Tuesday, December 18, 2007

Bob's Currency Focus - 14:00 GMT

The pair is trading within a narrow range Tuesday as the dollar’s sharp advance over the past 3 days stalled. US economic data Monday was mixed although a sizeable jump in international capital inflows reported for October was a big positive for the greenback, after 2 months of negative inflows in August and September. European industrial activity slowed again in December according to preliminary data released Monday and increasing concerns over growth in the single currency zone is certainly beginning to nullify the hawkish rhetoric from the ECB as we move to close out the year. In data just released Tuesday, US housing starts resumed their decline in November although the 3.7% fall on the month was lower than the 5.7% which was forecast and October’s rise was revised to +4.2% from +3.0%. Building permits fell 1.5% in November, exactly in line with projections. The eurozone recorded a trade surplus of €6.1B in October, twice what was forecast and much higher than the €3.7B recorded for September. Trading volumes are thinning out as we move towards the big holiday period and technical traders may well be the kingpins through to the end of the year. Fundamentals will take a back seat as the major trading desks wind down and square their positions for the year end. We are now hemmed into a 1.4330 to 1.4452 price range and whichever side manages a break outside this level may well take ownership of price direction over the coming days. I favour the euro purely on the fundamentals but am not entering the market with any great confidence while liquidity is tightening. Strategy: Tentative buy on dips towards 1.4350 with price targets of 1.4420 and 1.4445. Trade lightly in this market!

November inflation data was a major disappointment for any traders hoping for a sterling rebound. The pound gained Monday primarily on the assumption November CPI data would come in higher than forecast. It was a fair assumption given the upside surprises already seen in the US and eurozone inflation reports for the same month. In fact not only did the headline inflation rate remain steady at 2.15 (against a forecast of 2.2%) but the core rate actually narrowed to 1.4% (1.6% forecast) from 1.5% in October. Analysts may argue the retail price index, which grew to 4.3% from 4.2%, is a truer reflection of UK domestic inflation, but the fact is today’s report gives the Bank of England further wriggle room to reduce UK interest rates and a cut as early as January can’t be ruled out. All eyes will now be on Wednesday’s Bank of England minutes to ascertain how many members of the MPC voted for the cut in early December, which will help determine if the mood on the Committee is strong enough to see interest rates fall more aggressively than originally thought possible. Sterling could sell off dramatically tomorrow if the Bank of England minutes reveal a decisive 7-2 or greater majority in favour of December’s rate cut. This is no time to be buying the pound even if technical corrections and thin trading conditions see it rally. The outlook is grim for sterling both medium term and long term and if cable breaks convincingly below the 2 dollar mark, there may be no way back. The 2 dollar line could fall after tomorrow’s Bank of England minutes although a slender vote count of 5-4 should work in sterling’s favour, at least in the short-term. The euro is a good buy against the pound on any dips towards 0.71, while cable is a good sell on prices above 2.03. Strategy: Buy the euro against the pound at prices below 0.7120 with target prices of 0.7175 and 0.72. Sell cable on rallies close to 2.03 with price targets of 2.0150, 2.0090 and 1.9950.

The yen continues to struggle, despite broad underlying negative sentiment across global equity markets, and with risk tolerance levels on the rise Tuesday as stocks rebound, it may slip further later today. It is unusual to see the Japanese currency while risk aversion levels are running high, although this could have more to do with squaring of positions before the year end rather than anything more fundamental. Traders don’t wish to hold low-yielding currencies over the holiday period if they can help it. The chief hope for the Japanese currency is if stock markets continue to under-perform all the way up to the end of the week, something which should ward off any further wholesale sell-off of the currency. In economic data, department store sales bounced back in November recording a rise of 0.9%, following 1.4% decline in October. End of year market conditions do not favour the yen the further into the week we go and it is a risky buy, although it could still benefit from any further sharp reversals in stock markets. Strategy: Park the yen (do not trade) until after the holiday period.

The loonie had one of its best days in recent months Monday as the Canadian currency launched a bewildering counterattack, culminating in sharp gains across the board. USD/CAD came off almost 2 cents from its mid-session high of 2.0226 to dramatically collapse to 2.0030, before a close of 2.0053. Against the euro, the loonie made even more striking gains as that pair traded across a 3 cent range. The rally was baffling in that Canadian economic data Monday was worse than bad (capital inflows were a record -$24.32 Billion in October) and commodity prices retreated. I can only assume the currency rally was owing to some major repatriation of funds into Canada because from a fundamental and technical perspective, the loonie should have weakened against the greenback, given the data and because the greenback broke through technical resistance Friday. We have seen a similar pattern Tuesday, with the greenback rising to 1.0140 after the release of Canada’s inflation data, only for the loonie to push the pair back to below 1.0060 within 20 minutes. If we focus on the economic data, it makes sobering reading for loonie bulls because November’s core inflation rate at 1.6% is now at a 17 month low and opens the door for a further Bank of Canada rate cut, possibly as early as January. In addition Canada’s Leading Indicator for November shows the economy didn’t grow at all in the month of November (reported flat) after a marginal 0.1% rise in October. This does not augur well for quarter 4 GDP. After 2 days of such negative data, one would normally expect the loonie to have retreated sharply but thus far this has not happened. Rather than scratch our heads too much, we should put it down to holiday madness and use the data and the loonie’s distorted current value as an opportunity to sell the currency. Strategy: short-term – buy USD/CAD at any price close to 1.0050 (S/L just below parity) with upside targets of 1.0130, 1.0180 and 1.0220. The euro is good value at any price close to 1.4450 on EUR/CAD and our limit targets here are 1.46 and 1.47. Long-run – maintain long USD/CAD positions with S/L at 0.9750 and upside target of 1.05.

Bob B - Dec 18

Sunday, December 16, 2007

Bob's Currency Focus - Sun Dec 16

What a remarkable couple of days Thursday and Friday for the greenback, gaining 3 cents against the single currency, 2 cents of which came on the final day of the week. There is a combination of reasons for the move, principal among them being US inflation numbers for November which printed higher than expected and which suggests the Fed is more limited in its ability to aggressively ease rates in the coming months. Headline consumer price inflation has hit 4.3%, the highest in 2 years, with the core rate rising to 2.3%, the second monthly rise in the key annualised rate which is now inching further away from the Fed’s 1-2% comfort zone. Other US economic data last week was much stronger than expected with Retail Sales in November rising 1.2%, the highest in 6 months, and Industrial Production jumping 0.3% after falling half a percentage point in October. The consumer spending data in particular means the dire forecasts for quarter 4 GDP in the US are probably greatly exaggerated. Meanwhile the euro performed worse than most currencies over the past few days so we have also witnessed a broader correction in the single currency, further explaining the crash against the greenback. There will probably be a reassessment of sentiment for the US currency as we move closer to Christmas and a failure by the euro to quickly recapture the 1.45 price handle could mean a further slippage to 1.4350 and result in an eventual retreat all the way back to 1.3850. The underlying fundamentals for the euro have not changed however and with the Fed likely to remain under pressure to cut rates while the ECB remains on hold, the medium term outlook still looks to favour the euro. One important observation from Friday is that the dollar was the chief beneficiary from a rise in risk aversion levels as stock markets came under pressure. The yen, which is generally the chief benefactor during bouts of risk aversion, was distracted Friday following a weak domestic economic report (quarterly Bank of Japan Tankan Survey) but the Japanese currency could resume its role as main beneficiary if risk aversion levels remain elevated into this week. This might put an end to the dollar’s steep ascent. Strategy: Wait.

Cable plunged Friday and the pound lost almost 3 cents on the day. Cable closed the week below 2.0180 and the dollar is now within striking distance of the psychologically important 2 dollar line for the first time since August. There was no economic data out of the UK Friday and it was broader dollar strength that proved the pound’s undoing. Against this the UK currency did manage to appreciate against the euro, pushing the single currency back below 0.7150. November’s consumer price inflation is out Tuesday and if it prints much higher than expected, the pound might temporarily be able to push the euro back to 0.71. I still do not like the outlook for sterling and prefer to sell the currency after failed rallies, where a better entry price is available. Strategy: Wait until better price available on cable. Sell the pound against the Swiss franc on prices close to 2.33 with a target price of 2.30.

The yen declined further against the dollar Friday as the yen was punished for a poor quarterly Tankan survey report with big manufacturing and non-manufacturing firms in Japan returning a pessimistic outlook for the first quarter of 2008. This being said, the yen is never one to respond in a meaningful way to its own domestic data and with some economists downgrading the prospects for the extent of US rate cuts following the release of a robust set of inflation numbers for November, the dollar extended its gains through to the week’s close. US stock markets closed significantly down Friday and with the high yielders all retreating sharply against the greenback, it is something of a surprise the yen did not benefit more and facing into elevated risk aversion levels Monday, the dollar offers no value at prices close to Y113.50 and we could in fact witness a sharp retreat towards Y112. With the euro under broader pressure, the yen should be able to push the single currency back towards 162, if stock markets continue to struggle Monday. Strategy: sell USD/JPY at prices close to 113.50 with initial target of 112.50. Sell EUR/JPY at prices above Y163.50 with target of Y162. Monitor stock market performance closely.

The loonie had a very good day Friday, coming off a 3 month low against the greenback to close 0.3% higher, while the Canadian currency also made strong gains against all the European currencies and the Aussie dollar. The loonie jumped on the coattails of the greenback Friday as the North American currencies rallied strongly. The parity line however looks to be behind USD/CAD and we could see this pair go significantly higher this week as we move into the holiday period and more positions are closed out. There are still far more loonie longs than shorts in the market, so there remains the risk of further sharp depreciation for the loonie in the near-term. This Tuesday sees the release of November’s inflation data and if it is returned soft, the loonie will face a further sell-off because benign inflation makes it easier for the Bank of Canada to further cut rates in early 2008. Expect the loonie to give back most of Friday’s gains against the US dollar on Monday. Strategy: Buy USD/CAD on price drifts towards 1.0120, setting an initial limit target of 1.0220 with 1.0270 next. Positional traders should remain long on USD/CAD, keeping the target price of 1.05. We will look to move up our S/L from 0.9760 once price has been established above 1.02.

