Forex Investment and Currency Trading

USD has continued to weaken with EUR/USD extending to a 7-week high, further evidence that markets are now transitioning to a weaker USD environment. The dollar is losing its allure because of the Fed’s quantitative easing and evaporating real yields. There is a risk that USD weakness comes sooner rather than later now that the market is becoming less fearful of a disorderly end-of-year squeeze in dollar funding. USD has also started to decline against Asian currencies. USD/KRW fell more than 3% today. U. S. Initial jobless claims and trade balance are the focus today. Jobless claims increased again to 573k, which was the highest reading since 1982. Weak job market will keep US yields low, which will then make US difficult to attract capital flows to offset the deficit.

The euro hit a six-week high against a broadly weaker dollar with doubts creeping in as to whether pent-up demand for the US currency over the year-end will be as strong as previously thought. Implied interest rate spreads also moved in the euro’s favor after European Central Bank Executive Board member Stark said late yesterday the bank did not have a lot of room for maneuver on rates after its cut last week. Having climbed on a wave of risk aversion in recent months in tandem with the low-yielding Japanese yen, further dollar demand into the year-end from deleveraging flows might be showing some sign of cooling. A fall in volatility also indicates that extreme risk aversion may be easing.

GBP continues to underperform. In spite of making some headway against the USD this morning, GBP remains weak. EUR/GBP once again set a new all-time high as the currency cross rose just below 0.8900. Manufacturing data out of the UK disappointed the markets as manufacturing output expectations dropped to its lowest level in 30 years. This only furthers the case for further rate cuts. Given that inflation expectations fell to 2.8% in November vs. 4.4% in August.
In spite of risky markets performing well today, the yen has made gains against the dollar. The market sentiment is not so much one of risk appetite as it is general USD aversion. The BoJ deputy governor Yamaguchi noted that he expects the Japanese economy to recover some time in mid-2009, but risks still remain high.

The Australian dollar was wedged in a tight range on Thursday, well capped by concerns an abrupt economic slowdown in China will drag on Australia’s key commodity exports.  Domestic employment data showed the number of job losses in November was smaller than expected, limiting the downside, though analysts still expect unemployment to climb in the coming months.  China, Australia’s largest trading partner saw its consumer price inflation fall to a 22 month low of 2.4 percent in November after exports and imports from the worlds fourth largest economy shrank unexpectedly in the same month. Australia is a major commodities exporter and has ridden a Chinese economic boom in recent years, selling vast quantities of iron ore to the country’s steel-makers. 

CAD is firmer against its US counterpart supported by hopes that the rescue plan for the automakers will be successfully pushed through despite some opposition.  Higher commodity prices, especially crude, will provide good support for the Canadian Dollar. The Canadian merchandise trade balance came in better than expected, likely further supporting CAD.
Mexican stocks rose and the peso firmed on news of a tentative agreement by US lawmakers to aid Detroit’s ailing automakers, whose local plants are a key part of the Mexican economy. The US House of Representatives appeared set to vote on a proposed $15 billion bridge loan for the automakers after Democrats sent their plan to the White House, but congressional Republicans offered an alternative plan. Without aid from Washington, traders fear a possible bankruptcy in the auto sector could send shock-waves through Mexico, where US automakers have major operations.

Gold has climbed to an eight-week high as the weaker dollar has encouraged demand for the precious metal . Oil has made significant advances as well on the dollar move. OPEC President Khelil has recommended “severe” cuts in production at the December 17th meeting.