Forex Investment and Currency Trading

USD: Market continues to look for broad USD weakening for the remainder of the year followed by strength in 2010 against G10 except for JPY. Analysts do not expect the sort of risk pullback in the near term which would significantly strengthen USD, and the improving sentiment that had been building on the back of expectations has seen further ratification in the “hard” data. The ADP employment report and the payroll number will be the key figures in the upcoming week, with Labor Day (Mon, 7 September) marking the unofficial end of summer.

EUR: EUR-USD has generally been range-bound as of late. It is expected that the positive risk dynamics and continued EM reserve demand to be favorable for EUR. Economists also expect a relatively robust recovery to kick in for the Euro Area by the end of the year. Markets will focus on the ECB and the following press conference on Thursday as the key EUR-related macro event over the near term.

JPY: USD-JPY tends to lag behind other JPY crosses even in times of better risk appetite, as US-Japan yield differentials have not been supportive. No change in Japan’s FX policy is likely despite the government party changeover to a DPJ-led cabinet. Expectations of upward pressure on the JPY arising from the DPJ’s expansionary fiscal policy and higher Japanese rates should prove overdone. HIA repatriation flows may pick up in September, though.

GBP: Continue to target lower EUR-GBP medium term, but it would be premature to proclaim that the EUR-GBP rally is over, especially as the two-year EZUK swap rate differential continues to narrow sharply in favor of the EUR. We would need some stabilization in this rate differential before looking for an end of the EURGBP rally. As such, the view is that the short-term bias for the pair remains to the upside.

CHF: The SNB will continue to prevent the appreciation of the Swiss franc, with Jordan saying on Tuesday that “The overall situation of the Swiss economy remains difficult despite the many rays of hope with regard to the economic cycle”. As such, the 200-day moving average, currently at 1.5136, should continue to act as a floor on EUR-CHF. In terms of the upside, the June 24 high of 1.5380 continues to provide significant resistance.

SEK: Despite SEK having recently outperformed, traders view the currency as vulnerable to the same misfortune as GBP. The potential for the market to re-assess its expectations after the September 3 meeting of the Riksbank leaves SEK vulnerable to a pullback. Traders look for SEK underperformance to be particularly pronounced versus NOK.

NOK: The backdrop remains largely NOK positive. With the Norges Bank having recently warned about the need to raise rates, market expectations for monetary tightening in Norway seem unlikely to be scaled back in the weeks ahead, in contrast to those for Sweden and the United Kingdom. As such, the pressure appears to be building for a break below significant support for EUR-NOK at 8.5435, the March 24 low.

CAD: Yesterday, the release of Q2 GDP was largely as expected at -3.4%. The data calendar is relatively light in the near-term, but picks up speed on Friday. Expectations over these releases will likely be key, as they contain employment (4 Sep) and the Bank of Canada rate announcement (10 Sep) and housing data (8,9 Sep). Market continues to forecast CAD outperformance against the USD, but underperformance relative to the other dollar bloc currencies, AUD and NZD.

AUD: The upcoming week is filled with substantial macro news, led by Tuesday’s RBA announcement. As expected the RBA left its cash target at 3.00%, but market consensus expected a more overt move from a neutral to tightening bias. Next week’s data on retail trade (9 Sep) and employment (10 Sep) will be particularly important to the call for a hike as early as November. Additionally, we will receive Q2 GDP numbers (2 Sep) as well as the July trade balance (3 Sep). The combination of both policy and macro events should set the stage for further AUD strength medium term. Market forecasts for end-September are AUD-USD 0.85.

NZD: Upcoming data in New Zealand will be important for a risk call with confidence (31 August) and ANZ commodity prices (3 September) next week. However, the following week will be met with the RBNZ (10 September), retail sales (14 September) and terms of trade (10 September). The RBNZ remains the key risk as the past several statements have been surprisingly dovish, with the central bank articulating its unhappiness over the currency strength. What will be key to pay attention to will be the language surrounding policy rate outlook, which has remained unchanged over the past few statements.