Forex Investment and Currency Trading

While the USD has picked up a little more obvious support (ex-JPY) in the past week or so, there is little to suggest that the underlying drivers of currency movement has changed that significantly. The GBP’s sharp fall can be attributed directly to comments on the currency from BoE officials and ongoing speculation that the central bank may yet reduce the deposit rate in a bid to boost its stimulus efforts. The JPY has surged in response to comments from the newly-election Japanese government suggesting a higher tolerance for a stronger JPY and less appetite for intervention. While this is a commendable stance and has positive implications for freeing up exchange rate movement across Asia, it may also reflect a government that is still trying to find its feet. Finance Minister Fujii backtracked on some JPY comments earlier today and PM Hatoyama remarked that a stronger JPY does hurt smaller businesses. Not so much of a break with the LDP perhaps, after all. USD/JPY has bounced sharply from the low 88 area reached overnight and given the strength of support seen ahead of 87 in December and January, current JPY levels are starting to look a little rich perhaps.

More broadly though, there is little escaping the fact that risk appetite is still a significant driver of broader movement in the FX markets; the correlation between daily returns of the S&P 500 and the DXY remain negative and the trend has been strengthening significantly again in the past week.