Forex Investment and Currency Trading

Overnight we saw a complete reversal in the USD after two days of gains on Friday-Monday, with the DXY index just a hair off of Thursday’s low at time of writing. Equities in Europe have bounced back from yesterday’s declines, crude oil prices are back around $71, and gold is nearing $1020/oz again. It seems that instead of exercising caution ahead of tomorrow’s FOMC announcement and the G20 meeting at the end of the week, markets have moved back into rally mode after a short break.

One catalyst to the reversal was the broad-based upward growth revisions from the Asian Development Bank. Some of the notable gainers were China (from 7.0% to 8.2% in 2009 and from 8.0% to 8.9% in 2010), and India (from 5.0% to 6.0% in 2009 and from 6.5% to 7.0% in 2010), but we also saw higher growth numbers for Indonesia and south/southeast Asia in general. These growth upgrades not only helped local Asian currencies (even with Asian markets closed), but also AUD amongst others.

The top performing currency overnight was NZD, after the improvement in the current account balance was much sharper than expected. This not only drove NZD/USD to new highs for the year at over 0.72, but NZD managed to make new highs for the cycle against most other crosses, with NZD/JPY for example driving through 0.66. And despite the boost to AUD from the better ADB forecasts, AUD/NZD was still smashed, falling to just below 1.21 at its lows, its lowest level since April.

EUR/USD also managed to make new highs for the year overnight, breaking through 1.48. So far it doesn’t seem like European leaders are overly concerned about the strength in the euro. The latest party heard from was the ECB’s Weber, who said “There were some stronger data coming from the eurozone compared to some other regions, so I think that the behaviour of the foreign exchange markets is not out of line with these developments over the recent months,” in an interview with Market News. This leads us to wonder at what point – if ever – the ECB will finally get concerned about the stronger euro choking off export growth.

Today should be a pretty quiet day in North America, with only third-tier data out of the USD. We’ll be watching equities again for direction, as well as musings from various media outlets on the possible outcomes of this week’s G20 meeting. Analysts don’t expect to see any major initiatives to be agreed upon at this week’s confab, despite calls for an agreement on higher reserve levels for banks, among other things. Instead, we’ll likely just see a statement on the need to maintain expansive fiscal policy until the recovery becomes more entrenched.