Forex Investment and Currency Trading

EURUSD traded at 1.4254 lows after it fell quickly in early European trade due to strong selling by an Asian name and good follow through interest from a U.K. clearer and a European house. The fall in Chinese stocks was a negative influence, along with comments in today’s European press from ECB’s Mersch, who said that the current recovery is not sustainable. He said banks will have to make more bad loan provisions by year end, adding that without a rise in global demand there will no investment and no new jobs. Mersch takes the view that as long as global growth is supported by public money then we can not talk of sustainable growth. German Q2 GDP was confirmed at 0.3% q/q in the final release this morning, as expected. The breakdown confirmed that growth was supported by private consumption, which rose 0.7% q/q, government consumption, which rose 0.4% q/q and construction investment, which expanded 1.4% q/q. Below 1.4320 EURUSD is expected to remain offered.

USDJPY reverses gains of yesterday as UST yields fall back
In a re-run of yesterday in reverse, lower US Treasury yields have put pressure on USDJPY, with the pair breaking again below the 94 figure. With Shanghai trading down over 3% in the morning, and extending those losses in the afternoon session, pressure on yen crosses is likely to keep the pair under pressure. Securities investment data shows that significant buying of Japanese equities continues to impact the fx markets, with over USD14bn of inflows over the past four weeks. Added to this is the possibility of a landslide DPJ victory over the weekend – with the market seeing this eventuality as broadly JPY positive – and there seems little reason for USDJPY to gain today. However we remain within the recent tight 93.20-95.20 range, and although JPY is expected to appreciate, look for a break of support around 93.35 to confirm a likely shift lower.

The CHF and the USD are both negatively correlated to equities. Bullish equity investors have flattened the slope of the volatility curve suggesting investors are no longer buying portfolio insurance or selling options to generate premium income. Another warning signal is that equity fund flows turn negative as China story loses some of its shine China ’s resilient growth has been a key driver of flows into emerging markets equity funds in recent months. During the third week of August, however, doubts about the quality of the loans doled out at breakneck speed by Chinese banks during 1H09 prompted investors to book profits and take some of their recent gains off the table. EPFR Global-tracked China Equity Funds had their worst week since early 1Q08 while outflows from Asia ex-Japan and Global Emerging Markets (GEM) Equity Funds hit 24 week and year-to-date highs respectively. Weakening EMK flows do not bode well for shares but provide support for the USD and the CHF simultaneously.

GBP has further to do
UK. manufacturing pay growth hit a record low of 0.3% y/y in the three months to August according to the Engineering Employers Federation (EEF), versus 0.8% in July. Three quarters of manufacturing firms have frozen pay growth, according to EEF, a record number since EEF’s survey started in 1987. Weak labour market and compensation data suggests weak income growth suggesting consumption only to pick up when credit becomes available. However, households are heavily indebted and increasing debt levels further from here is obviously not a durable option. Yesterday, Sterling has been hit hard after the release of July public deficit data. Estimates have been revised and local papers suggest this morning the public deficit will reach GBP200bln this year. It remains clear that the UK can only get out of this mess by running tight fiscal and loose monetary conditions. A weak exchange rate will be required to keep the economy afloat. Needless to say that anticipated commodity price and equity weakness will also work against sterling. GBPUSD is on its way testing 1.6260. Sell against the 1.6575 resistance.

EURJPY falls on Wen comments, Shanghai stocks, Treasury yields.
In a reversal of yesterday’s markets, US Treasury yields have fallen, equities are softer and risk appetite is lower. And in a reversal of yesterday’s move, EURJPY is back below the 134.50 level where it was on Friday. Sharp falls in Shanghai stocks are likely to put further pressure on yen crosses and risk appetites in general. Overnight China’s PM Wen gave a more cautious assessment of the economic outlook, saying that the economy faces many difficulties. But the more interesting comment from Wen is the suggestion that China still faces great pressure from the slowdown in export demand. This is interesting insofar as it contrasts with the improvement in export data from the major western economies and confirms the view that the rebound in exports is a result of renewed availability of export credit and not the result of a rebound in underlying demand. Hence, EURJPY is expected to continue to fall as risk appetite is overdone. The Eurozone M3 data towards the end of the week (Thursday) represents another risk for the euro.

Further near-term gains expected for EURGBP as early week data will likely be supportive
EURGBP is expected to keep the pressure on the upside over the coming days. Use initial corrective pullbacks to establish near-term tactical long positions. Indeed, the EU industrial order data was stronger expected, jumping 3.1% m/m compared to market consensus expectations for a 1.8% m/m reading, allowing the year-on-year rate to improve to -25.1% in June from -30.3% y/y in May. This improvement in the orders data is expected to be reflected in the upcoming survey data, including the German IFO indicator. However, by the end of the week caution will be required given the release of the Eurozone M3 data. A further weak reading here will highlight the ongoing financial market problems in Europe, likely putting the euro back under pressure. There is also increasing speculation in the media that there could be a second round to the credit crisis in Europe which will weigh on the euro.

AUD shrugs off lower Shanghai stocks
Softer US stocks lent a weak tone to Asian stocks – most Asian markets have given up some of the gains from yesterday – but the interesting development has been the lack of reaction to Chinese developments. Downbeat comments from Premier Wen, rumours of the necessity of capital raising by a large Chinese bank and poor results from Chalco have all contributed to a fall of over 3% in Shanghai, but the AUD, and indeed most other risk-sensitive assets, has remained resilient. (The exception has been yen crosses, but these have been driven lower by USDJPY). This may just serve to remind us why it was that we were all looking at China – not because Chinese stocks will signal a recovery, but because Chinese stocks were the ‘canary in the coalmine’ that would signal that China was about to tighten. In this respect the authorities have been clear – no tightening will take place before it is clear that a sustainable recovery is underway. Nevertheless AUD momentum has stalled for the moment and with AUDJPY stops below 78.50, there is good potential for a test of the 0.8320 support today.

USDCAD keeping the pressure on the downside in the near-term, but caution
required once the lows are approached
The Canadian retail sales for June were much better than expected, coming in at 1.0% m/m for both the headline and the x-autos measures (market consensus was for 0.2% m/m and 0.4% m/m respectively). Hence, the CAD is now gaining support and the break through key support at the 1.0780 level provides scope for USDCAD to extend losses back towards the 1.0635 lows seen at the beginning of August. Monday’s data follows a recent stream of positive data surprises and while equity and commodity markets remain supported traders would expect the CAD to maintain its current outperforming position, especially as gains are also back by strong portfolio inflows currently according to the latest securities flow data. However, speculative positioning in the CAD is starting to become relatively extreme once again, suggesting that the CAD will become vulnerable to any negative shocks which could trigger an unwinding of positions. Hence, be caution with CAD long positions, especially once the 1.0635 lows of the year are approached.