Forex Investment and Currency Trading

The USD stabilized over the past month, holding steady against most major currencies. However, the USD still remains at historically weak levels and the consensus forecast calls for it to remain under pressure in the near term. The 80,000 decline in payroll employment for March confirmed that the US is in a recession. In the near term, the economy is likely to shrink a little further as turmoil in the financial markets and sub-prime mortgage crisis continue. On a positive note, it’s widely believed that the US economy will pick up in 2H08 thanks to the Fed’s recent and anticipated rate cuts and the fiscal stimulus package. The market still expects further interest rate cuts by the Fed, at least 0.25% in the April 30 FOMC meeting. Relative interest rates and record-high commodity prices are expected to keep the dollar depressed in the months ahead although consensus forecasts for the USD vary by currency.

·         EUR: The EUR is trading right at its historical highs of 1.59. ECB policy remains neutral as concerns over inflation, 3.6% in March, more than offset those of lower growth. The ECB, mandated to keep inflation under 2%, will not cut rates until inflation pressures start to subside. The consensus forecast is for the ECB to keep rates at 4% for the next few months. 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 1.53 to 1.65 over the next few months.

·         GBP: The GBP continues to trade at weaker levels against most currencies. In fact, the GBP has depreciated 20% against the EUR since August 2007 reaching its weakest levels in over a decade. The consensus forecast is for the pound to decline further against most currencies in the months ahead as its interest rate advantage should be more than offset by structural problems such as the sizeable current-account deficit, the house price bubble and large personal debt and low savings ratios. Consensus economic growth forecasts remain below 2% for 2008. The GBP is expected to trade in a range of 1.90 to 2.02 over the next several months.

·         JPY: The Yen strengthened very substantially against the USD in recent weeks. The JPY is thought of as a safe-haven in times of market upheavals. In addition, there has been a strong reversal in the carry trade. Many people who had borrowed and sold yen to switch into higher-yielding currencies are now rushing to sell the foreign currencies and purchase yen for debt repayment. This became especially important as the firming yen moved through several resistance levels and produced larger currency losses for people trying to reverse their positions. Japanese investors, in particular, became painfully aware of the risks inherent in the carry trade. They also rushed to repay their yen-denominated debt. Economic growth is slowing and there has even been speculation that the BoJ might lower its overnight rate 25 bp to provide additional liquidity into the economy. The consensus outlook is for the yen to fluctuate widely around present levels with a bias toward firming in the near term and to move gradually lower against the USD in the 6-12 month period. The JPY is expected to trade in a range of 98 to 106 over the next few months.

·         AUD: The AUD fell sharply against the USD and EUR toward the end of March in reaction to plunging commodity prices and the expectation for the slower global growth. The AUD rebounded in line with the rally in commodities. The AUD will receive support from attractive interest rate spreads. There is likely to be   considerable volatility during the next several months, but on balance the AUD is forecast to fluctuate around present rates. When monetary policy begins to ease, it is expected to put downside pressure on the AUD in the months ahead. The AUD is expected to trade in a range of 0.87 to 0.95 over the next few months.

·         CAD:  Downside pressure on the CAD intensified after reports of a drop in the leading indicators. However, the CAD rose on the back of soaring prices for the nation’s commodity exports, including crude oil and gold. Bank of Canada Governor is concerned that the U.S. economic recovery may be slower than expected, bolstering expectations of interest rate cuts. A Bank of Canada survey showed Canadian executives were pessimistic about future sales for the first time in more than six years as they struggle with constricted credit and weak U.S. demand. On balance, the CAD is forecast to weaken modestly in the months ahead. The CAD is expected to trade in a range of 0.99 to 0.1.05 over the next few months.