Forex Investment and Currency Trading

While US equities staggered back from yesterday’s lows toward the close, overnight the focus was on renewed financial concerns, with stocks across Asia and Europe deep in the red. Those bleeding most heavily were in the financial sector. Before the financial crisis started just over a year ago, there was ample liquidity in the global economy. Now there are worries about liquidity with major global financial institutions desperate to grab every penny of spare change in order to rebuild beleaguered balance sheets. The relevance for FX markets goes beyond the search for any port in the storm. It also affects the ongoing adjustment of global imbalances. Fact of the matter is, industrial countries with large current account deficits still need to attract enough capital to cover that deficit, and thus bear ongoing close scrutiny. The obvious candidates to watch in this regard are USD, GBP, AUD and NZD. Of this group, AUD looks the best even though the chances of a rate hike are declining as signs of slowdown mounts (discussed below). USD might rank in second spot, only because it has fallen so far over the past few years, although amid the bearish turmoil in US stock markets, USD rallies can’t maintain any momentum. GBP and NZD are only for the brave. There may be opportunities to take tactical long positions, but don’t fall in love with any such trades.

USD: Bernanke and Paulson speak at a FDIC forum on financial regulation today. Any headlines are not likely to paint a pretty picture. May pending home sales will add a streak of worry to the canvas. Fed Presidents tend to take a back seat when the Chairman is speaking, but pay attention to Lacker’s speech. Yesterday, SF Fed’s Yellen, considered dovish, gave a rousing call to defend Fed credibility, despite slow growth. Lacker is a hawk and might be even more resilient. While discussions of a defense of credibility might be considered USD positive, there are more than enough hurdles of confidence to forestall a sustained USD rally, which today is trading near yesterday’s close at 72.73. US consumer spending now faces imposing balance sheet restraint from the contraction in housing wealth and a bear market in equities. US consumer confidence is already in free fall is only going to fall further, and, if possible, even faster. ABC consumer confidence comes tonight. University of Michigan consumer sentiment is due Friday. Buckle up!!

AUD: The June NAB Business Survey headlines were weak. Confidence fell to a new low from -4 to -9, the 6th straight negative reading. Conditions fell to a new low from +7 to 0, the lowest since 2001. This helped drag AUD to a low of 0.9509, consolidating a break of short-term trendline support. The most worrying aspect of the survey was that the employment sub-components are turning lower suggesting flat to falling employment going forward.  An easing labour market reduces the risk of a wage-price spiral, removing one of the RBA’s biggest concerns. If employment surprises to the downside on Friday BST (cons: 10k), expect to see the 30% chance of a hike currently discounted in the next 12 months eroded further.

CAD has climbed back over 1.02 as oil prices slumped to a low of US$138.68/b, lowest since June 27. Even so, the BoC would probably not mind a stronger currency, if only to help fight import price inflation and take the pressure off the Governing Council to consider rate hikes in the shadow of negative Q1 GDP growth and with slack expected to increase through the year.