Forex Investment and Currency Trading

Over the weekend markets were watching the G7 meeting of Finance Ministers and Central Bank Governors, given the growing concern from officials with the weakness in the US dollar. However, the language in the communiqué was merely a repeat of what has been said before: “Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate.” Markets may have been braced though for something a little firmer, and perhaps USD-specific. The G7 used the remainder of the statement to pledge to “keep in place our support measures until recovery is assured,” and “to strengthen our financial system by building high quality capital and mitigating pro-cyclicality, implementing strong international compensation standards,improving over-the-counter derivatives markets, and addressing cross-border resolution and systemically important financial institutions,” in line with last week’s G20 statement. However, Friday’s disappointing nonfarm payrolls report seems to have left its mark on G7 sentiment, with the group adding that “there is no room for complacency since the prospects for growth remain fragile and labor market conditions are not yet improving.” In the latest chapter of Japan’s FinMin Fujii communication issues, this weekend he moved one step closer to the prointervention camp, saying that “If currencies show some excessive moves in a biased direction, we will take action.” However, markets don’t seem to have taken his threat too seriously – while JPY has underperformed overnight, USD/JPY is still sitting below 90, compared to the level of 94.50 that respondents to the latest quarterly Tankan survey expected to see during the remainder of fiscal year. The lack of any rhetoric from the G7 on a strong US dollar may be what the markets needed to resume the USD downtrend after several days of indecision. And with the USD-risk relationship weakening a little in recent weeks, we shouldn’t require stronger US economic data to make that happen. After Friday’s weak nonfarm payrolls report, the USD initially rallied; but as markets start to focus more attention on the order of central bank tightening, it makes less and less sense for the USD to rally on a worsening labour market picture., so the USD ended the day lower.

With little US data today, the main focus for the currency markets over the next 24 hours will likely be the RBA’s interest rate decision tonight. Markets are currently pricing in about a 60% chance of a 25bps rate hike tonight, which would make the RBA the first major central bank to tighten. AUD rallied overnight and is through 0.8750 based on RBA expectations, but we think it’s more likely that the RBA remains on hold and sticks with a tightening bias, likely sending AUD down from its highs.