Forex Investment and Currency Trading

Equity markets gave back a small part of their recent gains yesterday. The move however has not been large enough to give any solid indication that the mood of the equity market may have changed. US 10yr yields rose slightly but they are still more than 30bps below pre-FOMC levels. The dollar gained some ground as well with EUR currently trading at 1.3590 and high yielding currencies are trading more or less flat to low yielding ones.

On a very positive development for emerging markets, the IMF approved a major overhaul of its lending framework yesterday. The framework was made more flexible and it should make it easier for emerging markets to seek fund support. The Fund also announced a replacement of the short-term-liquidity facility established in October with a Flexible Credit Line (FCL). The FCL is aimed at countries with solid fundamentals and a track record of sound policies. The FCL can be used as a precautionary arrangement upon which, countries can draw at any time. The IMF Board will approve the size of “credit line” on a case-by-case basis but there are no pre-set quotas. Finally, a prequalified country can request a 6- or 12-months for repayment. The major EMs like Czech, Poland, South Africa, Israel, Brazil, Chile, Colombia and Mexico would qualify for the new facilities.

USD/CAD was one of the least active currency pairs overnight, with very little to focus on in Canada this week. A rangebound Asian session gave way to light CAD selling against the crosses during the London morning, and traders continue to look for stable ground within a 1.2200/1.2450 range.

Better demand for the USD across the board is helping to keep USD/CAD afloat for the time being; we saw good twoway flow above 1.2300 late yesterday in North America, which is helping to keep USD/CAD contained. On the topside - some resistance should be at 1.2370/75, Monday’s high during the North American session, and support on the downside is at 1.2200.

It appears as if the optimism following the announcement of the bank bailout plan on Monday is fading fast. Today there has been some focus on a Financial Times article talking about how the plan for bad assets could force some banks to take big write-downs, requiring them to raise yet more capital. Late yesterday it was announced that President Obama will meet with the heads of the major banks on Friday, which should give the administration a better idea of how many banks will actually willingly participate in the program.

This morning we’ve seen a series of bad news weighing on Sterling, as a major bank announced that it would cut another 1,200 jobs, the scheduled 2049 bond auction failed, and the CBI retail survey for March showed a worsening in retail conditions after an improvement in February. While the BoE’s Governor King suggested yesterday that that the BoE could spend less than the £75B of QE measures that have been announced if conditions were to improve, that’s not looking very likely.

The euro is doing better this morning; after dipping briefly following the immediate release of the German IFO survey earlier this morning, markets seem to be focussing on the improvement in the expectations component, which reached its highest level in six months, and EUR/USD has pushed a little higher. There’s a sense of uncertainty about the short-term direction of the euro, now that it has fallen back to around 1.35, approaching the top of its post-FOMC jump. A move below 1.3420 could push EUR/USD to have a run at the top of its 1.31-1.34 post-FOMC gap, or a move higher could be brought about by more negative talk about the USD as a reserve currency.