Forex Investment and Currency Trading

Our mind is drawn to the USD-Oil link. The past story arguing rising oil prices (spot US$133.30/b) were caused by a weak USD has given way to stories that state rising oil prices are a downside risk to USD. This theme is drawn from nervous glances at US energy prices, specifically gasoline prices, which pose two key risks to the US economy. As both have been well articulated for a long time, it is unclear why they are gaining traction in markets now. First, the US Memorial Day long weekend is all
about driving. It is the weekend of the Indianapolis 500, the embodiment of the US addiction to cars, speed and oil. FYI, Scott Dixon was the victor. Memorial Day is also the official kick off of the Summer driving season and the outlook is not that great with the national average gasoline prices pennies from USD$4/gallon. Second, oil and gasoline prices are now taken as the freshest risks to the US consumer, piling on the downside risks from the implosion in market values of the US housing sector, heavy leverage, and rising defaults and delinquencies. This was reinforced by Friday’s existing home sales report for April that showed and ongoing massive overhang of supply of unsold home that soared to a record 11.2 months. This suggests that home prices face even more intense downward pressure. The tax rebate cheques will do absolutely nothing other than offer a palliative to the imposing challenges facing the US economy. The Federal Reserve might be trying to convince all that they are in an indefinite holding pattern, but the risks still seem heavily tilted toward a little more tinkering on rates. Accordingly, market expects another 50bp in Q4.

Hence, after looking to have found its sea legs in late April, USD has been feeling rather under the weather for the past week. This actually leads to another factor to watch for with regard to the US economy particularly as we head into the Presidential Election silly season. The US trade deficit continues to be propped up by sky-high oil prices. The non-petroleum deficit has been narrowing since mid-2006, but the petroleum deficit continues to soar. This not only is an issue for the US, it also has implications of the oil producers of the GCC who are struggling to deal with burgeoning inflation problems of their own. Breaking the US trade deficit down a bit more, with an eye on the November 4 Congressional and Presidential elections, the US trade deficit is being held up by two juicy targets — OPEC who are already in Congresses sights, and China, which is always in Congress’ sights. The US trade deficit with China and OPEC is going to cross above the US trade deficit ex China and OPEC. The allure of blaming high gasoline prices and the imploding housing markets on nefarious foreign influences could prove very powerful over the summer. This lingering protectionist threat is another reason to be wary of USD.

NZD/USD and GBP/USD are two currencies in focus this week. The gains posted last week weren’t spectacular, but they did upset the view that NZD and GBP were on the verge of breaking lower, which seemed to be the case the prior week. NZD rallied sharply on the Budget and held those gains, and is back near 0.79. GBP rallied on the BoE minutes, which affirmed an inflation focus and put off the risk of rate cuts until later in the year, once there is evidence that inflation has peaked and the surprising buoyancy of the UK consumer fades. GBP held its gains into Friday trading back near 1.98. Even so, both currencies continue to look vulnerable to the downside.

CAD remains below parity, with oil prices rising toward US$133/b. There is little on the CAD event calendar, so CAD will likely take its cue from USD and commodity prices. Thursday’s Q1 current account data should be CAD positive. With recent gains in Canada’s trade surplus, the current account surplus is expected to bounce to C$3.3bn from the prior –C$0.5bn. Friday’s GDP data will likely show a Q2 expansion of 0.9%, comparable to that of the US, but still showing firm domestic demand in Canada, compared to a slowing trend in the US.