Forex Investment and Currency Trading

The USD continued to weaken over the past month, trading at or near historically weak levels against most major currencies. The Federal Reserve cut rates 0.75% in its March meeting, brining overnight rates down to 2.25%. The market still expects further interest rate cuts by the Fed, at least 0.25% by the June FOMC meeting. Lower interest rates, expectations of weaker economy continue to keep the dollar depressed. The consensus forecast for the USD varies by currency, but the market generally expects the USD to continue its weakening trend in the months ahead.

Market highlights include the following:

 ·         EUR: The EUR set a new historical high this month, trading as high as 1.59. The EUR remains near historical highs, currently trading in the 1.54’s. ECB policy remains neutral as concerns over inflation offset those of lower growth. The ECB, mandated to keep inflation under 2%, will not cut rates until inflation pressures start to subside. This contrast in policy to the FED will continue to keep interest rate differentials high and should keep the EUR strong in the months ahead. The EUR is expected to trade in the range of 1.50 to 1.60 over the next few months.  

·         GBP: The GBP continues to trade at weaker levels against most currencies. Consensus economic growth forecasts remain below 2% for 2008 as a result of several negative developments: consumer confidence fell to its lowest level since the surveys inception in 2004, employment increases are slowing, lower consumer spending, financial services continue to be negatively impacted by the subprime loan crisis, and a weak housing sector. The market fully expects the BoE to cut short-term rates at least 0.25% by the end of June from its current 5.25% level. The consensus forecast is for the pound to decline further against most currencies in the months ahead. The GBP is expected to trade in a range of 1.94 to 2.04 over the next several months.

·         JPY: The yen advanced strongly against the USD due to a large-scale reversal of the carry trade. The consensus expectation is that the yen will fluctuate widely around the present level, with a bias toward further modest strengthening in the months ahead. It is then expected to move along a gradually weakening trend line in the 6-12 month horizon, primarily because of positive developments for the dollar. The JPY will also come under pressure in the longer term as the softening economy has triggered speculation that the BoJ might lower its base rate 25 bp to help stimulate business activity. The JPY is expected to trade in a range of 97 to 106 over the next few months.

·         AUD: The AUD weakened this month.  However AUD is stronger than a month earlier. This reflects benefits derived from substantial interest rate differentials with other countries that attract carry trade investors, high commodity prices and strong underlying fundamentals. The AUD is forecast to fluctuate, sometimes quite widely around today’s rates during the 1-3 month horizon.  In Australia, GDP roses 0.6% q/q in 4Q. This suggests that the economy is slowing in reaction to tighter monetary policy. There are indications that interest rate has now peaked in AUD.  The AUD is forecast to weaken as the interest rate in Australia begins to be eased. The AUD is expected to trade in a range of 0.88 to 0.92 over the next few months.

·         CAD: The CAD came under downside pressure in reaction to the change in monetary policy. As widely expected, the Bank of Canada lowered its key rate 50 bp to 3.50%.  The accompanying statement left the door wide open for further rate cuts. Commodity prices are also expected to weaken from the current level, which will have a negative impact on CAD. The CAD is forecast to fluctuate around par during the next several weeks and then weaken moderately. The CAD is expected to trade in a range of 0.99 to 1.04 over the next few months.