Forex Investment and Currency Trading

The market reaction to yesterday’s FOMC announcement was rather bizarre. There weren’t any serious surprises in the statement – economic activity was upgraded from “levelling out” to “has picked up,” the Fed reiterated that it would keep rates low for “an extended period,” and the Fed decided to extend its agency/MBS purchase program out to the end of Q1 2010, which had been widely speculated. The USD sold off in response, which was partly attributable to the upgrade in economic conditions, and partly to the fact that the Fed decided to maintain the size of its asset purchase program, whereas some Fed speakers had speculated that the FOMC may elect not to purchase the entire $1.45B of agency/MBS products. And although equities rallied in the wake of the FOMC’s rosier economic outlook, they sold off later in the afternoon through to the closing bell, which turned everything on its head.

This early morning, European equities and US equity futures are in the red, energy prices have declined (which is also related to the larger than expected build in crude oil inventories in yesterday’s weekly DOE report), and the US dollar is well off yesterday’s lows (although the DXY index has trekked a little lower this morning).

Yesterday EUR/USD hit a new marginal high of 1.4840/45, but got hit after an unnamed French government official expressed concern over the strength of the euro, and fell further as equities sold off late in the afternoon. When asked about the euro’s current level, the French source said “it worries us,” and expressed hope that the Pittsburgh G20 will “fix a time for a discussion on currencies at a later stage.” This is in contrast to recent statements from the ECB’s Weber and other euro zone officials. While EUR/USD has bounced back to some extent after dipping just below 1.47 overnight, there has been a lot of focus on EUR/CHF, which dropped to its lowest levels since the SNB intervened in June. EUR/CHF has since bounced back above 1.51 (considered to be the SNB’s “line in the sand” by some), but will remain on the markets’ radar as the SNB reaffirmed its commitment to “act decisively to prevent any appreciation in the Swiss franc against the euro” just last week.

The biggest currency mover this morning has been sterling, which as been absolutely crushed. EUR/GBP has rallied by more than 100pts this morning, driving it well above 0.91 and to fresh 2009 highs, on a couple of big news stories. One, the UK Telegraph reports that the BoE has called a seminar of UK market economists to be hosted by Deputy Governor Bean. There is a lot of speculation surrounding what exactly the BoE hopes to achieve – some options being, clarifying the position on the reserve rate, introducing a change to the monetary policy
framework, or explaining the progress of QE as it feels the message has been rather muddled of late. And two, Mervyn King was in the Newcastle Journal talking down the pound. He called the pound’s drop “very helpful” to the process of rebalancing the economy.

With little data in North America today, the focus will turn to the first day of the G20 meeting. Traders don’t think that much will come out of it, but will be keeping an eye on headlines nonetheless.