Forex Investment and Currency Trading

1. Policy Commitment: If affecting inflation expectations is key, then moves that commit the central bank to continue easing until the reemergence of inflation is widely expected are fundamental;
2. Currency: In small, open economies, the effects of quantitative easing can weaken the exchange rate, providing a buttress to economic growth. In the face of a global downturn or if local firms and households have large unhedged currency exposures, though, such measures can engender negative feedback;
3. Portfolio Balance: By altering the composition of assets the central bank acquires in undertaking QE — buying securitized assets for example — the bank can [...]

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G10 central banks have gone generally into quantitative easing mode, with the Bank of England most recently now squarely in such policies. Their announcement of GBP75bn in asset purchases, on top of their 50bp cut to 0.50%, actually disappointed markets looking for an even larger initial purchase, hitting GBP both on currency-debasement and low growth fears. Meanwhile, the BOC appears to be the next headed next toward; they have cut rates to 0.50% like the BOE, and stated they are “refining” their approach for credit and quantitative easing. Remain short GBP-USD and long USD-CAD in your FX portfolio, reflecting how [...]

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US will likely report the largest jobs decline in this cycle… Several February reports this week will likely show further declines in employment reflecting the dire economic situation shown by the latest business surveys. Market anticipates a new cyclical high in the unemployment rate of 8% in February, and expect it to move into double-digit territory in late 2010.
… as economic activity is falling around the globe This week we will see a number of indicators ranging from IP and GDP to a slew of PMI surveys that in all likelihood will reinforce our view that the global growth in 2009 [...]

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The Bank of Canada and the Swiss National Bank have their rate announcements next week. Market forecasts the SNB (Thursday) to cut its policy rate by 50bp, and the BoC (Tuesday) to lower its rate by 50bp, possibly 75bp. The highlights for US data will be the trade balance (Thursday), producer prices, retail sales and Michigan consumer sentiment (Friday). In the euro area, we get German IP (Monday), German trade and ZEW (Tuesday), and E15 labor costs and industrial production (Friday). Finally, in the UK, we get producer prices (Monday) industrial production and trade (Tuesday).

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