Forex Investment and Currency Trading

Canada produced a stellar labour market report for September; employment rose 30k in the month, well ahead of the 5k expected, driven by a massive 91.6k gain in full time jobs. The unemployment rate fell from 8.7% to 8.4%, the first turn lower since the start of the deterioration in the labour market last year. While the market has been leaning towards a stronger number since yesterday’s better than expected Australian data, the result has still driven the CAD to fresh highs against the USD and the risk is for the CAD to continue rallying in the medium term, driven by improving domestic data, firm commodities and the weak USD trend. BoC Senior Deputy Governor Jenkins yesterday downplayed the comparison between Australia, where the RBA this week became the first of the major central banks to tighten policy in the recovery cycle, and Canada and reiterated the BoC’s pledge to keep interest rate policy on hold until mid 2010. If the run of domestic data – housing and jobs in particular – remains strong, speculation that the BoC will have to revise its stance will grow – just as we enter a period of seasonal weakness in the USD/strength in the CAD. It is noted that the latter part of the year often sees the USD sell off accelerate in years when the USD is in decline; momentum and the domestic data flow suggests that there is a good chance that the USD decline picks up speed in the next few weeks.

The USD is trading modestly higher in broad terms (measured by the DXY performance) so far today but the gains are modest. Mixed equity markets overseas and weaker US equity futures are propping up the USD; mildly hawkish comments from Fed Chairman Bernanke, indicating that the central bank had to continue to support the economy but could not do so indefinitely and that it would have to tighten at some point, provided the USD with some additional underpinning. However, the underlying USD trend remains weak and, with ECB President Trichet balking at the opportunity this week to talk the EUR down more forcefully, EUR/USD seems likely to remain well supported on dips – short term support is seen at 1.4700 intraday – and grind back towards the recent highs in the mid 1.48s. US trade data today may not have that much impact on the market but with the deficit expected to widen
modestly, it is unlikely to help the USD.

While the CAD performance will grab a lot of the attention today, given its performance over the past 24 hours, the AUD remains the top performing currency on the week; commodity bloc outperformance this week (the AUD, CAD, NZD and NOK are all up at least 3%) looks poised to continue, with these economies expected to be or remain at the vanguard of the major economy tightening cycle. This week’s AUD rally through the ultimate medium term retracement resistance suggests little technical impediment to a return to the 0.95/0.98 range.