Currency Trading Update 12/08/08

The unexpected rebound in equities following a Non-farm payroll report that showed the U.S. lost over half a million jobs in November caught our leaders on the wrong side of the risk trade. The entire top five saw their positions shrink with contestant 2 free falling to 12th due to two large short GBP/JPY trades. Contestant 1 maintained the top position despite seeing their portfolio drop to $352,610 from $396,723. Contestant 4 was a new entrant to the leader board as they were able to execute a long GBP/JPY trade and catch the bullish momentum offsetting previous loses. Although, their balance remained virtually unchanged, they benefitted from the losses of the contestants above. The EUR/USD continues to be the most popular pair to trade with 29% of contestants taking a position. Euro longs would benefit from the bout of risk appetite and the unexpected bullish reaction from the ECB rate cut making it one of the most profitable trades along with shorting the Yen crosses.

After a quiet start to the week we will see event risk pick up with U.K. manufacturing, German ZEW, U.S. pending home sales and a rate decision from the Bank of Canada.

Asian Trading Session
12/08, 18:50 ET
Japanese GDP (3Q F) – The final reading for 3Q Japanese GDP will cross the wires during Asian trading and economists are expecting a revision lower to -0.2% from -0.1%. The annualized reading is also expected to show that the current recession is deeper than expected with a 0.9% decline in growth revised lower from the preliminary reading of -0.4%. The Yen may already be on the run due to the current bout of risk appetite and the dour data could add to the weakness.

European Trading Session
12/09, 04:30 ET
U.K. Industrial Production (Nov) – Industrial production in the U.K. is expected to show zero or negative growth for the eight straight month according to a Bloomberg survey which is predicting a 0.5% decline in November. The Year-over-year figures are expected to decline by 3.2% as the credit crisis has sapped global demand. The fact that the recent weakness of the Pound hasn’t made British goods more attractive will lower the outlook for future growth. The BoE may be forced to continue their aggressive easing policy which will remain a weighing factor for the Sterling.

12/09, 05:00 ET
German ZEW Survey (DEC) – Last month’s German investor confidence unexpectedly rose on the back of declining oil prices and rate reductions by the major central banks. However, the declining outlook for the global economy is expected to dampen optimism in December. However, we could see the recent deeper then expected ECB rate cut raise hopes which could lead to a better than expected print. The indicator can at times be market moving, but doesn’t garner the same attention as the IFO reading latter in the month. A reverse in confidence could weigh on the Euro reversing its recent gains.

US Trading Session
12/09, 09:00 ET
Bank of Canada Rate Decision – The BoC is expected to cut their benchmark rate by 50 bps as the downside risks to the economy continue to increase. The raw material rich country continues to be hurt by falling commodity prices and declining exports from its main trading partner the U.S. Considering the aggressive easing that we saw from the European central banks, a deeper than expected cut is a possibility. A rate reduction is significant event risk for the currency and we should see the “loonie” weaken due to it. However, an expected cut and a signal from Governor Carney that the current easing policy is ending may spark bullish sentiment.

12/09 10:00
Pending Home Sales (OCT) – The housing market is expected to continue showing weakness as pending home sales are forecasted to drop by 3.0% following a 4.6% decline the month prior. Tight credit markets continue to separate sellers from potential buyers and until the housing markets bottoms, we may see further weakness in the U.S. economy. Therefore, a decline in home sales could fuel risk aversion and lead to dollar strength. However, fundamentally the dour data should lead to dollar weakness but the greenback hasn’t traded on that basis since the credit crisis heightened but that doesn’t preclude a return to that correlation.