Wednesday, October 24, 2007

Bob's Currency Focus - 12:00 GMT

The euro has drifted to the downside Wednesday and as I write, it is at 1.4230 against the dollar, down from 1.4260 overnight (but it did go as low as 1.4190). This afternoon is going to be quite an unpredictable market with traders awaiting the latest instalment of the US housing sector horror show, when the existing homes sales data for September is released at 14:00GMT. Nobody is forecasting an optimistic outcome and the average consensus amongst economists is for the annual sales rate to have fallen to 5.3 million homes from the 5.5 million reported for August. US stock markets are expected to open lower today and the housing news, coming just 30 minutes after the open, if really bad, could spook investors and send stocks tumbling. Ironically, a subsequent rise in risk aversion and a rush to the exits could send the dollar higher and there is a chance for a fall in EUR/USD right back to Monday’s levels of 1.4125. Any decline might prove to be short-lived however as a deterioration in the housing slump is likely to increase the chances of a Fed rate cut next week and that is not good news for the dollar, facing into next Wednesday’s key meeting. All is not so rosy in the euro garden either though, as this morning’s preliminary PMI data point to a significant slowdown in the euro area’s manufacturing sector, with growth slowing to its lowest level since August 2005. The chances of any imminent ECB rate hikes are fading fast and this will curb aggressive buying of the single currency on levels close to 1.43. Overall the risks today are to the downside and a possible spike lower similar to what we saw on Monday. Looking to the events over the next week though and the underlying sentiment, it is difficult to see the dollar holding any gains it may make for long, so the wisest move right now may be to buy the euro on dips. If you are short in the market, you might stay in, but keep moving your stop down, because we may witness another serious bounce later.

With no data of major significance this week, sterling is profiting from the wider uncertainty surrounding the economies in the US and the euro area and this morning the pound broke below the 0.6950 price level against the euro, a barrier that had held firm for the past 2 weeks. With the euro coming off the back of some weak data and growing concerns about the heightened value of the currency, the pound could potentially hold the euro around the 0.6950 in the days ahead. The major barrier to any further sterling move is if a rise in risk aversion leads to a major sell-off of the higher-yielding currencies today and tomorrow, which would see the pound fall off more than the euro. Cable looks very lofty above 2.05 and offers good sell-down value on prices above this level, with the possibility of another dip to 2.0350 or lower, if volatility levels pick up later today. The current market volatility is making cable an ideal pair to trade in both directions, although the range band has widened in the past week to 2.0250 to 2.0550. Sterling is vulnerable on the yen and Swiss franc crosses at current prices if stock markets sell off.

Carry traders currently want to sell the yen (given the sharp ups and downs we are witnessing), but the ongoing uncertainty in global financial markets means the yen keeps rebounding and we could see the Japanese currency retaliate further today if stock markets retreat sharply. The US dollar hit the Y115 price mark Tuesday but couldn’t hold it overnight, as traders bought the yen when Asian stock markets closed weakly. The pair has now gone as low at 114.10 today and could test Monday’s low of 113.25, if US equity markets tumble later today, while the euro could return to Y160.50. On the other hand, if equity markets rally, the yen will again be sold off and the dollar should be able to rally right back to 115, while the euro could climb to 164 this evening from the current 162.50 price level. September’s trade balance in Japan came in higher than expected and signals the appreciation in the Japanese currency after the credit crunch crisis in August failed to dampen demand for the country’s exports. The Australian and Canadian crosses could move significantly lower today, if the carry trade does experience a major wobble.

The loonie hit yet another high against the US dollar Tuesday, this time a 33 year low, as the US currency sank to a mere US96.25 cents against its Northern cousin. Monday’s decline was quickly shaken off by the Canadian currency as yesterday it resumed its mantle as the world’s strongest currency this year. While the loonie is vulnerable to a major correction at some point, its speculative backers are still not prepared to abandon the currency, just yet. The aggressive nature of the loonies march Tuesday will have put the frighteners up many would-be Canadian shorts and with no further major economic data out this week, only another spike in risk aversion is likely to lead to any significant sell-off. At prices below US0.97, the loonie offers no real value and with risks of further market volatility this week, there is the potential for the US dollar to again rally to 0.98, even if the greenback is unable to sustain any gains for long. The euro continues to offer good value against the loonie at current prices, especially around the 1.3750 price level.

Bob B

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