Forex Investment and Currency Trading

News reports indicating that BoA may need USD34bn in additional capital (with Citi also requiring USD10bn) has sobered up the optimistic undertone of the markets this morning, even as China’s central bank sounded upbeat on growth in its quarterly report, Australian data surprised on the
positive side and euro zone PMI data came in a little stronger than expected. USD remains strongly correlated (negatively) with global equities (the 90-day rolling correlation between the DXY and the MSCI stands at -85% currently). The JPY is the session’s top performer on the day so far and while that also speaks to renewed “risk aversion”, the fact that the Kiwi is the second best performer on the session undermines the argument to a degree. With US employment data on the horizon (ADP today, payrolls Friday) and the ECB policy meeting on Thursday, the markets perhaps need little excuse to
dial back risk positions.

There is somewhat sceptical that the USD can make up much ground overall though. While the USD has seen some supportive fundamental developments in the past few months (improving terms of trade and wider real interest rate spreads), the deterioration in the US’ fiscal position has been substantial and represents a significant drag on the USD’s “fair value”; USD remains significantly over valued. In addition, aside from the positive comments on domestic growth, the People’s Bank of China also sounded a rather ominous warning to the developed world’s central banks that a “policy mistake by some major central bank may bring inflation risks to the whole world … As more and more economies are adopting unconventional monetary policies … major currencies’ devaluation risks may rise”. If the ECB suggests a reluctance to go down the QE route tomorrow, EUR may bounce back higher.