Forex Investment and Currency Trading

• MBA Mortgage Applications (Actual: 11.9%)
• Trade Balance (Survey: -$57.0B, Actual: -$56.5B)
• Initial Jobless Claims (Survey: 480K, Actual: 516K)
• Continuing Claims (Survey: 3825K, Actual: 3897K)
• Monthly Budget Statement (Survey: -$200.0B, Actual:)

USD
The dollar continues to outperform as risk aversion and headline risk dominate the FX markets. In a global economic downturn where every country’s economic data is weak, comparative fundamentals are key and the market sees the US coming out of recession first. The market reacted badly to Treasury Secretary Paulson’s proposed changes to the TARP. Paulson abandoned plans to purchase troubled mortgage assets with the allocated fund and instead, the Treasury and Fed will look for ways to use the funds to support consumer credit, particularly through the ABS market. Uncertainty surrounding the Treasury’s plans and today’s weak jobless claims data may continue to weigh on equities and investor risk appetite, which should favor JPY and USD and hurt high-yielding G10, EM and commodity currencies.

EUR/USD

Data confirmed that Germany officially entered a recession in Q3, with GDP softer than expected at 0.5% vs 0.2% consensus. Analysts expect that EUR/USD should continue to trade in line with global stock markets and with equities trending lower, the euro could weaken further.

GBP/USD

After falling 5 percent yesterday to 6 ½ year lows after comments from BoE Governor King that indicated the central bank will continue cutting interest rates, the pound’s slide continues this morning. Yesterday’s data showed a rise in unemployment and BT Group Plc, the UK’s largest phone company, announced today that it plans to cut 6 percent of jobs. Sterling could continue to weaken as the market digests a weak labor market and the probability of aggressive rate cuts in the months ahead.

USD/JPY

Despite European equities falling further during the session and US equity futures printing in negative territory, JPY has underperformed against all currencies except NZD. Traders believe that dips in JPY provide an excellent opportunity to buy into and remain long JPY versus USD and EUR. Investor risk aversion, boosted by heightening concern over the economy, remains center stage. Key economic figures will continue to be closely watched within this context. Market believes risks are that further data weakness could heighten growth concerns and investor risk aversion to support further JPY strength. Indeed, JPY upside risks are also supported by the continued decline in U.S. long-term yields, rising Fed cut hopes, a steepening U.S. yield curve and the resumption of decline in EM assets. Market continues to believe USD/JPY could trade below 90 in the coming weeks.

AUD/USD and NZD/USD

AUD/USD and NZD/USD continue to decline on the back of weak equity markets. This comes in spite of the yen’s underperformance, a typical indicator of increased risk appetite in the FX markets. New Zealand retail sales data printed softer than expected. Rumors that the RBA came into the market to stabilize the Australian Dollar briefly lifted the currency, however it has also served to increase general nervousness. The RBNZ meets next on December 4th and is likely to make an additional aggressive cut.      

USD/CAD

The Canadian dollar had one of its worst single day drops ever yesterday on the back of declining commodity prices and increased risk aversion pushed investors away. The Toronto stock market dropped 500 points, or slightly over 5%. The Bank of Canada is likely to inject an additional $8bn into the market to help alleviate liquidity issues that still persist. With oil still trading below $60/bbl, CAD should continue to remain under pressure.  

Latin America

Brazil is likely to come in to the market today and offer $500mm worth of swaps to slow the currency’s depreciation. Inflation in the area continues to clime, accelerated 0.73% over the past month alone. This is worrisome news as it can limit the ability of the central bank to enter into more proactive growth policy. The peso broke back above 13.00 yesterday but is trading with more strength this morning as commodity prices slowly climb back higher.

Commodities Update
Oil is gaining slightly this morning, bouncing from 21-month lows after an additional OPEC meeting was announced this month before its scheduled meeting in December. OPEC officials are likely to cut production rather significantly to lift the price of crude. Gold is making gains this morning as the dollar gives back some of its gains yesterday.