Monday, October 8, 2007

Bob's Currency Focus - 12:00 GMT

The fundamentals influenced this morning as Friday’s rather positive US payroll report saw the dollar rally and push the euro back down towards 1.4080. Monday is a holiday in the US and we should be range-bound within Friday’s limits of 1.4032 to 1.4156 today, with the bias to the downside. The Fed are unlikely to cut rates later this month and indeed they could remain on hold for the remainder of the year as the prospects of a major US economic calamity appear to be receding. The dollar is clearly undervalued and with a slowing euro economy, EUR/USD may have a significant top in place at 1.4280. The euro offers little value close to 1.42 and any rallies near to this level will offer an attractive selling opportunity. We are sure to see institutional buying close to 1.40, and buying close to this level with stops just below 1.40 will be popular. With the prospects of a more meaningful correction improving for the dollar, selling down on failed upside rallies from around the 1.4150 to 1.42 price level may be the more astute move for now. 1.4085, 1.4050 and 1.4035 are the more immediate target levels ahead of 1.40.

Sterling has been written off by many currency analysts in recent weeks, yet the currency is more than holding its own against the dollar, while it has strengthened against the euro and the yen in the past week. Uncertainty about the euro economy and a renewed appetite for the carry trade is giving the pound important protection. Sterling has a good chance to push the euro back to 0.6850 this week, if market interest in higher yielding currencies intensifies. Cable should primarily trade in the 2.03 to 2.0440 price range for the next day or two, until a decisive move is made by one side or the other. It currently offers a good sell opportunity from above 2.04, particularly as the fundamentals on the US dollar side appear to have improved. Downside price targets are 2.0370, 2.0330 and 2.03. We need a close below 2.03 before we set our sights lower.

The yen has weakened dramatically since Friday as positive US economic data has fuelled a fresh sell-off of carry-trade funding currencies like the yen and the Swiss franc. We are likely to see the dollar rise to 118 in the short-term, before the yen offers any significant resistance. Monday’s break above 117.20 has seen the dollar rise to its highest level against the Japanese currency in over 2 months. There is an outside chance of a BoJ rate increase on Thursday, but it is unlikely with the economy having just posted its sixth consecutive month of price deflation. If the BoJ stands pat on rates, then expect a fresh wave of yen selling with many traders likely to offload the currency before the Bank make their announcement. A dollar rally to 119 later this week, where the 100 day SMA price currently resides, is a possibility.

I covered the loonie’s latest leg upwards in detail in last Friday’s analysis. With Monday being a holiday in both the US and Canada, we won’t see much activity on the pair until Tuesday. The loonie offers no value at current levels and there is plenty of room for a near-term correction in USD/CAD, certainly back up to 0.99, just below the previous 30 year low for the pair, which was taken out last Friday. Friday’s low of 0.9775 should act as a very strong support and a solid anchor/stop when buying the pair. The ratio of CAD longs to shorts in the market at present is almost 85% to 15% and we are likely to see an exodus of some of those CAD longs ahead of next week’s Bank of Canada monetary policy meeting, which is a major risk event for the currency. A rise back up to parity before then is a possibility, particularly if the US dollar can sustain a broader based recovery. AUD/CAD may be the safest cross to trade for range-traders, with both currencies equally overbought across the currency spectrum.

Bob B - Mon Oct 8 2007

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