Forex Investment and Currency Trading

August is ending on a very cautious note, with investors preferring the sidelines and safe havens over further buying of riskier assets. Equities around the globe are under pressure, led by another sharp drop in Chinese stocks – down 6.7% on the day. Currencies are playing along and clearly reflect the risk aversion theme amid low liquidity due to summer trading and the UK banking holiday. JPY is the clear winner overnight, boosted by both risk aversion and local politics. CAD, on the other hand, is struggling to find friends with oil down, is struggling, even against its commodity peers.

JPY: The Democratic Party of Japan captured 308 of the 480 seats in the lower house of parliament and will replace the Liberal Democratic Party which has ruled Japan for all but 11 months of the past 53 years. Both the equity and currency markets reacted positively – well, at least initially. The Nikkei rallied 2.2% in early trading on the hope that the DPJ will bring change and an economic recovery, but the euphoria did not last long. With vehicle sales down 31.9%y/y, housing starts 32.1% lower and construction orders declining by 42.8%, reality soon set in. Looking past the overnight data releases, Mr Hatoyama and his team are also facing record unemployment and the possibility of prolonged deflation. At the end of the day, the Nikkei closed 0.4% down. USD/JPY initially fell to 92.55 from Friday’s close of 93.60, before recovering to 93.05. Global risk aversion continues to provide strong underlying support for the JPY.

Chinese equities – alarm bells ringing: Not only did the Shanghai index drop by the biggest one-day decline since mid-2008 (-6.7%), but the index has now officially entered bear market territory, has broken below the 50% Fibbo retracement level drawn of March 3, 2009 and has recorded the first monthly decline since the Sept/Oct 2008 crisis. The fall in prices in recent weeks has been closely mirrored by a sharp drop-off in new trading accounts opened by Chinese retail investors, while a survey of Chinese fund managers released today also showed that the balance of respondents had cut their recommended allocation to equities for the first time in six months. Staying with China, the sharp drop in Chinese raw material imports is weighing on shipping rates and commodity prices. 

 USD: A number of data releases this week, but payrolls on Friday is the clear pick. USD has rallied on the day after the past three payrolls reports, two of which were upside surprises, one of which was a downside surprise. Might we see a four-peat on Friday? FYI, the market is poised for payrolls to decline by 233K which would be the smallest drop since August 2008, consistent with other evidence that the recession is losing its grip.

CAD: GDP growth in Q2 is expected to decline by 3.0%, but that is not as bad as the number suggest. Firstly, the decline compared favourably with the 5.4% decline recorded in Q1 and, secondly, the data is quite dated and positive growth is widely anticipated in Q3. Consequently, market reaction should be fairly limited to downside surprises - irrespective of how bad things were in Q2, Q3 will look much better. But an upside surprise, on the other hand, could lend further support to the notion that a strong-than-anticipated recovery is underway in Canada and CAD buying might well ensue. 

AUD: The RBA’s rate decision looms large tonight. The market is looking for Stevens and Co. to set the stage for rates hikes, though the market is pretty well priced for a rate hike flurry and might be overly sensitive if the RBA does not satisfy the ravenous demand for hawkishness