Forex Investment and Currency Trading

FX Update
ADP Employment change (Survey: -50k, Actual: -8k)
ISM Manufacturing (Survey: 49.5)

USD
Markets have generally consolidated during the session as month/quarter-end pressures abate and the focus remains squarely on the TARP bill. European equities are broadly in positive territory, though this could change later in the day with US equity futures currently in the red. USD has eased away from Tuesday’s highs as signs emerge of an easing in demand for USD liquidity at the start of the new quarter.

EUR/USD

The data flow from Europe moves from bad to grim with manufacturing PMI data revised lower. Unsurprisingly, there was particular weakness in Spanish PMI which made yet another lifetime low. With focus turning to the European economies and the financial system, the tug-of-war between deteriorating US fundamentals on the one hand and recessionary conditions in Europe will likely keep USD within a range versus the European currencies. Meanwhile, in focus will be tomorrow’s ECB press conference and interest rate decision. President Trichet will likely acknowledge the disappointing growth data which is starting to look large relative to the forecast released at the September meeting. But he will likely continue to stress that upside inflation risks remain the central bank’s primary concern and stick to the line of using the right tool for the right job; monetary policy for inflation risk and liquidity policy, deposit guarantees, equity injections and nationalization for financial and banking stress.

Short term technical studies show support levels at 1.3895 and a resistance level at 1.4205.

GBP/USD

In the UK, the PMI index fell to its lowest levels since 1992, with many sub-components hitting lifetime lows. In light of recent developments on the economic and financial front, economists have made downward revisions to their UK growth forecasts and expect more easing by the Bank of England. It is expected the MPC to cut rates by 25bps at next weeks meeting, a view which is 95% priced into the market. It is now seen the trough in rates at 3.25% by the end of 2009. Fed is expected to also cut rates over the coming months and given that there is a sizeable overhang of GBP shorts which should prevent sustained GBP downside.

Short term technical studies show support levels at 1.7450 and a resistance level at 1.7915.

USD/JPY
In the September Tankan survey, the headline DI of large manufacturers’ business condition fell from June’s +5 to -3, marking the first negative reading since 2Q03. Large nonmanufacturers registered a decline to -1 from 5 and small firms remain in deep negative territory. Perhaps more important firms still see a 1.3% capex cuts for fiscal 2008, about unchanged from June. Capex plans usually increase as the year progresses. While these numbers are not as weak as the raft of data we saw yesterday, there still see the risks shifting towards a weaker JPY versus USD as financial market tensions eventually ease.

Short term technical studies show support levels at 103.50 and a resistance level at 107.10.

AUD/USD and NZD/USD

Broad dollar strength and increased speculation that Australia and New Zealand will be forced to cut their benchmark rates has weighed on AUD and NZD. Growth in the area is slowing faster than forecast. An 89% chance is priced into the market for a 50bp rate cut out of Australia at its next meeting on October 7th. The results of tonight’s Senate vote on the bailout bill will likely be the next major driver for the currency pairs.

Short term technical studies show support levels at 0.7805 and a resistance level at 0.8080.

USD/CAD

In spite of the fact that the Canadian economy grew 0.7%, the most since March of 2004, USD/CAD has moved higher. With the country’s elections on October 14th, the major issue has become the economy. However, the Canadian economy remains closely tied to the US, and any major developments in the States should have a fairly direct effect on Canada.

Short term technical studies show support levels at 1.0545 and a resistance level at 1.0700.

Latin America
The Brazilian Real made the largest gains against USD among the most traded currencies during Tokyo trading hours as risk appetite broadly increased. The belief that the US senate will in fact pass the bail-out bill this evening has allowed EM currencies to take back some of their losses. The Mexican peso gained as well. The liquidity crunch in the US will undoubtedly weigh on the Mexican economy as tourism slows.

Commodities Update
Oil prices dipped back below $100/bbl as the credit crisis deepens and concerns that a global recession would curb demand for fuel. A report from the energy department is likely to show that oil supplies rose as well. Should the current economic condition continue to deteriorate, oil prices could fall further.