Forex Investment and Currency Trading

After a few fretful weeks, it has been a remarkably uneventful start to trading thus far. This has helped boost global equity markets and Dow futures were up just shy of 200pts in the early trading, suggesting a positive bias to US equities at the open. The rise in equities is reflected in risk-sensitive currencies outperforming to start the week including AUD, GBP and NZD. Over the weekend, the Dutch government announced plans to inject EUR10bn into ING, while the South Korean government announced a US$100bn plan to guarantee foreign-currency debt and a US$30 injection from FX reserves (US$239bn in September) to the banking sector. The South Korean moves will aid global efforts to ease the intense demand for USD funding that had led to consistent upward pressure on USD, over and above safe haven flows.

US: President Bush announced plans for a series of G8 Summits after the Nov 4 US election. There are few details on when, or where, or which countries will be invited. The only confirmed participant is the winner of the Presidential election. No market-moving US data today, but the US economic outlook is squarely in focus. Fed Chairman Bernanke is to testify before the House Budget Committee. He won’t candy-coat the outlook in laying bare the forthcoming intense challenge, while reiterating that the Fed will use “all tools” available including rate cuts. There is no room for complacency. Today’s NY Times reports that the US is likely to issue debt rather than cut spending or raise taxes as tax revenue suffer in the recession. This is not a surprise. It will pass the buck, so to speak, to foreigners (and thus to non voters) who have absorbed virtually all Treasury issuance in recent years, who now hold over 56% of US Treasuries, and who were already on the hook for the US$700bn bailout package. 

CAD: USD/CAD is continuing to consolidate after recently tickling the 1.20 level and as oil prices are now just shy of US$72/b. USD/CAD remains overbought, and there is scope for further short-term retrenchment, although the deterioration global economic outlook suggests that the risks over any reasonable horizon are to the upside. Today’s data will be overshadowed by BoC events this week. Foreign investors are expected to have been modest buyers of Canadian securities in August, while the risks wholesale sales are to the downside, but likely won’t suffer as heavily as did shipments. Wholesale activity is more sensitive to the domestic economy, which has —thus far — done demonstrably better than the external sector. The BoC is expected to cut the overnight target by 50bp to 2.00%, and to present its most up-to-date view on the economic outlook in Thursday’s Monetary Policy Report. 

GBP: After recent moves to shore up the financial sector, fiscal and monetary policy is aligning to tackle the deteriorating economic outlook. This week, BoE Governor King speaks on Tuesday and the BoE minutes are due Wednesday. Datawise, CBI (Tuesday) and retail sales (Thursday) are key data ahead of Friday’s advance estimate of Q3 GDP, which will confirm that the UK economy is screaming toward recession. Market looks for a 50bp cut at the BoE’s next meeting. Market sees policy rates troughing at 3% by Jun 09 but with the risk slanted toward further cuts being added in the latter half of the year. The UK government plans to fast-track spending plan and to relax fiscal rules to head off the effects of the recession.

AUD: Helping AUD fight to get back over 0.70 at the start of the week was a news report that fiscal policy measures and decisions to pass through the recent rate cut have taken the pressure off the RBA to follow with another aggressive move. RBA Governor Stevens speaks this evening and might provide some perspective on this view.