Forex Investment and Currency Trading

USD Repatriation remains a support for the USD even as USD funding pressures have improved. But a weak economy and declining stock prices are not a solid foundation for any currency over time.

EUR Global risk reduction continues to weigh heavily on the EUR; recent trading performance suggests EUR/JPY more related to US equity performance than USD/JPY, which is unlikely to persist into 2009.

JPY While the JPY remains vulnerable to risk developments, easing global financial market tensions suggest better risk appetite and some downside for the JPY. Maintain long AUD/JPY position.

GBP EUR/GBP has enjoyed a sharp gain of yield support in recent weeks, a development that is expected to continue. The pair will likely break above 0.8210 to post new record highs.

CHF EUR/CHF’s recovery has stalled. Indeed, the entrenched global slowdown will probably continue to weigh on the pair. Support is formed by the October 27 low at 1.4300.

SEK EUR/SEK has been boosted by renewed weakness in the Swedish equity market. Resistance in EUR/SEK is formed by the October 16 high of 10.2040.

NOK EUR/NOK has declined as tensions have been reduced in the money markets. Look for a drop towards support formed by the 55-day moving average, presently at 8.4033.

CAD USD/CAD has rebounded as oil has come under renewed pressure, and the down-trend from October 28 to November 4 has been broken. Strong resistance is created by the October high.

AUD The AUD TWI hovers near a 5-year low as global growth expectations continue to deteriorate, but positive Australian growth and less policy easing than currently expected suggest limited further weakness from current levels.

NZD The change of government to the conservative National Party does not portend major policy changes. Weak retail sales and manufacturing data are likely to limit further NZD gains versus the AUD.

MXN USD/MXN likely to remain volatile in the near term although upside may be limited given Banxico’s standing offer to sell $400mn USD daily. Local fixed income markets are slowly stabilizing.

BRL Response to crisis has focused on liquidity measures. Authorities seem unwilling to lower policy rate or pass a fiscal stimulus package in 2008. USD/BRL should remain in a volatile 2.08-2.40 range.

COP Central bank minutes showed a 50bp cut was considered at the Oct 24 meeting. Market expects rate cut cycle to begin in 1Q09. USD/COP remains sensitive to bouts of global risk aversion.

CLP Despite a rapidly deteriorating economic outlook, stubbornly high inflation to force central bank to remain on hold on Nov 13. USD/CLP may edge lower after gapping below 650 last week.

CNY CNY4 trillion fiscal package should help arrest downward growth risks. Lower inflation provides a conducive environment for active expansionary fiscal stance.

KRW USD funding remains restrictive despite Fed swap line. BoK’s weekly swap auction cleared at -13.24, down from -11.93 from previous week.

TWD Mounting growth risks and CBC’s implied preference for a more competitive currency for export growth will likely sustain upward bias in USD/TWD toward 33.0.
INR RBI launched a new FX swap facility for banks to meet USD funding needs. Off-market transactions to ease downward pressure on FX swap curve.

HUF Weakened but outperformed its CE-3 peers CZK and PLN on the back of the IMF program and a wider interest differential. Traders expect this to continue, particularly vs. CZK where see another cut in ‘08.

TRY Was affected by another EM sell-off. Activity dropping sharply, with September IP -5.5% yoy. Market expects a precautionary IMF program in the near term to reassure markets, despite the government’s denial.

PLN Sold off heavily amidst pricing-in of rate cuts already this year. This appears premature, given recent MPC comments and the ERM-II plans, and market expects EUR/PLN to recover to 3.50 by end-year.

ZAR Also suffered under renewed risk aversion, and USD/ZAR broke key resistance at 10.0. FRA rate cut pricing seems too aggressive to us, as the weaker ZAR generates substantial upward pressure on inflation.