Forex Investment and Currency Trading

Fears of a possible “Swine Flu pandemic” have dominated the global headlines. As a result, there has been a noticeable shift in risk sentiment to risk-off. Overnight USDMXN gained more than 3.5% at one point. The poor liquidity in addition to pandemic fears may have contributed to the gain. The Euro also reversed from last weeks highs as a result of levered selling in Asia and the Eurozone. The Pound also sold off overnight and Yen crosses have been lower. AUDJPY will be a key risk proxy for today. In Asia AUD closed below its 200dma of .7249. A close above 97.60 in USDJPY could signal the end of the downtrend. Prolonged apprehension over the swine flu could mean sustained USD strength. This week also brings a substantial amount of macro data. South Korean export data will be released on Friday. An improvement in the data could signal a stabilization or a peak trough in the export markets. US Q1 GDP will be released on Wednesday prior to an FOMC meeting, forecast is for +5.7%. Initial jobless claims will also be released on Thursday, and on Friday we’ll get US ISM.

Muted market reaction to “stress test” news

On Friday, the Fed introduced its stress test paper, “Supervisory Capital Assessment Program”, by stating most U.S. banks currently have capital levels “well in excess” of the amount required to be well capitalized.

This exercise is designed to assess the financial soundness of the largest 19 financial institutions in 2009 and 2010 under two macroeconomic scenarios: the baseline scenario and
one more severe than expected.

Under this “what if” exercise, the baseline for real GDP for 2009 was -2.0% and 2.1% for 2010. The more severe scenario was for GDP growth of -3.3% in 2009 and 0.5% in 2010 - the results of the “stress tests” will not be made public until 4 May.

There doesn’t seem to be any real news in these parameters and the lack of new quantitative details failed to undermine the stock market rally and the upturn in yields. But even though US equities ended up 1.7% higher on the day, the SPX finished the week 0.5% lower, breaking a six-week run. US Treasury yields have retraced their post-QE move back to range highs again, with the yields just below 3.0%, and around where they were in the morning of the March 18 FOMC decision before hitting lows of 2.50% later that day.