Forex Investment and Currency Trading

USD
Event risk: Mixed messages from the chain-store data but broad recessionary conditions and 4 consecutive falls in retail jobs suggest downside risk to consensus calling for a 0.2% rise in core retail sales (Mon). The ECRI leading index hints at still more potential downside for the Empire survey (Tue) and Philly (Thur). A 7%+ fall in Feb permits warns March housing starts (Wed) could fall sharply too. The Fed’s Beige Book (Wed) is likely to be peppered with anecdotes of yet more slowing in activity while the core CPI (Wed) should bounce back from an aberrant flat outturn to 0.2%.

Bias: Long USD bias for another week though even though the price action is beginning to look ominous. 1y1y forward interest rate spreads are no longer trending as aggressively against the USD as they were earlier this year, and in some cases (eg AUD-USD and EUR-USD) they have been nudging back in the USD’s favour lately. And, while LIBOR-OIS spreads are pushing out again, all the indications are that the Fed still has plenty of tricks up its sleeve, an important factor that should limit US financial sector default risk and thus check downside for the USD.

CAD
Event risk: Manufacturing shipments (Tue) and CPI (Wed).

Bias: CAD looking a bit soft on the crosses again but fresh highs in crude oil should dissuade any temptation to load up on fresh CAD shorts. And money markets still appear unrealistic in seeing the BoC as providing the most easing across the G10 through the balance of 2008. Favour expressing a bullish view on CAD via EUR/CAD.

Europe
Event risk: Bank of England and ECB meetings dominated the European calendar today. The BoE cut rates today by 25basis points to 5% this morning. The ECB remained firmly on hold and after this week’s 3.5% annual CPI print the hawkish rhetoric is expected to continue for now. Looking forward now to next week’s data. There we’ll get Swedish CPI, UK PPI and Eurozone IP (Mon), UK CPI and German ZEW (Tues), Eurozone core CPI (Wed) and Swiss retail sales (Thurs).

Bias: Still feel the next big move is towards pricing in more bad news in the UK. CHF remains dominated by risk appetite, which looks to be settling, hence the long USD/CHF trade recommendation. EUR/USD is tentatively thought has put in its medium term top.

AUD
Event risk: On Mon housing finance is out. Likely to show a modest rise, with housing credit positive in Feb. The RBA governor speaks on Tues, with the topic of the speech unknown at this stage. The RBA board minutes from the early April meeting are also released on Tues. From there it’s just minor data releases, although there will be some interest in the export and import price data out on Fri. The all important inflation data follows the week after.

Bias: We have been surprised by the resilience of the AUD to weaker domestic data. The AUD has continued to march higher despite weak sentiment and activity numbers (e.g. consumer and retail sales). The risk environment has improved, commodity prices have continued to push higher and the demand for high yielders is still strong. It’s difficult to fight this price action and as such the 1 month forecast is revised to 0.9200. Still the risks are for disappointing data over coming weeks, which may ultimately weigh on the AUD, particularly if the risk environment is less friendly than it is at present.

NZD
Event risk: CPI (Tues) should have limited impact on the currency, as it’s widely acknowledged that inflation will be outside the target band this year. Forecast of 0.8%qoq, 3.5%yoy is right in the middle of the pack. Ditto with 0.1% pick for retail sales (Mon), though February has been a wild card in recent times, with prints above 1% in four of the last six years.

Bias: The extremely poor data of recent days has failed to land the knockout blow for the NZD, and with next week’s news looking less threatening, the currency is left neutral for the moment. But over coming months a sharp slowing in the activity figures is expected to see, owing at least as much to domestic factors as to the turmoil offshore. Improved risk appetite may provide some bounces in the currency, but look to sell into these.

JPY
Event risk: This last week’s crop of data and events told us pretty much what we already knew. The Japanese economy has slumped and looks no closer to pulling out of it. The BoJ was perhaps more subtle - “[Japan] is expected to grow at a slower pace for the time being and follow a moderate growth path thereafter”. But it arguably means the same thing. We have no data events this week worthy of note - final mach orders Tue and final IP Thu. So it’s all down to the risk aversion and capital flow to drive the yen. Continue to argue for buying weakness in USD/JPY and yen crosses simply on the bases of heavy samurai issuance and soft Japanese data. However, look to tactically trade round this view.

Bias: EUR/JPY bias is to sell and USD/JPY bias is to neutral. With the sharp moves in Asian FX touched off by the MAS today, this view will go for another week.

North Asia
Event risk: The G7 statement should repeat its welcome of yuan appreciation but call for more. Any sideline comments in Washington by key officials will be noted with interest. The data calendar is dominated by various Chinese releases, due any time from Tue. Most attention should focus on Q1 GDP (likely a little over 10% y/y), Mar CPI (f/c 8.2% y/y) and Mar retail sales (close to 20% y/y).

Bias: It is hard to believe much money has been made in N Asian FX in recent weeks, with price action generally either whippy or totally range-bound. USD/KRW has calmed down for now, trading fairly quietly as it did in February. There is an upward bias on the pair towards 985/990, but stops would need to be wide. The tedious grind on spot USD/CNY has seen a few towels thrown in on short NDFs, to the point where -3% USD is priced into the 3mth and <1% on the 1mth. Both have scope to price in faster USD decline but it’s hardly a big % trade. CBC Taipei has drawn a line in the sand at USD/TWD 30.00 for now.

South Asia
Event risk: On the data slate, There are Malaysian Feb IP (f/c 8.2% y/y) and the same report from India (f/c 6.9% y/y), both on Fri, Singapore Feb retail sales (Tue), Philippines Feb remittances (Tue) and Singapore Mar exports (Thu). The G7 should have no real impact unless the pressure is ratcheted up on China, which would weigh on USD/MYR and USD/SGD.

Bias: Prior to the MAS surprise, no S/SE Asian currency had moved 1% or more vs USD over the past 2 weeks and it certainly felt like it. The upsurge in inflation (which can be limited by FX appreciation) competes with the recessionary US economy (arguing for caution on NEER gains) for policymakers unsure of how much USD decline to allow - though in the case of IDR, the more pressing agenda is capping USD upside. It all adds up to light positioning on most pairs (though we suspect the market is long ringgit, slowing further downside on USD/MYR - no MAS meeting next week!) and tight ranges until a clear catalyst. MAS should cushion the decline in USD/SGD and the biggest move is behind us but rallies should be sold.