Bob B - Dec 16

Friday, December 14, 2007

Bob and Ted are travelling and the next article will appear over this weekend.

Bob & Ted

Wednesday, December 12, 2007

Bob's Currency Focus - 15:00 GMT

The dollar rebounded after the FOMC rate announcement, having initially softened. The euro was pushed back to 1.4640 but rallied from there this morning to once again sail over the 1.47 price line, before settling around the 1.4680 price mark. While the FOMC statement was not greeted with euphoria by stock markets, the Fed did leave open the possibility of further rate cuts and this cannot be seen as dollar positive. An element of risk aversion overnight has helped support the dollar but the currency might struggle once the full impact of the statement seeps through. The euro on the other hand has lost a little conviction in recent days and Tuesday’s downbeat Zew Business Survey will not have helped. However in data released today, Industrial Production in the eurozone rose by twice the level forecast in October while employment for the 13 nations that make up the single currency rose by 0.3% in the third quarter. Outside of the Zew survey, Data has been largely positive this week for the euro. The currency pair remains hemmed into a range between 1.46 and 1.4770 and until one side or the other convincingly breaks outside this band, we could see the pair move back and forth. Coming to print we have just witnessed a whiplash move from 1.4670 to 1.4750 and back to 1.4680 within a half an hour as the market reacted to a report from the Fed that it is teaming up with other major Central Banks to help alleviate the liquidity crisis. The pair currently trade at 1.4686 and I’m inclined to stick to the same track as yesterday. Strategy: Buy euro on dips towards 1.46, with initial target prices of 1.4720 and 1.4740. If the pair moves above 1.4770 shift the target price to 1.4840. Markets are thinning and becoming more volatile the further into December we go and Stop losses are being eaten up by rapid market fluctuations, so ensure stop losses are strategically employed or else avoid the market altogether.

Cable is going through one of those incredibly volatile periods right now and already today the pair has traded across a massive 2.25 cent price range. It rarely stays in the one direction for long and it is horrendously dangerous to trade for if you are using tight stop losses. I still prefer the downside and the pound’s rapid upside rallies of late are more to do with it being carried on the crest of a desperate-like carry wave which has reached lunatic proportions today, rather than any new-found fundamental strength behind the UK currency. UK employment is holding up well according to a report issued today and the jobless number fell by more than expected in November, although wage inflation was reported softer than expected which in essence means today’s employment report is not an obstacle for the Bank of England in deciding whether or not to cut interest rates again early in 2008. The euro quickly rose to 0.72 Tuesday having retreated back towards 0.7150 so we called that one right yesterday. Cable also fell from above 2.05 to our initial target of 2.0360. We recommend much of the same today although we move up our targets slightly from yesterday, to reflect the wider range the pair is trading in. Strategy: Sell cable on prices above or close to 2.05 with initial target of 2.0380, followed by 2.0330. Buy the euro on any dips towards 0.7150 with target of 0.7206. Sterling will also come under pressure against the yen and Swiss franc if stock markets shift into reverse gear, so keep an eye on Wall Street.

The yen has taken a battering in the past few hours as risk tolerance levels have been energised by a recovery in stock markets and nobody appears willing to miss the party. The dollar had slipped to 110.50 Tuesday after Wall Street reacted badly to the Fed’s latest rate announcement, but since then the dollar has risen to 112.46 as the silly season well and truly lands on the currency markets. To be fair, a rate cut was never going to prove to be a positive for the Japanese currency because it was sure to attract plenty of buying interest for the high-yielding currencies, with the yen preferred as the funding currency. Last night can be called a reactionary blip which triggered a sudden bout of risk aversion and gave the yen a monetary lift, which when we scrutinise it, was always only going to be like a temporary loan. The fundamentals have not changed though and the rather gloomy outlook for the US and global economies is the same, so it is only a matter of time before risk tolerance levels abate once again and the yen comes into its own. The US dollar may reach Y113.50 in the short-term but it will surely struggle beyond this level and the euro does not offer any value above Y165. Japan’s current account remains in a healthy state and October’s surplus showed an improvement of almost 50% on the same month last year. The longer run trend for USD/JPY is down but because of the interest cost in holding the yen long-term, it is not worth entering the market until we are sure the current correction upwards is complete. But there is good value in entering the market short-term during bouts of heightened risk aversion like we saw yesterday. This requires close monitoring of stock markets so it is fruitless to offer a direct strategy here.

USD/CAD is one of the few currency pairs which had shown a degree of stability over the past 24 hours and the pair’s price is virtually unchanged from the one it was trading at this time Tuesday. The US dollar firmly held its lines yesterday and today and the loonie may now be quickly running out of attempts to reclaim the coveted parity handle. Canada’s Trade Balance for October was slightly better than expected but the worrying fact from the report is that exports again fell during the month, this time by 0.5%. In fact the only reason the trade surplus increased at all is because imports fell by 2% during the same period, which in itself is hardly encouraging because it points to reduced consumption within the domestic economy. 1.0214 is the key barrier to the upside, but with resurgent oil prices offering temporary support, the loonie should be able to protect that level in the short run. Friday’s manufacturing and productivity data, if it prints on the soft side, could be a risk for the loonie. Strategy: Short-term - Buy USD/CAD on any dips to around 1.0050 with upside price targets of 1.0120 and 1.0160. Shift upside targets to 1.0220, if 1.0160 is convincingly broken. Long-term – Hold USD/CAD long positions with S/L at 0.9760 and target price of 1.05.

Bob B - Dec 12

FOMC walks on eggshells

Has the Fed lost the plot? If one was to judge the reaction on Wall Street, where the major averages plunged by more than 2% each Wednesday, it would seem so. But then perhaps it is greedy investors and those TV pundits that beam from our screens who have essentially lost the plot and maybe the Fed is merely doing its job and trying to keep us all on the straight and narrow? A 50 basis points cut on the Fed Funds rate was never on the cards yesterday and although one Fed member believed it appropriate (Eric Rosengren voted for a 0.5% cut in the Fed Funds rate), the fact any cut was delivered at all demonstrated the Fed had essentially completed a 360 degree about-turn in the past 2 weeks. If the Fed is to be criticised one can point to the lack of creativity in not doing more with the discount rate. A 50 basis point cut in the discount rate would surely have helped ease the tightening which has intensified in recent weeks in credit markets. The fact the Fed came out late last night with a statement indicating it is prepared to do more to ease the liquidity problem is an admission of maybe not having done enough earlier and rather than help, it undermines the Fed’s credibility.

The Fed however could not have done more with the Fed Funds rate and one has to remember the benchmark rate has now fallen 1% in the past 3 months, something few would have envisioned back in September. The Fed’s December statement was more neutral than the October statement, but still places emphasis on inflation ‘Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.” Many of our less-initiated TV-pundit friends baulked at this sentence, believing the Fed should instead have told the market the door was left open for more aggressive rate cuts and eh…surging stock prices. What these pundits forget, or rather choose to ignore, is that US headline inflation which was running at 3.5% in October is expected to print at over 4% in November when the data is released this Friday. US core inflation is going to rise early next year, possibly sharply, and indeed were the Fed to have followed the example of the ECB, there would not only be no rate cuts, but no prospect of any, while inflation is such a significant threat, even if this may compromise growth prospects. The problem for the Fed is the Committee allows itself to be bullied by financial markets moreover any other major Central Bank and rather than allow Wall Street taste the downside reality of an economic cycle, the Fed rides in and attempts to put off the inevitable. This rather doomed strategy will soon see the Fed run out of basis points and it could mean the Fed pushes the US economy into a sustained period of stagflation, from believe it or not, as early as the first quarter of 2008 (are we to take headline inflation as the measure we might be there already).

So in many senses the Fed could certainly not have gone further on the Fed Funds rate and there is a very strong inflation argument to say they should not have moved at all Tuesday. We have to remember the last print of US growth was the whopping 4.9% recorded in quarter 3. The latest inflation figure will be released this Friday with a strong possibility the headline number will print above 4% while the core number may tick up from 2.2%. Core inflation is going to rise early next year because the year on year comparisons will no longer prove favourable for the measure. Growth is expected to slow to 2.5% in quarter 4 and may even slow further in quarter one of 2008. The Fed is walking on eggshells and there will be a lot of hard thinking for FOMC members between now and the end of January, when the Committee is scheduled to meet again.

Ted B - Dec 12

Tuesday, December 11, 2007

Bob's Currency Focus - 13:00 GMT

Trading is tentative Tuesday ahead of the FOMC rate announcement with traders unsure of direction. The euro rose to 1.4742 early this morning only to decline to 1.4656, on the back of another disappointing ZEW business survey out of the euro zone. The German think tank’s expectations index for December dropped to minus 37.2 from minus 32.5 a month previous. The current conditions index also fell, to 63.5 from 70.0 in November, meaning German businesses are more pessimistic both about current activity and about the growth outlook for 2008. The euro has grown adept at shaking off poor economic data of late and with ECB council members issuing more hawkish rhetoric Monday, the euro is likely to be well bid on any further dips. We could witness significant volatility immediately after the Fed statement is released this evening and with a 0.25% cut already fully priced in, direction will likely be determined by the content of the Fed’s statement. A 0.25% cut accompanied by cautious language underlying upside risks to inflation would support the dollar, while a 0.25% cut with a shift in bias towards policy easing would tend to damage the dollar, as this would worsen the dollar’s rate differential outlook against other major currencies for the coming quarter. If the Fed decides to be aggressive and cuts the Fed funds rate by 0.5% like it did back in October, the dollar will probably sink. It could take 30 to 60 minutes for the true impact to be established and any traders entering the market and trading the news immediately after the release are playing with fire. I expect to see the euro recover today’s losses and appreciate ahead of the announcement, but what happens thereafter is anyone’s guess. Strategy: Buy euro on any dips towards 1.4650 prior to the announcement and exit the market before the FOMC release. We will analyse the statement tomorrow and see what it means for the dollar going forward.

