Tuesday, October 23, 2007

Bob's Currency Focus - 15:00 GMT

The dollar may have gained the most in one day for almost two and a half years against the euro Monday but true to it form it gave back most of those gains today and the euro is now trading at the same levels it was at last Friday. The only thing that is going to enable the dollar make progress at present is if we have a sustained period of instability in equity markets, whereby a heightened demand for US bonds and a repatriation of overseas funds back to the US would see the dollar appreciate against all currencies, except the yen. Stock markets have rebounded Tuesday (albeit prematurely, as the fundamental concerns that triggered last Friday’s move have not changed) and panic-stricken traders that ran for the exits Monday are back in droves to sell-off the greenback. While this presumptuous approach may work for today, there is quite a deal of complacency out there and I for one will be surprised if we do not see Monday’s uncertainty resurrect itself again later in the week. A further capitulation in stock markets is likely at any time and traders need to be on their guard. The euro has returned to 1.4250 Tuesday lunchtime and this in itself is a sizeable bounce from yesterday, so it may be expecting a bit much to hope for a higher close than that this evening. There remains a possibility that the pair could even retreat right back to 1.4180, if US stocks start to plummet. If stock markets do remain stable over the next few days, then I expect to see the euro to sail over 1.43 again Wednesday, when the US existing homes sales data is released (barring a major upside surprise in this data). Poor home sales figures this week may well copper-fasten a Fed rate cut for next week and with this prospect looming large the dollar will find few friends this week. The dollar’s only hope is for risk aversion levels to remain high, something that will temporarily protect it.

Sterling has had a great day Tuesday, hitting the 2.05 bar against the dollar, while sending the euro scurrying back to 0.6950. It has recently come off those levels but remains well bid. We have witnessed with sterling over the past few weeks that every major rally usually leads to major sell-off. I maintain my position that cable is a good sell at levels close to 2.05, while the sterling offers good value against the euro at any price close to 0.70. With no major economic data out this week (except October’s CBI data Tuesday, which while softer than expected, is not a major market-mover) sterling is likely to run with the flow. This makes it a great currency to trade, particularly cable, while it remains in the 2.0250 to 2.0550 price range. If there is a breakout in cable this week, it could come on the upside, if US housing data is weak enough to assume a Fed rate cut on October 31st. Risk aversion levels remain high and with the pound also being sold for M&A reasons, sell-offs on rallies in the currency should continue.

The yen returned to the familiar role of funding currency Tuesday and suffered major losses to the euro, sterling and Canadian dollar, while the dollar rose to Y115 this afternoon. The dollar in particular will find it difficult to make gains beyond 115.50 in the short-term, while the yen is certain to rally strongly, if market volatility rises. The euro has almost recouped all of its losses from Monday again the yen and could rise to 165 against the Japanese currency over the next few days. If equity markets fall sharply, the yen could carve out major gains against sterling and the Canadian dollar, as these crosses look heavily weighted with short-term bets.

The loonie is experiencing one of its best days ever Tuesday and has put the disappointment of a sharp reversal on Monday clearly behind it. Even before Tuesday’s Retail Sales data was released, the loonie had chalked up 1.5% on the US dollar, while having also hit new high for the year against the euro of 1.3714. One might be forgiven for believing it all appears a bit suspect in how the Canadian dollar appreciates significantly in the run-up to key major data releases – that subsequently prove to be greater than market expectations (Retail Sales were 0.7% Vs 0.6% expected), but this observation aside, the loonie remains the currency to buy on dips as it invariably rebounds strongly. USD/CAD hit 0.9625 this afternoon, its highest level since 1974 and on current prices the CAD offers no value against the US dollar. The euro does offer very good value against the loonie - currently on offer at 1.3750, considering the pair opened the day at 1.3868 and the euro is well bid today. Eventually the realisation that a US slowdown will hurt Canada’s exports will weigh on the loonie, but as of yet, the currency is showing no sign of weakness.

Bob B - Oct 23

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