Forex Investment and Currency Trading

FX Update
Initial Jobless Claims (Survey: 475k, Actual: 478k)

USD
Price action during the European session has been more muted relative to events over the past few days. European equities have rebounded following broad based gains in Asia. A number of Asian central banks have followed the lead taken by G10 and eased policy rates which may have contributed some easing in tensions in stock markets. Although many people focus on the equity market as a barometer of the success or failure of recent government intervention in financial systems, the real measure of effectiveness is the money market. As long as financial institutions remain reluctant to lend to each other, the credit creation cycle will not be kick-started. With 3-month libor setting at its highest level since December, the condition of the money markets indicates that central bank financing remains the only source of ready liquidity for the financial system.

EUR/USD 

After cutting their benchmark interest rate for the first time in five years, the ECB is aiming to take further steps to ensure that their banking system is not hit as hard as the US’. In response to being asked if the rate cut was a one-off, Trichet responded “I don’t say that. I say that we will always do whatever is necessary.” Trichet is looking to restore confidence in credit as the ECB loaned European banks $100bn in overnight loans - a new record.

GBP/USD
The pound briefly dropped to its lowest level against the USD in three years before bouncing off of its lows. Risk appetite appears to be better this morning as higher yielding currencies take back some of their recent losses. However, the pound will continue to be highly affected by risk aversion going forward, as concern about the UK’s banking system permeate the market. Home prices continue to fall relentlessly in the area, furthering economic concerns and likely will weigh on the currency further.

USD/JPY

USD/JPY is back over 100 this morning, though global market uncertainty remains. The markets may have received some respite from recent volatile moves but it is too early to suggest that the worst is over.  Distress in the money markets continues whilst FX volatility remains elevated. Against this backdrop, the ongoing uncertainty regarding possible further steps by policy makers will keep risk elevated. With this in mind we continue to look for JPY to outperform.

AUD/USD and NZD/USD

As European and Asian equities rebounded, risk assets are consequently in the ascendancy and this has translated into FX, with both NZD and AUD performing strongly across the board. AUD rallied despite further evidence of a weakening in the Australian labor market, Employment in Australia rose by 2.2K in September, close to the consensus, but the pace of job growth is easing, with the 1.9% oya print the first sub-2% reading since June 2006.  And the unemployment rate bounced back up to 4.3% after August’s surprise decline to 4.1%.   Leading employment indicators signal further moderation in the pace of jobs growth. The price action in AUD in particular continues to demonstrate that investors are trading on bigger themes than relative fundamentals. However, over the medium-term the outlook for AUD still remains fragile as the domestic economy continues to slow and export growth (commodities) wanes against the backdrop of global economic slowdown.         

USD/CAD

The Canadian dollar fell as the market speculated that the Bank of Canada will cut rates further.  The central bank meets to set rates on October 21 and December 9. Lower commodity prices should keep the currency on its heels.

Latin America

Brazil and Mexico’s central banks tapped their reserves and sold dollars yesterday to support their currencies. Mexico sold $998 million of the $2.5 billion it offered in the largest intervention since the Russian debt crisis September 1998 and further offerings are planned for today and tomorrow. Brazil’s intervention was its first in five years. Mexican CPI data will be released at 10am today but economic data is having little impact on FX with shifts in risk attitudes dominating price action.
Commodities Update
Oil recovered as equity markets in Asia and Europe rose and the dollar weakened, boosting the appeal of dollar-priced commodities as a hedge against inflation. Gold slipped as investors liquidated their positions to raise cash amid soaring inter-bank borrowing costs.