Forex Investment and Currency Trading

USD
The dollar continued its climb against most currencies. The trade-weighted dollar hit its highest level since October 2007. The fundamental view has been bullish towards the dollar or some time, expecting the broader global slowdown to bring dollar strength from mid-year. Nonetheless, the extent of deleveraging and the extent of the dollar rally over the past two weeks has been surprising.  However, as a result of the large increase in the unemployment rate, market has now pushed back its call on the Fed to hike rates to the end of 2009. The Fed ’s rescue of Fannie Mae and Freddie Mac has lifted the US equity markets and should provide a near-term boost for the dollar.

EUR/USD

EUR/USD has continued trending lower today as the dollar makes headway on the back of the Fed’s rescue of Fannie and Freddie. The “relief” trade has given investors confidence that the US government will not let the economy fail. However, upcoming US earnings data cannot be ignored, and negative news could result in a swift EUR rebound.

Short term technical studies show support levels at 1.4145 and a resistance level at 1.4570.

GBP/USD

GBP is on course for its worst year since 1992. GBP is mired in a deep housing slump, and RICS house price balance is unlikely to provide any encouragement. A key number for the area will be the release of 2Q inflation expectations. Should household inflation expectations remain elevated, the chances for near-term policy easing could diminish further. The pound is 11% weaker on the year, and could continue to decline.

Short term technical studies show support levels at 1.7540 and a resistance level at 1.8000.

AUD/USD

AUD is relatively stronger this morning, particularly on the crosses, as the government’s take-over of Fannie Mae and Freddie Mac has restored some confidence in higher yielding currencies. With decreased risk aversion, AUD should remain well-supported. Looking forward, employment data out of the area should be a near-term driver, as a rise in unemployment will support concerns about the health of the domestic consumer. This could also be highlighted in the upcoming retail sales report.

Short term technical studies show support levels at 0.8030 and a resistance level at 0.8395.

USD/JPY

After outperforming on the crosses such as EUR/JPY and AUD/JPY over the past several weeks, the yen fell by the most in three months against the euro and fell almost 1 percent versus the dollar as the US government’s takeover of Fannie Mae and Freddie Mac boosted risk appetite and prompted investors to buy higher-yielding assets funded by Japan’s low-yielding currency. The yen could remain under pressure if the equity markets continue to rally.

Short term technical studies show support levels at 107.60 and a resistance level at 109.00.

USD/CAD

After Friday’s strong employment report, the Canadian dollar pared some of its gains after the Ivey purchasing manager’s index for August unexpectedly fell to its lowest level since December, indicating that Canadian business and government spending is slowing. Statistics Canada’s reported today that building permits unexpectedly rose 1.8 percent in July after falling 5.3 percent the month before. Canadians go to the polls on October 14 and the election campaign is likely to focus on the economy and jobs, especially as the Bank of Canada estimates economic growth of 1 percent this year, the slowest since 1992.

Short term technical studies show support levels at 1.0540 and a resistance level at 1.0780. CAD is currently trading near the high of the day’s range (1.0551 – 1.0661).

USD/MXN

Mexico’s peso fell almost 2 percent last week on a decline in oil prices and faltering global economy reduced demand for the country’s exports and for higher-yielding assets like the peso. Further weakening the peso are expectations that the Banco de Mexico will hold its lending rate at 8.25 percent, after tightening three times since May since the drop in commodity prices has improved the global inflation outlook.  Given its close ties to the US, as the US outlook stabilizes, the Mexican outlook could stabilize as well.

USD/BRL

Brazil’s real declined more than 5 percent last week, the most in over five years, as falling commodity prices and softening global economic outlook curbed investor demand for emerging market securities. While a falling food prices led to a decline in inflation of 0.32 percent in August, the first drop in more than two years, the market still expects that Brazil’s central bank will raise the benchmark SELIC interest rate at the September 10 meeting to its highest in two years to 13.75% to cool inflation and domestic demand.

Commodities Update
Natural Gas, Oil, Gold and Copper rallied on the day to start as Hurricane Ike threatened oil rigs in the Gulf of Mexico and the rescue of Fannie Mae and Freddie Mac spurred growth expectations. Watch gold very closely as a rally back through 820/825 should re-open the key 845/855 region which in turn should trigger a much stronger rally in gold and tip the USD’s hand. Oil is trading at $107.75/barrel. Gold is trading at $810.50/oz.