Forex Investment and Currency Trading

The Canadian dollar is still struggling today, with risk still firmly off. If the mood doesn’t change
and the S&P 500 ends the day in negative territory, that will be the first 3-day losing streak since the dying days of October, when USD/CAD rallied into the high-1.08 area.

Last night’s speech from Bank of Canada Governor Carney did not contain anything new for the FX markets, at least not for the short-term. Carney decided that it was his turn to speak out on China’s exchange rate, after recent comments from the IMF and from US President Obama, among others. Governor Carney spent a good portion of his speech discussing various options for reducing the reliance on the USD as the world’s reserve currency, which is important in the medium- to long-run, as well as the importance of China moving to a market-based exchange rate regime. He also made it very clear that Canada has already done its part in reducing global imbalances, mentioning specifically that advanced countries “including Canada, Japan, and the Euro area” have seen “sizable appreciations in their currencies” and that Canada’s current account has shifted from a surplus of 2% of a deficit of 3%. But turning to current conditions, he merely repeated verbatim what the BoC said in the October MPR.

Major Currencies
Risk is off again this morning, with some of the weakness in equities being blamed on ECB President Trichet’s suggestions this morning that the ECB will be withdrawing liquidity. Trichet wants to ensure that the liquidity measures don’t “denigrate into long-term dependence of the private sector on such support.” Markets may also still be reacting to the disappointing earnings report from Dell yesterday, which was released after North American markets closed.

The Bank of Japan made its latest interest rate decision overnight, where the BoJ kept rates on hold and moved to a more neutral stance on the risk of inflation. But at the same time, the government declared overnight that Japan is back in deflation territory for the first time since 2006. There seems to be a bit of a battle between the government and the BoJ in determining which party has the task of turning things around. Naoto Kan, the deputy prime minister, said that “we want the BoJ to extend support on the monetary policy front in overcoming deflation.” Meanwhile, BoJ Governor Shirakawa said at a press conference that prices are declining because of weak corporate and consumer demand, and that policy makers should implement measures to boost growth expectations and spending. These growing tensions will certainly be something important to watch going forward.

Sterling has been one of the major underperformers overnight, with media still focusing on yesterday’s poor public finance numbers for October. GBP is also suffering from the pull-back in
equities, with the correlation picking up in the last couple of weeks. The rolling 22-day correlation had fallen below 0.10 towards the end of October, but has recently risen to close to 0.50 again, as currency markets seem to be reacting a little less to the BoE’s QE plans (the correlation between GBP and equities began slipping right after the BoE’s announcement in August that it was increasing its asset purchases), and dumping GBP back in the risky product bucket, along with AUD, NZD, and CAD.