Forex Investment and Currency Trading

The recent financial storm and the liquidity injection by the Fed has proven to be USD negative as the market begins to digest the implications of the financial bail-out by the US government. At the same time, EUR/USD has rallied by more than 7% since the lows of 11th September, from 1.3882 to current levels of 1.4725. With the raised probability of a possible 25bp ECB rate cut in March 2009 from 30% to 40%, the following strategies below could help hedgers lock-in the USD weakness whilst still leaving potential for further EUR/USD appreciation.

EUR/USD Hedge 1
Position: Long a EUR Put [...]

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USD/KRW spot has been extremely volatile of late, on the back of the broad emerging weakness as well as intervention effort by the central bank. 1-month implied vols has gone from 16 vols a couple of weeks back to 23 vols now. In the near term, given the spillover effect of the meltdown in US equities and the continuous foreigners outflows from Korean equity market , we should see USD/KRW spot continue to drift higher possibly testing the recent 1159 high seen on September 3. As such, the follow strategy is recommended to take advantage of the high risk
reversal and [...]

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As of London open, with recent USD bearishness, the relatively affordable levels of GBP vols combined with spot approaching 2.0000 presents an opportunity to seek topside gains in GBP if spot breaks through this psychological level.
Current 200-day MA comes in around 1.9961, a close above this level should signal increased bullishness on GBPUSD. Currently GBP risk reversals favor GBP puts but with increased USD bearishness expressed in the option market, this should be viewed as an opportunity to cheapen a GBP bullish strategy.
A suggestion on the vanilla side to compliment this USD bearishness is to buy some 1-month 25 delta GBP Calls [...]

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Although G8 might have disappointed USD bulls with the lack of commentary on currencies, recent USD-bullish rhetoric from Paulson and Bernanke look set to deter the bears from pushing the USD further. On the Japanese front, while Japan’s trade and current account surpluses are likely to narrow temporarily in the near term, the risk appetite environment has not deteriorated. Thus, the recycling of the external surplus with capital outflows at prevailing JPY exchange rates should be relatively easy. Also, Japanese retail investors’ capital outflows have recovered. With USDJPY spot holding well after the broad USD recovery and the Fed looking [...]

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Economic uncertainty in the Euro bloc has led to a weaker perception of the EUR in the current market. At the same time, the stable equity markets have led to a positive environment for carry currencies, with the AUD dollar leading the views. The fundamental view has projected lower EURAUD rates going forward.
EURAUD forecast for 2008:
Spot 1.6900
Q2 1.6300
Q3 1.5500
Q4 1.5400
Risk /Reward trades
Options enable the end user to take on attractive risk reward trades while limiting their downside in the event the forecasted rates do not prove correct. Further, option spreads utilize a sold option combination
to reduce the premium outlay, while [...]

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