Forex Investment and Currency Trading

Data Update
ADP Employment Change (Survey: -535K, Actual: -522K)

Despite a solid performance by European equities, both USD and JPY have performed strongly over night. As was the case in Asia, FX markets are becoming somewhat less sensitive to near-term gyrations in equity markets. Helping investor confidence has been further evidence that service sector confidence is stabilizing and indeed showing moderate signs of improvement. Markets will seek solace where they can find it, although it has to be said that the data so far constitutes a tenuous basis for a durable rebound in risk markets.

The euro sentiment continues to shift very quickly in very short spaces of time, while we remain overall range bound in the bigger picture. The euro weakened over night against the dollar, giving up yesterday’s gains. Final service sector PMI is weaker than expected at 42.2, composite PMI falls to 38.3. Russia’s debt rating was downgraded by Fitch, which is not a big surprise but nonetheless has been a drag on EUR. European and Asian stocks performed well overnight, however the EUR/JPY cross, which has lately been very indicative of global equity strength declined sharply. Norges Bank announced a 50bp rate cut this morning, in line with market expectations. Overall, data seems mixed going into today’s trading and euro will likely trade range bound ahead of the ECB announcement tomorrow.

GBP edged higher this morning as the UK service sector PMI posted its highest reading since September and in turn supported the GBP sentiment. However, Nationwide consumer confidence printed a new low at 40 vs. consensus of 45 and the previous reading of 48, which caused GBP to give up some of yesterday’s gains during the earlier session. GBP trading today will likely be quieter today, ahead of Bank of England’s interest rate decision tomorrow which is expected to see the cost of borrowing cut 50 basis points to 1.00%.

The yen was able to gain strength regardless of the equity strength over night. The euro-yen cross dropped to lowest levels in about 8 years, which would normally be indicative of global equity weakness. Market will likely be cautious of yen strength today, if equity markets continue to strengthen.

In the early Asia session, AUD gave back some of yesterday’s gains on the back of a weaker building permits number as well as resistance and debate about the 42bln AUD rescue package. However, the overall AUD strength made it clear that countries whose starting fiscal position is strong can afford to dispense meaningful fiscal spending. December retail sales came in at 3.8% vs. 1.4% consensus, reflecting on-time government bonus payments as part of stimulus package. Offsetting this, December building approvals were much weaker than consensus. NZD was mostly in line with AUD, in lack of important economic data and any significant changes in commodity prices.

CAD weakened over night, paring some of yesterday’s gain, as more investors turned to USD for safety. Broad-based USD strength was the main driver of CAD trading, as commodities lacked any significant move. In the absence of any economic data, CAD will likely continue to trade on USD sentiment today.

The Mexican peso hit a record low yesterday amid worries that the steep economic downturn in the United States is undermining demand for Mexico’s already declining exports and pushing the country into recession. The weakness of the peso responds to the dark panorama projected for the economy as Mexico’s economy will likely shrink by 1.16% this year as the US recession weighs on its southern neighbor. The peso has lost more than 5% against the dollar so far this year following a drop of 21% in 2008. Brazil’s real closed slightly stronger yesterday despite the release of figures showing a sharp decrease in industrial output in December. Brazil’s industrial production dropped 12.4% in December compared to November.  It was the worst month on month decline since statistical collection began in 1991.

Commodities Update
Crude oil rose slightly, on the back of speculations that OPEC is implementing the record production cut it announced in December. Gold declined yesterday on broad-based USD strength, but rose slightly this morning after three days of decline, on back of renewed worries about the market.