Forex Investment and Currency Trading

Overnight:

• Asian stocks sharply higher. Kospi up 12%, Nikkei up 10% today for a 30% rally in three days; European stocks more muted, up between 1-4%; US equity futures up over 3%; yen still under pressure as risk appetite improves on optimism that other central banks will also follow the Fed and cut rates further; USD weaker again; US treasuries lower; Oil up $1, but base and precious metals much higher. 3 month Euribor down 3bp to 4.79%, lowest level since 18 April.
• Japan announces an economic stimulus plan worth yen 26.9tln, including new spending worth yen 5tln.
• Reserve Bank of Australia Dep Gov Battelino says inflation is falling but could limit room for manoeuvre on interest rate cuts. RBA does not draw lines in the sand on the currency.
• Euro area October economic sentiment index fell to 80.4 from 87.5, way below expectations, lowest since 1994. Consumer, services and industrial confidence indices all declined further. Consumer confidence at lowest since January 1994.
• German labour data on the strong side – Unemployment fell by 26k in October compared to expectations of -10k. The unemployment rate fell again to 7.5% from 7.6%. The ILO unemployment rate to 7.1% in September from 7.2%.

FX fundamentals: The latest equity recovery, and general annihilation of the USD and the JPY, is an indication that the market had finally got itself short USD, or that end of month flows this time around are more USD negative due to rebalancing effects. Either way, the sharp USD losses should not be expected to extend dramatically much beyond the end of the month. Although it would be rash to say that a further USD decline isn’t possible today, the USD decline has made a lot of things look a little expensive again on the basis of zero risk appetite. Only the CAD, SEK and NOK among the G10
currencies still look cheap against the USD on this basis, though the USD isn’t far below fair against any of the other currencies except the CHF (dramatically) and the JPY (moderately). As volatility declines, albeit only very gradually, there is scope for more declines in JPY and CHF and more upside potential for the AUD and NZD, and to a lesser extent GBP and the EUR. The market is going to stay very equity correlated, particularly in the AUD and NZD vs JPY and CHF crosses, but the equity correlation of the USD should gradually weaken from here as the market refocuses on fundamentals.

Trade of the day: short GBP/CAD - GBP rally least justified by fundamentals, CAD still cheapest of majors, risk rally still favoured, some risk of USD (and CAD cross) positive response to GDP