Forex Investment and Currency Trading

USD/CAD continued to drift higher overnight after Canada’s Finance Minister Flaherty created a stir yesterday afternoon by saying that he is concerned with any rapid changes in CAD, and that “There are some steps that could be taken to dampen that if there are… indications of some speculation in the Canadian currency which would not be justified in market terms.” Flaherty’s comments cannot be entirely brushed off, since the Bank of Canada would need to have the federal government onside before turning to currency intervention. The BoC’s website actually says that the Bank could intervene on behalf of the federal government to counter disruptive short-term movements in CAD, and that intervention policy is established by the government in close consultation with the Bank.

That being said, it is still hard to believe that currency intervention is a likely outcome for a number of reasons. For one, from the April MPR to the July MPR the BoC revised its assumption for CAD a full 7 cents higher, at the same time as it revised its forecast for 2009 and 2010 GDP growth about ½ a percentage point higher for each year; clearly a stronger Canadian dollar is not the end of the world when it occurs at the same time as stronger global growth and higher commodity prices.

The speed of CAD’s move is at least as great of a concern to the BoC (and the government) as the level of CAD. With CAD’s one-month return still nowhere near as strong as the rate we saw in May, combined with further signs of a global economic recovery, intervention seems highly unlikely right now. Yesterday’s comments from Flaherty weren’t the only factor driving USD/CAD higher (although they were probably the reason that CAD was the worst performing currency overnight), as some pull-back in risk sentiment is also to blame. Markets seem to be a little cautious heading into Friday’s US nonfarm payrolls report, with perhaps some fear that we could see a repeat of last month’s worse than expected reading. Markets will be keeping a close eye on today’s ADP report to get a feel for what’s in store for Friday.

Although risk sentiment has been a little choppy, we saw GBP outperform again overnight following another string of better than expected economic data. Lloyds’ declaration that loan impairments have “peaked” and expectations that the Bank of England will announce an end to its bond purchase programs (as opposed to expanding the program already authorized by the Treasury) at tomorrow’s meeting also helped to push sterling higher, with GBP/USD pushing further through 1.70. BoE is likely to be one of the first major central banks to start unwinding its monetary stimulus, and is certainly looking like it will be a few steps ahead of the Fed, given the relative rates of recovery in the two economies. GBP still looks to have further room to rally.

The NZD also hit a new high for the year overnight, after yesterday’s 26% increase in Fonterra dairy prices drove NZD/USD through 0.6700 yesterday afternoon, and then through 0.6750 this morning. The RBNZ will not be happy to see this since, like the Bank of Canada, it has expressed
considerable concern with the level of the currency. Governor Bollard had expressed hope that currency markets would distinguish between commodity-based currencies and not lump them all in one basket, as the New Zealand economy has been mired in recession for ages and fundamentals do not warrant the nearly 40% appreciation that the NZD has experienced since early March. Market expects to see further jawboning from Governor Bullard, as the NZD’s rally continues to run strong.