Forex Outlook

The Forex Outlook for the next week is extremely uncertain - with mixed signals. A prudent strategy is to take/protect profits when opportunities permit. A short-term focus is the most appropriate style for the weeks ahead. Short-risk positions could be given some more slack if recent range lows are broken.

Traditionally September is when positions are entered into for the duration of a year. With  the present pervasive economic sluggishness and pessimism, staying short-risk is a more than fair bet. But remember nothing is certain in love and forex.

This weekend, 27 central bank delegations gather in Basel to set final details of reforms concerning bank capital adequacy regulations. The issues amount to how much additional capital should be required and over what time frame. Germany, leading the charge for lower capital increases with a longer implementation period (10 years starting in 2013), with the US promoting a higher capital and liquidity requirements to be imposed more quickly (5 years from 2013).

Germany is opposed to more stringent requirements fearing its banking sector could be unfairly hurt by having to raise larger amounts of capital. This would potentially inhibit traditional lending activities and undermine economic recovery. European banks are less well capitalized than US. Thus a shorter timeframe to raise capital would have a EUR-negative impact. With the relatively long timeframes involved (either 7 or 12 years from now to meet new capital requirements), the short-term market impact might only be marginal.

Heightened concerns over the European banking sector are a concern at present. With additional burdens  a more extreme spasm of risk aversion could be expected. A compromise seems likely, although it may only be slight. This next week might see some volatility on rumors or knee jerk reactions to news from Basel - but the end result is most likely to be little overall change. The more significant factors which could see a rise in bot the Aussie and the Kiwi is trade data from China.