Forex Investment and Currency Trading

The USD is firmer overall into the end of the week; risk appetite is perhaps improving a little more – following yesterday’s late day burst higher in equities and this morning’s better than expected news from GE and Citi. But just how clearly firmer equities (or even a turn lower again) translates into the FX markets remains to be seen. We have noted that the recent correlation between equities and FX risk specifically has declined in the past few weeks. In particular, the USD’s inverse relationship with the stock market – generally better bid on the “safe haven” trade in times of equity market weakness – has weakened considerably; in fact, short term correlation studies suggest that more recently, the USD is positively correlated with equity movement – albeit rather weakly at the moment.

Assuming the firmer tone evident in US equity can be sustained this morning, there is a good chance that the USD can do a little better again. The euro zone bond redemptions and coupon payments (that have been in focus for much of the week) continue to drain the EUR versus the greenback and the JPY. EUR/USD momentum seems to heading for a test of 1.2950. The GBP has been pressured by negative comments from the UK trade minister while the CHF is a significant under achiever on the session so far, with comments from Swiss National Bank chief Roth (promising “decisive” action to stem CHF gains). After the SNB’s failure to follow up with its initial CHF selling in March, the move up in EUR/CHF thought the 1.52 line may be the break out that the markets have been looking for.

The AUD is a relative out-performer, with Asian demand for the currency and related commodities keeping the AUD slightly better supported; we note that AUD/USD price action yesterday was more negative (outside range day lower) but think that AUD trends on the crosses are a little more constructive – and may remain so; AUD/NZD is grinding higher, AUD/JPY is holding up above 70.45/50 break out support while EUR/AUD retains a very offered tone below recent breakdown support around 1.85.