Forex Investment and Currency Trading

Euro/dollar is ensconced above 1.4500 despite a turn lower in risk appetite overnight, mirrored in lower European equities and weaker AUD/CAD/NZD bloc.  Overnight data was mostly weaker than expected:  Japan machine orders -9.3% m/m (reversed prior month’s +9.7%), Australia employment -27K (after +33K previous), French IP +.1% m/m (expected +.4%), but UK house prices +.8% and now +4% since April’s bottom.  The RBNZ kept rates on hold, as expected, but with a dovish tone, sending NZD down toward .6900.  The BoE kept rates on hold as expected, and GBP jumped a penny.  Bank of Canada also stayed on hold, but complained a bit more strongly than last month about the strong CAD; USD/CAD had broken past stops to a 6 day high, despite higher oil.  Technicals are still Euro positive, targeting first 1.4622 and then 1.4700+.  Dollar/yen is sideways but still under 92, traders citing lower US/Japan interest differentials as US Treasuries are bid. 
 
This morning’s US data was mixed, unemployment claims falling as expected (joblessness moderating) but the US trade deficit surprisingly wider at -$32 bn, vs - $27 last month and expected to be unchanged.  Imports were highest since January, stoked by auto imports related to CARS; strong increases for pharma, tech, and aircraft all signal a turn in the domestic economy.  Compared with last July’s $65 bn deficit, the huge and rapid narrowing of the trade and current account deficits is a reason to remain positive on USD vs G10 for 2010. 
 
In addition to improving external deficits, other components of USD strength forecast for 2010, notably vs Euro, are:

1) Euro and other G10 strength undermines economic growth via lower exports, and growth negatives should weigh on Euro next year.  Some EZ officials are already complaining about Euro strength!

2) The correlation between positive risk and lower dollar should fade in 2010, and ultimately interest rate differentials should be USD supportive, notably the EUR/USD v 2 yr swap spread.