Forex Investment and Currency Trading

This morning, China’s Vice Foreign Minister He Yafei said he was not aware of reports that China had requested a debate about global reserve currencies at next week’s G-8 meeting in Italy, but he also flagged that Beijing expected the issue to be discussed informally. There are clear signs that China and other surplus countries are working on USD exit strategies. It is clear that such exit strategies can only work within an environment of strong global risk appetite. The IMF will have to play a key role.

This morning saw the Riksbank cutting rates by 25bps committing itself to the current low interest rate level until autumn 2010 provided inflation stays low. This approach follows the Canadian example shocking all those market participants believing current exceptional monetary easing measures would be removed soon. The ECB will be the next in the line. So far, the ECB insisted that it would never pre-commit on policy. However, extraordinarily weak banks will need planning security to be able to benefit from steep yield curves. Otherwise, the ECB risks turning Europe into a Japan like environment characterised by imploding monetary velocity and banks too weak to provide credit.

Japan’s weekly security flow data showed massive JPY outflows as Japan’s investors bought back into international bond markets. This is good news for USDJPY, JPY crosses and risk appetite as it indicates foreign demand for USD denominated debt is normalising.