Risk Currencies Seeing Some Action in Forex Trading

Even though U.S. markets are closed for the day, there are still things happening in forex trading. Indeed, the FX market is a global market, so there is plenty going on -- albeit in a subdued manner.

This morning, risk currencies seem to be doing well. The news that Japan is doing better than expected is helping some risk currencies that are putting off worries about China's efforts to limit growth. Indeed, with Chinese markets closed this week in observance of the New Year, some risk currencies are taking the chance to advance.

Forex Trading Blog reports on what is happening with different risk currencies right now:

Aussie (AUD):  The Aussie is up on risk-taking and the China growth story in addition to reduced fears out of the euro zone.  In addition, news out of Japan that the economy grew more than expected is good for the region’s recovery prospects.

Kiwi (NZD): Like the Aussie, the Kiwi is benefitting from improved risk outlooks primarily from Japan.  The Kiwi has been one of the worst performers vs. the US dollar over the last month as risk appetite decreased due to the Greek situation.

Loonie (CAD):  The Canadian dollar is higher this morning as risk themes are playing out and a boost from the Olympics which started this weekend.   Investors gave the Loonie a vote of confidence as Bank of Canada Governor Mark Carney spoke this weekend about maintaining fiscal prudence and highlighting the fact the Canada has the lowest debt-to-GDP ratio of all of the G-7 countries.

Britain Struggles with Employment

Today, employment data was released in Britain, showing continued deterioration in the situation. The sterling is falling in forex trading as a result, and concerns continue that Britain will be very slow to recovery from the global financial crisis.

GFT's Boris Schlossberg reports in FX360 on the labor conditions in Britain:

Labor conditions in the UK economy remain challenging as the country recovers from its worst recession in the post war period. The UK economy returned to positive growth only last quarter – the last of the industrialized nations to do so, and even then, the country’s GDP posted only a meager 0.1% gain. The dour employment news suggests that growth may remain tepid for the foreseeable future, leaving the BOE stationary for 2010 and perhaps beyond.

Until things improve for the British economy, the U.K. pound is likely to struggle in currency trading, no matter how much risk appetite is available in the rest of the world.

U.S. Dollar Gets Boost in Forex Trading from Fed Discount Rate Hike

The U.S. dollar got quite the boost in overnight forex trading after the Federal Reserve announced that it is hiking the discount rate by 25 basis points. By now, things have calmed down a bit, with the euro stabilizing and taking back its losses, but the U.K. pound is still struggling in currency trading against the greenback, and the dollar is up against the Japanese yen.

There had been some speculation before that the Fed could hike the discount rate as part of an economic stimulus exit strategy designed to limit inflation, but almost no one expected such a monetary policy move to come so soon.

GFT's Kathy Lien offers a look in FX360 at the difference between the discount rate and the Fed Funds rate:

First, it is important to realize that the discount rate is different from the Federal Funds or overnight lending rate. The discount rate is the rate charged to commercial banks and other depository institutions on loans that they receive from the Fed while the Fed funds rate is the rate that banks charge each other for loans. By hiking the discount rate and not the Fed funds rate, the central bank has in essence, widened the spread. The Fed also shortened the terms of primary loans to overnight from 90 days.

It will be interesting to see whether this move works, and whether banks start lending to each other. And, of course, it remains to be seen whether Ben Bernanke and the Fed got the timing right.