Forex Investment and Currency Trading

USD
The USD amazingly is holding up well in the face of the stock market and bond market breakouts and remains firm ahead of the Fed rate decision. This morning’s CPI numbers, which showed US consumer prices fell for the first time in almost two years, were a relative non-event with the market focused on today’s FOMC rate decision at 2:15pm. What had seemed like a relative non-event just a few weeks ago has become a key milestone for global markets that are currently seizing up because of concerns about systemic solvency and liquidity in the financial sector. Liquidity is a major issue in this market, with overnight USD Libor surging to 6.44% from 3.11% on Monday. Fed funds futures currently imply a 100% chance of a Fed ease, versus only 2% one week ago but options on Fed funds futures imply that a Fed hold is a possibility. Should the Fed refrain from easing and provide liquidity through other means, the market could react with further risk aversion and volatility.

EUR/USD

The euro has stayed relatively range-bound as the fallout from recent events continues and European equities continue to slide, with financials leading the carnage. The ZEW investor confidence index rose more than expected, supporting the euro somewhat. The ECB pumped EUR 70bn in overnight funds into the market today.

GBP/USD

The pound fell after Governor King said inflation is expected to peak soon around 5% and then slow in 2009, increasing speculation of an interest rate cut.  UK CPI was higher than expected, jumping 4.7% on an annual basis in August. The BoE announced today a special 2-day GBP 20bn repo operation to address intensifying UK funding pressures and financial institutions bid for almost three times the amount of funds available. Should money market strains escalate, GBP could remain under pressure.

USD/JPY

JPY continues to outperform at the expense of the high yielding currencies (AUD, NZD and GBP). The BoJ added $14.4bn in overnight repo operations – the biggest addition since March. In the face of the stock markets leading the risk aversion mentality, JPY and CHF should remain obvious out-performers and that has certainly been seen over night.

AUD/USD

The Reserve Bank of Australia’s minutes from the board’s September meeting provided little information about the future path of RBA policy. The Australian dollar continues to slide as decreased risk appetite for higher-yielding assets causes carry trades to fall out of favor. If equity markets continue to sell off, AUD could continue to perform weakly.

USD/CAD

Several factors helped contribute to a weaker CAD yesterday. Commodity prices sold off across the board, diminishing the value of nearly half of Canada’s exports. Concerns that the US’ financial crisis could continue longer than expected also hurts the Canadian economy as the US is Canada’s largest trade partner.

USD/MXN

The peso dropped to six-month lows yesterday as the financial market turmoil in the US brought about broad-based LatAm currency selling. Declining oil prices too contributed to the peso’s fall as oil represents about 1/3 of the government’s revenue.

USD/BRL

The real fell nearly 2% against the dollar yesterday as risk aversion dominated the marketplace. The Brazilian Central Bank President Henrique Meirelles noted that Brazilian banks have limited contact with the global financial crisis. He also stated that the country, however, is prepared for a crisis as it ratchets down its foreign debt.

Commodities Update
Gold has fallen about 1% from yesterday’s close while oil has fallen by over 3%. The sharp turn in the commodities cycle has important implications for various EM markets, which is a factor that is multiplied by the renewed liquidity squeeze.