Forex Investment and Currency Trading

USD was mixed overnight in markets dominated by sharp falls in AUD and NZD, particularly against JPY. Although London trade has seen NZD in particular rebound against USD, the JPY crosses remain under pressure. The move lower in AUD/JPY was independent of news flow, data in Australia generally being better than expected and Japan’s Q2 GDP release in line with poor expectations (-0.6% q/q). Speculation that the 500pt fall in AUD/JPY and 300pt fall in NZD/JPY over last week is a result of liquidation of margin trading positions is so far not supported by available data. TFX positioning data for Tuesday’s close show net long positions in both AUD/JPY and NZD/JPY only marginally below record highs. As such, the threat of forced liquidation continues to hang over these currency pairs. GBP is independently weak after the BoE Inflation Report clearly left room for lower UK rates (see below).

Today, US July retail sales are important in that they are the first “hard” consumer data for Q3 and will give some indication of how consumer spending is holding up as the impact of the tax rebates fades. Market sees downside risk to the key ex-autos reading (0.4% m/m; consensus 0.6%), which may buy some temporary relief for EUR/USD.

GBP/USD fell to a low of 1.8835. The BoE Inflation Report had a much softer tone than generally expected. Specifically, the central inflation projections now show headline CPI below target on a two year horizon, effectively signalling an easing bias. The Bank also revised down the growth projection so that the next year sees GDP broadly flat. Particularly in the light of the poor CPI data yesterday, markets had expected the BoE to talk down the risk of rate cuts, but in the event the Inflation Report does the opposite.

USD/CAD traded in a narrow range overnight and the absence of key data or events in Canada today will leave USD direction as the main driver of moves today.

EUR/NOK: All 20 economists surveyed by Bloomberg expect Norges Bank to leave rates unchanged at 5.75% today and this morning’s June retail sales (consensus 0.2% m/m) are unlikely to change that assessment. Norges Bank hiked the policy rate 25bp at the last meeting June and its guidance a the time was that “the key policy rate should be in the interval 5¼ - 6¼ per cent in the period to the publication of the next Report on 29 October, unless the Norwegian economy is exposed to major shocks”. Subsequent activity data have remained firm and core CPI has been higher than expected, though it is unlikely this news constitutes a “major shock”. As such, there is the consensus view of no change in rates. The risk remains, however, that the short accompanying statement guides expectations toward a further hike before year-end. Even after Monday’s poor CPI data. NOK FRAs discount rates being at a peak and such an outcome would be NOK-positive.

AUD/USD: Consumer confidence bounced back in August following a collapse in the first half of this year. The wage price index rose by 1.2% in Q2 (Consensus +1.0%), the largest quarterly increase in the survey’s history, taking the y/y rate to 4.2%