Forex Investment and Currency Trading

USD
Senate Democrat leadership proposes $25bln auto aid bill; loans would have 10-year terms; US government would get warrants or senior debt instrument in recipient company; Senate bill would also allow loans to auto industry component suppliers. Secretary Paulson noted solid progress has been made in stabilizing US financial system but it will take considerable time to restore it to health. European equities are trading lower, in sympathy with the overnight losses in Asia and the Americas. However, despite this, JPY has not made the kind of gains that have been seen recently following sharp equity losses. Though the core trading themes remain one of deleveraging and recession, there are signs that the correlation between volatility and FX is not as strong as it has been. This suggests that markets may be in the process of bottoming, but it is too early to jump into the recovery trade whilst economic data continues to print on the weak side. The conservatism over the outlook for risk trades is likely to be borne out this week with what is expected to be another wave of weak confidence data.

EUR/USD

EUR/USD has traded in a range this morning, down only slightly from yesterday’s close. The ECB’s Liikanen is set to speak today and will perhaps shed some more light on the future actions of the ECB. The UK CPI data has finally put the EURGBP moves of Thursday and Friday into some kind of context and finally the pound has found a firmer footing after the panic at the tail end of last week.

GBP/USD

UK inflation data provided the catalyst for some early reversal in GBP gains during the overnight session. Inflation declined for the first time since January 2008 as the impact of lower fuel and other commodity prices weighed on headline inflation. Despite the precipitous fall in GBP since last October, inflation now looks to have peaked in September. The data support market economists call for a further 100bps of easing in December, with inflationary pressures set to abate further in the months ahead as domestic demand wanes. The initial sell-off in GBP has not been sustained, but this is probably more reflective of near-term positioning. Continue to look for further GBP losses in the months ahead.

USD/JPY

As previously noted, an overnight sell-off in global equities did not directly translate into outsized gains for the yen. While the correlation is not as strong as it was earlier in the month, risk aversion driven trading is still a prominent theme. Economic data out of Japan continues to disappoint, with Nationwide department store sales falling 8.4%.

AUD/USD and NZD/USD

The Australian and New Zealand dollars fell as equities slumped and the November Reserve Bank of Australia minutes said the RBA’s recent interventions to buy AUD weren’t designed to defend any particular currency level. The minutes confirmed policymakers aim to return policy to neutral as quickly as possible but also made frequent reference to high domestic inflation. Therefore, analysts still look for only a 50bp cut next month.

USD/CAD

The Canadian dollar fell on a global decline in equities, persistent risk aversion and a bleak demand picture for commodities. With equity futures negative, CAD could remain under pressure today. CPI data for October will be released on Friday and the market expects a significant decline on a month over month basis.

Latin America

The Brazilian real and Mexican peso weakened as the global recession continued to weigh on risk aversion and the demand outlook for exports. Brazilian retail sales for September were stronger than expected but lower than in the previous month on an annual basis. Brazil’s central bank is offering currency swap contracts at auction in an effort to improve liquidity and support the real. EM FX is likely to remain under pressure as negative global real interest rates, fiscal stimulus and IMF support will only smooth but not avoid the impact of the recession in the developed world on EM economies.

Commodities Update
Oil rose yesterday after news of the hijacking of an oil tanker and a stronger than expected US industrial production number but the rally proved to be short-lived.  Oil has since slid to its lowest level in almost 22 months on a gloomy global demand picture and ahead of tomorrow’s Energy Department report that is expected to show crude oil inventories rose. Gold declined after UK inflation fell by the most in over a decade and ahead of data that is expected to show US producer prices fell, diminishing the metal’s appeal as a hedge against inflation.