Forex Investment and Currency Trading

USDCAD is still soaring, with the Canadian dollar the worst performing currency overnight. While the BoC only cut by 25bps yesterday morning, despite the fact that the majority of dealers were calling for a 50bps rate cut, the markets seemed to be unprepared for the extremely dovish tone of the BoC’s statement, where they said that “further stimulus will likely be required,” all but promising further rate cuts. USDCAD started its upward ascent following the BoC’s announcement and hasn’t stopped since.

After the Bank of Canada’s statement yesterday, markets may be a little more concerned about how the Canadian domestic economy is faring. Today’s retail sales report for August will give us an important look into how the consumer is holding up, but the news isn’t expected to be very good. July made three months in a row without any growth in real retail sales, the longest such string since the data began in 1997, and August will likely make for a fourth month. Given the momentum in USDCAD, now that it has rocketed through its previous high of 1.2120/25, it looks like a weaker retail sales report could help to drive USDCAD even higher.

Although LIBOR rates continue to fall and credit markets are thawing, the markets are focusing entirely on recession fears. In fact, the R-word is heard out of both the Bank of England (with respect to the UK) and the Bank of Canada (with respect to the US and global economy) yesterday. The BoE’s Governor King’s comments got a lot of attention, as he said that the UK is likely entering a recession and that the balance of risks to inflation has shifted decisively to the downside. He also said that the pound could fall faster and further than expected, and sure enough it did following his comments. GBP plummeted to below 1.63 overnight, and is at its lowest level against the USD in five years.

Every major currency aside from JPY lost ground against the USD overnight. EURJPY nosedived into the mid-120s, dropping below 130 for the first time in more than four years. AUDJPY actually held up remarkably well (comparatively), with AUD supported by the stronger than expected Australian CPI data, although NZDJPY has been a lot weaker with the RBNZ expected to deliver a 100bps rate cut this afternoon, with rumours swirling that the cut could be even bigger.

Today looks like it could be another volatile day in the equity markets after we already saw significant declines in Asian and European markets overnight, and a couple of weaker than expected earning reports this morning. This could keep the US dollar supported as the flight to safety strategy continues.