Forex Investment and Currency Trading

Over the weekend and into yesterday the FX market dealt with the bone-chilling stories about EURUSD nearly blowing down the 1.60 door, USDJPY below 100 (first since 1995), and USDCHF at parity (first time ever). But, by mid-day yesterday, the market’s seemed soothed in anticipation of today’s FOMC meeting.  Now one-week EURUSD and USDJPY implied vols are only 15% and 21%, respectively.  Now, everyone is waiting for the Fed.  Some people think that they will go a whole percentage point today (that’s 100bps to the layman).  But some only expect 50bps (a number that previously seemed huge).  Depending on what happens, we could see a big rally today in EM currencies as the interest rate differentials are bound to increase.  The question is just, how much?  Overnight the USD weakened against most EM currencies while remaining neutral with the majors (save against EUR, where EUR is up 0.60% again).  There were once again rumors going around about a China reval.  China hasn’t pulled the trigger on that yet, and there is no strong evidence they will soon, but they did raise the reserve requirement by 50bps, which they hope will take some of the pressure off and allow them to continue the CNY-appreciating spot fixings.

One of the biggest moves this morning is Cable, with the pound up almost 1% to 2.0170.  UK February CPI came out near expectations, which comforted the market, and the higher-yield today given Fed expectations is helping the currency perform (could be 5.25% vs 2.00% by the end of today).  A few minutes ago Canada CPI also came out, higher than expected.  The market was jumpy and though the reaction wasn’t immediate, USDCAD has moved from a low of 0.9905 to 0.9960, currently.  The 50-day MA is 1.0030 now, which could act as topside resistance from here.
USD/JPY has rebounded after its fall below 96 during yesterday’s volatile trading session.  The pair bottomed as retail FX margin traders in Japan exited short JPY positions driving USD/JPY lower. Yesterday’s move was likely overextended ahead of what the market expected to be a quite day of trading before the FOMC announcement today at EST 2:15.

AUD/USD  - After falling through yesterday’s trading, AUD has pared some of its losses and is appreciating this morning. With the Fed likely cutting rates by at least 75bp, the interest rate differential between the two nations will continue to expand. In spite of increased uncertainty in the market place, AUD is set to outperform today. RBA minutes reveal anxiety that persistently high inflation could drive inflation expectations higher still which would effectively push the interest rate differential wider still.

NZD/USD - The Kiwi dollar overcame its biggest fall in two weeks after the Prime Minister indicated that the country will “ride out any economic contraction.” This would indicate that New Zealand is not prepared to cut rates, and that the US / New Zealand interest rate differential should continue to expand.
USD/CAD has been trading in range this morning. Canada’s core inflation print surprised to the upside, resulting in early morning appreciation for the Canadian dollar on shifting rate expectations. However, most of those gains were taken back as investors were failed to be convinced that Canada will avoid cutting rates further. Look for CAD to continue trading sideways barring any surprise from the Fed.

Short term technical studies show support levels at 0.9820 and a resistance level at 0.9990. CAD is currently trading near the high of the day’s range (0.9892 – 0.9983)

Commodities After falling briefly below $104/barrel, oil prices have rebounded slightly this morning on speculation that a rate cut by the fed will encourage dollar weakness. It remains highly unlikely that OPEC will intervene to lower oil prices, and as such, crude prices will likely remain elevated with a bias to moving higher. Gold prices have also climbed substantially higher this morning as commodities have largely out performed after a day of weakness. Oil is trading at $107.87/barrel and gold is trading at $1005/oz.