Forex Investment and Currency Trading

USD is broadly stronger overnight, reversing roughly half of yesterday’s losses against most of the other majors.  There is no clear catalyst for the move, though stronger equity markets are probably helping as is evident in JPY underperformance. Most Asian stock markets ended higher, European markets are generally up around ½-1% and futures point to a rebound in US markets at the open (DJI +56pts). For the day ahead, there are no key US data, with Canadian June retail sales the only event risk (see below).

GBP/USD fell to a low of 1.8570, just above the two year low seen late last week. Although the move is primarily a result of broad USD direction, GBP is also lower on the crosses, not helped by the August MPC minutes showing Besley again alone in calling for higher rates. The Committee paid some lip service to the recent moderation of commodity prices, noting that the “upside risk to inflation in the short term had probably eased a little over the month”. As implied by the vote, meanwhile, it was noted that a “case could be made for an immediate increase, for a cut or for maintaining Bank Rate at the current level”.  As in July, the majority of members deemed steady rates to be the best course of action given the deteriorating growth outlook would ultimately bear down on inflation. Market continues to look for the rate cutters to build a majority by the November meeting and as such see further downside for GBP as a move at that time is only 50% discounted.

CAD: After a dearth of key data, June Canadian retail sales data will present the most important event risk today. Consensus forecast a print of 0.6%m/m for the ex autos component of retail sales, which would be an acceleration from the May result (0.4%m/m). Within the detail, a number of components (e.g. clothing and general merchandise stores) are expected to return to trend gains after very subdued increases in May. Auto sales are expected to be flat in the month reflecting indications from Statistics Canada that preliminary industry data for July were pointing to an unchanged level of sales activity. A core print above 0.6%m/m may see USD/CAD testing support at 1.0550/60. July leading indicators are expected to rise 0.1%, but generally attract little interest.

EUR/USD fell to a low of 1.4705 in London, though EUR’s mixed performance on the crosses suggests the move is wholly due to general USD direction.

AUD/NZD: AUD/NZD is expected to rally toward 1.33 by year end, as the Australian interest rate market appears to have fully discounted the extent of expected RBA rate cuts by year end, but underestimates the extent of RBNZ rate cuts over the same period. Market expects the RBA to cut by a cumulative 50bps by the end of the year, and by no more. In contrast, market continues to think the RBNZ will cut at least 25bps at each of the remaining 2008 meetings, but the risk of a greater than expected 50bps rate cut at either the September or October meetings is high.

USD/JPY broke back above 110 in London, reflecting improving market risk appetite and general USD strength. Despite the weak close in US equities yesterday.