Forex Investment and Currency Trading

USD: The underlying asset market backdrop appears to have tilted decisively against the USD in light of technical breaks higher in the major equity indices and the recovery in the oil price. Safe-haven demand for USD denominated assets seems set to be limited over the near term as stronger data encourage markets to focus on the potential for a strong cyclical recovery. The risks associated with US policy settings may come into focus in this environment.

EUR: Reserve accumulation and subsequent “flow” diversification demand for EUR appears to be rebuilding on the back of strong capital inflows to emerging markets. This order flow is likely to sustain a positive correlation between risk appetite and EUR-USD over the near term.

JPY: There is lower USD-JPY projections in view of weaker-than-expected yield support, global investors’ corrections of underweighting of Japanese equities, and a bottoming of Japan’s trade surplus. Still, the recent JPY rebound along with risk asset corrections should give way to renewed improvements in risk appetite on optimism about the global economic outlook. The recycling of Japan’s external surplus with capital outflows should be easier in a favorable risk sentiment environment.

GBP: The size of the Q2 UK GDP contraction suggests a larger than originally expected output gap and increases the chances that the BoE will expand the overall size of its quantitative easing program at the August meeting. While medium-term view of further declines for EUR-GBP, the worry over additional QE in August could weigh on GBP in the run up to the meeting.

CHF: FX reserve data recently released by the SNB confirmed that the central bank’s official EUR denominated reserves increased by 11.74bn in Q2 2009, while USD denominated reserves rose by 6.77bn. The ongoing intervention of the SNB has placed an effective floor on EUR-CHF around 1.5100. As such, any tests of the 100-day moving average, currently at 1.5158, should be bought.

SEK: The risk rally has helped EUR-SEK break below major trend-line support from the August 25, 2008 low. The high beta status of SEK has been relatively stable throughout the crisis. As such, the on-going “risk rally” is likely to help SEK retrace its extreme undershoot induced by the financial crisis.

NOK: The risk rally, and the resultant rise in oil, has helped EUR-NOK to break below significant trend-line support (8.8400) from the August 28, 2008 low on Monday. With the correlations between NOK and oil as well as NOK and the S&P 500 remaining strong, traders look for further NOK outperformance in the current environment. Over the medium term, the relative resilience of the Norwegian economy should lead to further NOK appreciation in the months ahead.

CAD: Data is light in Canada over the upcoming week, with GDP (31 July) the focus; -0.3% is expected, down from -0.1% previously. On Thursday the BoC upgraded its inflation and growth outlook for Canada, moving the path forward.

AUD: In Australia, the Q2 NAB business confidence number improved significantly to -4 from -24 Q1 (28 Jul). This index bottomed in Q4 2007 (-31), staging a 23% recovery from that low to -24 last quarter. Also on that day, RBA Governor Stevens spoke on the challenges facing economic policy. With the speech slightly tempered, the Q&A offered insight into the increasing pressures in Australia and supported the bullish call. 30 July we have housing data with new home sales as well as building approvals, important for Australia and its domestic conditions. The RBA meets on 4 August, and consensus is for a hold on rates.

NZD: The correlation between NZD-USD and AUD-USD has been increasing over the past few weeks, with both crosses being driven to a large degree by external data. In New Zealand, this is beginning to shift with the June trade data (28 Jun), falling significantly below expectations. For a more sustained differentiation, the RBNZ statement will be key when they meet on 30 July. While no change is expected (currently the OCR is at 2.50%), the accompanying statement in June was surprisingly dovish. Should the statement retain its dovishness, we would expect AUD outperformance moving forward.