Forex Investment and Currency Trading

Overnight markets have seen a continued reversal of yesterday’s sell-off in risk to the extent that AUD/USD and USD/JPY have reversed around half of their respective falls. Several factors underlie this. Firstly, reconsideration of the Reuters story that a Chinese buyer cancelled the contract for an Australian shipment of coal. Market views the reported rejection as only one cargo (perhaps 150,000t) in a monthly Australian coal trade to China that is running at more than 3Mt per month. There is insufficient evidence to suggest that Australia’s record coal trade with China is over and the AUD selloff on the back of the Reuters report was overblown. Secondly, comments from two Japanese officials that they are watching currency markets closely introduced an element of two way risk for JPY. Finally, Alcoa’s smaller than expected Q2 loss, reported after the US close, is offering some support to equities, again supporting risk proxies in FX.

USDCAD
Funds traded to a new high for this move up through the low 1.17s amid yesterday’s wild market volatility but the gains were not sustained – again – and, with the USD slipping lower across the board this morning and the CAD still finding some support on weakness from corporate and institutional interest, the picture for USD/CAD on the daily chart looks somewhat negative – again – today. Oil prices are a tad firmer and equities are looking a little more positive after Alcoa kicked off the earnings season with slightly better news (that is, a smaller loss) late yesterday, supporting CAD sentiment at the margin. But with the markets subject to so much seemingly random volatility at the moment, conviction levels are rock bottom and there is little confidence that even short term trends can hold. For the record, USD/CAD has found support around the 11-day MA so far in July and that support zone (11-day MA today at 1.1591) but a lower close (ideally around or below 1.16 today) would put another big dent in the USD’s technical picture and set up a strong reversal signal (“evening star”). It remains to be seen if we get a lower close though and if we do, whether this reversal has any ability to turn this USD rally around. Canadian housing starts at 8.15ET typically do not get much attention and after good Canadian data was roundly ignored earlier in the week, a small gain in starts this morning may not have much influence.

Majors
The USD is trading generally lower this morning as yesterday’s risk aversion unwinds; that has also helped nudge the JPY off its peaks but the JPY remains a prime candidate to appreciate a little more at least in the medium term (regardless of risk appetite); the improvement Japan’s external balances should be a mild positive for the JPY at least and note that this is the time of year (Q3) when we often see sharp JPY appreciation (repatriation flows). The short term technical picture suggests that downside risks for USD/JPY and EUR/JPY, for example, remain this morning. USD/JPY has recovered about a third of yesterday’s sell off but has run into decent selling interest in the mid 93 area and weakness below the base of the rising channel in place since Wednesday’s low suggests another run at the downside is on the cards. Speculation of Japanese interest to buy dips and concern about verbal intervention from the Japanese finance ministry will likely make this a lively axis for the markets in the next few days at least.

The G8/14 meetings are ongoing and China continues its verbal push for a more diversified global currency system. These sorts of comments will add to expectations of central bank interest to sell USD rallies will provide a steady cap on broader USD gains for the moment. Since the end of May, EUR/USD softness below the 1.39 area has met with steady demand (though equally, gains towards the 1.42 zone have met with supply). The BoE left policy settings unchanged this morning – the repo rate at 0.5% and its total QE at GBP125bn – helping boost the GBP a little; there had been speculation that the central bank would ramp up QE by a further GBP25bn so unchanged policy is seen as a mild positive. Volatility remains high though and the pound backed off its initial gains quickly before steadying.