Weekly Market Analysis

January can be the most difficult month of the year for forex traders.Most years dealers overload on positions at the end of the previousyear and then have to dig themselves out of a hole for most of January.

Weekly Edition- Difficult Markets

21:00 GMT- Jan 15 (global-view.com) January can be the most difficult month of the year for forex traders. Most years dealers overload on positions at the end of the previous year and then have to dig themselves out of a hole for most of January. This year it did not appear that dealers had overloaded positions coming into January. They have made up for that in the past week. Early in the year it had appeared that the EURUSD was headed higher, but then in the past week, momentum and sentiment seemed to have changed to negative. Now in the past 24-hours sentiment seems to have turned back positive in favor of the USD vs. the EUR. At the same time we have also noted that there has been good selling of the EUR on its crosses.

We have been looking for the reasons behind this price move. Market chatter has ranged from rumors (denied) that German Chancellor Merkel was going to resign, to comments over the past two days by ECB President Trichet where he seemed to be talking up the USD vs. the EUR for the second straight day. When asked if the EUR was too strong following the monthly ECB meeting on Thursday, Trichet answered by quoting Fed Chairman Bernanke and Treasury Secretary Geithner that the U.S. supports a strong USD. This implied the ECB is not pushing for a stronger euro. He did not appear to be suggesting that they would be driving the euro lower but his comments are undermining EURUSD support. The ECB seems to be increasingly worried about the weak state of the Eurozone economy. Another significant weight on the Euro has been growing concerns about the Greek sovereign debt situation. The EU seems to be taking a very hard line with the government. No bailout is coming from the EU, but they appear ready to help to pick up the pieces once the government has made all the difficult decisions.

Trade in the JPY has been particularly difficult. It appears that early fiscal yearend repatriations may have been offsetting renewed outflows as the JPY reassumes its role as the primary carry trade financing currency. Fin Min Kan modified his posture in favor of a weaker JPY to a view that the markets should set the value of JPY. Kan also has said that he must give sufficient consideration to expectations and hopes held by the business sector on the yen exchange rate. We are still concerned that Japan could slip back into deflation and that the JPY will be forced to weaken further over time. A sharp decline in factory orders underscored the deflationary problems in Japan that we have been citing here in recent weeks.

Euro on the Back Foot

11:00 GMT- Jan 15 (global-view.com) This has turned out to be a market without convictions. Those traders who are surviving have got to be quick on their feet to adjust to the winds of change that have been blowing in every few days. Keep a sharp eye on the crosses. Not only is the EURUSD weaker, but the EURJPY has fallen by even more. The EUR has been weighed down by rumors that German Chancellor Merkel is considering stepping down. Also, Europe seems to be using tough love on Greece. There is no stomach for bailing out the government or for papering over its problems. A Greek credit default is in the realm of the possible.

Furthermore, ECB President Trichet seemed to be talking up the USD vs. the euro for the second straight day. When asked if the euro was too strong Thursday, Mr. Trichet answered by quoting Mr. Bernanke and Geithner that the U.S. believes in a strong USD. By inference, this implied that he was not pushing for a stronger euro. He did not appear to be suggesting that the ECB would be driving the euro lower but his comments are undermining EURUSD support. The ECB seems to be increasingly worried about the Eurozone economy.

Risk trades are less of a focus for traders today. December Australian employment data yesterday gave the commodity trades a boost, but markets are trading in the opposite direction at this hour..

Today sees a slew of U.S. data with CPI, industrial production and the University of Michigan data the highlights. Check on the forex forum for up-to-date market developments and technical trading ideas. Also see the ECONOMIC CALENDAR for upcoming forex market events.

FOREX

EUR/USD is lower. The equity correlation trade has been working only off and on recently. The EUR is mixed on its major crosses. The ECB is backing away gradually from extraordinary policy ease.

EUR/CHF is steady. It has been established still well below its recent 1.50 SNB floor. USD/CHF is higher. The SNB recently reconfirmed a EUR/CHF support. The SNB made comments that it would continue to prevent ?excessive? franc gains against the euro. Excessive monetary ease is being scaled back even as rates were held steady for another quarter.

USD/JPY is down, and the EUR/JPY is sharply lower. Japanese forex policy is now aiming at weakening the JPY. The government and BOJ have reconciled their differences.

GBP/USD is steady. EUR/GBP is down. Mixed data have been triggering GBP instability. BOE King recently indicated that a weaker GBP could contribute positively to U.K. economy.

COMMODITIES and Commodity Currencies

The CAD is weaker. The Bank of Canada has been turning turned less dovish as the economy stabilizes. Canada could be one of the early major economies to raise interest rates, but not immediately.

The AUD and NZD are down. Risk trades keep cycling in and out. The RBA may hike rates next in February. Some expect an April RBNZ rate hike.

Gold and Oil are weaker. Gold, oil, equities and the commodity currencies are all carry trades. Gold is another anti-dollar.

EQUITIES & INTEREST RATES

Far East equity markets closed mostly higher. European bourses are higher. U.S. equities (electronic) are steady.

The U.S. 10-yr note is 3.71%, -2 bp. Fixed income markets are vulnerable as they consider the prospect of an end to excessive Fed ease and large borrowing needs by the the U.S. government. Nevertheless. Fed Funds should remain low for an extended time period.