Forex Investment and Currency Trading

FX Update
MBA Mortgage Applications (Actual: 2.5%)
CPI YoY (Survey: 4.0%, Actual: 4.0%)
Core CPI YoY (Survey: 2.4%, Actual 2.4%)
Housing Starts (Survey: 1010K, Actual: 947K)
Building Permits (Survey: 970K, Actual: 927K)
Industrial Production (Survey: 970K)

Upcoming Data: Jobless claims, existing home sales

USD
The USD is broadly weaker this morning on the back of worse than expected housing data released this morning. Housing starts came in well below expectations at 947K versus consensus estimates of 1,010K. Housing continues to remain a key theme in US markets and weakness in here reinforces the case for fundamental USD weakness.

EUR/USD
EUR/USD hit a new record high in the European sessions following stronger than expected Euro-area inflation data. HICP rose 3.6%y/y, the highest rate of inflation in 16 years. Persistent inflationary pressure lends credibility to the hawkish rhetoric coming from the ECB . Market believes that the divergent monetary policy outlook between the Fed and the ECB remains the most pervasive driver of EUR/USD and we continue to look for EUR to test 1.60 in the near term.

GBP/USD

GBP is trading higher this morning as the labor market data comes in line with expectations and the BoE takes additional steps to ease liquidity pressures. The Financial Times is reporting that the UK government will ask the Bank of England to accept collateral that would include MBS. This news is largely GBP positive as sterling strength has been tied to the fate of the housing market and the belief that such a move could reinvigorate the ailing new mortgage market is driving GBP higher. 

USD/JPY
USD/JPY has come off this morning after worse than expected housing prints in the US. European and Asian equity markets are trading higher this morning and US equity futures point to an open in positive territory but this has not been enough to drive USD/JPY higher. In the near term watch for the pair to track equity markets..

AUD/USD
As commodity prices have continued to rise, so too has the Australian dollar. Gains in US gave AUD/USD a bounce, and any further upside should translate into AUD appreciation. AUD has outperformed its neighbor New Zealand, with AUD/NZD rising to almost a five month high on speculation that the interest rate differential between the two nations will narrow. Continued AUD appreciation is likely if the equity markets continue to rally.

NZD/USD

NZD appreciated against the dollar overnight as risk appetite increased. However, concerns regarding the health of the New Zealand economy remain. Expectations are shifting to the belief that New Zealand might be forced to cut rates while Australia continues to hold. If equities and commodities continue to rally, expect further NZD/USD gains.

USD/CAD
The Canadian dollar is firmer against USD this morning. The continued rally in oil has added support to CAD. The reversal in USD/CAD is taking the pair back near parity, but technical resistance levels are likely to keep the pair from breaking through today barring any significant market surprise. Gains in equities should also be CAD supportive as risk aversion ticks down.

Commodities

Crude oil advanced to a record high price above $114/bbl as the dollar continues to fall. Investors have been looking to commodities as a hedge for inflation and a declining USD. While oil sits at highs, there is still the potential for further upside as the US appears a ways off from overcoming its current economic downturn. Gold prices are also higher for the second day. EUR/USD climbed to an all-time high lending itself to higher gold – the currency pair has had a 0.77 correlation with the precious metal. Gold is trading at $944/oz and Oil is trading at $114.00/bbl.

Energy The petroleum complex extended Monday’s gains with crude oil, gasoline and heating oil all setting new highs. The prompt month WTI increased 1.8% (to $113.79) and gasoline jumped 2.1% (to $2.881). Heating oil rose 2.2%, to $3.2739. The market was supported by concerns over disruptions of crude oil supply from Mexico where one export terminal still remains shut. Weather conditions prompted the suspension of operations at three of the country’s main export terminals last Sunday, two of which reopened on Tuesday. Meanwhile, in its monthly Market Oil Report, OPEC left its forecast for 2008 world oil demand broadly unchanged at 87.0 mb/d, an increase of 1.2 mb/d over 2007. OPEC supports the notion that non-OECD oil demand will offset weaker OECD demand this year, as non-OPEC supply increases 0.8 mb/d to 50.3 mb/d. Wednesday’s US petroleum inventory report is expected to show that crude stocks built 1.8 mb, while gasoline and distillates drew 1.8 mb and 1.65 mb respectively. Natural gas increased another 1.5% on Tuesday to $10.205, the highest in 15 months. Prices were supported by strength in the cash markets, as well as record prices in the petroleum complex.