Forex Investment and Currency Trading

The USD is recouping a little of the ground lost over the long weekend in Canada in early dealing so far today; however, the damage to the USD has been pretty extensive. USD/CAD has set a new low for this move down and the USD’s slide looks liable to extend as economic stabilization/recovery signals increase around the globe, underpinning investor appetite for riskier assets and diminishing the USD’s “safe haven” status further. Some market analysts have long considered the USD to be at risk of further weakness, due to the weak structural position of the US economy, low interest rates (and increasingly, it would seem, the risk that rates start to rise elsewhere in the industrialized world before the US) as well as investor diversification. CAD can continue to benefit from its relatively better structurally-positioned economy, sounder financial system, rebound in commodity prices as well as asset diversification away from the USD. The CAD is the top performing major currency over the course of the past month, with the USD falling some 8% and traders look for limited CAD losses from here and a run towards the technical target of 1.0465 in the near term (better employment data Friday would be a help); ultimately, some continue to plot a course for parity by year-end. Movement has turned a little choppy over the last few hours, with spot bouncing from the low 1.06s and that does suggest some risk at least of a short term push back through the low 1.07 area; key resistance comes in at 1.0812 in the short term, the top of the descending channel in place since mid July.

Early week USD losses have steadied to some degree overnight as equity markets have drifted back but the gradual improvement in risk appetite as well as the broader decline in the USD – the USD index fell to its lowest level since last September – looks to have further to go. Improving economic data suggests that central banks may have start to consider their exit strategies a little harder; the RBA moved to neutral earlier today. Improving UK data (strengthening house prices data and PMI data showing the UK manufacturing sector expanding for the first time since April 2008, for example) suggest that BoE policy makers can maintain policy settings where they are – rather than extend QE – at Thursday’s policy meeting. UK may be among the first economies to move decisively away from a super-easy policy setting.

The financial markets’ risk on/off “switch” remains the main directional influence over currencies at the moment but if the global recovery does take firmer hold, traders expect the markets will start to focus more intently on relative economic merits and less on the knee-jerk reaction to equity market gains or losses; as noted above, the USD is considered to be a structurally weak currency and prone to more softness in the medium term. In the short term, EUR/USD should find good support intraday through the upper 1.43 area and the renewed EUR strength through the 1.4417 (small bull flag signal trigger) will herald a further slide in the USD broadly.