Forex Investment and Currency Trading

FX Update
Durable Goods Orders (Survey: -2.0%, Actual: -2.6%)
Initial Jobless Claims (Survey: 575K, Actual: 588K)
New Home Sales (Survey: 397K)

USD strengthened overnight as the Fed announcement did not bring any details on the possible longer term Treasury purchase plan. The Fed’s discussion of growth was downbeat — unsurprisingly — and the outlook for a second-half recovery was accompanied with “significant” downside risks. More interesting in the discussion of the economy was the characterization of the inflation outlook.  For the first time this cycle the Committee as a whole expressed concern about downside inflation risks, as the statement noted “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” If this persists, the measures that would be taken by the Fed (further expansion of the monetary base) would hurt USD in the medium term.

Euro is weaker this morning as the European equity markets have failed to capitalize on the strong gains seen in Asia and New York. Most of the major indices are down 1% with financial stocks bearing the brunt of the selling. There has been no major catalyst for renewed selling even as confidence indicators from Europe suggest some stabilization in sentiment. EUR trend was not helped following comments by ECB Trichet that rates could fall below 2% whilst also indicating that the door on unconventional policy measures (ie. quantitative easing) has not been closed. Trichet once again emphasizes that the March meeting will be very important. Whilse a rate cut is likely at that meeting, the continued mention of unconventional measures may feature at the press conference.

GBP trended lower overnight even as the nationwide house price index hinted at further stabilization in the UK housing market. The house prices dropped less than expected at -1.3%. However, this morning brought heavy EUR/GBP selling, which helped lift the pound. Today’s trading will focus on incoming US data. Traders will also be watching to take profit in any rallies caused by flows, as we saw this morning.

JPY has recovered lost ground during the Asian session. However, JPY gains have been mostly at the expense of the commodity currencies, with European FX performing better. The lack of detail on a possible Treasury purchase plan from the US government also helped lift the JPY as there is demand for the safe haven currencies. Yen will continue to trade on risk aversion and factors affecting the USD.

NZD has been the clear under-performer during the Asian session as the RBNZ delivered a larger than consensus 150bp rate cut. Although Governor Bollard suggested further cuts to come, he also said that further cuts will be smaller than those recently delivered. Despite the rally in Asian stocks, the continued yield erosion of NZD is likely to maintain the pressure on the currency through the day. AUD also traded lower, as commodities came under pressure and European equities sold off as risk aversion came back to the markets.

CAD was little changed over night, even as the commodities came under pressure. Trading was mostly influenced by an M&A deal flows linked to MXN. This morning’s data showed that raw material prices dropped a record of 15.4% in December and industrial product prices dropped 1.9%. Today’s trading will likely continue to be influenced by M&A deal flows and commodity trading.

MXN opened stronger despite the weaker tone in equities. This is mainly following the move lower in BRL, as equity markets rallied on back of the news that a rescue plan for the US will be announced soon. Real was strengthening as investors continued to recover their appetite for risk and on hopes that toxic bank assets in the United States may be isolated in a so called “bad bank”.  The two currencies are responding well today as hopes for a US recovery increased.

Commodities Update
Crude oil prices fell this morning as US stockpiles gained more than expected last week. Refiners also reduced output as demand declined, dragged by the global recession. Gold declined again in London trading on the back of dollar strengthening as the Fed avoided any detail on possible UST purchases.