Forex Investment and Currency Trading

Key data releases/forecast changes overnight

• ECB Bank Lending Survey - Jan: Further tightening of lending standards - but not faster than in October
• UK IP: Big fall in manufacturing.  Weaker than expected - the data imply a downward revision to Q4 GDP from -1.5%qoq to -1.6%qoq.
• Change to Russia GDP forecast: The disappointing full-year 2008 GDP numbers point to a sharp slowdown in 2008Q4 that will feed through into weaker numbers through much of this year. Analysts now expect GDP to decline on a quarter-on-quarter basis for four quarters from 08Q4 to 09Q3, and see the economy contracting 3.5% this year.
• Norwegian manufacturing: Norwegian manufacturing output contracted by -2.4%mom in December after -0.8%mom - equivalent to 0.9%yoy and worse than consensus expectations. The decline was broad based across sectors. Oil and gas extraction, well correlated with offshore activity, expanded by 1.2%mom after +0.4% and is up 5.6% on the quarter.

Update on Russia: The market again failed to test the 41 level of the basket. It reached it for the first time yesterday but only for a second after which rouble quickly bounced back to 40.93 - 95 where it closed. CBR yesterday sent a message to the market that using interest rates would not be their main mechanism to prevent currency speculators from attacking the rouble. Instead, they will be reducing their refinancing programs, mainly the unsecured loan auctions that has already become the major source of obtaining liquidity. By imposing new requirements (such that providing dollar loans to exporting companies only) they are likely to use a more subjective approach in setting limits on participating banks. Note the much smaller amount of repos borrowed from CBR and reducing dependency of banks from CBR. Liquidity is quickly improving, which creates a good potential for the attack on the currency if the market changes its peaceful attitude.

Thoughts on GBP: We saw the break and close above 1.4600 yesterday, with further capitulation in eur/gbp; the cross breaking down below the 50% retracement of the rally from 0.78 to 0.98. The question now is whether the market maintains its new found love for the pound, and more significantly if longer term shorts being to close out positions. Cable is nudging against the 55-day (1.4725), although having broken through here earlier this month, only a weekly close above would be significant. The cross continues to look the more constructive - next major support at 0.8580 represents the 100 day m/a and it still doesn’t feel like participation rate is in this move is remotely close to its highs. The surprise in the HBOS housing data, while discounted as many (including myself) as more of an anomaly based on a very small number of transactions, does however highlight the fact that a few more positive surprises are starting to emanate from the UK. However given it’s Friday and non-farm payrolls, tempting to take some profit on eur gbp shorts here for now and look to sell the break of the 100 day for the next leg towards 0.8250. Cable, raise stops towards 1.4500 or 1.4350 if you have the cushion…

Thoughts on JPY: After weeks of hibernation in a 88-90 range, USDYEN roared back to life yesterday afternoon gaining 2.5% in just over an hour to print a 92.25 high. However post the London close, the emerging doubts and frustrations over the bank and stimulus package has seen USD slip back and crucially we were unable to get a close above the 55dma at 91.25 which has capped us since Sept ‘08.  Looking ahead, there are plenty of reasons for the yen to go the same way as gbp, nzd and most of the EM complex and suffer a sharp sell off and while we can dream about such a “straight forward” scenario, the reality is the near term driver will remain the ephemeral “risk sentiment” and all that entails. For the yen we also need to factor in the upcoming fiscal year end March and it was interesting to note BoJ Shirakawa comment overnight that the biggest risk for Japanese banks was the falling value of their shareholdings (hence the decision to buy shares from them). The level of the Nikkei is now as important as the S&P in attempting to gauge the risk on/off level.  Trading wise - staying long and looking to scale into more on a dip towards 90.00 , risking the former range highs at 89.50. NFP and policy announcements are the main risks on the day but whether we close above or below the 55dma could be an important signal.