Forex Investment and Currency Trading

USD traded with a slight offer tone overnight but remained below 1.5500 ahead of a crucial ECB meeting on Thursday. In a quiet overnight session, partly due to Mayday celebrations in the UK, AUD stole the limelight on strong domestic data.
NA equity futures are pointing to a lower opening today, with the S&P futures down 0.5%. The options market is getting increasingly skeptical about the recent equity rally, with option traders now paying 63% more for downside protection in the S&P 500 than upside protection – the widest difference since at least 2005 according to Bloomberg.

USD interest rates: Market now lean towards another 50bp Fed cut in Q4 08. Market remains concerned that the economy will sag again after the tax rebates wear off under the pressure of continued housing weakness and impaired banking system. Consequently, we see the Fed moving to the sidelines through Q2 and Q3, but then having to ease again in Q4 to put a final floor under the US economy.

CAD: USD/CAD was caught in an extremely tight range just below 1.02. A speech this morning by Deputy Governor Murray on CAD will help explain the link between CAD and the benign inflation backdrop, but won’t likely move the market. More important will be data on Apr housing starts (Thu) and March employment (Fri). On the interest rate front, the BoC is expected to complete its easing cycle with a 25bps cut in July as an insurance policy against Canada’s economy heading into a sustained period of slower growth. Inflation is not a problem with both the core and headline near the low end of the BoC’s target band.

AUD: Outperformed overnight, with AUD/USD again breaking above 0.9400. Australian house prices rose 1.1%q/q, well above consensus of 0.0%q/q, taking the annual rate to 13.8%y/y (cons: 11.0%y/y). The TD inflation gauge provided an added setback for the RBA, as the indicator rose to 4.3%y/y. The indicator has increased almost uninterruptedly from 2.6%y/y
in June 07 to its current level and will be a concern for the RBA ahead of tonight’s interest rate decision. Although no change is expected, the RBA will be reluctant to change its “data watch” stance but is also likely to hint at increasing concern on the inflation front and the need to keep inflationary expectations well anchored.

ECB: The recent flow of European data provides some evidence regional activity may finally be succumbing to the twin evils of a strong currency and the turbulent financial market backdrop. Indeed, we suspect the comments that accompanied the recent pronounced drop in the Ifo survey may herald a turning point with European resilience now likely to increasingly be replaced by vulnerability. That said, while the risk of the ECB beginning to hint at an easing bias is rising, the still decidedly elevated inflation rate weighs against the Bank shifting from its firmly neutral stance in the accompanying press statement. Any shift in policy stance could see a sharp sell-off in EUR.

BoE: The minutes to the BoE’s April meeting provided little indication a back to back rate move might be in the offing (Thu) - only the MPC’s maverick dove, David Blanchflower, voted for a larger 50bp move while two members unexpectedly supported a steady rate verdict.