By Kathleen Brooks, Research Director UK EMEA, FOREX.com

FX is playing second fiddle to stock markets today. If you are a trader who likes trends then equities are where the established trends are. European markets are spending another day in the green. The FTSE 100 is within touching distance of the 2007 high at 6,607; however markets are already chatting about all-time highs in the UK index above 6,950 ? the high from December 1999. What that chatter does not include is what happened after the euphoria of that record high: the FTSE 100 sold off nearly 50% in the proceeding 2-years.

The downside isn't in focus right now, even if there are some whispers of concern about the lack of volume. However, the bulls are spinning this not as a warning sign, but instead as a sign that cash is on the side-lines that will eventually move into equities, so who cares. Nerves aside, right now the money likes momentum and stocks are where you are finding momentum. Global easy money is having a soothing effect on the markets, thus global equity markets, including the higher risk emerging market indices, are rallying even though commodities are soft and the economic outlook is uncertain after downgrades to global growth forecasts.

FX intervention risk rises

The FX market is not immune to this giant wall of money. USDSCAD is approaching parity even though the new Bank of Canada head is expected to target a weaker CAD and commodities (a key Canadian export) are soft. Likewise, not even an unexpected rate cut from the Reserve Bank of Australia can keep the Aussie at bay, mid-way through Wednesday's London session AUDUSD was approaching 1.0200 ? a key support level last week, but now a major short term resistance level. Even with the rate cut AUDUSD did not drop below 1.0150, which suggests that the RBA may have some work to do if it truly does desire a weaker currency.

Us Treasury yields could run into wall of resistance

It's also worth looking at other markets for signs that the equity house of cards could be about to collapse. On that note, US stocks markets continued into record-breaking territory yesterday even though Treasury yields also moved higher. These two tend to have a negative correlation and move in opposite directions, so what is going on? We think that this dichotomy is temporary and that Treasury yields are still adjusting to Friday's news that payroll growth in the last few months had been massively under-estimated by the Bureau of Labour statistics. But yields could be capped around 1.82% - the 50-day sma (which is still below the 100-day sma and signals a bearish trend), after all there is no sign that QE3 Treasury purchases will be tapered this year.

NZD and Scandi's run into giant walls of money

Giant walls of money tend to attract criticism and easy money flowing in to the NZD and Scandi currencies have not gone unnoticed. Overnight the head of the RBNZ said that the central bank had intervened to weaken the Kiwi. Although the amounts were fairly small (less than NZD 200 million at a time) it could be the precursor to more drastic action down the line to try and halt Kiwi strength. Likewise, Scandinavian officials have also tried to verbally weaken their currencies. The Swedish finance minister said

Tuesday that he was watching the SEK closely, after it appreciated more than 10% over the past year against the dollar. Norway's Norges Bank kept rates on hold today, yet it also said that it wanted a weaker NOK. The Bank is trying to tread a fine line between helping exporters with a weaker currency and trying to avert a credit bubble by not cutting rates any further. Unfortunately, verbal intervention could fall on deaf ears in this environment where yield is king. The Scandi's may have to take the South African approach; the SARB has threatened to cut rates later this month in an attempt to weaken the rand. In contrast to other commodity currencies the ZAR has weakened more than 15% this year.

What we are watching:

Overall, it's a fairly directionless day as top-tier fundamental data and news is thin on the ground. This is a good time to take stock and watch the price action of the markets. I will be watching: 1, if Treasury yields get thwarted at 1.82% - the 50-day sma. 2, If Scandi currencies move higher on the back of failed verbal intervention and 3, if the EUR continues to make its recovery and if 1.3160 holds as short term resistance, which has been the high since some stronger German economic data the last two days.

Re-published with permission. Views expressed are not by association FNArena's (see our disclaimer).

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