Friday, October 19, 2007

Bob's Currency Focus - 13:00 GMT

The euro briefly went to 1.4320 overnight before returning to 1.4285 - the level it traded at for most of Thursday evening, after the initial surge. As long as price remains above the previous high of 1.4280, the pair will maintain its bullish tone. With no economic data out Friday, market sentiment and risk aversion will drive prices through to the week’s close. The G7 summit starts later Friday and while it is probable European Ministers will try to raise the question of the weak dollar behind closed doors, it seems highly improbably that the US will permit the release of an official communique that mentions the dollar’s exchange rate. The same goes for Japan and the yen, so any official statement on currencies will probably again focus on the Chinese yuan, given that China are not part of the G7. Markets effectively don’t expect the dollar to get a public airing and that is why there has been a bold move to push the euro higher over the past few days. Today could prove to be volatile as currency traders closely track equity markets and volatility levels. If we get another run of momentum on the euro, we could see the single currency try to reach 2.0350 this afternoon. Stops should be placed at the overnight low of 1.4260 and if this gives way, we could be set for a return to 1.4240 and possibly even 1.42 later today. With no data and a lot of volatility out there, the safest option might be to stay away for the rest of the day and close out positions for the weekend. Any verbal intervention on the euro or dollar could see markets open at significantly different prices come Sunday night.

Despite all the forecasts of gloom for the UK housing sector and the potential for a major slowdown in the economy, today it was reported that the UK grew at an annualised 3.3% rate in quarter 3, above the 3.1% in quarter 2. It is the fastest economic growth seen for 3 years. The quarter on quarter rate at 0.8% was higher than the 0.7% forecast. Sterling has rallied back up towards USD2.05 against the dollar, while pushing the euro back to GBP0.6970 from the GBP0.70 reached overnight. Cable will struggle to hold above 2.05 in short-term unless there is more dollar weakness across the board. Sterling is still attracting plenty of selling interest with many analysts expecting a slowdown in the economy over the final quarter and into early next year. If the dollar stages a recovery late Friday, then cable could fall back to 2.04. there is no value n buying sterling at current levels against the dollar (2.0490), but sterling offers good value against the euro on any euro rallies towards 0.70.

USD/JPY hit 114.83 this morning as risk averse traders exit their long positions ahead of the G7 meeting. That is the lowest the pair has reached in 3 weeks and if equity markets significantly under-perform Friday, then we could see the yen reach 114. The yen will probably revert back to its funding role next week and weaken, unless there is an official statement from the G7 meeting directed at the currency. The euro has rallied back up to 164.90 against the Japanese currency at lunch-time, having fallen to 164.20 this morning. Expect the yen to weaken further today if US stock markets rally to the upside. In this event, the dollar could strengthen to 116, while the euro could reach 165.50.

The loonie hit yet another 31 year high Friday against the US dollar, in the wake of higher than expected consumer price inflation data and oil prices hitting $90 a barrel. USD/CAD fell over 80 points to 0.9653 soon after the CPI data showed the headline inflation rate in September rose to a much higher than expected 2.5% while the core rate slowed to 2.0%, in line with expectations. The headline rate was distorted by a massive increase in gasoline prices over the month and with the core rate (which excludes volatile items like food and energy) in check, it is unlikely to shift the Bank of Canada from its current neutral stance, so the market move we have seen today is a knee-jerk reaction. The loonie is grossly overbought at present and when we do see a genuine shift away form the currency, it is likely to be a very sharp one (CAD longs stand at 85%). The currency offers no value at present levels, and in terms of value against the loonie, the euro again offers the best buy, with the EUR/CAD cross back presently back down to1.38 today.

Bob B - Oct 19

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