Forex Investment and Currency Trading

• The Dollar has continued to weaken on a broad basis and is now 6% weaker on a tradeweighted
  basis than early December.
• Open short USD/CAD trades to participate in this move given that C$ has been a laggard so far
  despite its relatively better fundamentals.
• The BoJ is set to cut rates to 0.15% overnight and open the door to QE.
• Contrary to history, the Yen is likely to benefit given the BoJ’s experience with this policy
  framework compared to elsewhere.
• The Japanese authorities appear to be getting uncomfortable with Yen strength particularly
  after yesterday’s 2.4% Yen appreciation. Watch commentary from the BoJ/MoF.

The Dollar continued its march weaker during yesterday’s trading moving above 1.44 in EUR/USD and brushed 87 in USD/YEN. The move remains broad based with further appreciation of the Asians in overnight trading. The hoopla surrounding the higher USD/CNY rates of two weeks ago has died down with USD/CNY spot firmly in its old ranges. The Dollar is now 6% weaker than Dec 5th which seems to be the pivot point of the current move.

Not all currencies have ‘joined in’ the Dollar move to the same extent, the CAD being one of them. Several other currencies also have scope to catch up with the Dollar move including the TWD. Trading Strategy: Long Cable to capture the broad Dollar weakening move on a longer term basis.

In other asset classes, yields continue to rally, with 10-yr Treasuries reaching 2.14 as concerns remained over the health of the US economy and with an eye on quantitative easing from the Fed. Equities, by their standards were basically flat on the day.

Following on from the Fed, monetary policy in Europe was back in the limelight again yesterday. Norges Bank cut rates by an aggressive 175bps to 3% on the back of stalling domestic demand and a sharp drop in inflation. The MPC minutes of the December meeting indicated that at least a 100bps reduction was necessary, however some voters decided against voting for a larger move because of what a downward surprise might do to the currency or confidence in the economy. The Riksbank decision to cut rates by 175bps in early December was a unanimous decision and while the bank’s base scenario is that rates would need to be lowered beyond 2%, the bank is not averse to lower rates should conditions require such a move.

Despite the dovish commentary from Norges Bank and the Riksbank, NOK and SEK both managed to appreciate slightly vs the Euro through the day’s trading. Sterling on the other hand continued to get beaten up and is now trading at 0.94 vs the Euro. EUR/CHF has fallen to 1.55, given the SNB’s desire to have a weaker CHF it will be interesting to see if they have anything to say about the recent move.