Forex Investment and Currency Trading

Data Update
Personal Income (Survey: -0.4%, Actual: -0.2%)
ISM Manufacturing (Survey: 32.5, Actual: 35.6)
ISM Prices Paid (Survey: 18.0, Actual: 29.0)
Construction Spending MoM (Survey: -1.2, Actual: -1.4%)

USD remains the defensive currency along with JPY, as stock markets in Europe and Asia continue to drop. This week’s macro economic event caldendar is quite heavy with a series of important US releases, including January job data. Also, there are several key earning releases from US companies. Economic releases and earning reports will remain the main driver of investor’s sentiment. It is still believed that the risk is skewed towards a further deterioration in sentiment that will favor for the defensive trades. On the monetary policy front, RBA (Tuesday), Norges Bank (Wednesday), ECB and BoE (Thursday) will announce their rate decisions. However, the impact of the monetary policy decision on the short-term FX trend has become less significant.

The euro hovered near two-month lows against the dollar on worries over the financial sector and economic outlook. The Market Eurozone Manufacturing purchasing managers’ index (PMI) for January rose to 34.4 from 33.9 in December, compared with market forecasts for 34.5. The Irish government will unveil another set of measures to stabilize banks later this week including capital injections and bad loan guarantees. Meanwhile, the European Central Bank is expected to keep rates on hold at 2.00% when it meets on Thursday but take action in March as both growth and inflation slide to new lows.

Sterling sank more than 2% against the US currency on worries over the financial sector and economic outlook. Concerns about the financial system were reignited after Moody’s Investors Service cut its long-term ratings on Barclays Bank and equity markets in Europe were battered. British manufacturing PMI was slightly better than expected at 35.8, although it was still the third-lowest since the series began in 1992. The pound is also weighed down on expectations that the Bank of England will cut key interest rates by 50 basis points from the current historic low of 1.50%.

The yen gained as the deepening economic downturn stoked haven demand for the currency. January auto registrations were weaker than expectations coming in -27.9%.

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.

The Australian dollar was mired near two month lows on Monday as extreme risk aversion and expectations of a deep interest rate cut this week sidelined investors. Appetite for riskier assets like stocks was hit by data showing the United States economy contracted at the fastest pace in nearly 27 years in the fourth quarter. With almost all of Australia’s export markets contracting in the fourth quarter, analysts expect the RBA to go for a bold 100 basis point cut on Tuesday. The Australian government is also expected to announce a second package of fiscal stimulus measures as soon as Monday. NZD also traded down as commodities prices suffered from drop in global demand, as well as global risk aversion rooting from equity markets.

CAD declined for a third day as crude oil prices declined and USD pushed higher as demand for defensive currencies increased globally. Employment data in Canada and US later this week will likely be key drivers for CAD trading.

Mexican financial markets are closed on Monday due to a public holiday. Brazil’s currency, the real, slumped more than 2 percent on Monday as global economic concerns scared investors away from riskier emerging market assets such as the real. The real fell about 2.3 percent which gained against a basket of other major currencies. Concerns about the financial system were fueled by a cut to Barclay’s long term ratings by Mood’s credit ratings agency, while European shares also fell sharply.

Commodities Update
Speculation that the recession in the US, world’s largest energy consumer, will deepen caused oil to decline. Gold fell the most in 3 weeks as investors bet that the metal’s rise to highest levels since July was overdone.