Forex Investment and Currency Trading

USD rose overnight as the pressure on European equities continued yesterday as well, with risk aversion persisting once again. The dollar and yen are set for their biggest monthly gains against the euro since last October as evidence of a deep global slowdown caused increased risk aversion this month. Fed balance sheet shrinks $110bn to 1.1929tn in latest week due as CPs rolled off, which implies that the CP market conditions may be improving. GDP growth came in much better than expected at -3.8%, however rise the inventories has negative implications going forward. US GDP, Chicago PMI and the final estimate of Michigan University consumer sentiment provide the data focus today, and will drive trading.

Euro was weaker overnight as the continued risk aversion dragged equity markets for a second day. Flash estimate of CPI came in well below consensus. While a rate cut is not expected at next week’s meeting, the pressure will be on for the ECB to ease further in March against the backdrop of sharply deteriorating economic conditions. Trichet’s comments yesterday indicated that further unconventional measures (i.e. quantitative easing) are not ruled out. This could maintain pressure on the euro.

GBP performed well overnight, despite the rising risk aversion rooted in Europe. GBP has strengthened most of the week and was given further support following Bank of England data on mortgage lending and approvals (mortgage lending rose 1.9bn and mortgage approvals rose 31K). The recent news from the housing market has been encouraging with signs of some marginal improvement in the outlook. The impact of monetary easing and government pressure for banks to pass on rate cuts appears to be having the desired effect. Euro sentiment and US data will be in focus today.

JPY continued to benefit from the rising risk aversion in Europe. Japanese economic figures were uniformly weak; December industrial production was dismal again and production outlooks suggest that the contraction in manufacturing will accelerate in 1Q09 even after the 39.8% annualized plunge in 4Q08. Unemployment rate jumped to 4.4% in December from 3.9% in November. December real household spending was weaker than consensus falling from 1.6% to 1.1%. Continued risk aversion will benefit the JPY as end of month trades will likely keep managers risk averse.

AUD and NZD continued their decline overnight as the global risk aversion came at their cost. RBNZ’s Bollard reiterated that there is still room to cut the policy rate further. In AUD, private sector credit unexpectedly fell in December for the first time since 1992, supporting call for -100bp from the RBA next week. Global market sentiment will be key for trading today, with a change being less likely than continued risk aversion.
CAD declined yesterday as risk aversion trades favored its USD counterpart. The pressure continued this morning as data showed a larger than expected decline in Canadian GDP, which came in at -0.7% vs. expectations of -0.4%. CAD trading will monitor US markets, which make up more than 50% of Canada’s global exports.

MXN and BRL sank as concerns over the US economy and job cuts increased fears of a prolonged US recession. A report this week showed the Mexican economy shrank 2.7% in November, its worst contraction in more than 6 years as US demand for the country’s exports fell and the domestic service sector stalled. BRL is following a similar story, as global risk aversion affected commodity prices negatively as well.

Commodities Update
Crude oil climbed today as OPEC cut output and the US GDP growth report showed a less than expected contraction. Gold however climbed to a three-month high as demand for gold as a safe haven increased, on the back of continued drag in European markets.