Friday, October 26, 2007

Bob's Currency Focus - 16:00 GMT

Yet another high for the pair Friday, coming up just shy of 1.44, but trading in bullish fashion just below this level. 1.45 now looks like a certainty to be hit next week and markets may not even wait for the Fed on Wednesday, such is the negative sentiment surrounding the dollar. We are in major overbought territory and a major dollar correction is due, once the market is satisfied a significant top has been put in place. We are highly unlikely to see any correction though until after the Fed meeting next week. Any sell-offs in EUR/USD between now and next Wednesday is only likely to be down to bouts of profit-taking, unless there is some Central Bank intervention (unlikely) and this may offer a fresh opportunity to enter the market long. The US dollar is showing increased signs of being abandoned by major players and the sharp rise in gold and oil prices over the past 3 days are very worrying for the dollar and the US economy as a whole. For now the euro will probably keep the pressure on ahead of the Fed and dips below 1.43 are likely to attract strong buying interest. One needs to keep the radar on for any comments from Fed officials and ECB officials ahead of next week’s Fed meeting.

Sterling has fallen badly against the euro Friday as the single currency tries to establish itself above the 0.70 line. There was no data out of the UK Friday but with traders positioning themselves ahead of next week’s Fed meeting, the euro is in popular demand, while continued uncertainty surrounding the UK housing sector is dampening demand for the pound. The euro however is massively overbought at present and offers no value against sterling at present levels. Sterling has the potential to push the euro back to 0.6950 later next week, although further euro buying against the dollar and the yen ahead of the Fed may mean it is wise to stay out of it for the moment. Cable rallied to 2.0572 this morning but could not hold these levels and is currently languishing near Thursday’s close at 2.0518. Sterling clearly is not the currency of choice of the anti-dollar brigade right now and cable’s ability to rise to the 3-decade highs of 2.0650 next week very much depend on how the dollar performs across the broader spectrum. If there is a major market correction next week and traders exit their positions, sterling should gain against the euro, Australian and Canadian dollars, simply because there is a much smaller % of sterling long positions out there than there are long positions on the euro and the commodity currencies.

Japan experienced the seventh consecutive month of deflation in September according to a report released last night and with Industrial Production surprisingly in decline, there are still several question marks about the outlook for the Japanese economy and interest rates. It is highly unlikely the Bank of Japan will raise rates again this year. The yen has managed to hold its own against the US dollar and sterling today, but this is owing to weakness on their part, as opposed to any renewed strength in the yen. The Japanese currency may sell-off a little later today if US stock markets close on a high and we could see the dollar rise to 114.50. The picture for next week looks bleak for the yen, as a cut in US interest rates is likely to trigger a fresh wave of carry trades, with the yen being used as the preferred funding currency. There is huge complacency out there however and this is clearly evident in the steam-rolling advance of the high-yielding Aussie dollar over the past few days. Any serious glitch in global stock markets could send the carry trade running for cover and in this event the yen could make significant inroads, even later today. Keep an eye on the Dow’s performance this evening.

The loonie did it again Friday, hitting yet another 33 year low against the US dollar, when the pair slid to below 0.96 briefly, to touch 0.9588 this morning. Manufacturers in Canada are less optimistic about manufacturing conditions with a 3rd quarter survey showing the key business sentiment index slipped to +2 from +7 in quarter 2. Weekly earnings in August softened to an annualised 3.1% from 3.7% in July, something that will please the Bank of Canada. The loonie is trading softer this afternoon and the US dollar has strengthened to 0.9630 against the currency, while the euro is up to 1.3850, having been as low as 1.3750 earlier today. The loonie offers no value against the dollar at present rates but with an expected rate cut from the Fed and record high oil prices, the US currency will find it difficult to make much progress. The euro continues to be the currency to buy against the loonie, especially on any dips back to 1.3750, or even below 1.38.

Bob B - Oct 26

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