Forex Investment and Currency Trading

Canada reported better than expected employment data for June, showing headline job losses of just 7.4k; positive reaction will be tempered by the fact that the full time jobs declined 47.5k in the month while part-time work rose 40.1k. The unemployment rate continues to push up, meanwhile, reaching an 11-year high. The CAD sold off ahead of the data so the better than expected headline result has been good for a modest squeeze on short positions but the impact has been modest to say the least and slight CAD gains on the data release have not been sustained. We remain essentially range bound in funds, with the market caught between steady selling interest in the upper 1.16 area and support in the mid 1.15s as the market debates whether green shoots in the global economy really are trying to push through or not and financial markets flip between risk-seeking and risk averse behaviour. Some remain a little more positive on the global economic outlook through the second half of the year and into early 2010 at least and look for commodity prices and the CAD to pick up from current levels in the medium term. In the short term though, range trading looks likely to persist; yesterday’s early USD/CAD losses were not sustained through the close and spot nosed back above the 1.16 line in late trading, leaving some equivocal signs on the daily chart – a possible top/reversal but not an especially convincing one. Technically, a minor Head & Shoulders top may be forming on the short term, with the neckline at 1.1545 but with risk aversion looking to be the main theme for the markets, the main risk for funds in the short term appears to be higher towards the 1.1680 area. It remains to be seen if market sentiment has any more staying power than the short term vacillations we have seen in the past couple of weeks though.

Majors

USD/JPY and some of the main JPY crosses have corrected between a third and a half of this week’s earlier slide and look poised to retest the lows at least. Intraday losses for USD/JPY below 92.50 should see a little more yen strength across the board. Some would expect trade to become a little jittery on a renewed push under 92 – especially into next week; early Asian trade Monday could be volatile and rumour driven while the Finance Ministry may get a little more forceful with its verbal intervention if the JPY strength persists.

The other on/off debate in the market at the moment appears to centre on reserve diversification; German Chancellor Merkel doused speculation of an alternative to the USD by stating that China’s proposal for “artificial” reserve currency (presumably, this means the SDR idea) was not practically relevant; that may be so but, as yesterday’s comments from China clearly indicated, China is deadly serious about spreading its currency risks out – whether this means the SDR or something else. It will not happen overnight and the USD will likely remain the major reserve currency asset for some time but Asian appetite for USD-denominated investments is more likely to decline than anything else in the longer term. The comments –plus renewed focus on Eastern Europe’s problems – have weighed on the EUR to a degree this morning, as have EUR/JPY flows. A heavy schedule of bond redemptions and coupon payments next week suggest headwinds for the EUR in the short run may remain strong. EUR/USD is essentially range trading at the moment though and still look for support in the 1.3750/1.3850 – where reserve managers have been buyers recently.