Forex Investment and Currency Trading

USD/CAD retains a heavy bias though losses have been mitigated by corporate buyers in the upper 1.21 area in the overnight session. The commodity bloc as a group has outperformed over the past week and while the global economic outlook is hardly robust – soft data from Australia and very weak Q1 GDP data from Singapore earlier today – the general tendency to embrace risk seems likely to continue in the near term – and it is notable that despite the questionable outlook, industrial metals prices continue to firm, which should help underpin the likes of the AUD and CAD sentiment. Equity markets are mixed this morning, with the markets chewing over – carefully – the early GS results. For all the bad news out in the past few weeks, the markets have not been able to drive the CAD significantly lower versus the USD; the 1.30 area has held like a rock and now, traders look for funds to gravitate towards the lower end of the broader trading range of the past few months. The early move in funds to the mid 1.21 area should keep the short term focus on the downside for today; Strong resistance is now seen in the 1.2240/50 and feel that the market has probably seen its intraday high already. There is little in terms of notable support between current spot rates and 1.2030. We should probably see a test of the 1.15/1.18 area in the next few weeks.

The USD has recovered a little ground in aggregate overnight but declining volatility and firmer equity markets suggest that the underlying bias is likely to favour riskier assets. As noted above, base metals have risen sharply in the past few days – falling inventories amid firm Asian demand pushed copper up 8% yesterday to its best levels since October. The short term correlation between copper and AUD remains strong and while some think the AUD is somewhat over valued on the basis of a soft domestic economic backdrop, the short term focus – and driver – for the AUD is likely to remain on metals. We see short term technical support for the AUD at 0.7220/30 and a push through yesterday’s high at 0.7325/35 may see this move extend a little further.

EUR/USD has slipped back a bit on profit taking after yesterday’s surge. Analysts remain more negative on the USD generally and look for the EUR’s recent bounce from the 1.31 area to extend in the near term at least – and likely beyond. USD is liable to struggle broadly over the course of the year as global reserve managers shy away from adding to USD exposure as the US fiscal deficit mounts. Battle lines are becoming a little clearer after the recent chop, with key EUR/USD resistance now at 1.3500/05 and support in the low 1.31 zone. Intraday gains through 1.3300/05 should put the EUR on a slightly higher flight path after the overnight dip.