Forex Investment and Currency Trading

USD enhanced yesterday’s gains overnight with DXY pushing up through 77.0 for the first time this year to reach a high of 77.252. Helping the USD bid were falling oil and gold prices with the black stuff dipping 1.7% and gold losing 3.2%, falling through USD800/ozt for the first time in 2008. The price action in gold extended across the precious metals with platinum down 6.5%, palladium losing 6.6%, and silver diving 9.2%. Asian equities followed the US ’ lead overnight as the Nikkei rallied 0.48%. Europe had no intention of bucking this trend with DAX pushing 1.06% higher, CAC rallying 1.40%, and the FTSE gaining 0.58%.

Today, the US data focus will be on the University of Michigan ’s survey of consumer confidence sentiment which is expected to have edged up from 61.2 to 62.0. NY empire manufacturing is also scheduled for release today and is expected to have moderated to -4.2   in August from -4.9 in July. Industrial production and capacity utilisation data are expected by the market at 0.0% and 79.8% respectively, though market sees some downside risk to both these data. Also of interest will be the Fed’s Evans speaking on the outlook for the US economy.

EUR/USD continued to fall overnight reaching a low of 1.4699 during a data free session with much of Europe shut for Assumption day. A bearish development is the slowing growth in FX reserves of Asian central banks. Asia (ex. China ) outright FX reserves have fallen by about US$70bn since April, and the rate of change has slowed from 18.1%y/y to 11.1%y/y. China has yet to release data for July, but data to June also show a slowing in the rate of reserve growth from 41%y/y to 35.7%y/y as of June. Should this trend in Asian FX reserve growth be sustained, it is reasonable to assume Asian central bank supply of USDs will be reduced further. With EUR previously the biggest beneficiary of portfolio rebalancing, sustained slowdown in reserve growth will weigh on EUR.

USD/CAD rallied up to a high of 1.0694 overnight, before pulling back somewhat to around the 1.0660 level. The data for June Canadian manufacturing shipments is expected. Manufacturing shipments have been helped over the last two months by strong increases in oil prices that continued unabated in June. Also expected to provide support to shipments was the ending of a strike at a key auto parts producer in late May. While the shipments data may provide some support to the CAD, there is good support now at 1.0566, and resistance remains in the 1.0720/25 region.

The Antipodeans were weaker overnight with AUD falling in line with commodity price action and NZD drifting 0.8% lower. In New Zealand , headline June retail sales rose by 0.9%m/m (cons. flat) following a 1.2% drop in the previous month. More importantly, Q2 retail sales ex-inflation fell by 1.5%q/q (cons. -1.8%. This was the second largest quarterly decline on record and the first back-to-back quarterly decline since the ‘97/’98 New Zealand recession. Pressure from close to double digit mortgage rates, rising fuel and food prices, falling house prices and a waning labour market are weighing on the Kiwi consumer. These data remain consistent with another negative GDP print with the RBNZ likely to revise down its growth forecasts in the upcoming September MPS.

USD was mixed overnight in markets dominated by sharp falls in AUD and NZD, particularly against JPY. Although London trade has seen NZD in particular rebound against USD, the JPY crosses remain under pressure. The move lower in AUD/JPY was independent of news flow, data in Australia generally being better than expected and Japan’s Q2 GDP release in line with poor expectations (-0.6% q/q). Speculation that the 500pt fall in AUD/JPY and 300pt fall in NZD/JPY over last week is a result of liquidation of margin trading positions is so far not supported by available data. TFX positioning data for Tuesday’s close show net long positions in both AUD/JPY and NZD/JPY only marginally below record highs. As such, the threat of forced liquidation continues to hang over these currency pairs. GBP is independently weak after the BoE Inflation Report clearly left room for lower UK rates (see below).

Today, US July retail sales are important in that they are the first “hard” consumer data for Q3 and will give some indication of how consumer spending is holding up as the impact of the tax rebates fades. Market sees downside risk to the key ex-autos reading (0.4% m/m; consensus 0.6%), which may buy some temporary relief for EUR/USD.

