Forex Investment and Currency Trading

USD
Inflation fears and expectations for central bank responses remained the key theme in the FX markets in the past week.  Mixed US data did not deter the market from pricing more than three Fed hikes by the end of the year.  Despite considerable anticipation, foreign exchange was not mentioned at the G-8 Summit over the weekend.  The dollar will likely give back some of its recent gains early this week and then consolidate on the rate backdrop.  The market will look to Bernanke’s speech today at the Senate Finance Committee’s Health Reform Summit for any further indication of future rate hikes.  The next round of quarterly earnings is due to begin next week; Goldman Sachs and Morgan Stanley will report this week, and there is scope for market volatility to increase again on the back of such events.

EUR/USD 

Because the ECB should be quicker than the Fed to follow hawkish rhetoric with rate hikes, the EUR should be supported in the near-term.  Market still looks for a gradual decline in EUR/USD later this year, though, as rate hikes should be more damaging to the European economy given the stimulus already in place in the US; Market targets 1.50 by year end.  G-8’s avoidance of foreign exchange and dollar weakness may lead to slight upside for EUR today.  Look for ECB President Trichet’s speech on Friday as a significant market mover.  

GBP/USD

GBP rose to 1.9627 against the dollar this morning after the BoE’s inflation rate exceeded its May limit of 3.1%, forcing governor King to write a letter to the Chancellor of Exchequer regarding how he plans to contain it. With this, consumer inflation expectations increased by 100 bp to 4.3%, thus highlighting the conundrum facing the Bank of England.  Look to the BoE minutes due on Wednesday as a market mover for GBP.

USD/JPY

Forecasts were adjusted this week to show further JPY weakness through Q1 2009, as USD/JPY broke through the July ‘07 trendline. Forecasts preview a strengthened USD, with JPY weakness of up to 112 USD/JPY by March 2009. The move in USD/JPY has been quicker and more dramatic than expected.  It seems the relationship between USD/JPY and market volatility has broken down for the time being, and the move in US rates has been the dominant factor.

AUD/USD

The Australian dollar was little changed since late last week; however, AUD made slight gains after the G-8 Summit failed to discuss foreign exchange issues and USD weakness.  Look to the RBA release of minutes from the Jun. 3 monetary policy meeting for further indications of Australia’s rates outlook.  

NZD/USD

The kiwi dollar retracted some of last week’s losses after finance ministers at the G-8 Summit did not directly address the need for a stronger USD.  With little data due out of New Zealand, expect that USD performance will most likely drive NZD/USD in the coming week.  

USD/CAD

The USD/CAD rose last week mostly due to a rapidly strengthening dollar.  Bank of Canada Governor Carnet will speak on Thursday and likely will defend his decision to keep rates unchanged at the recent BoC meeting.  Market predicts CAD should trade well in the near term given the improvement in the US backdrop and the strong statement the BoC easing cycle has finished.  However, the potential for economic data such as CPI and retail sales to come in weak could cause further CAD depreciation.    

Commodities Update
With the given inflationary environment, gold and crude oil are both expected to continue increasing in the coming week. However, USD strength could temper any significant gains. Increased crude supply could also remove some of oil’s price pressures.