rate may work its way back above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as market participants increase bets for QE3.

Potential Price Targets For The Rate Decision

How To Trade This Event Risk

As the FOMC sticks to its current policy, market participants will be closely watching the policy statement for cues, and we may see a bullish reaction in the USD should the central bank talk down speculation for additional monetary support. Therefore, if the Fed strikes an improved outlook for the world’s largest economy and pledges to carry out ‘Operation Twist’ in 2012, we will need a red, five-minute candle following the announcement to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

On the other hand, the ongoing weakness in employment paired with easing price pressures may prompt the FOMC to cast a dour outlook for the region, and the committee may see scope to expand monetary policy further in order to encourage a more robust recovery. As a result, if Chairman Bernanke talks up speculation for QE3, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the F.O.M.C Interest Rate decision has had on U.S.D during the last meeting

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
NOV 2011	11/02/2011 16:30 GMT	0.25%	0.25%	-49	-29

November 2011 Federal Open Market Committee Interest Rate Decision

As expected, the Federal Open Market Committee maintained its zero interest rate policy in November, but lowered its fundamental forecast for the world’s largest economy give the ‘continued weakness’ in the labor market paired with the ‘significant downside risks’ to the growth outlook. In turn, Chicago Fed President Charles Evans pushed for ‘additional policy accommodation’ in order to encourage a more robust recovery, while Chairman Ben Bernanke highlighted a greater willingness to increase purchases of mortgage-backed securities in order to shore up the real economy. However, as Fed officials see the recovery gradually gathering pace over the coming months, the central bank looks as though it will carry its current policy into the following year, and we could see a growing rift within the committee as the diminishing risk of a double-dip recession limits the scope for another large-scale asset purchase program. Indeed, the initial reaction to the FOMC rate decision pushed the EUR/USD down to 1.3712, but the USD struggled to hold its ground following the press conference with Chairman Bernanke, with the exchange rate settling at 1.3746 at the end of the day.

Euro Drops to Fresh Multi-Month Low Exposing 1.2500 Further Down

• Spain looking to recapitalize; Greece working to secure bailout money
• Rumors of additional E.C.B rate cuts making the rounds
• EUR/AUD cross finally breaks to fresh record lows
• EUR/JPY remains under intense pressure
• French auction results fairly well received
• Aussie data comes in weaker than expected

Ongoing concerns over the health of the Eurozone and its impact on the broader global macro economy continue to dominate trade. The latest talk of Spain looking to recapitalize its banking sector, a German institution recapitalization and Greece working hard to secure bailout funds, has not inspired any confidence and we are once again seeing a continuation of risk correlated liquidation, highlighted by Euro declines. A decent French auction has also not helped to bolster the Euro at all on Thursday and the market has broken to fresh multi-month lows towards 1.2800. Rumors of additional rate cuts have also been making the rounds and this could put additional pressure on the beleaguered Euro currency. EUR/JPY continues to drop and has recently moved into the 98.00’s.

1. JPY -0.13%
2. CAD -0.57%
3. GBP -0.63%
4. NZD -0.75%
5. CHF -0.76%
6. EUR -0.81%
7. AUD -1.08%

Still, we see a point at which the crisis intensifies to the east and puts even more pressure on China, it correlated economies and emerging markets. One such correlated economy is Australia, and with the EUR/AUD cross rate trading over 85 big figures off its 2008 peak, we anticipate relative weakness in the Australian Dollar going forward, even against the Euro. Just as we saw the crisis spread from the US to the Eurozone and the USD start to find relative bids, so too here, we see the crisis spreading to Australia and the Euro finding relative bids. The EUR/AUD cross rate has now traded to fresh +20-year/record lows, and technically, charts are screaming for a much needed healthy corrective bounce at a minimum. Australian data overnight has not been encouraging and perhaps this could provide the initial spark for some form of a bounce in the cross rate.

Looking ahead, US Challenger job cuts, ADP employment, initial jobless claims and ISM non-manufacturing are the key releases in North American trade. But with all the focus on Eurozone deterioration, markets will likely continue to be influenced by these broader macro themes. Also worth noting is the potential for downgrades from the rating agencies on European countries after S&P hinted at such developments in late 2011. Global equity markets have been rather supported in recent trade, but are starting to show signs of renewed weakness. 

The Euro and risk correlated assets remain under pressure heading into Friday and at this point, there appears to be no sign of any relief for these markets. Rumors of an S&P France downgrade and an incident at a North Korean nuclear facility have not helped matters, and this weighs on an already stressed situation on the global macro front, with the Eurozone economy looking increasingly fragile. The latest suggestion by Greece’s PM that the country may default in March and the leave the Eurozone has been a primary driver of Euro selling over the past few hours and disappointing EZ auction results coupled with talk of recapitalizations have added to the high degree of uncertainty in the region.

At this point, next key support for the Euro comes in by the 1.2500 area, and we could see a test of this level sooner than even we had anticipated. We are also starting to see a potential breakdown in familiar correlations where USD performance had been inversely correlated with US economic data results. Economic data has been quite solid out of the US in recent trade and the stronger results have actually been inspiring fresh USD bids. As such, we continue to be very bullish on our outlook for the US Dollar across the board, and recommend looking to fade other major currencies against the buck over the coming months. Some of these currencies include the commodity bloc currencies, highlighted by the Australian, New Zealand and Canadian Dollars. Looking ahead, all eyes will be on today’s US employment report.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: After finally taking out the 2011 lows from January by 1.2870, the market seems poised for the next major downside extension. Overall, we retain a strong bearish outlook for this market and look for setbacks to extend towards the 1.2000 handle over the coming months. While we would not rule out the potential for corrective rallies, any rallies should be very well capped above 1.3500. Meanwhile, a daily close below 1.2850 on Thursday will accelerate declines.

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5360 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.