GBP/USD fell to a low of 1.8835. The BoE Inflation Report had a much softer tone than generally expected. Specifically, the central inflation projections now show headline CPI below target on a two year horizon, effectively signalling an easing bias. The Bank also revised down the growth projection so that the next year sees GDP broadly flat. Particularly in the light of the poor CPI data yesterday, markets had expected the BoE to talk down the risk of rate cuts, but in the event the Inflation Report does the opposite.

USD/CAD traded in a narrow range overnight and the absence of key data or events in Canada today will leave USD direction as the main driver of moves today.

EUR/NOK: All 20 economists surveyed by Bloomberg expect Norges Bank to leave rates unchanged at 5.75% today and this morning’s June retail sales (consensus 0.2% m/m) are unlikely to change that assessment. Norges Bank hiked the policy rate 25bp at the last meeting June and its guidance a the time was that “the key policy rate should be in the interval 5¼ - 6¼ per cent in the period to the publication of the next Report on 29 October, unless the Norwegian economy is exposed to major shocks”. Subsequent activity data have remained firm and core CPI has been higher than expected, though it is unlikely this news constitutes a “major shock”. As such, there is the consensus view of no change in rates. The risk remains, however, that the short accompanying statement guides expectations toward a further hike before year-end. Even after Monday’s poor CPI data. NOK FRAs discount rates being at a peak and such an outcome would be NOK-positive.

AUD/USD: Consumer confidence bounced back in August following a collapse in the first half of this year. The wage price index rose by 1.2% in Q2 (Consensus +1.0%), the largest quarterly increase in the survey’s history, taking the y/y rate to 4.2%

USD was largely unchanged overnight as the modest boost seen during the Asian session was reversed as London opened. Of note overnight was price action in commodities. Gold added to yesterday’s losses falling a further 2% down to around USD810 as the precious metal looks set to test the USD800 barrier for the first time this year. While crude oil prices also followed a downward pat, dropping 2% down to around USD113/bl. In terms of data, the key US release today will be trade balance data for June, with the US trade deficit forecast to rise from US$59.8bn to US$62.0bn.

EUR/USD initially fell to a low of 1.4816 before news hit the wires that the Russian President, Dmitry Medvedev, had ordered a halt to the military operation in Georgia . This resulted in a EUR bid that returned the pair to levels seen at around the time of yesterday’s US close.

GBP: Data released early in the session had a minimal impact on the currency as an improvement in the RICS house price balance which rose from -86.9 in June to -83.9 in July (cons. -90), was balanced by weak BRC retail sales data which fell from 2.1% to 1.7% in July, with same store sales dropping from -0.4% to -0.9%. However, the release of firm July CPI and RPI data later in the session weighed heavily on GBP, highlighting the comments that the relationship between GBP price action and rates expectations has broken down. July CPI printed above expectations at 0.0%m/m, 4.4%y/y (cons. -0.2%, 4.2%), with the yearly rate representing a new record high since the series began in Jan ’97. Worringly for the BoE, the rise in price pressures were broad-based in nature. The RPI measure of inflation was also firmer than expected at -0.1%m/m, 5.0%y/y (cons. -0.3%, 4.9%).

CAD was moderately better offered overnight ahead of today’s Canadian trade data. If this data is given downside surprise will likely see USD/CAD attempt to break through strong resistance at 1.079.

NZD was softer against USD overnight but outperformed Australia on the cross. REINZ house price data were mixed. Prices registered 0%m/m, -1.4%y/y, while sales printed at 4.3%m/m, -32.6%y/y, the first rise in monthly sales since February, though anecdotal evidence would suggest a proportion of this was due to distressed mortgage sales. The report also showed the median number of days taken to sell a house rose from 53 in June to 58 in July.

AUD/USD fell for the 11th consecutive day as the pair slumped to a low of 0.8704 overnight. This marks a decline of more than 11% since AUD peaked less than a month ago on July 15th. The July NAB survey showed business confidence steady at a 6 ½ year-low of -9, while business conditions fell from 0 in June to -5 in July, a level not seen since 2001, with the largest deterioration observed in business profitability. Capacity utilisation fell 0.9pts to 81.6%.  The survey suggests a slowing in GDP growth which is consistent with the RBA’s Q4 forecast of 2%y/y/.