Forex Investment and Currency Trading

USD: The negative impact on the USD in the last 10 days started to fade into week’s end. There is a likely continuation of the USD revival. Market is looking for some disappointment in the
G20 outcome (communiqué April 2) and US equities to support a shift back into USD. Ironically,
another bad US jobs report on the April 3rd might accelerate this shift.

EUR: Whereas earlier in the month poor Euro area data (eg,German IP and orders) had little impact on the EUR, this week’s soft numbers, especially on inflation, did hurt it. This is in part because the euro is more elevated now, and in part because market participants are getting whiff of possible shift to ECB QE. Market is consensus on a 50bp cut on April 2, but actually think QE signal will be a bit slower in coming.

JPY: The correlation between USD-JPY and equities has become unstable, while JPY price action is reacting more to yield differentials. Still, expected equity volatility in the bank and company results announcement season during April-May cannot be ignored. It seems premature to expect a sustained JPY depreciation phase. The Japanese HIA should foster Japanese corporate repatriation only gradually over time.

GBP: EUR-GBP is poised to continue its sell-off as the all the “bad news” now appears to be priced in for sterling. The January high of 0.9520 is a critical level. As long as the pair remains below this number, remain short EUR-GBP in the short and medium to long term. The main risk to this outlook would be an increase in inflation expectations as the BoE aggressively implements QE, although analysts believe that the present economic contraction poses greater risks of deflation than rampant inflation.

CHF: EUR-CHF appears to be settling in a range of 1.50 to 1.55. As the SNB continues its attempt to ease monetary conditions via currency market intervention, any additional drift to the downside should be limited with the central bank having an unlimited ability to print and sell CHF as long as inflation remains subdued.

SEK: SEK remains bullish as the sell-off related to concerns about Sweden’s exposure to Eastern Europe appears exaggerated. The recent recovery in risk should help EUR-SEK to continue its fall in the near term. The SEK rally is likely to be rather precipitous versus NOK as well, with the pair eyeing a return toward the 1.1500 level.

NOK: This week’s Norges Bank outcome proved that the central bank will be forced to lower rates further as the image of Norway as an island of stability continues to be proven false, suggesting a further loss of yield support for NOK. The Norges Bank indicated in the Monetary Policy Report that if 2009 GDP were to come in below their optimistic forecast of -1.0%, the key policy rate would likely have to fall to 0.50% from its present level of 2.0% and the present forecast of 1.00%.

CAD: USD/CAD did not fall as far as USD/DXY, so the rebound has also been less aggressive thus far, especially with oil prices still constructive and it being a quiet period for Canadian data (ie, a relief from all the bad news). The week ahead is not much more interesting except for January GDP which might highlight the scope for a huge Q1 GDP drop. There are two Carney appearances as well. Some traders reestablished a long USD-CAD position on the basis of a more dovish rates and QE call than the market ahead of the April 21 BoC decision.

AUD: There is near-term risk related to Australia’s terms of trade, which are only just starting to roll over because more than 50% of Australia’s commodity exports are established by contract prices, only re-setting now. Quite a variation on opinion about what the RBA does on the 7th.

NZD: Q4 BoP (current account gap eases modestly, but still very wide) and GDP (-0.9% qoq, fourth negative in a row) data were largely priced in. NBNZ and NZIER surveys the next two weeks will be a barometer of how businesses are coping. NZIER ‘QSBO” on the 7th is especially important because it was the weak QSBO three months ago that triggered the last leg down in kiwi.

MXN: The USD-MXN continues to trade with an upward bias, though it has seen decent resistance around 14.40. Traders maintain a bearish bias on the MXN given central bank policy uncertainty and potential for sharply weaker economic deterioration than currently expected. On a long-term view -the currency is viewed as undervalued at these levels and USD-MXN is expected to move lower toward year-end as global risk appetite improves.

BRL: Macroeconomic fundamentals and technical positioning favor a stronger BRL going forward. The 12m accumulated current account deficit narrowed for a second straight month to USD25.7bn from a trough of USD28.3bn and may narrow further. The materialization of a more benign inflation outlook should also be supportive of the BRL. Technical positioning in the BMF is also bullish for the BRL with foreigners’ USD long positions at USD9bn, near the record high.

CLP: Daily USD sales of USD50mn a day for 60 business days began on March 27. USDCLP has moved lower in anticipation of this, but the actual sales which amount to 5% of daily trading volume should lend further support to the CLP in coming weeks. However, the scope for CLP appreciation over the next few months is limited given the need to maintain easy monetary policy.

COP: Bearish on the COP as slowing growth, a widening current account deficit, and political risk should weigh on the currency going forward. The central bank has eased by 250bp at its last two meetings in an attempt to stimulate growth, but persistent inflationary pressures may now limit the scope for further easing. Meanwhile, a widening fiscal deficit should limit the scope for fiscal stimulus.

CNY: China is expected to continue with its jawboning efforts in its last minute bid to establish a greater voice during the G20 summit. FX market typically ignores such verbal ‘warfare’, but USD-RMB will likely stay weighed on the back of continued gains in the equity markets. 1Y RMB NDF is now pricing in about 0.9% appreciation, with further leftward shifts in view.

SGD: Finance Minister Tharman said the economy could reach a bottom in the next six months. We could infer that the authorities probably maintain a subdued outlook for inflation expectation from his latest comment. Combined with the below expectation February CPI print, analysts expect a policy preference that leans toward neutral to loose monetary policy via a re-centering of the SGD NEER band lower in April, in which event should underpin USDSGD above 1.51 level.

KRW: USD-KRW started the year at around 1259 and further won strength beyond this will likely need a stronger conviction that economic recovery is underway. However, latest data suggest a less downbeat outlook – April business manufacturing survey rose to 60 from 50, IP contraction lessened to -10.7% yoy from -27.0% and leading index improved mildly to -4.0% from -4.5%. BoK maintained -2% GDP forecast for this year despite extra stimulus.

HUF: Bearish on the HUF in the near term. The HUF’s performance has suffered also from the deteriorated political climate. The fundamental picture remains poor and there is mounting evidence that the IMF program financing may have to raised.

TRY: The global backdrop will continue to be the key driver of the TRY after the uneventful local elections. If a new IMF program can be agreed upon quickly, this will provide a boost to investor confidence.

PLN: PLN’s performance will be hurt by the weakening fundamentals going forward, including the weak balance of payments dynamics.

ZAR: Bearish view on the ZAR. The currency performance had been strong in recent weeks, but that makes the rand particularly vulnerable, especially in the context of higher risk aversion and stronger dollar.