Cable has rallied for a fourth consecutive day Tuesday and the pound is currently trading around the 2.05 price level. Sterling is essentially trading well above its station and the currency is getting a false lift on the back of a resurgent carry trade, back in vogue thanks to expectations for a Fed interest rate cut today. The pound has risen against every major currency today, rising 0.5% against the euro, 0.26% against the dollar, 0.36% against the yen and 0.86% against the Swiss franc. The party may well end this evening, particularly if the Fed’s statement fails to rally stock markets, at which time the aggressive run-up in carry trades over the past number of days will begin to unwind. The UK trade deficit in October narrowed to £7.1B from a record £8.0B in September, but this is hardly a reason for celebration through rapid sterling appreciation and once today’s much heralded Fed event is out of the way, markets will again examine sterling with close scrutiny and with a sharp slowdown forecast for the UK economy in 2008, it is difficult to see sterling not coming under pressure in the coming days. It is conceivable cable could run up to over 2.06 later today if the Fed delivers more than what the market has priced in, but even if this is the case, cable should begin to retrace its gains later this week. Positional players may well see any price over 2.05 as an incentive to enter the market and go short, even if they have to sit it out and wait for the pair to top out before tumbling again. Strategy: short-run traders should maybe focus on EUR/GBP, buying dips to around 0.7150 with a target price of 0.72. Cable is worth selling on prices above 2.05 with downside price targets of 2.0370 and 2.0310, but this has the added risk of the Fed statement later Tuesday.

The yen continues its retreat Tuesday as carry traders targeted the currency to bump up positions on high yielding currencies like cable and the Aussie and New Zealand dollars, ahead of an expected rate cut from the Fed later today. The dollar rose to over 112 against the yen for the first time in a month but has struggled to stay there while the euro has changed little against the Japanese currency as it too retreated early Tuesday. Japanese consumer sentiment dipped further in November, but the currency’s decline has more to do with a rise in risk tolerance than any adverse impact of domestic economic data. If the Fed is aggressive and cuts rates by 0.5% today or shifts its policy bias towards monetary easing, we could witness a stock market rally for the next few days and the yen will decline further. The currency will be able to regain ground once the current bout of market euphoria comes to an end and that could even happen as early as this evening, if the Fed statement falls short of market expectations. It is too difficult to make a call on yen direction, with uncertainty large ahead of the Fed statement, so the best course of action could be to avoid the yen until we have had time to analyse this evening’s statement and gauge the reaction of equity markets. A sharp retreat in equities will see the yen appreciate just as sharply. Strategy: Await Fed announcement and avoid the yen for the moment.

The loonie has remained trapped within a 1.00 to 1.0140 price range against the dollar ever since last Friday’s Canadian employment report. The loonie has been unable to make a real impression and the US dollar is being bought against it on any dips towards the parity line. We could see the loonie strengthen a bit immediately ahead of the Fed announcement as nerves creep in and any subsequent negative statement for the US dollar could see parity broken for the first time since the Bank of Canada announced its rate cut last Tuesday. However, if the Fed cuts by 0.25% and remains cautious on inflation, US dollar bulls may well return to the market en masse and the greenback could once again advance to the 1.02 line. I’m inclined to not enter the market today, given the potential risks to the greenback (I’m a bull on USD/CAD) and any traders with an intra-day bid on USD/CAD are advised to get out at the best possible price before this evening, and not to risk their profits. Longer run I continue to be long on USD/CAD and maintain a price target of 1.05 with a S/L of 0.9760. Strategy: Intra-day, do not enter the market until after having had a chance to assess the immediate significance of the Fed Statement.

Bob B – Dec 11

Monday, December 10, 2007

Market Watch: FOMC December 07

FOMC to give green light:

The Fed is widely expected to deliver a 25 basis points cut when the FOMC releases its latest monetary policy statement Tuesday evening (19:15 GMT). There seems little doubt a cut is in the offing, with some analysts even predicting an aggressive 50 basis points easing, although the chances of a cut of this magnitude appear to be dwindling. The minutes of the last FOMC meeting that were released on November 20th appeared to rule out a further cut this year as we were told the cut on October 31st was a ‘close call.’ In the past two weeks we have witnessed an about-turn with Fed Chairman Ben Bernanke and his deputy Donald Koln issuing very dovish statements, effectively turning the minutes of the October meeting on their head and signalling to markets the Fed was ready to ease again. Since that October meeting economic data has been at best mixed, but there have been further significant write-downs from banks and financial institutions over the subprime crisis and credit conditions have tightened. Inflation meanwhile has moved steadily upwards with the headline inflation rate reaching 3.5% in October and expected to print over 4% in November when the data is released next Friday.

There is little doubt that if the subprime fiasco was not having such an adverse affect on market credit conditions, the Fed would not be about to cut rates this week. There may well be considerable unease within the FOMC to have to cut rates at all because as we close out 2007, we move into a new period where the year on year inflation rate can easily tick up a notch or two (US core consumer price inflation eased progressively early in 2007 and as we move into 2008, the year over year comparisons may gradually show a marked deterioration in the core inflation rate).

The Fed’s greatest headache is tightening in credit markets and a creative FOMC might choose to customise a solution Tuesday which focuses on the Fed’s discount overnight rate. The discount rate is the rate the bank offers to major lending institutions but is not commonly used at present because of the stigma attached with going to the Fed for borrowings. The FOMC could possibly vote to reduce the discount rate by 0.5% tomorrow, bringing the discount rate down to 4.5%, while at the same time reducing the Fed Funds rate by 0.25% to 4.25%. The logic is that if the discount rate is lowered substantially, more banks will be enticed to come to the Fed’s discount window, rather than paying higher rates through lending from other financial institutions.

Last Friday’s payroll report revealed that while growth continues to slow, the labour market is healthy and unemployment at 4.7% remains at a historically low level. An aggressive 50 basis point cut Tuesday could send all the wrong signals about the US economy and indeed help make a recession a self-fulfilling prophecy. Many FOMC members will feel they have been railroaded into a further cut by Messrs Bernanke and Koln and are most unlikely to vote for anything more than a 0.25% reduction in the Fed Funds rate.

The statement Tuesday needs to be read very closely 1) to see if the policy decision was unanimous and 2) to see if the Fed shifts from the rather neutral stance of the last statement to a more dovish line this time round.

Forecast: 0.25% cut in the Fed funds rate and a 0.50% cut in the discount rate. The dollar will probably fall in the period immediately after the announcement, but should soon rebound, unless the FOMC is seen to have shifted aggressively towards the easing side in its statement, or if the FOMC surprises and chooses to cut the Fed Funds rate by 0.50%.

Ted B - Dec 10

Bob's Currency Focus - Dec 10 - 14:00 GMT

The euro has made a significant rally Monday, taking almost 0.8 cents off the dollar, now trading at 1.4720. Although markets may be discounting a 50 basis points cut by the Fed Tuesday, the longer-run rate outlook for the dollar sees it at a big disadvantage against the euro, so the greenback is coming under further pressure ahead of tomorrow’s key FOMC meeting. Euro area economic data Monday was mostly positive with the German trade balance printing at €18.1B for October, over €1.1B higher than forecast. French Industrial production also soared in October, rising a massive 2.1% on the month against a forecast increase of just 0.4%. The impact of a stronger euro has certainly not deterred the industrial powerhouses of France and Germany and today’s results have helped push the euro higher. Friday’s payroll data from the US, while marginally better than anticipated, nonetheless signals a slowdown in the labour sector and simply gives the Fed breathing space to continue to cut rates. I personally would not rule out a 50 basis point cut by the Fed Tuesday, because this particular FOMC has become more unpredictable, inflation has more or less been abandoned as a principal Fed concern and there is most definitely a Bernanke put to appease US financial markets. While we might not agree entirely with the ECB’s ultra hawkish stance, we can at least say the ECB is consistent and monetary policy is most definitely not dictated by financial markets, as is currently the case in the US. Expect the dollar to remain under pressure against the euro in the build-up to Tuesday’s meeting and any break above 1.4770 will be significant, because it could trigger a temporary move closer to 1.49. We also need to be cautious, because we saw last week that both sterling and the Canadian dollar actually appreciated in value in the days after the respective Central Banks announced rate cuts and expectations of a rate cut in either of those jurisdictions was put at less than 50%. Markets have priced in a 100% chance of a Fed cut tomorrow, but this being a 0.25% cut. I prefer to buy the euro on dips back towards 1.4650, with upside targets of 1.4730, 1.4770 and 1.4840.

Cable has lost the run of itself Monday, rising sharply to a high of 2.0467, up over 1.5 cents on the day. Considering cable languished below 2.02 immediately following last Thursday’s Bank of England rate cut, it is quite a remarkable feat. The currency moved before today’s producer prices report, a report which although signalling higher than expected inflation at the factory gates, is hardly going to alter Bank of England monetary policy, which shifted to the easing side last week. House prices for October, in a separate report released by the department of local government today, grew to an annualised 11.3% in October from 10.8% in September and this also helped to support the pound. Cable offers no bid value on prices above 2.05 and even 2.0450, even if the market is nervous ahead of Tuesday’s FOMC meeting. The euro also slipped to 0.7180 against the pound Monday but has since recovered towards 0.72. Sharp sterling gains are likely to be continued to be met by sharp sterling sell-offs because the outlook for the UK economy is uncertain at best and with the Bank of England having joined the Fed in policy easing, positional traders will be looking beyond the UK currency. On Tuesday we have October’s trade balance and if we see another record deficit, sterling will sell down. Trading will continue to be thin ahead of the Fed and some currency moves will be exaggerated, including sterling’s. Strategy: Wait until after Fed meeting on Tuesday. Do not buy sterling at present levels.

The yen remains under pressure Monday as the prospect of a US rate cut on Tuesday has seen risk tolerance levels rise and a resurgence in the carry trade, with the yen being used as the preferred funding currency. The yen is only down fractionally against the US dollar, but is down 0.5% against the euro and 0.75 against sterling. It is down almost 1% against the Aussie dollar. With stock markets up today and likely to continue their rally if the Fed cuts rates tomorrow, the yen may be sold off further and we could potentially see the dollar rise to Y113 and the euro to over Y166 by tomorrow evening. In economic news, data released overnight showed Japan’s machinery orders surged by more than 12% in October, but against this the closely monitored economy watchers survey revealed that ordinary Japanese workers were not very enthusiastic about either current economic conditions or about the country’s economic outlook during November. Strategy: Don’t trade the yen until after the Fed decision, when markets have settled again.

