Forex Investment and Currency Trading

EURUSD Outlook
Trichet, Fed comments fail to reverse EUR rise
The ECB kept policy on hold as expected and said little to suggest that rates will be raised anytime soon. And although on the currency side Trichet did mention the desirability of a strong dollar, the standard phrasing used did not suggest any real sense of urgency to act on this. A raft of hawkish-sounding comments from the Fed’s Bernanke, Lacker and Hoenig, plus Obama advisor Summers, pushed the USD stronger against most majors in the Asia morning. The message was the by-now familiar ‘rates will have to be raised at some time, and policy will have to be forward-looking.’ In reality the Fed cannot afford to raise rates any time soon, and it seems that such comments are mostly aimed at quashing any budding inflation expectations that might lead to higher long-term rates before the economy can handle them. As such the effect should be short-lived and EURUSD is expected to continue its march higher. Intervention from Asian central banks continues, supporting the EUR, and traders look for a break of the year’s high at 1.4842.

USDJPY Outlook
USDJPY rebounds on Fed comments, short-covering ahead of long weekend
USDJPY traded higher in the Asian morning session after the Fed’s chairman Ben Bernanke said “Fed set to tighten, return balance sheet to normal when outlook improved enough” and “Fed has wide range of tools for tightening policy”. Additional comments from the Fed’s Lacker and Hoenig, and from Obama advisor Summers, were also mostly USD supportive, although Hoenig’s comment that the recovery is likely to be “agonisingly slow” reinforced the message that rates are likely to remain low for some time. Market players closed USDJPY short positions on the comments and ahead of a long weekend in both the US and Japan. 10Y UST yield traded 1bp higher to 3.29% as of writing provided dollar support as well. Japan’s capex spending is still weak as core machinery orders rose in August, weaker than market expectations. However, the upside room for dollar is limited and sell USDJPY on rallies. The USDJPY bearish channel remains intact.

GBPUSD Outlook
GBPUSD ready breaking lower
Sterling has come under selling pressure with the release of stronger than expected UK PPI data not helping at all. Recent activity data have been weak and with UK inflation repeatedly surprising to the upside foreign asset holders have become nervous hooding UK debt. Given its macro risks the UK offers very little yield protection. BoE said that the scale of the asset purchase programme remains under review and given the recent weak UK data, speculation that the QE programme can be extended is likely to intensify.

EURJPY Outlook
EURJPY grinds higher on cross-JPY buying, still isolated from larger USD moves
Sustained, if not heavy, cross-JPY buying by speculators has continued over the last 24 hours. With Tuesday’s RBA hike vindicated by the strong employment figures yesterday, AUDJPY has been the large mover and it has now broken the key 80 level. EURJPY has followed, although less convincingly, and the pair is now back over the 131 level. However much of the recent move has been a USD move, and today has been no exception, with comments from a host of US officials having very little impact on the cross. We continue to see EUR supported – partly through continued intervention by Asian central banks – but the move up in USDJPY is likely to be capped below 90. Position squaring ahead of long weekends in both the US and Japan could see more USJPY buying, but a similar reduction in long cross-JPY positions should leave the market relatively neutral.

EURGBP Outlook
EURGBP has finished the downward correction ahead of the 0.9175 support.
The EURGBP correction to 0.9180 has been text book like supporting the view that the next move is up. Sterling fundamentals have remained weak. This morning’s release of PPI showed industrial prices rising by 0.5% mom beating expectations. Rising UK inflation rates will undermine real rates as there is no sign the BOE terminating its expansionary monetary policy course. The BOE interest rate statements suggested that a potential increase of the debt purchasing programme has remained on the agenda.

AUDUSD Outlook
AUDUSD post-RBA rally sustained by equities, gold
AUDUSD charged higher on a strong risk-seeking rally overnight after the RBA surprise rate hike, reaching a high of high of 0.9049 as further support was provided by rallies in equities and gold. Gold – Australian’s third most valuable raw material exports surged to a 20-year high above the 1040 level. This morning’s September Australia construction index expanded for the first time in 18 months and a rise in investment lending signals that the domestic economy is generally strengthening, although the housing loans data disappointed as demand from first-time buyers cooled. However, some selling interest has been seen today due to profit taking on speculation that gains have been too far and too fast. Nonetheless, longer-term bullish sentiment for AUD remains strong as markets price in further RBA rate hikes in November and December. Traders see any short-term correction as a good buying opportunity.

USDCAD Outlook
USDCAD breaks lower due to strong local PMI data
Canada’s Ivey PMI revealed a stronger than anticipated rise in September. The index is now at the highest level since July of 2008 and well above the record low 36.1 reading in January. Of course the improvement in the index during September lines-up with the usual seasonal pattern for this not seasonally adjusted index, which has historically nearly always moved higher during the month. The rise in the index during August following the 11.0% drop in July also conformed to the usual seasonal pattern. Given the strong seasonal pattern in the monthly changes, viewing the index on a year comparable basis can provide useful insights into the underlying sentiment trend. Overall, the steady recovery in the index this year from January’s record low matches up with the improving tone in the domestic economy that is expected to result in a return to growth in Q3 and Q4.