Forex Investment and Currency Trading

MBA Mortgage Applications (Prior: -6.2%, Actual: -14.1%)
ADP Employment Change (Survey: -60K, Actual: 9K)

USD

Commodity currencies continue to lead the dollar bull charge as Aud and Nzd continue to show bleaker economic outlooks. Gold sold off hard and oil is sitting on significant 120.0 support a break of which could trigger a nice dollar rally.  The dollar traded strongly against major currencies making its biggest gain against EUR in almost two months yesterday as Consumer Confidence numbers printed better than expected and oil prices continued to fall. USD rose the most against AUD and NZD as stocks rose in Asia and Europe on optimism that easing oil prices will bring down production costs. The coming days pose event risk to USD with ISM, payrolls and Q2 GDP due for release. There is some risk of position squaring ahead of these key data releases, given the rally in USD since last week. Should the numbers print better than expected, a move down towards the bottom end of the recent trading range in EUR/USD is likely as markets keep alive the prospect of Fed rate hikes by the end of the year. With the ADP employment index printing positively this morning look for continued dollar strength throughout the day.

EUR/USD

EUR fell significantly overnight and has remained at levels near 1.55 this morning. Another batch of soft confidence data out of the Euro area and the regional business climate index deteriorating further in July to its lowest levels since 2005 adds to concerns that the Euro-area is heading toward economic recession. EUR continues to ease away from its highs as the slew of weaker data drives a narrowing in the yield advantage of EUR over its G10 counterparts. While the latest batch of German CPI data continues to point to elevated near-term inflationary pressures, the deterioration in real data reinforces the monetary policy bind as ECB joins the stagflation club. EUR/USD remains under pressure as recent US economic data has surprised on the upside.

Short term technical studies show support levels 1.5480 at and a resistance level at 1.5655. EUR is currently trading near the low of the day’s range (1.5547 – 1.5617).

GBP/USD

GBP weakened yesterday and continued to fall last night as an index of UK retail sales dropped to a 25-year low and mortgage approvals declined, adding to expectations that the economy is headed toward a recession. The currency has traded sideways this morning. Futures showed investors are betting that BoE will lower its benchmark rate at the August policy meeting. GfK consumer confidence survey and Nationwide House prices data printing tomorrow could intensify signals for economic decline.

Short term technical studies show support levels at 1.9740 and a resistance level at 1.9865. GBP is currently trading near the low of the day’s range (1.9780 - 1.9843).

AUD/USD

AUD depreciated steadily overnight and this morning as USD posted a strong rally and Australian Building Approvals data surprisingly dropped in June. The data released added color to a picture of housing market decline spreading from the US to other parts of the world. A troubled housing market and signs of economic growth slowing have sparked speculation that the central bank will cut interest rates, which would thereby reduce the appeal of Australia’s currently higher-yielding assets. Additionally, the recent turn in commodities prices has hurt AUD. These factors, together, suggest that further AUD weakness is likely in the coming sessions.

Short term technical studies show support levels at 0.9425 and a resistance level at 0.9530. AUD is currently trading near the low of the day’s range (0.9434 - 0.9528).

USD/JPY

USD/JPY fell to its one-month low overnight. However, JPY climbed back up as selling by Japanese exporters cut the dollar’s rise. Nonetheless, JPY’s gain may be limited on speculation that Japanese investors will invest their summer bonuses in overseas assets offering higher yields. JPY traded higher this morning against USD leading up to the ADP employment change data. However, the report, which has recently been a poor predictor of actual employment numbers, printed positive when surveys predicted a negative change. This may add to dollar strength against JPY today.

Short term technical studies show support levels at 107.15 and a resistance level at 108.60. USD/JPY is currently trading near the high of the day’s range (107.70 - 108.24).

USD/CAD

CAD traded lower against the USD for a sixth straight session on Tuesday, its longest streak in nearly a year and a half, on the back of dollar-strength and falling commodity prices. Oil prices specifically are suspected to be falling as US demand decreases. This is bad news for Canada as it is one of the world’s largest exporters of oil and the US is its greatest trading partner. CAD has traded near parity with the dollar since September on speculation that Canada might be able to escape the economic turmoil troubling the US. However, forecasters are now looking for a reversal mostly a reflection of falling commodity prices and exports. However with so much resistance between here and 1.0324,don’t rush in a USD/CAD long at this point, especially considering how many times a move higher has failed this year. Look to trade a 1.02/1.0270 range, perhaps via the options market considering the fact that vol is still so cheap in CAD.

Short term technical studies show support levels at 1.0120 and a resistance level at 1.0305. USD/CAD is currently trading near the high of the day’s range (1.0219 - 1.0252).

USDCHF
Another quiet range overnight for the franc but an interesting realization from the KOF leading indicator.  For all the recent attention about how the problems from the US are starting to spread to Australia and New Zealand, the KOF leading indicator showed that Switzerland is starting to roll over as well as the leading indicator last night fell to a five year low. It’s not just banking leading the decline either as the KOF said a gauge measuring consumption “is now contributing most markedly” to slowing growth. While Swiss fundamentals rarely impact USDCHF or EURCHF, more evidence of recoupling across the globe should benefit the greenback. Level wise, the previous top/breakout level from yesterday of 1.0410 should now serve as support.

USD/BRL

BRL opened stronger this morning as booming speculation that interest rates will rise attract foreign investors to Brazil’s fixed-income securities. Brazil’s real interest rate is the second highest behind Turkey’s and may close that gap as several economists agree that the central bank is nowhere near the end of an interest-rate increase cycle. The bank said in a July 28 report that Brazil’s benchmark rate will rise to 14.25% by then end of the year. Additionally, expectations for a government report to show net debt as a percentage of GDP to have decreased in June could take BRL even higher.

BRL is currently trading near the low of the day’s range (1.5627 - 1.5694).

USD/MXN

MXN opened the day making a strong rally as US equity futures are up and bets that Mexico’s central bankers will raise the benchmark lending rate in August for a third straight month to control the fastest inflation in more than three years. Rising equities have increased investors’ risk appetite making them more willing to invest in Mexican fixed income securities. With the outlook for US, Mexico’s largest trading partner, and the dollar turning positive amid better than expected data releases and resurfaced global economic concerns, expect to see greater MXN strength.

MXN is currently trading near the low of the day’s range (10.0347  - 10.0588).

Commodities Update
Crude oil prices dropped to a 12-week low yesterday of $120.42/bbl on fears of sliding global demand. Gold fell to the lowest in a month on expectations that the dollar will extend its rally, reducing demand for gold as a hedge.