Forex Investment and Currency Trading

A decent bid under commodities and gains for the likes of the AUD and NZD yesterday suggest a decent backdrop for the CAD overall. While the rebound in commodities may be attributable to commodity index rebalancing at the start of the calendar year (and oil prices have slipped back this morning), recent gains in the CAD and its commodity peers appear to have some real legs, with investors perhaps looking to move back into riskier assets. A big setback for commodities from here would be a drag on the CAD etc. but recent price action has probably done enough to draw in fresh long interest from the medium term technical models. USD/CAD still looks heavy on the charts and the market still has the potential to drop back to the low 1.16s in the next week or so.

A pretty downbeat assessment of economic prospects from the Fed in yesterday’s FOMC minutes and President-elect Obama’s admission that he will likely inherit a trillion dollar budget deficit this year (and that the US might be looking at similar scale deficits for “years” to come) account for the softer USD tone this morning. EUR/USD’s decline was already looking a little suspect - analysts still think that the USD risks coming under broad pressure again as we move through the year. The
markets seem to have settled into two camps at the moment – those expecting US economic policies (massive fiscal stimulus and slashing interest rates) to lead to a quicker recovery than the rest of the developed world and those expecting the same US policies will ultimately drag the USD lower.

The GBP has picked up good support all around this morning, with decent GBP interest noted on the crosses and Cable pushing up through resistance at 1.4972 to regain the 1.50 area. While Sterling fundamentals do look soft, negative factors are perhaps largely discounted by the market now and we are seeing some tentative signs of GBP stabilization/reversal on the crosses (EUR/GBP and GBP/CHF weekly patterns look more promising for the pound at the moment).

German unemployment rose by 18K in December, nearly double expectations, and the prior month was revised from - 10K to -4K. As a result, the unemployment rate is sitting at 7.6%, unchanged from the revised November rate. This was the first rise in German unemployment in three years. Eurozone PPI fell by 1.9% M/M in November, the biggest monthly fall on record, which pushed the Y/Y rate down to 3.3%, nearly halving the prior month’s 6.3% rate.

Yesterday’s US data was mostly on the weak side, with factory orders falling twice as fast expected with a 4.6% decline, and pending home sales falling four times faster than expected with a 4.0% fall. However, the ISM nonmanufacturing index was a little better than expected, rising from 37.3 to 40.6 in December. But the small rebound doesn’t seem quite as great when considering that in the prior month, the headline index and most of the subcomponents fell to new all-time lows. Looking at
growth/contraction by industry, one industry reported growth while 17 contracted. And unexpectedly, the one industry reporting growth was retail sales. This suggests that perhaps the collapse in gasoline prices helped to provide a little more support to consumer spending than analysts had expected,
particularly after we saw strong consumption numbers in November as well. Unfortunately, that’s only likely to provide short-term support, as growing job losses and rising unemployment swamp the positive effect from lower gas prices. The other big economic event yesterday was the release of the minutes from the December 15-16 FOMC meeting. But unfortunately, there wasn’t as much detail in
the minutes as we had hoped for.