Into The New Year We Go

Full volume will not return to the broad international marketplace today and trading may remain thin until the middle of this week. Many markets are still closed today for the holiday even though New Year’s Day was celebrated this weekend. The USD has traded slightly weaker against the EUR and GBP the past couple of sessions, but this must be taken into the context that volume has been extremely thin. Today the U.S. will release its ISM Manufacturing PMI and a slight improvement is expected. However data will not return to full reporting until tomorrow and it is possible that Tuesday could be the first day in two weeks that fundamentals are actually factored into what has largely been a marketplace based on sentiment and momentum.

The later end of this week the U.S. will release jobless data and the Non Farm Employment Change numbers remain very important. However for the next day or so investors who are returning to their offices will also be looking at commodity data and the lingering questions regarding Sovereign Debt in Europe. Commodity prices have found a breath of life and have found themselves climbing. Gold is near its record high as it trades around the 1420.00 USD an ounce mark. The AUD continues to be a magnate for backers because of the strong commodity prices and its economy which is perceived to be healthy compared to many of its counterparts. The question is how much speculation is a factor in commodity prices.

The markets have been quite light regarding volume the past two weeks, but the JPY and AUD have performed very well and have found a good amount of added value. The question is what will happen when all investors return as participants. Today and tomorrow may prove the last couple of days to take advantage of trends that may not have much fundamental backing. The JPY and AUD will prove one way or another - a critical barometer for the beginning of 2011. This because a strong JPY typically means a high degree of risk adverse trading, and a strong AUD means that not only commodities are strong but that there is some risk appetite abounding. This is obviously divergent thinking and one of the ways to decipher that we are not seeing exactly normal market conditions. Not to say that the JPY and AUD cannot be strong at the same time, but this trend will have to be watched closely the next month.

The core problem going into 2011 is the sentiment that both the USD and EUR have difficulties ahead of them for a variety of economic reasons. While trading these two currencies, the prime decision factor is likely to be which one of these major currencies is less ugly than the other. Emerging markets piled in plenty of strength the past six months and their currencies did well. However emerging markets are not overly happy about having their currencies become valued at such heights, particularly if they are an exporting country.

There are big issues that will have to be dealt with in 2011 by government officials in many nations and economic spheres. The economic crisis is not finished yet and the potential for dangerous surprises lurk. Volatility was a staple of trading in 2010 as currencies saw their values under pressure and hit by swift ranges. The USD will continue to be an important focal point for investors worldwide as they garner their sentiment and factor it into their outlooks. While some are talking up the prospects of a stronger U.S. economy, it remains to be seen if unemployment and housing are going to recover in 2011. And the EUR is likely to continue to hear whispers about debt problems and how slow growth will impact austerity plans.

Again, volume will likely remain quite light today and will start to pick up tomorrow, but traders should not expect normal markets for a few days as investors slowly return from their holidays.