Forex Investment and Currency Trading

The CAD could not sustain the gains made on the back of the initial reaction to the BoC policy announcement yesterday, even though the statement should have doused any lingering
speculation of additional policy measures to lift the economy or dampen the CAD. At the margin, the more upbeat statement took a softer line on the CAD specifically, which seems appropriate given the lack of significant movement since the June meeting. There is little in practical terms that the BoC can do about the CAD at the moment – easier policy is out of the question and we doubt the BoC is seriously considering intervention. The cost would be significant and the impact dubious without the backing of additional policy measures – witness the Swiss National Bank intervention, which has seen a 60% rise in EUR reserve holdings in Q2 for a for a meagre 0.6% rise in the EUR/CHF exchange rate over the period. For now then, it seems that the markets will revert to the daily (and hourly) task of assessing – via the equity markets – whether risk is “on” or “off” and react accordingly. For the CAD, retail sales may be an early influence on price; traders look for stronger than consensus May sales, which may give the CAD a modest lift at least.

US stocks made back a lot of yesterday’s intraday losses by the close but global markets have lost a little more ground overnight; a good deal of “better news” is perhaps already discounted in the markets generally but the fact that stocks are starting to string together some impressive consecutive gains while there appears to be a stronger sense that the worst is behind the global economy among the major central banks perhaps means that risk appetite continues to simmer under the surface. The Bank of England MPC minutes for the July meeting showed policy makers reluctant to increase QE – at least until they have more data at hand in August – and a little more upbeat about Q2 growth (due Friday) and the hand off into H2 (even if the medium term outlook for the economy was unchanged). Sterling remains a modest under-performer on the session so far but looks potentially well-positioned to gain against a range of currencies.

Traders still like the idea of EUR/USD trading higher over the course of the next few weeks (and months); despite the market’s on again/off again relationship with risk resulting in some choppy
and hard to trade markets, the underlying grind higher remains in place and the market may be on the cusp of an important break out; a weekly close above 1.4225/35 should signal an extension of the EUR rally towards the 1.45/1.46 over the next few weeks. Chairman Bernanke goes for round 2 of his congressional testimony today; it is essentially a repeat of yesterday’s performance but the market may try to find glimmers of optimism in the Q&A to sustain the underlying optimism.