Forex Investment and Currency Trading

The G7 statement, released Friday night, contained new language on exchange rates expressing concerns about recent moves in G3. The mild tone of the statement suggests that G7 is not ready for Dollar intervention at this stage (as expected). Nevertheless, the change in the statement does provide some clarification that we are getting closer to a situation where Dollar weakness becomes undesirable for the G7 and where coordinated intervention becomes a real possibility.

After extending the rally since mid-March in the first week of April, global equities sold off last week,
primarily due to a disappointing earnings report from one of the world’s leading industrial conglomerates. While the dynamics of lower earnings revisions is likely to be a drag on US equities, it is possible that the market will be able to look past this headwind. Outside the US, the situation looks more promising with the recent sell-off in domestic-facing stocks in Europe improving their valuations relative to macro views.

In bond space, we turned a little more constructive last Monday anticipating a better trading tone. Since then, the major bond markets have rallied, but still stayed within the range seen over the past four weeks or so.

Overnight, we have got weak housing finance data from Australia. The total number of owner occupiers’ approvals fell by 5.9% in the month, which was below market (+0.5%mom) expectations. The run of weaker data over recent weeks rules out a further tightening in monetary policy. This is helping the long Australian bond futures trade.

G7 Statement Expresses Concern About Fluctuations in Major Currencies

The G7 statement, released on Friday, contained new language on exchange rates. The new key sentence is: “Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability”. The explicit reference to sharp fluctuations in major currencies since the last meeting is the main new element. It shows that the Dollar depreciation has reached a pace over the last six months which has made the G7 concerned about its impact.

The current USD view is that some of the forces which have been driving accelerated Dollar weakness over the last ten months are no longer as clearly in place. In this context, the G3 rate differentials are set to consolidate in coming months, after a period where they have moved sharply against the Dollar. The gradual shift on G7 FX policy points in the same direction. After a period where the possibility of G7 policy intervention seemed very remote, providing no counter-weight to the Dollar depreciation forces, we are moving towards a regime where G7 intervention is a more real possibility. On the margin this will work to limit the probability of further accelerated Dollar weakness.

Related to this, a more neutral trading stance on the dollar can be adopted