The loonie weakened moderately Monday against the greenback but the pair has remained firmly inside the 1.00 to 1.01 trading band ever since Friday’s employment report. The loonie strengthened down close to the parity line again Monday but was unable to break through and the dollar has since advanced to 1.0080. Housing Starts in Canada rose to a 227.9K rate in November, up 0.1% from October but this was largely in line with forecasts and had no market impact. While base metal prices have fallen, oil is up over $1 a barrel and this should offer some short-term protection to the Canadian currency. Overall I expect the uptrend to continue, but we may continue in a period of consolidation until after the Fed rate decision Tuesday. The loonie has come off quite sharply against the euro Monday, losing over 1 cent, with the euro up to CAD1.4750. Strategy: Buy USD/CAD on dips towards 1.00 with limit targets of 1.0090 and 1.0135. Longer run bid positions should be retained with S/L at 0.9750 and target of 1.05. The loonie may appreciate against the dollar in the lead up to tomorrow’s Fed announcement, so anyone who is has entered long today on USD/CAD need to time their exit.

Bob B – Dec 10

Friday, December 7, 2007

Bob's Currency Focus: Dec 7 - 16:30GMT

Coming towards the end of another week and rather surprisingly the euro is little changed against the dollar from last week’s close. Friday’s non-farm payroll number for November was marginally higher than forecast but as it didn’t really surprise on either side, the market has been unable to take any direction from it. The unemployment rate was reported at 4.7% with economists having predicted a tick up to 4.8%, while hourly earnings in November rose a sizeable 0.5%, much higher than the 0.2% seen in October. The data is strong enough to prevent the Fed contemplating a 50 basis points rate cut next Tuesday and with a 0.25% cut already priced in, the euro was unable to sustain any meaningful rally Friday. Sentiment should work against the dollar however in the run-up to Tuesday’s announcement and I will be surprised if we are not trading closer to this week’s high of 1.4770 before then. The market has had a rather muted response to ECB President Jean Claude Trichet’s hawkish statement yesterday and it will be something of a surprise if that statement does not play out in a much stronger euro next week, against the backdrop of further US rate cuts. Trading levels are beginning to thin and will thin out even more the further into December we go, so the market will become somewhat erratic. The stage though is being set for a further euro attack with 1.50 being a very realistic target before the year end (there are plenty of option contracts out there that want this price to be hit before the options expire at year-end). Expect a run-up in the euro between now and next Tuesday’s with the advance likely to become more pronounced in the period immediately leading up to the meeting. A break above 1.4770 could see price closer to 1.4850 in and around the time the decision comes out. Strategy: Start to buy on dips towards 1.46 with target prices of 1.47, 1.4760. If price holds above 1.47 buy with target of 1.48 and once holding above 1.4770, target 1.4850 and 1.49. We will see where prices are at Monday.

Sterling has done remarkably well over the past 24 hours when once considers interest rates were cut Thursday for the first time in over 2 years. The pound is virtually unchanged against most currencies Friday and has made gains against the lower-yielding Swiss franc and Japanese yen. Renewed dollar weakness and a strong rally in equity markets helped protect sterling in the aftermath of yesterday’s decision but the medium-term outlook for the currency is not very bright. Most traders saw little value in selling cable following a 3 cent decline Wednesday, but selling pressure will re-emerge on any significant pound rallies we see. Cable could run up to over 2.04 in the lead-up to the Fed rate announcement on Tuesday next, but thereafter cable may continue its downward trend, with the possibility of sharp moves as trading condition get thin. The ECB yesterday did not do sterling prospects any good (by dashing hopes for wider Central Bank easing) and we could witness a strong upside rally in EUR/GBP next week, with 0.7250 being the initial target and 0.73 being realistic before the end of the year. Sterling best chances against the euro are if the euro experiences a sharp sell-off itself, which seems unlikely in the short run given the ECB’s stubborn policy position. In the only data release out of the UK Friday, business think-tank body NIESR estimated UK economic growth slowed to 0.6% in the three months to the end of November. Strategy: Wait until after the Fed on Tuesday before considering a sell down of cable, but any rallies above 2.04 deserve the attention of cable bears. 2.0084 is the target next week.

The yen had to take it on the chin again Friday as stock markets continued to rally and risk tolerance levels rose, thus leading to renewed interest in carry trades funded by the Japanese currency. Indeed, the yen will probably remain under pressure until after next Wednesday, i.e. after stock markets have exhausted their upside rally, following an expected Fed rate cut on Tuesday. Data out of Japan overnight showed annualized quarter 3 GDP was revised downwards from 2.6% to 1.5%, which was a major surprise and highlights that the US economy is not alone in terms of facing an uncertain future as we come towards the end of the year. The yen has depreciated 0.35% against the dollar Friday and the pair now stands just shy of the 112 price line which is a significant barrier level. A break above 112 could mean the dollar will advance back towards 114 against the yen by the middle of next week as the euphoria over the Fed coming to the aid of the markets sends the yen packing for a few days. The euro has risen to 163.80 against the yen Friday and Y165 looks a certainty come Tuesday night. The Japan’s currency will likely come under further pressure on the carry crosses through to next Wednesday. Strategy: Buy EUR/JPY on any dips below Y163 with target prices of Y164 and Y165.

The loonie has showed some impressive resilience over the past few days and is now trading at the same price it was at against the greenback, prior to Tuesday’s Bank of Canada rate cut. As we have seen recently in the past number of months, the loonie strengthened just ahead of a key employment report and then made rapid gains immediately after the actual release. I have become suspicious of how the market trades Canada’s monthly employment report, because some segments of the market appear to be two steps ahead of the rest of us, but that’s an issue for another day. November’s 43K gain was impressive and the report points to continued solid growth in Canada’s labour sector against a background of competitive pressures from a strong currency and a slowing US economy. Jobs tend to be a lagging indicator though and it could me several months before we see the true impact of the recent strains which have been put on the Canadian economy. The US dollar failed to sustain a break above 1.02 over the past 3 days and today the loonie took control pushing the greenback back sharply, the pair touching 1.0007 before settling closer to 1.0050. It is highly unlikely we are witnessing a return to the downward trend, but a temporary correction was due and we could see another attempt by the loonie to break parity before the uptrend gathers pace again. Strategy: hold current longer-run upside positions and switch S/L to 0.97.60 to protect against Fed decision increased volatility during thin market conditions. Short run positions should buy on levels above the parity line using 0.9945 as a S/L and target 1.0140 and 1.0185. The loonie should also continue to make gains against the Japanese yen through to next Wednesday.

Bob B - Dec 7

Thursday, December 6, 2007

Bob's Currency Focus Dec 6 14:00 GMT

We saw quite a dramatic capitulation of this pair Wednesday, with the euro ceding almost 1.7 cents on the day, which is an unprecedented level for this pair. I’m inclined to believe the move had more to do with the closure of positions ahead of today’s key Central Bank announcements, rather than a fresh wave of new positions coming in behind the dollar. We are entering quite a thin trading period in the run-up to Christmas with many fund traders squaring their positions prior to the year end, so erratic moves will not be uncommon through the remainder of December. The US data yesterday was mixed for the dollar moreover being wholly positive, despite the market rally we witnessed. Activity in the services sector, as given by the latest ISM survey, slowed more than expected in November while unit wage costs in the third quarter actually declined. The ADP employment report, which signalled a surprise 189K gain in jobs in the private sector last month, is notorious for being inaccurate and there is no guarantee that the non-farm payroll report on Friday is going to reflect such any such surprise gain in employment. The reality is that the Fed is going to cut rates next week and the ECB has not cut rates today. The ECB has primarily maintained a hawkish bias and gave a balanced assessment of the euro economy today which in essence means the rate differential outlook into 2008 strongly favours the euro. The ECB is unlikely to raise rates soon but with the Fed set to cut several times more, it is difficult to favour the dollar over the euro at the moment from a fundamental perspective. I continue to favour buying the euro upon dips and I maintain we could yet see 1.50 hit before the end of next week. The euro has jumped from a low of 1.4523 this morning to now hit 1.46, and while there will remain some nervousness ahead of Friday’s US non-farm payroll data, the euro looks set to resume the upside trend ahead of the Fed next week. German factory orders soared by 4% in October, 8 times higher than forecast and suggests the strong euro certainly has not led to any deterioration in manufacturing in the euro’s premier economy. US jobless numbers fell by 15K last week and rises expectations for a positive non-farm number Friday. Strategy: Buy euro on dips with price targets of 1.4610, 1.4650, 1.47 and 1.4760.

PS: ECB President Jean Calude Trichet stated in his press conference a short while ago that some members of the MPC today favoured and voted for a rate hike.

The Bank of England followed the example set by the Bank of Canada Tuesday to shift policy and move to monetary easing. The 0.25% rate cut delivered today will have surprised many but the prospects of a rate cut have been increasing all week, owing to softer economic data and markets essentially pricing in a cut. Sterling had sold off prior to the announcement and in fact has since rallied as traders believed Wednesday’s sharp sell-off had gone far enough, for now. Sterling will continue to come under pressure if further economic data prints to the soft side as it will raise the belief that today’s Bank of England move is only the first stage in a prolonged monetary easing cycle, which many believe will stretch well into 2008. Cable has been protected by broader dollar weakness this afternoon and this might continue as markets next look to the Fed which meets next week. There is a chance of an aggressive 0.5% cut by the Fed next week, but this may be totally dependent upon Friday’s nonfarm payroll number. Sterling has sold off somewhat against the euro but is still below yesterday’s record 5 year lows, but there is a risk of a further attack on EUR/GBP, particularly if the euro launches a broader market rally. On the data side, industrial production and manufacturing output released earlier today came in higher than forecast, growing at 0.4% and 0.5% respectively on the month, which at least signals that the manufacturing sector in particular is holding up well. Strategy: Our target 2.0246 has been reached and given the sharp move and the anticipation of a Fed rate cut, I’m not inclined to sell cable at current price levels. It may be worth buying cable on dips below 2.02 as there is the prospect of a corrective return to 2.04, particularly with the dollar likely to come under pressure leading into the Fed policy meeting. Much will also depend on the US non-farm number tomorrow and I would recommend being out of the market before this data is released (13:30 GMT). Sterling has now taken on a negative tone on the broader market and there is little value in buying it against any currency other than the dollar at the moment.

