Forex Investment and Currency Trading

FX Fundamentals: Risky assets fell back overnight, and as a result US yields fell and the JPY rose. But the USD was generally stronger against other currencies, particularly the NZD and AUD. NZD weakness was fully justified by very weak employment data, but the Australian employment numbers were still quite strong (even though the unemployment rate rose) so the AUD decline was more down to general risk negative sentiment than AUD fundamentals. Having said this, the AUD has traded strong to yield spreads in the last few weeks, so market would not expect any major recovery. Nevertheless, in the short run the NZD looks more vulnerable as 2 year yields are down 20bps overnight, though the downside is limited by the more modest decline in longer dated yields. The decline in risk appetite overnight was overdue, as the data in the last week has been convincingly weak globally, and the case for equity strength has been based on reduced financial sector stress and commodity price strength rather than positive economic outlooks. There should therefore be little scope for a bounce near term. This suggests the JPY will continue to perform well and the high
yielders will continue to struggle.

FX Trade of the day – NZD weakness fully justified by very weak employment data following 20bp drop in two year rates. Some GBP upside on expected BoE “unchanged” rate decision later.

FX technicals: Pro-USD scenario looks to be panning out nicely, with yesterday’s USD advance versus the Asian block a noteworthy occurrence. (Strategy: Buy USD SGD at 1.3675, targeting 1.4500. Stop at 1.3525). EUR USD has slipped through the 1.5365/45 support, which opens the way for a run at the key 1.4985/65 level (intermediate support 1.5165). Intraday now resisted at 1.5365 (max. 1.5430).

Rates strategy European markets take their opening bid from the slump in US equities overnight and concomitant rally in Treasuries. But it’s not enough to get out of the range, merely taking us back to the top end of it as we go into the ECB and MPC meetings. Risks are skewed to the dovish side on the ECB given how much pricing of cuts the market has taken out. Be long front-end swaps and hold swap steepeners. In the UK, the market see around a 20% chance of a cut. Stay long 5y5y gilts.