Forex Investment and Currency Trading

USD
The announcement that China’s State Council agreed on an aggressive fiscal stimulus package amounting to 4 trillion yuan over the next two years has triggered a rally in EM and commodity currencies.  The increase in the US deficit and consequent jump in Treasury supply has become a topic of interest for FX markets. This topic will be at the fore this week: as part of its usual Quarterly Refunding, the Treasury will issue $55bln of new and reopened issues. Going forward, the Treasury is likely to auction approximately $100bln of 2-year, 3-year and 5-year notes monthly, so supply will continue to be a consideration. Foreign demand for US securities has declined significantly in recent months. Agency and credit sales largely explain the drop in aggregate demand, but Treasury demand has remained robust. Foreign private investors favor US Treasuries as a safe haven during recessions and foreign official accounts cannot move wholly away from US assets without changes to their respective FX regimes.  Obama’s decisive victory in the presidential election begins to clarify what the US policy landscape will look like over the medium-term. There is some scope for relief rallies in coming weeks as fiscal stimulus plans materialize and key officials are named. Still, any decisions and announcements from the new administration can do little to hasten the end of recession in the near term. Relief rallies will likely be met with renewed risk aversion, and it remains too early to consider positioning for a recovery.

EUR/USD

European bank earnings continue next week. The key focus is on loan loss provisions, particularly with respect to EM exposure. Q3 loan loss provisions should only be the tip of the iceberg given that the slowdown in EM only just has started. The effect of negative news on FX markets should be muted, though, given European governments’ support of the financial sector. French Industrial Production fell 0.5% in Sep (a bit less than the Street call -0.7%), but 3Q is still down 2.7% annualized.  Italian IP wasn’t any better, with September down 2.1% (correcting for a calendar boost in August) and 2Q down 6.6% annualized.

GBP/USD

The pound rose against the dollar as stock markets rallied after news of China’s stimulus plan. The improvement in risk sentiment increased demand. Producer price inflation is slowing rapidly (as it did in China and Korea in numbers released overnight), with producer input prices falling 5.6% m/m in October and output prices down 1% m/m – the output price inflation rate slowed to 6.8% from 8.5&% in September.

USD/JPY

The yen weakened as risk appetite returned to the market and stock markets rose after China unveiled its $586 billion stimulus package, reviving demand for higher-yielding assets funded with yen. Core machinery orders recovered somewhat in September, rising 5.5% m/m.  But after steep declines in August and July, orders for 3Q still stand 10.4% (not annualized) below the second-quarter tally, and the survey signals another 3.1% decline in Q4.  In Q2, orders declined 1.4%.  Core machinery orders lead business investment (but are a less accurate predictor than before), but these numbers leave no doubt that the Japanese corporate sector is slashing capital expenditures, consistent with forecast for a severe recession. 

AUD/USD and NZD/USD

The announcement of a $586bn Chinese stimulus plan has helped encourage AUD and NZD strength this morning. The assumption that the stimulus package will boost the demand for Australia and New Zealand’s commodities could provide some relief for the struggling economies. Over the past week, correlation between AUD and NZD and equity market volatility has dropped. This could be indicative of speculative positions in the currencies being reduced significantly. Given view that the reality of global recession will continue to weigh on broad sentiment, the bias is towards continued underperformance of commodity currencies, but expect sell-offs to be less violent going forward.      

USD/CAD
The Bank of Canada Governor Mark Carney indicated that Canada may slide into a recession. This makes room for additional rate cuts. However, official forecasts still look for a rise in GDP both this year and next albeit at the slowest rate since 1991. On the other end of the spectrum, inflation still remains a concern sitting near 5-year highs. The data is worrisome, however overall market sentiment and commodity prices will continue to be near-term drivers

Latin America

USD/BRL has had a hefty bounce in the wake of China’s stimulus announcement. Commodity exporters have been the major outperformers on the back of this news. Nearly 2/3 of Brazil’s exports are commodities and as such the currency has gained over 2% against the dollar this morning. There is not a significant amount of data coming out of the area this morning, and equity and commodity markets are likely to set the tone.

Commodities Update
Crude oil and metals have climbed significantly on the back of China’s stimulus package. The hope is that the additional capital will encourage purchasing of commodities to build up the country’s infrastructure. Oil has climbed by as much as 7% this morning. Higher oil prices and the weaker dollar today have helped increase demand for gold as well.