Forex Investment and Currency Trading

USD
The dollar was mainly strong overnight as European equity markets carried on the trend seen in Asia, making losses across the board with financials and utilities leading the declines. Despite this, both JPY and USD have failed to fully capitalize on continued investor risk aversion. Reportedly Intel’s top executive told employees that the company could potentially report its first loss in more than two decades in the current quarter. The pressure on global equities should continue through the NY trading session with earning reports from Apple, Ebay and US Bancorp, thus limiting any further intra-day weakness in JPY or USD.

The euro was mixed overnight, posting gains against the dollar in Tokyo and losing them in Europe. ECB’s Trichet stated that inflationary pressures are easing and economic outlook has deteriorated over the past month. He also added that rumors of EUR break-up are unfounded. Euro continues to get sold in the risk averse environment and as traders comment, financial stocks are bearing the brunt and these have to turn for there to be any rally in EUR/USD.

GBP has once again been the major under-performing currency during the European session, making broad based losses, particularly versus the Scandinavian currencies. MPC Minutes showed an 8-1 split in the decision to cut rates by 50bps, with Blanchflower voting for a more aggressive 100bps cut. UK data was also weak with an above consensus rise in the unemployment rate and a worse than expected public sector borrowing requirement. With the UK moving inexorably towards quantitative easing, the macro and policy backdrop to GBP continues to deteriorate and traders look for further weakness in the months ahead.

The yen continues to be a safe haven in the risk averse environment with GBP, AUD and NZD as the main underperformers. An intraday weakness is unlikely as earnings continue to put pressure on risky markets.

AUD and NZD also posted gains in Tokyo and reversed during the London session. However, they continue to be main underperformers, especially against the yen. In New Zealand, November retail sales were much stronger than consensus at 0.0% (consensus -1.2%). In Australia, Prime Minister Rudd stated that the government is ready to help the country’s banks plug a AUD 75bn shortfall in corporate funding. Trading will likely be driven by the tone set by US corporate earnings.

CAD rose from 6-week low this morning as crude oil advanced. The BoC did what the market was looking for yesterday and cut rates by 50 bp to 1.0%. The ensuing statement was downbeat, as would be expected in the current environment. November wholesales came in at -1.6% vs expectations of -1.5%. A continued strength in oil will reverse CAD’s recent decline and lift it in the near term.

Mexican stocks suffered their biggest one day drop in three months on Tuesday as investors worried that weak US banks would be unable to help revive the slumping US economy. The peso lost 0.78 percent at the central banks final reference. The real has perked up despite some earlier negative impulses - broadly firmer USD, weak base metals.  Despite, the real has managed to advance about 0.4% against the US dollar.  FX investors are keeping a watchful eye on BDB easing, after a likely 75 bps cut today, as most currencies have seen aggressive central bank interest rate easing.

Commodities Update
Crude oil rose as the USD retreated from its highest in more than a month against the euro, which increased investor demand for USD priced commodities. Gold was relatively flat vs the dollar. Although eroding demand continues to undermine commodities, any weakness in the dollar will reverse their recent downward trend.