Bob's Currency Focus - 12:00 GMT

USD
The dollar plummeted in early European trading, with the US dollar index collapsing to below 78 again, near its all-time low. New-found negative sentiment has clung to the currency since the release of the Fed minutes Tuesday, with many analysts now expecting the Fed to again cut rates at the end of this month. Last Friday’s apparent upbeat employment report is now but a distant memory. The euro rose to above 1.42 against the dollar yet again and within striking distance of the lifetime high, while the Canadian dollar and Australian dollars hit fresh 30 year and 24 year highs respectively against the beleaguered greenback Thursday morning. The dollar has managed to rise to 117.40 against the yen, which weakened across the board as the Bank of Japan kept interest rates on hold for the fourth consecutive meeting. The dollar has also held its own against the pound which is trading weaker this morning. Some of the positioning against the US dollar looks to be ambitious in the short-term, particularly with the euro, and the dollar does have a chance to reclaim some of its losses later today, particularly if we see a strong trade balance number. The currency has been struggling to hold onto any gains for long, so if you are going to back the dollar, the advice is not to sit on your positions for too long if you can help it. There is the potential for a rise to 118 against the yen and a move to 2.03 against sterling, while 1.41 against the euro is favoured ahead ahead of a fall of the lifetime high, which sits at 1.4280.

EURO
The European Commission this morning lowered its GDP forecast for quarter 3 to between 0.3% and 0.7% from 0.3% to 0.8%, while Eurostat confirmed quarter 2 GDP at a lowly 0.3%, in line with the original estimates. While the euro economy does not appear to be firing on all cylinders, it is still attracting a lot of support, being the only viable major currency alternative to an out-of-favour US dollar. With a new wave of negative dollar sentiment sweeping markets, the euro is in with a great chance of rising to above the lifetime high of 1.4280 within the next week. A weak US retail sales number Friday could provide the impetus traders need to push towards that milestone, while a period of consolidation is likely today with the currency having risen from a low of 1.4014 on Tuesday to 1.4217 this morning. A drift back to 1.4150 looks more likely in the short-term, before the next leg up. The euro rose significantly against the pound this morning, hitting a high of over 0.6970 and has the potential to reach 0.70 in the short-term, while the single currency has gained over 100 pips against the yen Thursday and at 1.6687, it is now within sight of the all-time highs near 1.70. With the carry trade back in vogue, there appears little to stop the euro reaching a new record against the yen, unless we encounter a prolonged bout of market instability, or have Central Bank intervention.

GBP
The pound came under pressure Thursday as the RICS house price survey for September reported the greatest fall in house prices in over 2 years. Despite the bad news, against the majors the pound only lost against the euro, while holding its own against the US dollar and gaining 100 pips against the yen. It remains vulnerable though as concerns about the economy’s housing sector grow, although greater interest in the higher yielding currencies will afford it some protection in the short-term. We could see the euro rise to 0.70, while a decline to below 2.03 against the dollar is possible later today. There is no further economic data out of the UK this week and the currency’s immediate fate will very much depend on US data.

Yen
As expected the Bank of Japan kept rates on hold Thursday and with Governor Fukui’s press statement lacking in clarity and seemingly riddled with contradictions, the smart money is on the Bank of Japan remaining on hold until the end of the year. The yen, not surprisingly, ceded further ground against all currencies this morning, particularly against the euro, with EUR/JPY having reached 1.67. The yen is currently at 117.50 against the dollar and could fall to below 118 later today, especially if US stock markets rally. The Japanese currency has also fallen dramatically against the commodity currencies today and with intensified interest in the carry trade as risk tolerance levels remain high, the yen looks under threat to the end of the week. The only chance of respite for the yen is if stock markets reverse rends and risk aversion levels rise.

CAD
The loonie struck yet another 30 year high today against the US dollar, with the US currency dropping to 0.9746 earlier Thursday. Rising oil prices have helped to underpin the Canadian currency, which thus far has shown no inclination to correct, following its recent rapid rise. Today’s Trade Balance number will be important to test the competitiveness of Canadian exporters, faced with a strengthening domestic currency. The figure is from August, so will not capture the most recent sharp appreciation in the currency, which occurred during September. A sharp narrowing of the trade surplus, particularly with the US would hurt the loonie and should send it into retreat. The CAD does not offer any value against the US dollar at current levels and there is the potential for a correction to 0.9830, or even higher if the trade data is bad. A much wider than expected trade surplus on the other hand could help the loonie push the dollar back to 0.97. The best cross to range trade right now remains AUD/CAD.

Bob B - Oct 11