Forex Investment and Currency Trading

USD
The USD continued its broad based recovery over the past week, driven by stronger than expected US data and the ongoing improvement in investor risk appetite. The USD rally has weighed on commodities – though today’s moves have bucked this trend - with gold falling by over 5% and oil pulling back from $120/bbl levels. The USD calendar will be lighter in the week ahead with the key release being the ISM non-manufacturing. Barring a significant downside surprise, the USD should not be unduly impacted.

EUR/USD

The euro has been a major underperformer over the past week. Euro sentiment was not helped by further declines in Euro-area business confidence. There is potential event risk for the euro this week with the ECB meeting on Thursday. While market expects the ECB to remain on hold, rhetoric that shows a more dovish tone could be an immediate EUR/USD downside risk.

GBP/USD

While lower this morning, GBP has continued to perform strongly on a broad trade-weighted basis. While there was further evidence of a slowdown in the UK housing market, the GBP continued to remain strong. This reflects the view that much of the bad news on this sector is now fully priced into the market. Outside of housing, broad based economic performance in the US and UK was respectable according to Q1 GDP.

USD/JPY

The yen continues to remain weak as an improving backdrop to risk taking has provided support for carry trades. Stronger than expected US payrolls pushed USD/JPY up significantly higher as the print indicated that the US might be exiting its cyclical low. Look for JPY to remain weak barring a substantial downside surprise in US data.

AUD/USD

The improving risk backdrop has been supportive of the Australian dollar. While commodity prices fell broadly over the past week, many major commodities – oil in particular – have consolidated back higher and have lent to additional AUD strength. The RBA will meet this week and the expectation that they will keep rates unchanged at the 12 year high should continue to support the currency.

NZD/USD

NZD gained for a second straight day as a marginal return to commodity strength has lent support to the higher yielding commodity. The current rates environment has been supportive of the kiwi dollar as risk sensitive currencies have largely outperformed. NZD should track its Australian counterpart higher.

USD/CAD

The Canadian dollar has been trading at a weaker level over the past week as speculation that slowing Canadian economy will force the Central Bank to continue cutting rates. CAD slipped for the second straight week, though it has remained supported this morning on higher commodity prices. Canadian employment is released on Friday and market expects a weak print.

Commodities Update

After a week of falling commodity prices, commodity prices are once again stronger this morning. Oil prices have moved sharply higher over the weekend as supply concerns and Turkish military involvement in Iraq have encouraged oil buying. Gold prices rose in sympathy with oil, climbing from its lowest level in four months. The Gold – EUR/USD correlation has been breaking down recently with a correlation of .51 – down from .97 in December.