Forex Investment and Currency Trading

Risk has receded overnight, as the market focused on the potential for tighter banking regulation in China. As a result, EUR/USD pulled back from its overnight high, but remains above support formed by the break-out level around 1.4365. A material adverse change in the macro back-drop appears unlikely ahead of Friday’s US non-farm payrolls report. The rebound in global PMI data continues and the impact of government stimulus is starting to show up in hard activity data. Economists flag yesterday’s stronger-than-expected US light vehicle sales data as reason to revise up their forecast for headline retail sales in July, while they are now tracking Q3 GDP with risks to the upside. As such, positive data surprises have scope to continue a while longer. In this context, EUR-USD rally is expected to continue. The next target now stands at 1.4621, the 61.8% retracement of the decline from the July 2008 highs to the October 2008 lows.

USD-CAD has posted modest gains, with risk having pulled backed. However, the sell-off remains technically in place, with the pair having made a lower low today. Canada sees no economic data releases on Tuesday (and will not see any significant data points until Friday’s employment report), and the pair’s price action should, therefore, continue to be driven by the overall risk environment. Nonetheless, the USD-CAD decline remains broadly in place, and a move above yesterday’s high of 1.0712 would be required for a clear signal that the sell-off has come to an end.

European crosses
EUR-SEK has rallied significantly, as risk appetite has pulled back modestly. The move has also been helped by an article in the Financial Times about the possibility of a devaluation in the Baltic countries. However, the article adds nothing new to the debate and does not create any material change for further SEK gains. Nonetheless, the rally of EUR-SEK above Monday’s high of 10.3116 is a negative development from a technical point of view. A close above 10.40 (the July 30th low) would trigger the stop on our EURSEK short. For its part, NOK has failed to benefit from the higher-than-expected reading on the Norwegian PMI survey as risk pulls back, given NOK’s high beta status. Nonetheless, EUR-NOK remains below short-term resistance (8.8010) created by the trend-line from the July 13 high.

Asia Development
The USD and JPY remained soft during Asian hours, following their overnight declines on improving risk appetite, along with growing optimism about the cyclical recovery spurred by stronger-than-expected US ISM manufacturing activity and motor vehicle sales data. EUR-USD broke above the 3 June high at 1.4339, but retreated somewhat, as Asian equities were modestly softer. USDJPY held the trend support overnight, but failed to break above the 55-day moving average resistance (currently 95.47). AUD-USD and NZD-USD were firmer during Asian morning hours, but the AUD dropped on an as-expected monetary policy decision by the RBA (no change in the 3.0% cash target, withdrawal from the easing bias, and current accommodative policy setting as “appropriate”).

USD’s decline continued to fuel risk appetite in Asia. The risk of a reverse in the recent risk rally in Asian currencies looks subdued, although Friday’s US payrolls data could be a swing factor. In the meantime, Asian central banks continue to stand in the way of swift FX movements, as evidenced in the latest reserves data out of Korea. Nevertheless, Korea, India and Indonesia were major recipients of recent foreign funds inflows into Asia. These currencies are well poised to appreciate further in active response to the positive risk environment, given their high correlation with their respective stock market movements.