Forex Investment and Currency Trading

As markets kicked off after the long weekend, USD hit its highest level since March 12 at 73.194. However, as NA markets restart the engines, the USD rally is sputtering. USD/JPY had poked its head above 100 as USD peaked, but it could not hold above the century threshold. Thankfully, there was an uneventful weekend with regard to financial markets. If anything, the most interesting news was that JPMorgan might up its bid for Bear Stearns from US$2 to US$10 per share to al ay furious shareholders at Bear. Oddly, the Federal Reserve, which was the marriage broker to the Morgan-Bear hook-up must approve the new terms of the deal and is evidently cool to the idea.

USD: The difficulty of a sustained USD rally will be clear early in the week, which will show the ongoing risk of negative fallout of the housing downturn on US consumers. February existing home sales will show the ongoing erosion in US household wealth, while the March Conference Board’s consumer confidence is expected to dip to 73.5 (consensus), its lowest reading since March 2003, the month the US-Iraq war started. Home sales and consumer confidence will remain intense challenges for Federal Reserve policymakers even if the recent liquidity injections are successful in shoring up the financial system. The Fed’s efforts on the financial system Core PCE inflation (due Friday) will help ease some concern that the Fed is putting its credibility at risk. Consensus looks for core PCE to remain at 2.2%y/y in Feb.

From an overnight low of 1.5342, EUR has rallied back over 1.5440, although trade remained thin. GBP/USD remains well below 2.00, but has also rallied from an overnight low of 1.9760. EUR/GBP traded in a tight range, reflecting thin markets, and remains a few ticks below 0.78.

JPY: The end of extreme USD bearishness and the sell off in commodities has helped lift USD/JPY from its March 17 low of 95.78 to near 100. However, market confidence remains shaky, but should confidence return so should some risking behaviour, which will be reflected in JPY crosses.

Commodity Prices: Oil prices have rallied after an earlier test support at US$100/b.  Meantime, gold has bounced from a low of US$906.79/oz, its lowest intra-day reading since mid-February, and far from US$1032/oz, its intra-day high on St. Patrick’s Day. Both oil and gold prices remain elevated, but they are not as frothy as they were a week ago with investors seeming comfortable taking some profit into the end of Q1.

USD/CAD hit a high of 1.0310 overnight, its first trip above 1.03 since late January, as the commodity environment is deteriorating. There is no data today, although January retail sales are due tomorrow. Also tomorrow, Ontario presents its budget, which will demonstrate that the US slowdown and its impact on Canadian manufacturing is having a negative fallout on that provinces finances. Oil-soaked Alberta might be rolling in cash, but Ontario will struggle to not run a deficit. While it is hard to see things getting any better for Alberta, it is easy to see Ontario facing ongoing challenges. It is clear that this is the BoC’s perspective and is a key reason for its clear easing bias. Thus, Ontario’s budget and the outlook for growth in the province represent one of the key hurdles for CAD into year end. The view is that the balance is tipping toward CAD bearishness.