Forex Investment and Currency Trading

The dollar continued to show strength as the recent trends continued over night. USD and JPY continued to outperform as European equities slid into negative territory. US government said that the remaining $350bn from the TARP will be used in part to help homeowners facing mortgage foreclosure. Fed’s Lockhart said he was comfortable that the Fed could grow balance sheet without risking inflation. Bernanke, in his speech this morning said fiscal stimulus alone won’t spur a lasting rebound and that toxic assets are still the barrier to private capital. The narrowing in the US trade deficit, as well as the absense of any other significant data releases will likely continue the current trends in the NY trading session.

The euro was mixed over night as it showed weakness against the dollar but strengthened against the GBP. Germany ruling coalition reached on agreement on a new economic stimulus package worth EUR50bn. German Chancellor Merkel said jobs are the key focus for the stimulus package and that the coalition is determined to fight the decline. NY trading is likely to continue the current trend.

GBP fell against the major currencies over night as reports showed that the economy slumped the most in two decades and home sales dropped to the lowest level since 1978. Despite significant GBP depreciation over the past 18-months, the trade deficit deteriorated further, with exports falling by more than imports. Such poor data is likely to continue to undermine GBP in a environment where the focus is increasingly on external and fiscal balances and challenges the view that GBP is now cheap.

The yen continued its strong rally against major currencies yesterday as European equities and commodities sank, despite the 4% drop in Nikkei. November current account surplus was broadly in line with consensus. The strength of the yen is increasingly becoming a concern for the exporter of Japan and its economy, which is increasing the feasibility of a possible intervention. Regardless, no such policy is discussed right now, and the yen will likely continue its rally as the weak global slump still looms over the markets.

AUD and NZD continued to sell off as oil continued its drop and pushed below $37/barrel. S&P revised the outlook for New Zealand’s rating from stable to negative. NZIER business confidence plunged in 4Q to -64, from -19 in 3Q. A reversal in the sell off of two currencies is unlikely unless the global sentiment changes and commodities reverse their decline.

The Canadian dollar was weak over night as BoC’s business outlook survey painted a dismal picture, with most indices falling to lifetime lows. Senior loan officer survey shows tightest credit since its inception in 2001, raising risk of a greater than 50bps cut next week. As commodities continue their decline, CAD is unlikely to reverse its recent trend in NY trading.

BRL declined against the dollar as metals and oil continued their decline. In MXN, Ortiz announced he will be leaving his post of CB governor on March 1st, sooner than expected.  This was overall dovish news for the market and front end rates rallied on the back of this news. The replacement will be chosen by President Calderon, who will likely rely on input from Finance Minister Carstens, who is certainly more dovish than Ortiz. Trading today will continue to be under downward pressure as equity futures are pointing downward.

Commodities Update
Oil continued to sink on concerns that stockpiles are increasing while the global demand is shrinking. However, Saudi Arabia said it will make deeper supply cuts beyond those announced at OPEC’s meeting. Gold also dropped as the gain in dollar lowered the incentive to invest in gold.