The Japanese yen lost further ground Thursday against both the euro and the dollar and the US currency has now appreciated to Y111.25, close to the recent highs. There may be a push to try and force the pair towards 112, but the dollar looks to offer very little value above this level, when once considers the US Fed is set to cut rates next week to try and stimulate economic growth in the world’s largest economy. The yen’s market price however looks set to be overtaken by events and if global stock markets sustain their rally through to the Fed meeting, then with risk aversion levels in decline the yen is going to be on the defensive. We have not seen any major outlay on the carry trade in the past 24 hours, despite stock market moves, so the yen has not slipped as far as it might have done. High volatility is likely to be the order of the day and the yen will be pulled in both directions. Any sharp reversal in US stock markets later today should see money flow back into the yen and see the currency rise against the dollar. Revised GDP numbers for Qtr 3 are released tonight but these are unlikely to have any market impact. Strategy: Sell USD/JPY on any moves towards Y112, with target prices of Y111 and Y110.50. A strong non-farm payroll number Friday will favour high yielding currencies over the yen and traders should exit the market before the data is released (13:30 GMT.

Canadian data Thursday was fairly robust with Building Permits rebounding by 6.8% in October, following a decline of 1.7% the previous month. Business activity picked up in November as evidenced by the IVEY purchasing managers index, which rose to 58.7 against 57.1 in October. Oil prices continue to fall (down a further $1 a barrel today) and with base metal prices in retreat owing to concerns over the global economy, the Canadian dollar will remain under threat. The loonie pushed its Us counterpart back to 1.01 over night but was unable to hold that level and the pair quickly rallied to 1.0193 this morning. The pair looks range-bound between 1.01 and 1.02 for now with the smart money buying the pair on dips. The immediate outlook for the currency will be determined by Friday’s employment data and another robust report could see the loonie temporarily correct back to parity with the greenback. However traders are looking for opportunities to sell the currency and should we see a negative employment number coupled with a strong US non-farm number, USD/CAD could rise to 1.03 tomorrow. The loonie has corrected somewhat against the euro, but this has more to do with the broader euro sell-off we saw yesterday than any new-found loonie strength. Strategy: Buy USD/CAD on dips towards 1.01 with upside price targets of 1.0180 and 1.0250. Friday’s trading between 12:00GMT and 14:00GMT will be volatile and intra-day range-traders should exit beforehand. Longer run – retain open long positions with S/L just below parity and upside price target of 1.05.

Bob B – Dec 6

Wednesday, December 5, 2007

Bob's Currency Focus - Dec 5: 13:00 GMT

The dollar has pared back half of the losses from Tuesday, when the pair retreated towards 1.47 after 1.4770 proved to be tough resistance for the euro to break. Euro-zone data was weak Wednesday with retail sales plummeting by 0.7% in October and growth in the dominant services sector slowing to a 2 year low, although the services PMI did come in slightly above last week’s preliminary forecast. Futures markets are beginning to price in increased chances of a 0.5% rate cut from the Fed next week and if US economic data remains weak for the remainder of this week, then the probability of an aggressive 50 basis points cut will increase. Wednesday sees the release of the ISM services PMI for November and the ADP employment report which estimates the number of jobs added in the private sector in November. Two weak reports will put added pressure on the dollar and to be honest it is hard to see how the greenback can sustain any real momentum over the next week, given the underlying risks. The ECB is the main event of this week and if the MPC maintains its hawkish inflation bias tomorrow I cannot but see 1.50 being hit within the next week. We need to be cautious though because we have already witnessed a shift in emphasis from the Central Banks in Canada and Australia over the past 24 hours and with the strong possibility of a rate cut from the Bank of England Thursday, it may well be the ECB will be forced into delivering a softer line because of wider concerns over a slowing global economy. Many traders will stay on the sidelines until after the ECB deliver their statement tomorrow and price movements between now and then may prove to be volatile and misleading. Soft US data though will increase expectations of a 50 basis point cut from the Fed and should see the euro rise to test Tuesday’s highs. Strategy: buy on any dips towards 1.4630 with target prices of 1.4730 and 1.4760, or if you want to be aggressive you can buy the euro at current levels with a stop loss just below 1.47 and a limit target of 1.4760 or 1.48.

Sterling has taken a hammering Wednesday as traders increase bets the Bank of England will move to cut rates Thursday. We have seen a spat of weaker data Wednesday, with the Nationwide consumer confidence index falling to its lowest level since February, Halifax reporting house prices fell by 1.1% in November and the CIPS services PMI for last month printing at 51.9, below the 53.0 forecast. The euro rose to a fresh 4.5 year high against the pound at 0.7234, almost a full 2% up on the 0.7090, where the pair was trading early Tuesday morning. Cable also came tumbling down, from just below the 2.06 it was trading at last night to hit a low of 2.0351 this morning. Cable could yet return to challenge key support in the 2.0246 price region over the next 24 hours. While sterling is oversold against the euro, there is too much risk in buying the UK currency ahead of the Bank of England’s rate announcement tomorrow. The pound might get some relief later today if US stock markets rally and higher yielding currencies gain some reprieve. Between now and the Bank of England announcement it is a case of sell on any significant rallies. If the Bank does not cut rates tomorrow, sterling will rebound, particularly against the euro, so anyone going short needs to be aware of the inherent risks. Strategy: Sell cable on any rallies towards the 2.05 price region, with limit targets of 2.04, 2.0360 and 2.0250. Keep a watch on Bank of England and ECB Thursday for direction on EUR/GBP. BoE cut + hawkish ECB = further sterling weakness. BoE on hold + dovish ECB = sterling rally.

The yen weakened overnight against both the dollar and the euro as Asian stock markets rallied. European stock markets have also rallied so far today, but the yen has managed to limits its losses as risk aversion levels remain high and higher yielding currencies like sterling and the Aussie dollar have sold off. The yen will come under pressure in the short-term if stock markets sustain their rally in anticipation of further rate cuts from the Fed, but any reversal in the fortunes of stocks should spark a sharp recovery in the yen. The dollar could potentially push back above Y111 later today if US data is better than expected and markets stabilize. The euro could advance to over Y163 Wednesday. Strategy: None. Await Central bank outcomes Thursday.

If you have been following my analysis you will see I called it correct on the Bank of Canada and also forecast a spike in price of USD/CAD to 1.02, which was achieved overnight. The Bank made the correct move, although their accompanying statement was relatively neutral, so aggressive selling of the loonie solely on the basis of yesterday’s outcome is hardly warranted. We will probably now enter a period of consolidation, probably within the 1.01 to 1.03 price range, but Friday’s employment report from Canada has added significance and a strong report coupled with a weak US nonfarm number and an imminent US Fed rate cut should offer some temporary respite for the loonie, at least against the US dollar. The euro appreciated to over 1.50 against the loonie early this morning and while the move looks overdone, it is quite dangerous to buy the loonie right now with underlying sentiment beginning to weigh more and more against it. Strategy: Buy USD/CAD on dips towards 1.01 with limit targets of 1.02 and 1.0250. Move the stop loss on those long-run positions up to 1.0 from 0.95 and retain the 1.05 target price.

Bob B - Dec 5

Tuesday, December 4, 2007

Bob's Currency Focus - Dec 4 - 13:30 GMT

The euro has rallied strongly Tuesday coming off a low of 1.4635 to register at 1.4740 at 12:00 GMT. The single currency has benefited from significant bids on the EUR/GBP pair, fuelled by speculation of a possible Bank of England rate cut later this week, and the sell-off of sterling against the single currency has in turn helped the euro rise against the dollar. There is no data of any significance later today, while this morning October producer prices for the euro area printed at +0.6% for the month, higher than the forecast +0.4%. There were 2 Fed officials speaking Monday – Eric Rosengren and Janet Yellen, and both highlighted downside risks to growth in the US economy, which suggests the weight of opinion on the FOMC seems to have swung to the dovish side and a rate cut next week looks like a done deal. The ECB meet Thursday and the committee is expected to keep rates on hold and markets anticipate a hawkish bias with euro-zone inflation having hit a 6-year high in November. If the ECB does deliver a hawkish line and with the Fed set to cut next week and possibly cut rates a number of times next year, then under this scenario the dollar looks set to struggle against the euro for the foreseeable future. The only possible get-out clause for the dollar will be if the ECB choose to shift their monetary policy to a more balanced or dovish stance. The ECB could conceivably shift their stance to neutral, as recent speeches from council members point to a growing number of doves on the policy committee. Price action between now and Thursday’s ECB meeting will probably see bias to the upside, but nerves will play on traders and there is liable to be quite a bit of volatility. There appears no good reason to buy the dollar, unless the ECB are going to soften their stance and Friday’s non-farm payrolls may prove to be redundant in market terms as it appears they won’t have any impact on the Fed’s decision next week. It may well be that the Fed has already seen the payroll numbers and that they are not strong enough to dissuade the Fed from easing rates next week. Strategy: Buy on dips towards 1.4630 with stop loss at 1.46. Upside price targets are 1.47 and 1.4740. A close above 1.4750 Tuesday will mean price possibly rising to 1.48 Wednesday. Risk: Euro-zone Services PMI (09:30 GMT) on Wednesday, if much lower than forecast, could spur the ECB to soften their tone and will make the euro vulnerable to a temporary sell-off.

