Forex Investment and Currency Trading

USD
The November payroll report is the key event for markets today, and while the expectations were pessimistic, clearly the data indicates that the labor market is worse than most had imagined. The past three months have held the worst loss in jobs since the 1940s in terms of actual number of jobs, and in terms of percentage of the labor force, the worst three months since the 1980s. As has been the case over the past year, the immediate price reaction to the release is not always the right one, with the initial knee-jerk moves often being reversed through the rest of the session. Equity and FX markets have discounted much of the bad news on the outlook for the global economy, but  in any case, perhaps the clearest implication to draw is that the large downside surprise should continue to benefit recession trades - long JPY vs USD and GBP. International data releases continue to be grim. German manufacturing orders fell sharply, and Canadian payroll data declined significantly more than expectations
       
EUR/USD

The resilience of EUR/USD to the continued weakness in equity markets has been impressive, leading to the question of whether the pair is forming a base. Deleveraging has been at the heart of the fall from grace of EUR versus both USD and JPY, but data on the Euro area balance of payments suggests that a significant part of the deleveraging has already taken place, with net equity outflows in September, the largest since 2000. Against this backdrop, there is now more two way scope in EUR/USD price action and with the Fed in full quantitative easing mode and potentially monetizing its debt, USD weakness could now extend to the non-JPY currencies.

GBP/USD

The 100bp rate cut by the BoE yesterday was clearly welcomed and will do its part to help revive the economy. However, the MPC announcement also stated explicitly that rate cuts alone will not relieve strained credit conditions – that “further measures” would be needed, signaling a readiness to consider following the Fed in undertaking unconventional quantitative easing measures.  GBP, already selling off this morning, will likely be hurt by the weak payroll numbers.

USD/JPY

The yen broke sharply lower this morning on the back of the very weak US payroll numbers. Not surprisingly, the yen continues to be a strong performer in the face of surprisingly bad news. With equities likely to open deep in the red as confidence and risk appetite recede, JPY will continue to have support.

AUD/USD and NZD/USD
The Australian and New Zealand dollars weakened as investors sold higher-yielding assets ahead of and after weak US employment data. As central banks in Australia, New Zealand, Europe and the UK have eased rates, demand for AUD and NZD has weakened. The currencies will likely remain under pressure today with stock markets declining after the weak US economic data.

USD/CAD

A very weak jobs report was released at 7 AM this morning.  Headline employment fell 70,600 and the unemployment rate ticked up to 6.3% from 6.2% in October.  Both full-time (-30.2K) and part-time (-38.0K) employment got hit and the manufacturing sector shed 38.3K jobs.  (Multiply every number by 10 to translate to rough US equivalent.) CAD already is under pressure from low oil prices, weak business sentiment – the Ivey PMI fell 12 points to 40,2 in November – and political problems.  The Prime Minister has asked the Governor-General to shut down Parliament until January 26 in an attempt to hang on to power after the opposition Liberals, NDP and Bloc Quebecois agreed to cooperate.

Latin America
Latin FX continued to weaken yesterday led by the Brazilian real, which extended this week’s sharp losses on the back of fresh data (a plunge in industrial production and auto sales)  pointing to a rapidly deteriorating growth outlook. According to Banamex’s latest expectation survey, analysts anticipate higher Mexican inflation in the coming months and lower inflation towards the end of 2009. Market sees disinflation in 2009 due to a sharper recession and currency appreciation and is in line with most analysts that Banxico should start easing in March 2009. Market forecasts USD/MXN at 11.50 by end-2009 and 11.80 by end-2010.

Commodities Update
Oil recovered overnight from its four-year low on speculation that OPEC will cut production to support oil prices when it meets on December 17 but has given back its gains after the US payrolls data indicate demand will plummet. Gold rose after today’s weak US employment data weighed on the dollar, boosting the metal’s appeal as a safe haven and alternative investment.