The Australian dollar and New Zealand dollar proved to be the strongest of the G10 currencies on Monday as demand for risky assets rose.
In fact, the high-yielders gained approximately 2 percent versus the US dollar and Japanese yen, in line with the nearly 5 percent surge in both the DJIA and S&P 500, along with broad increases in commodities and a plunge in the CBOE’s VIX Index - a key gauge of volatility - to 53 from a record closing high of 70 on Friday (the intraday high hit a whopping 81.17). These currencies are a natural candidate to rebound, as they were hit the hardest when the stock markets were plummeting and risk aversion was the dominant theme in the markets. This is one of the main reasons I chose “long AUD/USD” as my Analyst Pick this week, and I will likely maintain that bias through the end of the week. There is one “commodity dollar” that hasn’t rebounded: the Canadian dollar. The Loonie has floundered quite a bit, especially since Monday’s data was disappointing. Canadian international securities transactions unexpectedly fell negative for the second consecutive month, signaling waning foreign investment, while wholesale sales surprisingly plunged 1.5 percent. This figure is worth keeping in mind as it tends to be a good leading indicator for the headline retail sales report, which will be released on Wednesday. However, the big risk for the Canadian dollar comes on Tuesday when the Bank of Canada will announce their rate decision. The BOC is widely expected to cut rates by at least 25bps, though a Bloomberg News survey shows that 13 of the 24 economists polled are betting they will slash rates by 50bps to 2.00 percent. The confusion comes from the fact the Bank of Canada (BOC) just cut rates on October 8 in a coordinated effort with the Federal Reserve, European Central Bank, Bank of England, and Swiss National Bank, while Credit Suisse overnight index swaps show the markets pricing in a whopping 100bps worth of reductions during the next 12 months. However, looking at the BOC’s October 8 press release, there are indications that we could instead see a 25bp cut to 2.25 percent or no change, though the latter would most likely come along with a policy statement that suggests they will make monetary policy more accommodative going forward. Regardless, with a 50bp cut already priced in to the Loonie, a smaller-than-expected reduction could actually lead the Canadian dollar to rebound. In order to judge the long-term impact, though, traders should keep an eye on the bias reflected in the policy statement. Related Articles: Forex Market Weekly Outlook, 5 Key Events for the Forex Market This Week 10-19-08 Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.