Forex Investment and Currency Trading

Overseas equities followed US stocks higher overnight, Eurostoxx +3%, and the resulting drop in risk aversion has seen recovery in Euro/yen and emerging market gains.  Euro/dollar spiked toward 1.5900 in London on an FT article about sovereign wealth funds moving out of USD but slipped to mid-range near 1.5865 by the US open.  It dipped to near 1.5800 after US housing starts and unemployment claims came in better than expected.  But the 9.1% jump in housing starts was inflated by higher multi-family starts from a building code change in NYC, and Euro/dollar has easily held yesterday’s 1.5803, a  bullish technical signal.  Unemployment claims were lower than expected, another USD plus, but gains have reversed on the just-released weak Philly Fed index of industrial activity.  Also, Dow gains are being erased, sending Euro/dollar and Cable back toward highs.  Oil is hovering under trend/line support of $135 and a close below the 55 day MA of $131.73 would be a big dollar plus.  But for now, despite better than expected bank earnings, the Dow’s drift down is key.  

 
EM strength on monetary tightening (TRY expected +50 bps today, MXN +25 tomorrow, BRL +50 next week, PHP +50 last night) is consistent with lower risk aversion.  USD/MXN is nearing 5 year lows.  
 
The chart below of China FX reserves indicates that China is not shunning the USD significantly and even a few billion dollars from China into Europe would not have a big USD impact.

Eurozone Outlook: Resilient No More

Oil & Euro Cause Semi-Stagnation - ECB On Hold – Modest Rebound 2009

• Even the Eurozone cannot bear the current oil price. The economy is finally succumbing to the barrage of external shocks ranging from the surge in oil and food prices to the overvalued euro, slower global growth and financial market turmoil. After a good start into 2008, market expects GDP to almost stagnate for the remainder of this year. If oil prices stabilize soon, growth can return to trend in 2H 2009 in our view.
• Following a modest rise in wage inflation this year, market expects slower economic activity to gradually tame underlying inflationary pressures next year. If oil prices stabilize, headline inflation can fall back to target by mid-2009.
• The ECB decision to hike rates to 4.25% in July was bold. Monetary conditions were sufficiently restrictive to deal with all domestic inflation pressures even before this move. Any further tightening could raise the risk of an outright recession.