Thursday, October 4, 2007

Bob's Currency Focus

Thursday Oct 4: 16:00

The euro has rebounded to 1.4140 having hit a low of 1.4066 as markets grappled with the meaning of the ECB policy statement Thursday. Traders are positioning themselves ahead of the critical US payroll report 12:30GMT Friday which is going to determine the dollar’s immediate fate and today’s price swings may only prove to be temporary. The euro also fell against sterling today, going as low as 0.6910 before bouncing back to 0.6925. The ECB look set to stay on hold for the remainder of they year and with Trichet iterating downside risks to euro economic growth in the medium term, the euro may well struggle to recapture the 1.42 level against the dollar unless we see a poor non-farm number from the US Friday. With carry trade appetite on the up, the euro could hit 1.65 against the yen today. EUR/CAD is the one cross that offers some medium term upside value, having hit a low of 1.4050 today.

Sterling firmed after the Bank of England kept rates unchanged. Halifax house index shows the first price decline this year and with expectations of a rate cut before the end of the year, the pound’s gains could prove to be short-lived. Expect caution ahead of tomorrow’s US nonfarm payroll number and GBP/USD should largely remain in the 2.03 to 2.0440 range between now and then. With no UK data for the remainder of the week, sterling’s immediate fate depends on US data and a strong payroll number could see cable fall back below 2.0250.

The prospects for Friday’s payroll number took a knock when the weekly jobless claims figure rose by its highest level in 4 months Thursday. Expect whiplash moves in the currency between now and 12:30GMT Friday. A figure of over 120K Friday should see the dollar push the euro back below 1.40, while another disastrous number <40K will raise expectations of further rate cuts and the greenback should fall to a new record low against the euro and to 2.05 against sterling.

The Japanese currency is totally out of favour this week and even declines in global equities in the past 2 days has failed to spark a yen revival. There should be consolidation below 117 against the dollar ahead of Friday’s payroll report, where a negative number could lead to a sharp correction back down to 115. The ratio of longs to shorts was nearly 50:50 in the latest COTS report, so the yen does not have the same potential to move as sharply as it did back in August, if risk aversion levels were to rise later this week. However, given the weight of the carry trade this week, AUD/JPY and GBP/JPY could sell off significantly Friday, if a weak US payroll report leads to heightened concerns about the state of the US economy.

Still the most resilient currency on the market and the CAD has now closed better than parity against the US dollar for 4 consecutive days. The economic fundamentals for Canada remain sound and the first big test for the parity-beating currency will come in the shape of August’s employment data on Friday (11:00 GMT), which is released 1.5 hours ahead of the US payroll data. A strong Canada payroll number could send the USD/CAD to below US0.99, while a minus number will see the CAD fall sharply against its US counterpart, regardless of the outcome of the US employment report. The CAD is overbought on most of the crosses at the moment, with little value on offer, although CAD/JPY could scale 118 if both the Canadian and US data is good on Friday.

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