Forex Investment and Currency Trading

Congressional Democrats and White House reportedly agreed on the outlines of the bailout plan for the auto industry. Senator Levin said, “this gets us to the 20-yard line.”  US futures signal gains at the open and the dollar is weaker. European stocks are lackluster with economic numbers again weaker than expected, failing to follow through on the strong Asian session fueled by news of an approved bailout package for the Big 3 automakers.  

There are no notable data releases or official speaker today. Friday brings the release of retail sales data and Michigan Consumer Confidence.

Stocks were down yesterday, but EUR/USD was still higher. The correlation of EUR/USD tracking the S&P has broken down and fundamental USD problems are beginning to come through. Industrial activity in Europe continues to surprise to the downside with October prints for France, Italy and Sweden below expectations at -2.7%, - 1.2% and -1.6% m/m respectively.
The pound rose as optimism that the US auto bailout will be approved fueled demand for higher-yielding currencies like GBP. UK growth contracted 1% in the three months to November and Chancellor Darling is considering credit guarantees for household and companies to spur lending.  
JPY is back to normal correlation with equities. JPY rallied along with falling US equities and fell along with strong Japanese equities.

NZD continued its strong performance following hawkish comments from RBNZ governor Bollard. He said “it is worth remembering that… inflation rates in New Zealand remain very high.” Market believes that officials want the market to know that inflation remains a key policy consideration, but one also believes the RBNZ is not even close to the finish of the easing cycle. Australian home loans increased in October, although they are still down 24% from a year ago.

The Canadian dollar fell sharply yesterday after the BoC surprised markets with an aggressive 75bp rate cut. This was made only worse by declining oil prices. However there has been a slight reversal this morning as crude makes headway. Movements in commodities continue to underpin USD/CAD price action.

November Mexico headline CPI printed at 1.14%m/m, slightly above market consensus (1.12%m/m) forecasts.The November inflation release suggests that inflation is near its peak and next year disinflation could be much sharper than anticipated. Against this backdrop, one keeps the call for Banxico to begin cutting rates in March, delivering rate cuts at a 25bp per meeting pace for a cumulative easing of 125bp. The risks to the forecast are that Banxico brings forward the timing of the first cut to February, accelerates the pace to 50bp per meeting and delivers more than 125bp in cuts. Out of Brazil, market sees the COPOM on hold today despite the much weaker activity scenario due to rising inflation risks on the back of currency volatility and the difficulty in assessing the net impact of the growing fiscal stimulus. The COPOM minutes, however, will have to recognize the recent dovish developments and drop the informal tightening bias.

Crude oil is climbing on increased speculation that a coordinated production cut between Russia and OPEC is likely on the way. The $40 level has provided a fairly strong support for crude, and the gains could be investors unwinding their short positions around the level. China’s oil imports fell to the lowest in a year and marked the first decline since July.