Forex Investment and Currency Trading

USD continued to march higher overnight, its ascent gathering pace on the London open, with DXY pushing up to six-week highs at 73.828 as crude oil prices sank and speculation of FOMC dissenters grew. The other theme overnight was the out performance of low yielders (JPY being the only G10 currency to rally against USD) and the underperformance of high yielders, though the fall in the worst performer, AUD, was largely driven by the dovish statement that accompanied the RBC rate decision. This unwinding of carry trades despite a strong rally in US equity futures overnight underlines the observation that the recent relationship between rallying equities and carry trade buying has broken down.

USD/CAD pushed up to high of 1.0427 overnight on the back of USD strength and falling oil prices. Crude oil added to the losses suffered yesterday, trading down to around USD118/bl, nearly 20% lower than the highs seen last month.

EUR/USD fell 0.5% as USD remained better bid throughout the overnight session. June retail sales fell 0.6%m/m, -3.1%y/y (cons. -0.6%, -1.3%), though this failed to impact substantially on the currency. EUR/USD near term support is at 1.5475.

GBP recouped some of the losses suffered against EUR yesterday as the pair traded down to a low of 0.7916. July UK Services PMI were firmer than expected at 47.4 (cons. 46.6) but remain firmly stuck in contractionary territory and point to negative q/q GDP in Q3. Slowing activity was also evident in June production data with industrial output dipping 0.2%m/m and the more closely observed manufacturing falling 0.5%m/m (cons.+0.1%,+0.1%). Northern Rock reported H1 pre-tax losses of GBP585.4mn, while it is worth noting that the institution is repaying its borrowings from the BoE at a considerably faster pace than expected.

NZD/USD fell around 0.8% to a new 08 low of 0.7233 on the back of three main drivers. Firstly, the unwinding of carry trades was evident as high yielders underperformed low yielders, secondly, NZD moved in sympathy with its Antipodean neighbour following the dovish tone of the RBA statement, and thirdly, comments from RBNZ Governor Bollard that “In a softening economy, people are going to be very hesitant about price increases and things like that so that’s given us enough room to cut and we’ve got more room out there”.

AUD: The RBA left rates unchanged at 7.25% but signalled the adoption of an easing bias. Comments that “with demand slowing, the Board’s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing”, have effectively opened the door to lower rates with the resultant bill futures rally of up to 33bp discounting close to 100% probability of a 25bp rate cut in Sep. AUD/USD fell 1.2% to a 4mth low of 0.9180 as a result. Market is bringing forward the start of the RBA’s easing cycle to Q4 2008 from mid 2009 with expectations of a total of 100bp of cuts.