Forex Investment and Currency Trading

USD spiked higher, particularly against EUR, at the start of the Asian session in response to Saturday’s G7 communiqué. Gains, however, were fleeting and a steady drift lower in London has left DXY only around 0.1% above the North American closing level. The G7 communique’s paragraph pertaining to foreign exchange took a sharper stance by including two new sentences.  Specifically, “We reaffirm our shared interest in a strong and stable international financial system. 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”.  Market does not believe that coordinated intervention to support the USD is imminent, but the sharp change in language does indicate that policymakers are increasingly uncomfortable with the recent pace of USD weakening, introducing more two way risk to the USD.

Aside from the G7 meeting, FX markets are dominated by diminishing market risk appetite as Asian and European equity markets took their lead from the sharp fall in US stocks into the close on Friday. Higher yielders are underperforming and JPY outperforming. The fall in risk appetite was driven primarily by higher equity volatility, with VIX rising 1.0pts to 23.5. Narrower corporate bond spreads, which tightened by 3bp to 171bp (single-A), partly offset this.

On the data front, US March retail sales are the main focus of the day ahead and the news flow is generally heavy this week, with US March PPI and CPI also due and eight scheduled Fed speakers. Equities are also likely to be a key driver of FX direction as the US Q1 earnings season get underway. JP Morgan, Citi and Merrill Lynch top the agenda amongst the financials, but tech stock results actually dominate the week, with IBM, Intel and Google reporting, amongst others.

USD/CAD rallied to an overnight high of 1.0275, driven most by general USD strength. The BoC Business Outlook Survey will be released today but is generally not a market mover.

EUR/GBP initially fell in parallel with EUR/USD, though a subsequent rebound has seen the 0.80 level re-rested, despite higher than expected March UK PPI data. Output prices rose 0.9% m/m (consensus 0.5%), while input prices jumped 1.8% m/m (consensus 1.9%).

NZD: Feb retail sales were much weaker than expected at -0.7%m/m (cons: 0.0%m/m). In real terms, retail sales could well be negative for Q1. The NZ consumer is buckling under the combined weight of higher food and petrol prices and mortgage rates, and domestic growth momentum in NZ is falling sharply. Since consumer confidence readings have fallen further in March, further weakness in retail sales is in store in coming months.  Market remains bearish NZD crosses.