Monday, October 15, 2007

Bob's Currency Focus - 13:00 GMT

The euro held support at 1.4150 Friday even though US economic data was stronger than expected. The dollar is simply unable to gain any momentum at present with the market effectively anticipating a further Fed rate cut later this month. We have key inflation and housing data out in the US this Wednesday and ahead of that there is a speech by Fed Chairman Ben Bernanke tonight. Bernanke is unlikely to give too much away in tonight’s speech ahead of a key policy meeting later this month, but if he does emphasis continued weakness in the housing sector and further downside growth risks to the wider economy, then the dollar will suffer. The euro is ideally positioned price-wise to take out the lifetime high at 1.4280, if Bernanke says the ‘wrong’ thing this evening. If he says nothing or talks up inflation risks, then there is plenty of scope for a pullback to 1.4160, or below. Failure by the dollar to take out 1.4150 will however leave the bulls firmly in control. Expect most of today’s price action to be between 1.4150 to 1.4250.

Sterling bounced back rather miraculously on Friday and made further inroads Monday on the back of broad dollar weakness and increased appetite for the carry trade. Sterling has been very volatile in the past week and has fluctuated sporadically against nearly all currencies with little clear directional pattern developing in the short-term. This is a major week for UK data, with consumer price inflation data Tuesday and the Bank of England minutes of the October meeting released Wednesday. Tuesday’s inflation data could determine whether or not the BoE have scope to cut interest rates when they meet in November, while the Bank of England minutes will inform us whether or not the MPC are inclined to move on interest rates at all. Cable should remain in a 2.03 to 2.0440 price range until Tuesday’s data, while the pound should attract support on any rallies to 0.70 against the euro.

The only currency doing worse than the US dollar right now is the yen, which continues to be the target of risk-hungry carry traders. This situation is unlikely to change unless there is a distinct rise in risk aversion levels. The dollar should be able to rise to 118 against the yen in the short-term, although it could prove difficult to hold significantly above this level ahead of the weekend’s G7 meeting, when weakness of both the dollar and the yen may be raised as an issue. The euro rose to above 1.6750 against the yen Monday morning and now seems on course to challenge the lifetime high at 1.6894 this week. There appears little reason why this level won’t be taken out and if the yen cedes the 118 price line to the dollar, then expect the euro to hit the all-time high against the Japanese currency in the coming days.

The loonie hit yet another 31 year high against the greenback Friday (and Monday), when the dollar slipped to 0.9705 against its North American rival. Canada’s leading indicator rose 0.4% in September and vehicle sales rebounded to jump 2.8% in August. Record oil prices are helping to curtail the extent of any US dollar rally and the key question now for the pair is how low can it go, or how low will it be allowed to go? The Bank of Canada meet Tuesday and they find themselves in a serious dilemma. While the country’s underlying fundamentals appear to be sound, many of the economic reports released of late do not reflect the impact of the loonies surge through September and October, during which time it appreciated by almost 8 cents. There has to be concerns within the Bank of Canada about the serious implications for the competitiveness of Canada’s economy moving forward and they may well use the opportunity this Tuesday to signal their intentions on how to manage the impact of the loonie’s strength. It is not beyond the bounds of possibility that they could even cut rates tomorrow, or signal to the market that the next rate move is likely to be down. Tomorrow is a major risk event for the loonie and it could retreat back to at least 0.98 ahead of the Bank of Canada statement at 13:00GMT Tuesday. The euro looks at present to offer good value at levels close to 1.38 against the loonie.

Bob B - Oct 15

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