Forex Investment and Currency Trading

After yesterday’s coordinated rate cuts from most of the world’s major central banks, markets are already asking what’s next. Interbank lending is still getting worse instead of better, as the 3-month USD LIBOR rate jumped by another 23bps overnight to 4.25%, driving the LIBOR-OIS rate to a record 3.50%. Yesterday the equity markets couldn’t decide how to react to the rate cuts, first rising, then falling, then paring losses, and then falling again into the close after U.S. Secretary Paulson admitted that the purchase of troubled assets won’t start for “several weeks.” The VIX index soared above 57, making the rise in March surrounding the collapse of Bear Stearns (when the VIX index hit 32) look like a little blip in the data.

Today the high-yielding currencies are outperforming, with AUD and NZD leading the pack overnight, and the yen softening. AUDJPY is back above 70, correcting sharply after falling briefly below 65 yesterday. It looks like some small amount of confidence has been restored to the markets, for now anyways.

Economic Data
Australian employment increased by 2,200 persons in September, beating expectations for a flat result, while the unemployment rate increased from 4.1% to 4.3%, in-line with expectations. August’s 14,600 increase in employment was revised down to 10,200. In addition, full-time employment declined by 15,400 persons while part-time employment increased by 17,700 in September. This suggests that firms downsized full-time positions and hours worked in recognition of the slowing economy and weaker business activity.

Japanese machine orders for August were extremely weak, dropping by 14.5% M/M. This was the third month in a row of falling machine orders, which is the longest losing streak since 2001.

German wholesale prices for September increased by 5.8% Y/Y as expected, and wholesale price inflation is much lower now than at its 9.9% peak in July. The trade balance for August was a little weaker than expected at €10.6B (NSA), with exports declining by more than imports

The UK’s HBOS house price index fell by 1.7% in September, pushing the Y/Y figure down to -13.3%. This was the biggest annual price drop since the index began in 1983.

Yesterday in Canada the housing starts data for September were stronger than expected at 218K. The single-unit segment continued to weaken, and fell to its lowest level, as a percentage of total starts, since 1982. The more interesting event yesterday was that Canadian commercial banks lowered their prime rate by only 25bps after the Bank of Canada cut the overnight rate by 50bps yesterday morning. With data going back to 1996, this is the first time that the spread between the prime rate and the overnight rate has exceeded 175bps. The risk is that the Bank of Canada is going to have to cut the overnight rate further than it otherwise would to have the same impact on consumer and business lending rates.