Sterling sold off sharply against the euro Tuesday (losing over 0.5%), giving back most of the gains it had earned over the previous 2 days. The British Retail Consortium reported total retail sales grew just 3.1% over the year to the end of November while same store sales only grew by 1.2%. Also today the CIPS Construction PMI came in at 54.3, the lowest reading in 14 months and suggesting the slowdown in the housing sector is accelerating. The soft data has made many traders nervous ahead of the Bank of England rate announcement this Thursday. As of now the probability of a rate cut is only around 35%, but Wednesday’s Services PMI will be very important in terms of giving a clearer picture ahead of Thursday’s actual rate decision. The Services sector constitutes 70% of the UK economy and if tomorrow’s PMI points to further deterioration in this sector, then it could be enough to influence the Bank of England to move on rates this week. It is dangerous to buy sterling ahead of the rate decision and indeed if the Bank of Canada moves to cut rates today, markets may view it more likely the Bank of England will follow suit later in the week. Strategy: Sell Cable on prices close to 2.07 with target prices of 2.06 and 2.0550.

The yen has rallied for a second day as global stock markets decline further and risk aversion levels continue to rise. The Japanese currency pushed the dollar to as low as 109.57 this morning but has since come off those levels to trade at around 109.80, still up 0.6% on the day. If negative sentiment carries through to Wall Street later today, the yen could push the dollar back to below 109, with a return to 108.50 a possibility over the next 24 hours. There is no data to influence the pair today and the yen’s fate will be determined by risk tolerance levels. The euro is down only marginally against the yen today – trading at around 161.80, but the pair could fall to test Y160 if stock markets continue their decline into Wednesday. Strategy: Wait for markets to stabilise before reviewing price levels and the way forward.

Today is ‘D’ day for the loonie with the Bank of Canada rate decision due out in just 30 minutes. Markets price the chances of a cut at 30% but I personally put them higher than 50%, especially since the Fed have now indicated they intend cutting US interest rates again next week, which may act as trigger today. Canadian inflation is benign and the risks to the domestic economy are major, so there appears to be no reason for the Bank of Canada not to move now. Why put off the inevitable? If the Bank believes the risks are real, which they are, then the economy will benefit in the long run if the Bank is proactive in terms of easing interest rates. The loonie is trading as if traders have the jitters and are half expecting a cut. If a cut does come, expect a whole new wave of bids for USD/CAD and the pair should easily reach 1.02. If a cut does not come, then we will get a retracement probably back to as far as 0.99 or lower today, before a resumption of the uptrend. The best value pair in the event of no rate cut is EUR/CAD, i.e. sell it down. Strategy: If not in the market already, then stay out until the dust has settled after the rate announcement. Those that are in the market and are long should move up their stop loss, in case the Bank reneges today. We will revisit the situation tomorrow.

Bob B - Dec 4

Monday, December 3, 2007

Bob's Currency Focus 15:00 GMT

An up and down session Monday thus far with neither side able to push home an advantage. The euro did have a sharp run to just over 1.47 this morning but came back down equally sharply and the pair has since traded primarily in the 1.4650 to 1.4670 price range. Data was mostly positive for both currencies Monday as the respective Manufacturing PMIs for November printed slightly higher than forecast. Euro-zone unemployment also fell to 7.2% in October, down from 7.3% a month earlier. The fundamentals would appear to have shifted more in the euro’s favour in the past week, but there appears to be some degree of nervousness in pushing the single currency to 1.50 in the short-term and we may well witness a correction back to 1.45 before the upside trend gathers pace again. We probably won’t get a true picture of immediate direction until after the ECB this Thursday and non-farm payrolls on Friday. Also of importance to the euro this week is Wednesday’s services PMI, which is expected to report a sharp decline in the dominant sector for November. We may range trade for the rest of today between 1.46 and 1.47. US treasury yields have plummeted in the pas few days and the 2-yr bond now yields just 2.95 with the 10-yr bond at 3.91%. The bond market suggests aggressive cuts by the US Fed and this is not dollar positive in the medium term. There is the danger of a sharp impulsive rally against the dollar at any time. Strategy: buy on any dips towards 1.4630 with upside target prices of 1.4675 and 1.47.

Sterling is the strongest currency in the basket Monday and the pound has launched significant rallies against the dollar, the euro and the Swiss franc. This strength is thanks to the CIPS Manufacturing PMI for November, which printed higher than expected at 54.4 against a 52.5 forecast. Traders are more confident buying the pound today believing the CIPS PMI result reduces the chances of a Bank of England rate cut this Thursday. Odds of a rate cut are probably at best 35%-40%, but it is concerns over the housing sector downturn and ongoing credit stresses in financial markets that are the real drivers for a near-term cut, so today’s wave of support for sterling is probably a little over the top and has inflated the pound’s short-term value, particularly against the euro. We have the BRC retail sales numbers released at midnight tonight and this will give a flavour of the current consumption appetite of the UK consumer and this may have more influence on the Bank of England than the manufacturing PMI. Sterling will benefit if the stock market rally continues, especially if a rate cut this week is further discounted. There are risks however and sterling rallies may be met by equally sharp sell-offs as the week progresses. Sterling could come off sharply against the Swiss franc if stock markets begin to tumble once again. Strategy: Sell down cable on prices above 2.07 with a target price of 2.0550. Any break below 2.0520 will probably mean a further decline to 2.0370 before there is any further bounce.

The Japanese currency made a strong recovery against both the dollar and the euro Monday, having come off sharply last Friday, against the dollar in particular. Asian stock markets were mixed overnight and an element of risk aversion has crept back in which has seen the yen broadly supported. The yen is up 0.4% against the greenback and the single currency today. Japanese data will play second fiddle this week and the yen’s fate lies with the fortunes of equity markets and risk tolerance levels. A sell-off on Wall Street into the close Monday could see the yen push the dollar back below Y110 as we head into the Asian session. By the same token a strong rally on US stock markets could see the dollar advance back towards Friday’s high of Y111.33. Strategy: Stay clear for now.

After a brief period below parity against the dollar Monday morning the loonie has since ceded the parity line as the decline continues. There was no data out of Canada Monday but the currency was not helped by a further drop in oil prices, while many traders are nervous about the prospect of a rate cut from the bank of Canada Tuesday and are simply giving the Canadian currency a wide berth. Last week’s GDP numbers were stronger than forecast and if the Bank of Canada fail to cut rates tomorrow, the loonie should be able to push the dollar back below the parity line once again. A rate cut could see the dollar appreciate to over 1.02 very rapidly, even ahead of the key payroll figures due for release for both countries later this week. I am now a loonie bear so will only sell the currency, but would prefer to see price drift back to between 0.9250 and 0.9550 before coming in again. There is major risk in having an open position on the loonie going into Tuesday’s rate decision and the more astute approach would be to have an advance buy order in place to pick up the directional move (if rates are cut), as USD/CAD will probably move very sharply in the period immediately following the rate announcement. Strategy: Buy on any dips to between 0.9920 and 0.9950 with target prices of 1.0020 and 1.0035. Exit live open positions before Bank of Canada rate announcement.

Bob B - Dec 3

Market Watch - ECB December 6

What to expect from the ECB

The ECB’s Monetary Policy Committee delivers its final rate verdict of the year on Thursday next. It is 100% certain rates will be unchanged for the sixth consecutive month, meaning the baseline interest rate for the euro area will remain at 4.0% into 2008. While the rate outcome seems not in doubt, of more significance to markets is the accompanying statement and the precise language used by Jean Claude Trichet, the ECB President, when he presides over the customary press conference, 1 hour and 15 minutes after the official rate announcement. During the whole global credit crisis, which first befell financial markets back in August, the ECB maintained its hawkish bias throughout. This week the MPC finds itself between a rock and a hard place, as recent economic data points to a cooling in the euro economy, credit woes are worsening in financial markets, while euro area inflation hit a 6 year high in November. Dovish comments have begun to emanate from ECB council members, particularly as the euro’s rapid appreciation is now causing considerable disquiet within some euro nations, most notably France. With the Fed signalling further rate cuts in the US, the ECB stands accused by many of merely sitting on its laurels and allowing the Fed to take full responsibility for alleviating a credit crisis that engulfs not just the US stock market and banking sectors, but all of the world’s major financial markets.

It was a safe bet a few weeks ago to expect the ECB to significantly qualify their tone this week and to release a more neutral policy statement, balancing upside inflation risks with downside growth risks. This may still be the essence of the message Trichet delivers next Thursday, but given the ECB’s preoccupation with price stability and inflation, which it argues is its only remit, can the ECB seriously afford to sound more dovish at a time when inflation has suddenly hit a worrying peak? I recall a comment made by the ECB’s Weber a couple of months ago, which caused quite a stir in global stock markets at the time. Weber suggested the ECB may have to continue to raise interest rates, even if the euro economy hit a significant downturn, in order to keep inflation under control. This argument could form the crux of the debate when the ECB deliberates this week.

I suspect the MPC will maintain its inflation bias, for to do anything else might undermine their authority and consistency. Trichet will talk up the downside risks to growth for sure. I don't expect Trichet to refer directly to the strength of the euro in his statement, although he will probably reiterate the ‘brutal movements in currency markets are unwelcome’ comment during his Q&A session. Maintaining a hawkish bias now will not prevent the ECB from cutting rates at any point in the near future, if an easing move is deemed necessary, i.e. if financial markets are not functioning properly. On the other hand the ECB is unlikely to signal any imminent rate hike, despite inflation having risen to levels well above the ECB’s comfort zone. It will be interesting to hear what the ECB forecaast for inflation into 2008, which when taken together with the Bank's growth forecasts, will at least give some indication of where rates may go next year.

Don’t expect too much of a shift in ECB policy stance Thursday and with little hope of any major shift to a more dovish stance in the near future, the rate differential outlook fo the euro Vs the dollar still very much favours the euro, as we come to the end of this year.

