Forex Investment and Currency Trading

The overnight session for CAD was pretty quiet ahead of this morning’s Canadian inflation report, the last big data released ahead of next week’s Bank of Canada Fixed Announcement Date. CPI came in exactly in line with market expectations, so there was very little CAD reaction. A lot of headlines seem to be focusing on the fact that Canadian headline inflation is now negative (-0.3%) for the first time since the mid-90s, and is in fact deeper into negative territory than it has been since the 1950s. However, the focus is in the wrong place here, and the more important fact is that inflation has come in stronger than the Bank of Canada had forecast in April. Remember that the BoC’s pledge to keep interest rates near zero until mid-2010 is contingent on the outlook for inflation; with core inflation remaining much more sticky than had been expected (the BoC was expecting 1.6% average core CPI for Q2, whereas it came in at 1.9% instead), that all but eliminates the probability of the BoC implementing QE, and in fact maybe even raises the odds that the BoC will start raising rates sooner than it had expected. Looking at the big picture, this was a CAD-positive outcome.

Markets are still focused on earnings reports, with Citi, Bank of America, and GE reporting today. So far markets don’t seem to be very impressed; while BofA’s and GE’s numbers beat expectations, the focus seems to be on the big slide in earnings for both companies. Markets also continue to watch CIT, which is reportedly still in talks with lenders in an attempt to
prevent bankruptcy.

Yesterday’s IMF report on the UK has been weighing on GBP, as Sterling was the worst performing currency overnight. The IMF said that a “credible plan” was needed to reverse the rapid deterioration in public finances, in order to uphold confidence in the UK and in the pound. More specifically, the IMF warned that the benefit of the doubt that the public had been granting the UK was not going to last forever, and that the Government should not test the limits of the market’s confidence. The IMF also added that the structural position of UK finances was weak even before the financial crisis erupted, and it sees gross debt doubling over the next five years to 100% of GDP.

The Australian dollar is also struggling this morning, on weaker terms of trade, and Fitch downgrading the state of Queensland credit ratings (following S&P and Moody’s earlier this year). AUD/JPY has come off this week’s highs, and is trading back at about 75.00, while AUD/USD has struggled to break through the mid/high-0.80 level.

Today currency markets will continue to follow equities, as markets digest this week’s earnings announcements.