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Despite the spread of risk aversion across the market, traders are still seeking sure yield with a low threat of volatility. The AUDCAD is the perfect match for these requirements. The Reserve Bank of Australia is one of the only central bank among the G10 that remains hawkish. In contrast, the Bank of Canada has just assumed a more aggressive approach to easing its own monetary policy with a 50 basis point rate cut this month.

Despite the spread of risk aversion across the market, traders are still seeking sure yield with a low threat of volatility. The AUDCAD is the perfect match for these requirements. The Reserve Bank of Australia is one of the only central bank among the G10 that remains hawkish. In contrast, the Bank of Canada has just assumed a more aggressive approach to easing its own monetary policy with a 50 basis point rate cut this month. This dichotomy in interest rate policy is rare in current market conditions. This fact alone has encouraged a substantive rally that has potential to turn into a dominant, long-term bull trend. What’s more, the presence of the Canadian dollar helps to act as a buffer to the potential of a major risk reversal. The loonie has a tendency to diverge from all of its major counterparts. This may prove useful for AUDCAD which may see its Aussie component hit by a potential sharp jump in risk aversion. However, our bullish trend has hit considerable resistance with a range high and a hedge is necessary.

Hedging Strategy of the Week

Short Term Bias: Bearish
Short Term Position: Short Against 0.9375 (range top), Target 0.9100 (rising trend)

The AUDCAD has provided a very consistent rising trend since the beginning of the year. However, recent price action has seen the pair hemmed in by a range that has left us to congestion. Considering the medium-term outlook for interest rates, we want to stay with the bullish trend and hedge any drawdowns that may result from the preponderance of the temporary range. Traders that are already in a profitable long position or are looking to enter at a good price should consider a hedge in a short AUDCAD trade with a stop above 0.9375/9400 and a limit near the rising trend seen below (around 0.9110 on 3/19). Should our hedge position reach its target, we will profit from a rebound to the upside; and if it is stopped out, our long-term position will benefit from the break and follow through momentum to the upside. The long-term position should have a stop as well, below 0.9050.

When should I use the hedging feature?

Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.

The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.

For more information on FXCM hedging strategies please visit http://www.fxcm.com/hedging.jsp

Written by John Kicklighter and Ilya Spivak, Currency Analysts for DailyFX.com

To contact John about this or other articles he has authored, you can email him at research@dailyfx.com

Ongoing political squabbles between the ruling LDP party and opposition DPJ party now in control of the upper house of the Diet, Japan’s legislative branch, have lead to a leadership vacuum at the Bank of Japan. The Prime Minister has had two nominees for the Governor position voted down by the upper house over the last week. Former BoJ Governor Fukui’s term has ended, however, and recently appointed Deputy Governor Masaaki Shirakawa was given a battlefield promotion to Acting Governor while the political wrangling continues.

The opposition DPJ has said they are concerned about the central bank’s independence and the perceived parachuting of senior government officials into other positions. Each of the two rejected candidates had held the same senior position at the Ministry of Finance and it was felt this would give the current government too much influence over monetary policy. However, the opposition’s two suggested nominees did not exactly break the mold, recommending the current head of the Asian Development Bank and a less senior official at the Ministry of Finance. This process reeks of political wrangling and attempts to force an election.

The first proposed candidate, current BoJ Deputy Governor Muto, seemed to be in the "normalization" camp - the belief exceptionally low rates lead to bubbles and are bad for medium-term economic prospects. Also, one of the former deputies whose term just ended was the sole dissenter last February when the BoJ raised rates to 0.50%. He has been replaced with the new Deputy (and acting Governor) Shirikawa who also appears to be in the normalizationist camp and would need further evidence to be convinced to cut rates. The second Gubernatorial candidate voted down, Tanami, on the other hand, is quoted as having said he would take "decisive action" to stem "downside risks" to growth.

Unfortunately, there is no indication as to who may be the next nominee or eventual Governor. If the nominee is closer to the Prime Minister or Ministry of Finance, there may be some bias towards the dovish spectrum. Japan is facing the highest public debt burden of any G-7 economy, and the administration would prefer a candidate more willing to work with the needed fiscal tightening to come. Also, there is some fear that as an Acting Governor, Shirikawa would not be invited to the G-7 meeting in April. In light of the global financial turmoil, this may increase political pressure to get an official nominee in place as we get closer to those meetings.

Our own economic forecasts see the Japanese economy contracting in the first quarter of 2008, but after that, being able to sustain real GDP growth in the range of 1.0-1.5% - not stellar, but certainly not suggesting a pressing need to cut interest rates from their already stimulative 0.50%. Moreover, while core consumer price inflation remains in marginally deflationary territory at -0.1% y/y, the headline figure is now running at 0.7% y/y. Even with some moderation expected in the second half of 2008, headline inflation should manage to stay in positive territory. Lastly, this recent acceleration in inflation has meant real interest rates in Japan have fallen by nearly a full 100 bps since September with no move from the BoJ. Therefore, we believe there is much less scope for interest rate cuts in the near term than the almost two-thirds probability priced in to markets right now. However, there is a tremendous amount of political risk associated with this given the uncertainty over who will ultimately be at the helm.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

The BoE voted 7-2 not to cut rates as John Gieve and eternal dove David Blanchflower voted for a rate cut.The majority said that the balance of risks didn’t warrant another cut, fearing that it would signal that inflation wasn’t a focus of their attention. The minority Gieve and Blanchflower, voted in favor of further reductions, on fears that current market turmoil increased the downside risks to the economy. Meanwhile, jobless claims fell for the 17th month, but less than expected. The pound fell on the news dropping 50 points, as speculation increases that the BoE will need to make further cuts, as the current market turmoil has only heighten since the BoE’s meeting. The MPC has cut rates 50 points since November, but an increasing deteriorating housing industry and global liquidity crunch may force them to abandon their inflation concerns..

