Forex Investment and Currency Trading

USD: Over the shorter term market continues to look for USD to weaken on the back of continued positive risk-sentiment and maintenance of the risk-positive/USD negative dynamic. FX markets have been shifting from listlessness to more of a directional view in terms of further USD weakness over the near-term, highlighted with negative moves against both EUR and high beta currencies like the Dollar Bloc and the Scandies. USD is expected to be strengthening medium term, over 2010, the correlation between risk and USD weakness will fade.

EUR: EUR-USD is expected to break towards 1.50 by the end of the year, as a variety of dynamics, including positive risk appetite and additional EUR diversification demand from EM reserve accumulation continues further. But such strength will wind up reversing next year as such a strong currency is likely detrimental for Euro-area growth prospects, and leading to its own reversal.

JPY: USD-JPY broke below the July low, as the pair was not exempt from broad USD declines, especially with narrower US-Japan yield differentials. While Japan’s government changeover is not likely to accelerate inflows of global equity investor funds, the approach of end-of-September book closings will probably slow Japanese institutions’ capital outflows in the near term. Yield support is probably needed for a sustainable USD-JPY rebound.

GBP: The BoE voted to keep monetary policy unchanged last Thursday, as widely expected. However, with the possibility of additional QE (in November when the next quarterly inflation report is released) hanging over sterling at a time when other central banks are focusing on exit strategies, market remains cautious on GBP and do not believe that sterling will be able to post significant gains in the near term. The most likely scenario is a mere drift for EUR-GBP back towards the middle of its recent range.

CHF: The SNB announces its interest rate decision next Thursday. Analysts do not expect a change in interest rates or in the SNB’s FX intervention policy. As such, it will likely be a non-event and have little effect on EUR-CHF. EUR-CHF is expected to remain supported by its 200-day moving average, currently at 1.5124, while being capped by resistance at 1.5380, the June 24 high.

SEK: Market became increasingly concerned about the possibility of a SEK sell-off induced by a reiteration of the Riksbank’s commitment to keep rates on hold until autumn 2010 at the September 03 meeting. Market retains these fears with Sweden having experienced one of the deepest recession and therefore likely to be one of the last countries to hike. SEK is expected to be a relative underperformer, especially versus NOK.

NOK: The rising rate expectations should continue to support NOK. The two-year Norwegian swap rate has risen 77bp since early July, and there is no reason for a material pull-back. Furthermore, net NOK purchases by foreign banks have increased to the highest level since 2007. This suggests that the recent NOK rally has strong fundamental support. Market expects this trend to continue as the relative resilience of the domestic economy creates an attractive investment environment.

CAD: The Bank of Canada has been paring back its language when discussing the negative impacts currency of currency strength. A prolonged discussion loses effect as markets adapt. What is notable is that the wording surrounding the banks discussion of the currency strength appears to be less dramatic, opening room for further appreciation.

AUD: The amount of AUD the RBA has sold to the market has decreased markedly allowing further appreciation of the currency against the USD. As this strength has been relatively orderly, such a trend would be expected to continue. Traders remain positive on AUD, given both the near-term outlook for risk-appetite, the tie of Australia to the robust China growth cycle, and the likelihood that the RBA will be the first G10 central bank to outright hike rates.

NZD: By far the out-performer recently in the dollar bloc, the NZD has risen nearly 3.2% against the USD from its low of 0.6776 pre-payrolls to 0.7036 currently. On a technical side, correlations between the NZD and risk appetite have begun to reaffirm themselves, indicating the NZD is one again being subject more to exogenous factors than domestic ones.