Forex Investment and Currency Trading

There was a lot of price movement in FX yesterday, as the markets absorbed US Treasury Secretary Geithner’s announcement and Fed Chairman Bernanke’s Congressional testimony. USD fell to one-week lows against the yen while strengthening to one-week high against the GBP. Geithner’s bank rescue plan did not bring any new information, and the markets reacted with disappointment. Bernanke’s testimony revisited policies to support lending and economic activity and suggested steps to enhance transparency of Fed initiatives.

EUR traded range bound over night as news from both US and Europe drove trading, such as Riksbank’s decision to cut rates more than expected by 100bps to 1%. There is a small bias for a weaker dollar vs. EUR from current levels given that Geithner’s plan, however sparse on details, almost surely will heightern concerns about the US funding requirement as financial institutions are recapitalised.

GBP has been one of the major under-performers during the European session, following the release of Bank of England Quarterly Inflation Report. The main focus of attention was the central projection for inflation under the assumption of current market rates. Markets had assumed a small undershoot in inflation with the current level of rates. In the event, the Bank of England sees inflation at 0.5% with 1% rates. This provides the clearest signal that rates are heading lower. Indeed in his testimony Governor King hasa signalled that further easing may well be required. In a sign of acceptance that further QE may be required, King added that MPC has a full range of instruments at its disposal to get CPI to target. GBP has already reacted to the news falling across the board, while short-sterling futures are nearly 20bps higher across the curve. Though the recent stabilisation in UK indicators have provided some support for GBP, the tone of this QIR is bearish and should set the stage for a reversal of recent gains.

Nikkei was closed yesterday for holiday, but JPY performed strongly over night as the US Treasury Secretary Geithner’s bank rescue plan failed to ease markets’ worries about the financial system. The EUR/JPY cross also fell to one-week lows, which usually is indicative of a downturn in equity markets. One expects a weaker dollar against the yen given that Geithner’s large bank rescue should eventually raise concerns about US funding pressures.

AUD and NZD were firm yesterday, perhaps reflecting Tokyo’s closure, so the absence of cross-yen selling. In Australian economic data, home loans rose 6.4% in December from 1.3% in November due to falling mortgage rates. Consumer confidence fell 4.6% in February following a 2.2% decline in January. Traders are expecting AUD and NZD to track equities today, with a downward risk if S&P crosses the 800 level.

CAD was weaker yesterday after Tim Geithner’s stimulus package proved to be a disappointment to the markets causing equities and EM to trade a lot lower. New housing price index came in at -0.1% vs expectations of -0.3%, and trade data came in at -0.5B vs. expectations of +0.5B. With oil still under $40/barrel, and equities and EM still under pressure, traders expect that CAD won’t get much stronger from current levels, unless we see a turn in the other markets.

MXN weakened throughout yesterday as Tim Geithner’s plan disappointed the markets and raised worries over the US economy, Mexico’s main trading partner. The stock market fell 3.5%, and the currency came close to levels at which the central bank intervened last week. BRL also weakened yesterday on the back of announcements from the US. Oil is also dragging the currency, as it fell below $40/barrel.

Commodities Update
Crude oil fell sharply yesterday, settling below $38/barrel. However, speculation that OPEC cuts are starting to reduce oversupply of crude helped oil make up some its losses today. Crude oil inventories report is coming out today and is expected to have dropped to 2750K from the prior reading of 7170K. Gold rose yesterday, as investors turned to the precious metal as a store of value after Tim Geithner’s rescue plan failed to ease concerns over the financial markets.