DailyFX

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The dollar traded mixed following Tuesday’s US stock rally and 75 basis-point Fed rate cut. Two dissenting FOMC members and the 75-rather-than-100-basis-point cut may indicate that the Fed is getting closer to the end of its policy-easing cycle. The yen and Swiss franc fell on renewed carry-trade interest as stocks rallied on the Fed rate cut and better-than-expected earnings from Goldman Sachs and Lehman Brothers. Sterling was higher following higher-than-expected UK inflation while the Canadian dollar rose on rising Canadian core inflation. The Australian dollar was supported by renewed risk appetite.

Unable to reach a new all-time high today, the EUR/USD fell moderately following today’s Fed rate cut. The pair is still in a clear uptrend but extremely overbought. If the 1.55-area support is broken, the pair will likely test the 1.50-area support.

Financial and Economic News and Comments

US & Canada

• The Federal Open Market Committee voted 8-2 to cut its target for the federal funds rate to 2.25% from 3%. ‘Recent information indicates that the outlook for economic activity has weakened further. Financial markets remain under considerable stress, and the tightening of the credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,’ the Fed said in a statement accompanying the decision. ‘Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability,’ the Fed said.
• US producer price index for finished goods rose 0.3% m/m and 6.4% y/y in February after increasing 1.0% m/m in January, the Labor Department said. The core PPI index, which excludes food and energy items, rose 0.5% m/m and 2.4% y/y, its highest monthly increase since November 2006.
• US housing starts fell 0.6% m/m and 28.4% y/y to 1.065 million homes at an annual rate in February, from an upwardly revised 1.071 million pace in January, the Commerce Department said. Building permits fell alarger- than-expected 7.8% m/m to a 978,000 annual pace, the lowest level in more than 16 years, indicating further contraction in the housing sector. The current level is approaching levels where the housing had bottomed in the previous recessions (yellow shading); however, we think it is still too early for a rebound in the housing market.

• The NAHB index for sales of new, single-family homes held steady at 20 in March, the National Association of Home Builders reported. The gauge is based on a survey of builders who were asked about prospects for sales.
• Canada’s consumer prices rose 0.4% m/m and 1.8% y/y in February. Core inflation unexpectedly rose 0.5% m/m and 1.5% y/y in February.

Europe

• UK consumer price inflation rose 0.7% m/m and 2.5% y/y in February, the Office for National Statistics said. Excluding food, energy, alcohol and tobacco, inflation slowed to 1.2% y/y in February, the weakest pace since August 2006. Retail price inflation was 4.1% y/y in February, the same as January. Retail prices rose 0.8% m/m, the most since December 2006

Asia-Pacific

• The People’s Bank of China increased reserve requirement for banks by 0.5% to a record 15.5% of deposit after inflation accelerated to an 11-year high. The increase will take effect on March 25.
• The Japanese government nominated Koji Tanami, former vice finance minister, to replace Bank of Japan Governor Toshihiko Fukui, his term expires tomorrow. The opposition Democratic Party of Japan, which controls the upper house of Parliament, said it will reject Tanami to lead the BOJ, assuring a vacancy before the current governor’s term expires tomorrow

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.

• The FOMC cut the fed funds rate by 75 bps to 2.25%. This was largely in line with market expectations, though was less than our forecast for a 100 bps rate cut
• The discount rate was also cut by 75 bps to 2.5%
• There were two dissenters at this meeting, which is unusually high
• The FOMC signals further rate cuts in its communiqué

The FOMC cut both the fed funds and the discount rate by 75 bps today. The federal funds rate is now at 2.25%, while the discount rate is now at 2.5%, preserving the 25bps spread between the two. The statement continued to take on a dovish tone citing that "economic activity has weakened further." The committee noted that consumer spending and labour markets have softened. In addition, financial markets remain under pressure.

It was not a unanimous decision. Dallas Fed President Fisher and Philadelphia Fed Plosser were the two dissenters at this meeting, preferring to take less aggressive action at this meeting. This is the first time there have been two dissenters since the September 2002 meeting. President Fisher, in particular, remains one of the FOMC’s notably hawks and with the Fed’s statement retaining a view that inflation remains elevated, there are clearly indications that inflation is not off the Fed’s radar. The FOMC did note that "inflation has been elevated and some indicators of inflation expectations have risen." So it is not that the dissenters were against rate cuts, per se, but that they were against rate cuts of this size.

The tone of the statement, on balance, suggested that more rate cuts are in the pipeline. It is interesting that the Committee noted that it will "act in a timely manner as needed to promote sustainable economic growth and price stability." This is a contrast to the last statement when the FOMC noted that it will "continue to assess the effects of financial and other developments on economic prospects." In combination with the statement that "downside risks to growth remain" it points to further rate cuts.

Given that credit markets remain in a fundamental paralysis, and the economy continues to unwind, we are of the view that the Fed will remain in an easing cycle for the next few meetings. The key issue is to first unclog the credit markets and get the wheels turning again. The economy will naturally have to reach a bottom, and with sufficient stimulus, the Fed can engineer a modestly softer landing than otherwise. As such, we expect considerable further easing in the near term.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

Release Date: March 18, 2008

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

Source