Thursday, October 18, 2007

Bob's Currency Focus - 15:00 GMT

Yesterday’s woeful report on US housing starts and building permits was far worse than expected and sent shockwaves through the markets and the yield on US treasurys nosedived. The dollar now finds itself under renewed pressure as markets begin to price in a further Fed rate cut at the end of October. The US dollar index has also sunk to its lowest print ever Thursday and all of this ahead of the G7 meeting which starts tomorrow and at which European officials are expected to voice concerns about the weakness of the US currency (albeit unofficially). Markets don’t appear to expect anything to materialise from the G7, because the dollar continues to be sold off in large volumes. The euro this morning took out the 1.4280 lifetime high and hit a new high of 1.4312. With dollar sentiment so negative, the dollar is going to continue to struggle, with its rallies being limited to sell-offs owing to profit-taking. What is really worrying for the US currency is its sharp decline against a broad-based appreciation of both the yen and the Swiss franc today, which suggests that for now the dollar has been abandoned as a ‘safe haven’ currency by risk averse traders. The euro appears to offer little value at current levels, but the market may try to push it to as far as 1.45 in the near future. So long as the euro remains above the previous high of 1.4280, there is the potential for the pair to climb to at least 1.4350 by tomorrow. If the euro stalls and profit-taking ensues, then a fall back below 1.4280 will open the way for a retreat back to 1.4240, with an outside chance of a sharp decline to 1.4180 over the next 24 hours.

Sterling got a lift from a strong set of retail sales figures for September, which printed at 0.6% on the month, much higher than forecast. Cable rallied to just over 2.05, thanks mostly to a further dollar decline. Having taken out the 2-month high at 2.0492, cable now has the potential to rise towards 2.06 and the 28 year high at 2.0660. The pound fell against the euro this morning, with the single currency hitting 0.6984. With prospects of an interest rate cut in the UK this year now receding, on the back of stronger data, the pound should be able to keep the euro below 0.70 in the short term and again any rallies to this price level offer sell opportunities for EUR/GBP, although any attempt to take out 0.6950 is likely to hit resistance. UK third quarter GDP is out Friday and all the indications are that the number will match the robust 0.7% seen in quarter 2, for another annual 3.1% growth rate. A strong GDP figure should boost sterling and could see cable establish itself above USD2.05. On the crosses, sterling should be able to gain against the Canadian dollar and the Aussie dollar, particularly while risk appetite for the carry trade is somewhat more constrained.

The yen has gained significantly over the past day, with the aversion to risk, nervousness over the forthcoming G7 meeting, lower interest rate expectations for the US and a repatriation of funds all contributing to a strengthening Japanese currency. The currency has gained 100 points against the dollar since the close in New York Wednesday and the pair reached 115.23 today and is seemingly on its way to going lower. If equity markets continue to tumble, there is scope for further appreciation, possibly to as low as 114 by Friday. Against the euro, the yen should be able to push the single currency back towards 164 ahead of the weekend. But any shift in risk tolerance levels will see the yen once again go into retreat, so traders need to keep a firm eye on what is happening on equity markets.

Despite the record oil prices, the loonie has clung to the dollar for most of Thursday and it has lost out to all other currencies. The US dollar’s broad retreat was triggered by data released Wednesday that shows that the US housing sector crisis is getting significantly worse, leading many to believe the US economy is headed for recession. While bad news for the US dollar, it is hardly good news for a Canadian economy that sends 80% of its exports to the US. The loonie could be the one currency to watch in the coming weeks, because with 85% of all open positions on the currency now long, if the fate of the Canadian economy is coupled with that of the US in the minds of investors, we could soon witness a major reversal in the USD/CAD currency pair. For now, the US dollar must hold the 0.97 line against the loonie, while a rally that sees the pair close above 0.9830 could signal a possible rethink on which direction the pair is going in the near future. Friday's consumer price inflation data from Canada is going to be crucial and a very soft set of figures should trigger a sell-off of some of the current CAD long positions. On the crosses, the CAD will probably remain under pressure against both the euro and the AUD.

Bob B - Oct 18

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