Forex Investment and Currency Trading

New cycle highs for the AUD (hawkish RBA comments) and NZD (higher than expected CPI data) as well as general pressure on the USD helped lift the CAD to a fresh 14-month peak overnight. The CAD backtracked modestly in European trading as equities slip in response to the next round of earnings reports (Goldman Sachs was a little disappointing relative to the “whisper” number but still above consensus, Citigroup and Google are the headliners over the rest of the session) and intraday short positions were squeezed out by the move back above 1.0250 and again through 1.0290. Still, the general bias towards rising risk appetite, which should favour the commodity bloc, means that CAD losses are liable to be limited in the near term. Negative earnings surprises are a near term risk for the CAD and the focus will soon start to fall on next week’s BoC policy meeting (and the potential for CAD negative rhetoric). These factors may check the CAD’s appreciation in the near term but traders remain bullish on the CAD overall and think that modest corrections in the CAD’s recent bull run provide an opportunity to buy; there is still a fair bit of mileage in this move and while we are targeting par by yearend, the risk of an overshoot on the downside remains high as we run into year end. Noted that seasonal factors suggest USD/CAD sell offs tend to accelerate late in the year and this observation has been largely borne out by recent developments. Technically, the USD/CAD downtrend retains strong momentum and while spot is pushing above short term trend resistance at 1.0250/60, there should be no significant scope for a rebound in the USD at present; trend strength signals are bearishly aligned across short, medium and longer term time frames and limited gains in spot is expected over the next few days.

RBA Governor Stevens’ comment that the central bank should not be “timid” in raising rates and a 1.3% rise in rise in NZ Q3 CPI (well ahead of forecasts) ramped up interest rate expectation in both countries and drove the AUD and NZD higher and pulled the other major currencies along for the ride in the Asian session. Sterling took up the baton in European trading, rising on the back of M&A speculation and press reports suggesting that the BoE may “pause” its asset purchase programme; GBP/USD is up 1.7% on the session and the pound is out-performing on the crosses. Some of the rebound reflects positioning; a heavy build up of GBP shorts in late September has been gradually squeezed out in the past few days. Traders retain a cautious view on the GBP – while it does look undervalued on a number of fronts (it has done for a long time), some do not think the pathway to a sustainable rally will be open until the BoE itself makes its policy objectives clearer.

US data releases today may serve to check the USD rebound; while it seems ridiculous to talk about inflation concerns when US headline CPI is expected to fall by 1.4% in the September year, the steady rise in US 10 year breakeven rates recently suggests that there are some underlying inflation worries. Rising inflation concerns have tended to depress the USD so far this year so a modest disappointment here may weaken the USD this morning.