Forex Investment and Currency Trading

Equity market sentiment deteriorated further last night with US equities closing down by 2.3% and Latam equities posting significant losses. Overnight, Asian equity markets followed suit and the negative undertone remains in place in European markets this morning. Fixed income is trading flat this morning after having traded strong for the last few days.

In FX space, higher risk aversion has manifested itself mostly through renewed outperformance of current account surplus currencies. On the other hand high carry currencies remain directionless relative to low carry ones on average.

The calendar for economic releases is light today, with the US trade balance being the most significant data point.

The risk aversion started yesterday and some of it is the reality that the stimulus and rate cuts planned globally have already been priced in while the real economic malaise continues.  Today we get the US trade data – probably not going to show much more than oil prices lower, imports lower, exports lower and the US still in a substantial deficit.  The barometer of global trade as a measure of growth has been good over the years and it’s unlikely to make anyone feel better today.  So how do we go about trading FX in this environment? 

• It’s clear that certain currencies in the G10 are out of the normal zone and will correct over time.  GBP, NOK and SEK stand out there.
• All about regional bias.  The US markets would probably do well to rethink the CAD and MXN relationship as any growth or pain here will hit NAFTA countries hard.  So the CAD is breaking back out towards a 1.25 test – perhaps this is an indication less of oil and more of how bad the US economy is – so too MXN at 13.80 pivot – set for 14.20 again?
• Crosses – its all about JPY and CHF safe-havens.  The market is clearly trading FX today with both JPY and CHF crosses as the main story – so fighting this flow whether EUR/JPY 117.50 or GBP/JPY or AUD/JPY is catching a falling knife. 

USD/CAD retains a better bid tone this morning after yesterday’s surge. With the commodity currencies generally underperforming this morning and oil prices continuing to slide, the generally stronger USD tone is liable to remain obvious against the CAD for a little longer at least. Last week’s rejection of levels in the low 1.18s/upper 1.17s and the move through technical trend resistance in the upper 1.20 zone yesterday should be enough to sustain a better bid tone technically for USD/CAD in the near term at least (risk towards 1.2370/80). Support is now expected in the upper 1.21 area. From a fundamental point of view, Canada’s weakened (though internationally, still very respectable) structural position will be in focus this morning, with a reduced trade surplus expected to result from weakened US demand and lower commodity prices. Slack trade data will accentuate domestic slowdown worries after yesterday’s especially bleak Business Conditions Survey results.