Forex Investment and Currency Trading

It is a quiet start to the week for the markets, with Tokyo and London closed today. The USD/CAD has moved quite sharply off its overnight low just under the 1.18 level and while the move is likely a result of thin and illiquid trading over the above mentioned holidays, the USD slide may be starting to look a little overcooked in the short term, with slightly softer oil prices perhaps a minor drag on the CAD. But equity markets are flashing a fair bit of green at the moment as activity data from Asia and Europe continue to point to a stabilization in the global economy or perhaps more accurately, a slower pace of contraction in activity (“less worse” remains tantamount to outright positive these days) and the commodity currencies may continue to benefit in the near term at least. The most recent data from the IMM pit suggests that while speculators have reduced their net short CAD positioning through May 1st, they remain net short of the top-performing major currency in the quarter so far. There is only limited scope for USD/CAD to bounce from here and look for short term USD/CAD rebounds to remain capped in the low/mid 1.19s (technical resistance is 1.1919) today. Note that Canadian employment data is due Friday.

China’s manufacturing sector expanded for the first time in nine months in April (according to the CLSA measure released earlier today) while euro zone manufacturing PMI rose to a six month high and the Swiss manufacturing survey rose to its highest level in 16 months; most economies are still deep in contraction territory or course but the fact that some of the steep declines in output are starting to show some more obvious signs of relative improvement is encouraging the feeling that the worst may be over. It remains to be seen just how far these “green shoots” can flourish, of course (bank “stress tests”, equity market performance, ‘flu concerns could all flip the mood very quickly back to negative) but the short term thrust of these developments should be positive for risk appetite (commodity currencies, EM) and a knock against the USD that seems to have benefitted the most from the unsettled environment of the past few months. Analysts remain more negative on the USD overall, considering the US’ mounting debt pile and the waning appetite (seemingly, at least) for US denominated investments. Note that the USD has not benefited materially from the pop in yields (note that there is a further USD71bn in 3s, 10s and 30s in Treasury debt coming to the market this week, though with a Fed purchase in between). Given that currencies where central banks which have taken an apparent step back from the QE brink (Sweden, Canada for example) have tended to rally, a cautious approach from the ECB this week may be a positive for the EUR. In any case, the market will have to make some decent topside progress soon or risk slumping back to the 1.31 zone.

Elsewhere, market looks for good support for EUR/CHF now on dips to the 1.50 area – key short term support is 1.5110/15 – and for the cross to pick up more positive momentum above technical resistance at 1.5135. Golden Week holidays in Japan will reduce JPY volume significantly in the near term; while the improvement in economic sentiment suggests pressures on the JPY from reduced safe haven demand, scope for JPY weakness is very limited above the 100 line for the moment. Asian currencies are improving broadly – the CNY strengthened to its strongest level since September earlier today and likes of the KRW and IDR are sustaining the strong rallies seen last week. A rising global economic tide should lift all Asian currencies.