Forex Investment and Currency Trading

The risk off tone which has characterised markets over the last couple of weeks continued through overnight trading. US yields rallied by over 15bps at one point in late US trading, but then retraced on profit taking. The news that China had cancelled a coal shipment was not helpful for the Australian Dollar in the current jittery markets. The over 2% appreciation in the Yen vs the Dollar prompted a Japanese government spokesman to describe excessive currency moves as undesirable, mirroring their reaction to similar moves through the financial crisis.

In other news, China’s central bank announced it would issue 1-year central bank notes. This move to mop up excess liquidity is reasonable given the large extent of monetary accommodation that has taken place in China. But although this is an adjustment in terms of excess liquidity analysts do not see this as a signal of a move towards monetary tightening in the near term. PBOC will keep policy expansionary in the months ahead.

Turning to other monetary policy developments in focus today. The Bank of Korea kept rates on hold at 2% at today’s meeting. The accompanying statement was neutral, balancing falling inflation and uncertain recovery prospects against moderately rising house prices. Rates rallied in response. In European time, the Bank of England will give its latest monetary policy pronouncement. Market expects an unchanged rates decision to be accompanied by the announcement of another GBP25bn-worth of bond purchases taking the total to GBP150bn and an expansion of this facility with the Treasury, providing it scope for additional purchases if required.

Finally on the data front, the US claims data will receive close attention for any signs of improvement.