Forex Investment and Currency Trading

The USD remains on the defensive generally this morning, with EUR/USD trading around 1.45; short-term focus is likely to remain on gold to assess the impact of Barrick’s after-hours announcement on cutting its gold hedges last night; other producers may opt to follow Barrick’s suit, providing some further short term support for gold and investor reaction off the North American open this morning may dictate whether investors see this as a vote of confidence in gold – which it ostensibly is – or a move that is coming very late in the gold rally. The key here may be whether gold can quickly move through the March 2008 $1033 high; new highs in the near term should be a positive for the market.

The negative correlation between USD and gold has strengthened again in the past few sessions and a strong inverse relationship between market returns remains the rule rather than the exception. A higher gold price will be a further drag on the USD’s performance, which we already expect to be weak over the course of the next few quarters anyway. Short term trends suggest that currency investors are voting with their feet and moving out of the USD anyway; EUR/USD consolidated briefly after the early week surge to 1.4540 or so; above 1.4510 this morning will put the market on track to retest the highs at least. A further sharp move lower in the USD generally remains a risk from a short term perspective.

GBP/CAD: Thomson Reuters PLC is to unify its dual listed company structure today as its UK listing ceases to exist and UK listed stock is switched to North American stock. The FX implications are somewhat ambiguous, though GBP/CAD may prove better bid as speculation is mounting that UK investors may undergo the stock switch from London to North America, before then selling their holding and repatriating funds back to the UK. The likelihood of this is increased by the fact the London listing trades at a discount of around 2% to the North American listing. This premium has previously stood as high as 14% and hedge funds have been active in trading this arbitrage.

AUD was driven lower following the release of weak domestic data. Strong Aug consumer confidence (+5.2%m/m vs. cons. 3.7%) was largely ignored by the market which chose to focus on the soft retail sales and housing data. Home loans data for July registered a greater-than-expected 2.0%m/m fall against forecasts of a more modest 1.5%m/m decline. July retail sales were also soft, falling 1.0%m/m to disappoint the consensus which was calling for a 0.5%m/m increase in the month. In the immediate aftermath of these data, AUD slumped 35pips and continued to grind lower down to around 0.857 where some support was found.

NZD traded with a heavy bias through the Asian session as rising risk aversion weighed on high yielders. A moderate bid for risky assets emerged during the European session however, and NZD retraced most of its initial move. All eyes are now firmly fixed on the RBNZ rate decision tonight. The Bank stated in its June Monetary Policy Statement (MPS) that, “The OCR could still move modestly lower over the coming quarters” and that they “expect to keep the OCR at or below the current level until the latter part of 2010”. However, recent indicators suggest that this is no longer a credible threat. Analysts expect the RBNZ to move away from an explicit easing bias to a more neutral stance as it revises up its domestic and trading partner GDP forecasts, and thus see downside risk for AUD/NZD today.