Bob's Currency Focus - Oct 31

EUR/USD

Just over an hour to go to the Fed and the euro has run up to yet another new high in anticipation of a cut, which should see the euro sail over the 1.45 price mark. How high the pair can go will very much depend on what the Fed says in its accompanying statement. If the Fed hints at further monetary easing in the months ahead the euro may well reach 1.46. Any shift of bias to the inflation side could see the dollar bounce back after an initial push upwards. It is high risk stuff but one would prefer to be long right now than short. Many clever traders will stay out of it altogether until the dust has settled. Today’s report which showed US GDP grew at its fastest pace in quarter 3 since the first quarter of 2006 failed to inspire any dollar rally. The ADP employment report hinted at a possible upside surprise in this Friday’s nonfarm payroll report, as private sector jobs were reported to have risen by 105K in October, above economists’ predictions for a rise of just 60K. The euro was boosted this morning by the preliminary inflation indicator for October, which at 2.6%, is the highest inflation rate seen in the euro area for 25 months. This is sure to keep ECB hawks in the majority and raise the prospect of further tightening in the near future. The European Commission's key economic sentiment index for October,released today, revealed that business sentiment across the euro area weakened further in the past month. The index fell to 105.9, from 106.9 in September. Euro area unemployment dropped to 7.3% in September from 7.4% in August (originally reported at 6.9%, but how the measure is calculated was changed).

GBP
Sterling is the day’s star performer, gaining on both the dollar and the euro, while rising significantly on the yen cross. The currency was boosted by a survey from Nationwide which reported that house prices rose at their fastest pace in 4 months in October, signalling that reports of a major housing slump may be exaggerated. Cable has risen to 2.0780 this afternoon and so long as it stays above 2.0650, 2.10 now looks like a realistic target over the next week. The euro has dropped to 0.6958 against the pound and there is the potential for a brief return to 0.69, if the Fed cuts rates and it fuels a rally in stock markets and the carry trade through to the end of this week. Sterling is vulnerable if there is a rise in risk aversion, given the current rally has come on the back of a new wave of carry trades.

Yen
The yen came under attack today after the Bank of Japan shocked nobody and left its core interest rate unchanged at 0.5%. While not a surprise, the anticipation of a Fed rate cut this evening, is enticing more and more positions into the carry trade, with the Japanese currency being used as the funding currency. Housing starts in Japan crashed by 44% year on year in September, raising concerns about the domestic economy. The yen needs to hold the dollar below 115.50 today, otherwise the dollar could again take control of the pair's direction and we could see a return to 117 over the next week. The euro has risen significantly against the yen to over Y166.50 Wednesday and is now only 2% of fthe magical Y170 price barrier, which it looks set to breach over the next week, unless there is a significant rise in risk aversion levels. If the Fed fails to deliver a rate cut this evening, the yen will rebound strongly across the board, but particularly against sterling and the Aussie and Canadian dollars.

CAD
USD/CAD is currently trading along the 0.95 line, having dipped below it for the first time in 40 years a short while ago. The loonie rallied on the back of a GDP report for August which revealed the economy grew by 0.2% in the month, (in line with expectations) and rising oil prices. Oil has virtually regained all of Tuesday’s losses thanks to a weekly inventory report in the US which shows that crude inventories surprisingly dropped last week. The loonie was untroubled by comments from Canada’s Finance Minister Jim Flaherty, who suggested the loonie's current strength is down to speculative trading moreover underlying fundamentals. We will have to wait until the dust settles after this evening’s Fed rate announcement, to see whether Flaherty’s comments scare off some of the speculative longs in the market. The loonie looks set to record a further record high later today, possibly around 0.9450, but the time must be nigh for a very sharp correction and if Friday’s payroll report out of Canada disappoints, it could just trigger it. The Euro again offers good value at around 1.37 against the Canadian currency.

Bob T - Oct 31