Forex Investment and Currency Trading

The resurgence in financial market turmoil, driven by mounting concerns over the health of GSE’s has once again returned to haunt USD. Treasury Secretary Paulson commented yesterday said that the economy is in a “challenging time” and that slow growth is expected for months ahead because of high oil prices. His statements have also added to expectations for a Fed hold on rates. Corporate earnings reports, housing and durable goods data and Fed speakers’ likely restatement of downside risks to growth and upside risks to inflation will dictate USD price action this week.

USD is softer against most of the majors as equities retreat from Friday’s highs (DJI future -27pts) in thin Asian and European trade. AUD is the single largest mover overnight and GBP is the only currency down against USD (see below). There no important macro data due today and FX markets are again likely to take direction from earnings reports (Bank of America and Apple report today). US data in the remainder of the week are largely second tier, existing and new home sales (Thursday and Friday) being the only exceptions. Stocks will again therefore hold the key to FX performance with 160 S&P 500 companies announcing Q2 earnings through the course of the week.

GBP/USD
GBP is trading lower in the New York morning after an industry report showed house prices fell the most in July since 2002, adding to indications that the economy is slowing. The BoE’s David Blanchflower commented that the central bank must cut interest rates to support the economy, which is headed for a recession that may last longer than a year. Further interest rate cut expectations by the BoE will certainly push the currency lower.

Short term technical studies show support levels at 1.9840 and a resistance level at 2.0155. GBP is currently trading near the high of the day’s range (1.9908 - 1.9987).

EUR/USD

EUR strengthened overnight as European and Asian equity market gains and oil and metals prices lifted from last week’s lows. EUR also jumped to a record high against JPY this morning. However, EUR/USD has seen some consolidation lower. Market expects that it will be difficult for EUR to sustain its new highs. As bad as the US’ economy appears, Europe’s doesn’t look much brighter. The continued deterioration in economic fundamentals is likely to weigh on EUR as the ECB faces a similar dilemma to the Fed regarding its rates decision given the stagflation prone environment.

Short term technical studies show support levels 1.5790 at and a resistance level at 1.5945. EUR is currently trading near the low of the day’s range (1.5829 – 1.5909).

USD/CAD has traded in a very tight 1.0040-1.0074 range overnight. There are no key day due today, but the main event of the week is June CPI (Wednesday). The BoC recently stated that if current energy price trends hold, headline CPI inflation will temporarily rise above 4% (current 2.2%), before peaking in Q1 of 2009. Policymakers also upwardly revised their forecast for core inflation, and now expect it to be 2.0% (from 1.5% in May) by the second half of 2009. The June inflation report should lend weight to this less benign base-case scenario.

Short term technical studies show support levels at 0.9980 and a resistance level at 1.0100. USD/CAD is currently trading near the low of the day’s range (1.0033 - 1.0073).

AUD/USD
AUD overcame three-days of losses against the dollar as the price of gold climbed this morning. Further AUD appreciation is expected as the interest rate differential favors AUD versus the yen and dollar. Speculation continues to increase that the RBA will hold rates constant with a bias towards hiking, and the likelihood of a rate cut is being further priced out of the market.

Short term technical studies show support levels at 0.9700 and a resistance level at 0.9800. AUD is currently trading near the high of the day’s range (0.9705 - 0.9768).

USD/JPY: Following today’s holiday in Japan, CPI on Friday is the main data focus. However, with the BOJ seen on hold for the foreseeable future, domestic data has not been a significant driver of JPY for some time.

Short term technical studies show support levels at 105.9and a resistance level at 107.75. USD/JPY is currently trading near the high of the day’s range (106.37 - 107.15).

USD/CHF Gold and oil have bounced a bit after last week’s selloffs but USDCHF and EURCHF both remain resilient even amidst the euro squeeze overnight. With BOA’s better than expected earnings, look for the pairs to continue to stay supported. Offers at 107 in USDJPY were capping USDCHF topside but now that we’ve broken through, we should see further gains for USDCHF. Technically, USDCHF would seem to offer better risk/reward with EURCHF sitting at the top of its trendline channel resistance and having rallied four straight days (including today) – the longest such streak since the end of April. 1.0250/60 is the first topside target in USDCHF and with nothing else on the calendar today, look for the dollar to continue to rally.

USD/BRL

BRL remained rangebound overnight in anticipation of the central bank’s meeting later this week. It is expected that the central bank will raise the interest rate for the third consecutive meeting to 12.75% from 12.25% as inflation rises toward the upper limit of the target range. As usual, also look for commodities trading to dictate BRL price action this week.

BRL is currently trading near the low of the day’s range (1.5832 - 1.5901).

USD/MXN

MXN fell early last night but is opening this morning positively after the central bank raised its benchmark interest rate last week. Friday’s rate hike marked the second straight month of such action in an effort to combat the highest inflation in over three years.

MXN is currently trading near the low of the day’s range (10.1615 - 10.1957).

Commodities Update
Crude oil prices rose as much as $2.14 from a six-week low as a tropical storm headed toward the Gulf of Mexico and Iran resisted pressure to shut down its nuclear research program. Gold is trading higher on concern that US earnings reports this week could take the dollar lower thereby increasing the demand for gold as a hedge against the currency.