Ted B - Dec 2

Friday, November 30, 2007

Bob's Currency Focus - 18:00 GMT

Wall Street has opened sharply higher Friday as investors are buoyed from comments made by Fed Chairman Ben Bernanke overnight, signalling further monetary policy easing was on the way. Anyone who watched the broadcast may have been struck by the uncomfortable posture and lack of conviction emanating from the Fed Chief. Bernanke reiterated verbatim some of the phrases and observations made by Vice President Koln two days earlier, to give the impression the FOMC were at one on where monetary policy needs to go - at least Messrs Bernanke and Koln are at one. Based on some of the other speeches we heard from members of the FOMC this week, it is now apparent there is very clear division within the FOMC on whether rates need to be cut again so soon. Bernanke might be undermining the role of the Fed by allowing monetary policy be dictated by financial markets, meaning the Fed is merely playing a supporting role. With headline inflation currently running at 3.6%, the Fed is playing a very dangerous game indeed, particularly as up to now the US Fed is the only major Central Bank to have altered monetary policy to alleviate stresses in financial markets. The funny thing is the dollar has held up remarkably well Friday considering the events that have just passed in recent days. Add to this the fact Euro-zone inflation rose to a 6 year high in November (3.0%), virtually ruling out any hope of easing on the part of the ECB in the foreseeable future. Today is the end of the month and a closure of dollar short positions is seeing the dollar appreciate across the board, which may come as a surprise to many. The euro has got a bounce late on Friday over recent weeks, but it is seriously on the back foot right now as the dollar breaks below 1.47, though there may be a rebound later in the day. There does appear to be some correction of the dollar, but as to whether that will be carried through to next week remains to be seen. We could potentially see a decline to 1.4660 today and to as low as 1.45 next week, although a new month dawns on Monday and the greenback may once again find itself on the defensive. Strategy: Stay out until Monday, until we see where the current attempted correction closes.

Another bad day for cable which has drifted to around 2.0550, though crucially the first line of support at 2.0520 remains intact. UK Consumer Confidence hit a 4 year low in November according to the latest survey released today by the Gfk group and next week’s Bank of England meeting makes for an interesting time. The odds against a rate cut next week are still of the order of around 60%, but with the Fed forced into action and no sign of a let-up in the liquidity tightening, the MPC may be pressed into action sooner than some of Committee members would like. Sterling is facing into an uncertain week and the likelihood is the currency will face tentative trading ahead of Thursday’s key rate decision, and sterling may struggle to attract much buying support. The dollar has shown some muscle this week and cable offers the best value for a sell-off of the pound, with any rallies close to 2.07 likely to attract strong selling interest early next week. The pound could find itself pushed right back to 2.0246 over the course of next week. A broader sell-off of the euro could see sterling push the single currency back to around 0.71, but in view of the risks ahead, I would not like to make any sterling bids, at least not ahead of next Thursday. The pound also risks sharp retreats against both the Swiss franc and the yen, if risk aversion re-emerges in global stock markets. Strategy: Sell down cable on prices close to or above 2.07, with target prices of 2.0550 and 2.0460.

The Japanese yen has been the principal victim of the Fed’s comments on monetary policy this week. The Japanese currency at one stage today was down almost 4 cents from its high earlier in the week against the dollar. The prospect of further monetary easing in the US has led to an increase in risk appetite and a lack of demand for the low yielding yen. There is much complacency in the current move though as in essence what we are seeing is markets rallying on the back of what is economic uncertainty and bad news. The underlying fundamentals are exactly as they were this time last week, or if anything they are worse as economic data published this week point to an accelerating slowdown in the global economy. The Fed is prepared to let stocks dictate near-term policy however and stocks this week are rallying exclusively because of the Fed’s verbal intervention and acquiescence. Memories are notoriously short in equity markets and by next week markets will run out of reason to extend the current rally and we could see another sharp reversal lower. This will benefit the yen. The US currency offers no value above the 111-112 price range and it will take but a single day’s sell-off on Wall Street to see the yen appreciate back to around 109. It is best to wait until there is a rise in risk aversion evident before coming in to buy the yen. Look out for any potential late sell-off on Wall Street tonight. The yen is also down 0.6% against the euro Friday with the pair currently hovering around the 163 price level. There may also be value on selling down this pair at levels close to Y164 next week, when uncertainty returns to the market.

The loonie has finally ceded the parity line with the dollar Friday, two and a half months after breaching it for the first time in 30 years. Loonies followers tried bravely to defend the psychologically important levels for the past 3 days, but today the weight of a broader dollar move saw resistance at the 1:1 level give way. The dollar failed to manifest a clean follow-through and the pair has sparred around the parity line for most of the afternoon. It will be a surprise however if the greenback does not pull away above the line ahead of Tuesday’s Bank of Canada rate decision. While today’s quarter 3 GDP number at an annualised 2.9% rate came in much higher than anticipated, this is essentially of historical consequence particularly as the most recent economic data has pointed to an accelerating slowdown. After Ben Bernanke signalled the Fed would likely move to cut US rates again in December, this might be the cue for the Bank of Canada to act next week. Canada faces a similar economic dimemna to the US, but it has the added complication of a recent lack of competitiveness because of the strength of the loonie and a cooling global demand for the countries commodities, which constitute over 50% of the country’s exports. Inflation is also more benign in Canada than in the US and it could prove to be a grave mistake if the Bank of Canada flounder and don’t act to allow the economy more breathing space in the immediate term. A 0.25% cut on Tuesday seems likely and with markets still unsure as to whether the Bank will act or not, the loonie will struggle to gain bid support in the run-up to the announcement at 14:00 GMT Tuesday. USD/CAD could be destined to rise to between 1.02 and 1.03 by Wednesday, if the Bank of Canada delivers the necessary. Any retreat back to levels close to 0.99 between now and Monday will offer a good buying opportunity. It is too risky to buy the loonie against any currency before the Bank of Canada rate decision. Strategy: Buy USD/CAD on any dips in price between 0.9920 and 0.9950. Target price is 1.0020, followed by 1.01, 1.02 and 1.0250. Long run position is to go short on the loonie and wait for price to hit 1.05.

Bob B

Have a good weekend!

Thursday, November 29, 2007

Bob's Currency Focus 18:00 GMT

The euro took a bit of a battering this morning for the second consecutive day, dropping a full cent to 1.4723, before rebounding back to the current price of 1.4770. It is encouraging for the dollar to be able to bounce back so quickly following the intervention of the Fed’s Koln Wednesday evening, who sparked the biggest rally on Wall Street for 4 years by suggesting the Fed would cut rates (effectively) to bail out financial markets. While the dollar sank in late trading Wednesday, it has since recovered and is trading higher against most currencies. US data was mixed Thursday, with quarter 3 GDP revised upwards to a staggering 4.9% annual rate (not bad for an economy said to be on the brink of a recession), jobless claims rose unexpectedly by 23K last week, while New Home Sales again disappointed, reported at a lowly 723K rate in October, against a forecast of 740k. German unemployment fell by a greater than expected 53K in October and the jobless rate in the euro-zone’s largest economy now stands at 8.6%, down from 8.7% a month earlier. Other euro area data today was mixed. Having established a break below 1.4780, there is potential for the dollar to push the euro back to 1.4660 on Friday, but it needs to close below 1.4780 this evening for the pair to retain a bearish bias. Fed Chairman Ben Bernanke speaks later this evening in Charlotte (00:00 GMT) and if he gives any hint about Fed intentions for the December meeting, it will have a major market impact. Bernanke is more tactful however and it would be some surprise were he to be blatant and commit the sort of faux-pas we got from his Vice President Wednesday. Strategy: Sell rallies above 1.4820 with target of 1.4730, moving to 1.4660, once 1.4610 gives way. Stop loss at 1.4860. Beware Bernanke Speech!

Sterling rocketed late Wednesday making significant gains against almost every currency. There didn’t appear to be any reason, other than that jolt higher yielding currencies experienced following a speech from the Fed’s Koln. Sterling has been on the back foot against the dollar and the euro for most of Thursday, although sterling is merely trading around the levels it was at on Tuesday. The latest housing survey from Nationwide reveal UK house prices fell 0.8% in November while the number of mortgage approvals reported by the Bank of England for October were 88K, down from 100K in September. Ongoing softness in the housing sector and credit stresses in financial markets add up to increased pressure on the Bank of England to cut rates sooner rather than later. MPC voting member Blanchflower (a well known dove) called for an early reduction in interest rates Thursday, while Governor King said inflation and growth risks were finely balanced when he testified in front of the Parliament Treasury Committee this morning. The Bank of England deliver their December policy statement on Thursday next and given the underlying risks for sterling, if rates are to be cut, it is likely we may start to see a greater liquidation of sterling long positions over the next week. Cable would appear to offer the best value in chipping away at the pound, but until the dollar can deliver the pair below a price of 2.0520, the best value in selling down the pair is to come in at prices over 2.07. Last night’s exaggerated rally to over 2.08 offered a huge temptation to cable bears, many of which seized the opportunity, as evidenced by the sharp decline seen Thursday. Cable could well end the week around 2.05, if the dollar sustains its broader market rally. Sterling does have the potential to appreciate back to levels around 0.7120 against the euro, but only because there are many more euro longs than sterling longs in the market and a dollar assault could hurt the euro more than the pound. Friday sees the releases of the Gfk consumer confidence index for November, but it should not have too much market impact. Be confident because you may need wide stops with current volatility. The theme will remain the same – sterling will be sold on any significant rallies. Beware the Bernanke speech tonight in case he says something that might damage the dollar and thus our immediate cable prospects. Strategy: sell cable on prices above or close to 2.07, with target of 2.06 and 2.0550. A strong close for the dollar against the pound this evening could mean we see 2.05 Friday.

to be continued....

Bob's Currency Focus - 00:20 GMT


The Vice Chairman of the Fed delivered what will go down as one of the most controversial speeches ever by an FOMC member, when his speech Wednesday in New York single handily pushed Wall Street to its biggest single day gain in 4 years and leading to the largest 2-day stock rally in 5 years. It also sent the dollar into sharp retreat on a day when the currency had just earlier been experiencing a rare period of strength. I do not have the time or space to go through the detail of just what Koln said, but the implicit message taken by financial markets was that the Fed would cut rates and cut them aggressively, if needed, to bail out financial markets. In fact Koln’s speech is riddled with contradictions and his direct market intervention at a time when markets are going through what is a long overdue and ‘reality check’ correction, is nothing short of scandalous. There is a little footnote at the bottom of Koln’s speech ‘These are my views and are not necessarily those of my colleagues on the Federal Open Market Committee’ but this afterthought was either not seen, or it was selectively ignored, by the many armies of frantic marketers that set out on a panic spate of stock buying and dollar selling. What is the point in the FOMC meeting behind closed doors to deliver monetary policy if there is a member of that committee out there getting markets to price in his policy prerogatives before the FOMC has even discussed the issues? Koln believes monetary policy must be ‘nimble’ and designed to placate financial markets.

Koln threw markets on their head Wednesday and EUR/USD was exceptionally volatile and traded in a wide range of 1.4712 to 1.4858, giving up more than a cent late in the day as traders quickly off-loaded dollars as the rate outlook began to rain on the greenback. The odd thing is that markets had already priced in a 0.25% cut in December from the Fed but markets began to see many more cuts over the horizon thanks to that speech in New York. Fed Chairman Ben Bernanke speaks Thursday and what he says will be highly significant. If he backs the remarks made by Koln and delivers the same sentiment, then the dollar will fall further. US GDP revisions for Quarter 3 are expected to show growth in the quarter grew by 4.8%, against the 3.9% reported last month. That is one hell of a growth level for an economy apparently on the brink, but such is the nature of current market sentiment, the data is unlikely to boost the dollar and instead the currency’s direction will be determined by Ben Bernanke’s comments and to a lesser extent by the New Home Sales data at 15:00GMT. We have German and French unemployment data out Thursday also but these are unlikely to impact the market very much unless they surprise very sharply on the downside. We could have another voltiale day of trading Thursday, but with so much rate cut talk about in the US, it is difficult to see how the greenback s going to make much progress. Strategy: We could see some corrective move downwards tonight as markets may be seen as having delivered an exaggerated response to the Koln speech. I would still be inclined to buy the euro though on any dips towards 1.4750, with an initial target price of 1.4860. It is highly possible we might see another run above 1.49 tomorrow, if the euro holds up tonight and the negative rate sentiment against the dollar carries through to Thursday’s European session.

To be continued..

Tuesday, November 27, 2007

Bob's away on Forex-related business and is strapped for time, so the next currency focus article will appear on Wednesday evening.

Meanwhile, Bob likes the Aussie dollar tonight, expecting it to rise against the greenback, euro and sterling currencies. Get out before mid-morning as stock markets could give back today's gains later tomorrow, which would not be good for the Aussie. AUD/USD is safest trade - target 0.8845, S/L from 0.8735.

Bob's words

Monday, November 26, 2007

Bob's Currency Focus - 18:00 GMT

A more stable day on currency markets Monday with the upsurge in liquidity removing most of the volatility we saw last Friday. The euro looks as if it wants to appreciate some more but some elements of the market are unsure and the upside was limited to 1.4885 so far today. The pair is little changed on the day and the lack of direction is not helped by the dearth of economic data. European stock markets closed lower, but US markets are flat as we speak, yet any sharp move to the downside on the Dow this evening could spell trouble for the dollar by rekindling demands for a December Fed rate cut. There is a key indicator for the euro out Tuesday in the German Ifo Business survey and it is important this key sentiment index does not disappoint greatly, to ensure the euro maintains current levels of confidence as the market seeks to challenge the 1.50 price mark this week. If the Ifo index is good we could test 1.50 later Tuesday or Wednesday, particularly with major risk indicators (consumer confidence Tue and existing home sales Wed) due out in the US over the next 2 days. For now it is a case of sitting it out and playing it safe, but as long as 1.4785 holds in the coming days, the momentum will remain bullish. If the euro again has a premature run at 1.50 (against a backdrop of any further weak euro data) we could witness another sharp retreat, one which this time might potentially bring us right back to 1.4660. Because of the very high ratio of longs in the market there remains the danger of a strong correction at any time and bidders should start to employ tighter stops. Watch the data Tuesday and listen for any Central Bank speak. Strategy: short-term buy on dips below 1.4830, using 1.48 or 1.4780 as a stop loss with targets of 1.4880 and 1.4920. Wait for opportunity to sell down the pair around 1.4940, if the euro rallies above 1.49 but fails to break above 1.4970.

This is a data light week for sterling, with nothing of any note released up to Thursday. The key question on everyone’s minds thus far is effectively ‘will they or won’t they?,’ essentially asking if the Bank of England will cut rates next week or if they will decide to wait until early 2008. Sterling is riding high again Monday, thanks primarily to a renewed interest in carry trades and the pound has risen against both the dollar and the euro today. Cable looks dangerously high to me on levels above 2.07, for a currency that might be hit with a rate cut in a little over a week’s time. Hometrack reported early Monday morning that UK house prices slowed to an annual rate of 3.6% in November, with prices actually declining by a marginal 0.2% on the month. I’m not sure who is buying sterling at present, but it is unlikely to be anyone with a longer run view, so it is dangerous to be buying cable at elevated levels, even if the dollar’s is nobody’s friend right now. I still like to sell down cable on prices around 2.07 or above, with targets of 2.06 and 2.0550. Sterling will continue to attract strong selling pressure on any runaway rallies, because there are still many wise old traders that can read between those carry lines. I still do fancy sterling though to manage to pull the euro back to 0.7150 at least, simply because the EUR/GBP pair remains overbought and the euro may have some questions to answer of its own/. Strategy: Sell cable on prices above 2.07, with target prices of 2.06 and 2.0550. Stay away from EUR/GBP but do sell the pound against the Aussie dollar when risk aversion levels fall and stock markets are rallying.

The yen struggled overnight when Asian stocks took off but has come back into its own again this afternoon with European and American stocks faltering and credits woes on the rise. A bad close on Wall Street could trigger a very bad night for Asian stock markets and possibly pave the way for new peaks for the yen. USD/JPY is now just above the 108 price mark and the pair might return to the 2.5 year low at 107.56 (set on Friday) by tomorrow morning, if Wall Street closes poorly. There are no major data releases to impact the yen tonight, but any market moves in financial markets that raise the prospect of a Fed rate cut in December will see the Japanese currency advance. The currency offers little value though at present levels, particularly since it could correct sharply the other way at any time, if risk aversion levels suddenly were to fall. My preference is to wait on opportunities to sell the yen, especially against the euro, which would seem to have more upside potential against the currency than the dollar. Strategy: Stay clear until risk aversion levels fall (stock markets rebound) then buy EUR/JPY with initial target prices of 162.00 and 163.00.

No data to influence direction Monday and USD/CAD has remained stuck in its now fairly lucrative 0.98 to 0.99 band. The loonie is still protected by high oil and gold prices, with Nymex crude once again hitting $99 a barrel earlier today before retreating to just below $98. Oil prices are however masking the underlying problems for the loonie and with quarter 3 GDP expected to print at a lowly 2.3% later this week (against 3.4% in quarter 2 and 3.95 in quarter 1), doubts about the outlook for the Canadian economy will begin to intensify in the build-up to next week’s Bank of Canada rate decision. It will be a surprise to me if more and more Canadian bulls don’t exit the market ahead of the Bank of Canada and all the risks for the loonie right now look to be to the downside. I continue to prefer buying the US dollar against the loonie on dips and indeed this has proven to have been the most profitable trading strategy across any of the major pairs in the past week. Strategy: short-term: Buy USD/CAD on dips to below or around 0.98 (stop at 0.9760) with target prices of 0.9880, 0.99 and 0.9930. Longer-run: Buy USD/CAD on prices below 0.98 with stop at 0.95 and target price of 1.02 to 1.05 (move stop to 1.0 when parity level convincingly broken).

Bob B - Nov 26

Market Watch: Bank of Canada

Will interest rates be cut on December 4?

The Bank of Canada meets on December 3rd and 4th next week to deliberate and to deliver the Central Bank’s latest monetary policy decision (Tuesday the 4th). This is arguably the most important policy decision in 18 months as much has changed since the Bank last met in early October. Inflation has slowed, with the Bank’s preferred core rate falling to 1.8% in October, the slowest rate of inflation since June 2006. The headline rate also slowed, to 2.4% from 2.5% in September. Inflation is now lower in Canada than in the US and with the Fed in an easing cycle, the Bank of Canada is expected to follow suit, albeit in a less aggressive manner than the Fed. The key question is whether the Bank of Canada will move to cut rates now or wait until early 2008. Recent economic data may well make the decision somewhat less painful for the Bank and it will be something of a surprise to me if rates are not cut next week.

Underlying fundamental data points to some deterioration in the Canadian economy: retail sales in quarter 3 recorded the first quarterly decline since the final quarter in 2003; exports have dropped significantly over recent months, particularly for durable goods and in September the economy’s trade balance narrowed to its lowest level in 4 years; manufacturing shipments are falling consistently with outlook bleak as new orders are falling at a sharpened rate; GDP for quarter 3, reported later this week, is expected to print at an annualised 2.3% rate, down substantially from the 3.4% rate recorded in quarter 2 and the 3.9% reported for quarter 1. On top of this we have a scenario where the neighbouring US economy is slowing and is expected to slow further, hardly good news for the export-oriented Canadian economy, where 80% of all exports go to the US. To round it off we have the Canadian dollar still trading 20% higher on the year against its US counterpart, which is taking a huge slice off corporate profits and rendering many Canadian manufacturers and exporters uncompetitive or redundant. The global economy too is showing distinct signs of weakness and the idea that a commodity-rich Canada can flourish while the country’s major trading partners sink is far-fetched.

The time is nigh for the Bank of Canada and it is pointless them using the record tight labour market in Canada to adopt a wait and see approach. Labour is a lagging indicator, but jobs will be shed very quickly when things turn nasty, and the undercurrents already suggest the screw is turning. By acting now the Bank of Canada will demonstrate they are thinking proactively, while a cut should also mean some further correction in the value of the loonie and at least allow Canadian producers compete at a fairer exchange level on international markets. Governor David Dodge has complained that Canada has had to carry too much of the burden of a weakened US dollar, but the way to right this wrong is to help drive the Canadian currency to a more realistic value level. While currency valuation is not the policy imperative of the Bank of Canada, currency manipulation on the part of the speculators that have placed Canada’s economy at risk should be.

In any event, aside from the risks posed by a strong Canadian dollar, recent domestic data in Canada points to an economy which is slowing, an inflation rate which is slowing and increasing external risk from growing uncertainty in the US and global economies. Why wait? Forecast: Bank of Canada to cut the key interest rate from 4.5% to 4.25% on December 4.

Ted B - Nov 26