Bob's Currency Focus

USD
The dollar declined against most currencies Thursday, although it did manage to recoup some of its losses towards the close and gained against sterling and the yen. Despite a better than expected reduction in the country’s trade deficit and a decline in jobless numbers, traders are generally shying away from the currency as traders begin to expect a further Fed rate cut at the end of this month. Every dollar rally we are seeing is fleeting and the market is using each opportunity as a means of selling the greenback at a cut-down price. There is huge complacency out there at the moment but with the prospect of further rate cuts in the US while on hold elsewhere, nobody wants to stay on the dollar for long. Anything short of a very positive retail sales number today is unlikely to offer even short-term dollar support. Volatility in equity markets has increased and if we see a significant decline today in stocks, it may offer the dollar some protection, albeit temporary. A poor retail sales number coupled with a bounce in equities should see the dollar lose out to the euro, the AUD, CAD and NZD, although it could rise to 118 against the yen. A very positive retail sales number >0.5% should help pare back rate cut prospects and boost the dollar across the board. Against the euro, the dollar needs to break below 141.50 and 1.4130, if it to make any meaningful progress. There is also the potential for a move to 201.90 against sterling later today.

EUR
The euro was boosted early Friday by a positive set of Industrial Production numbers for the euro area in August, which came in much higher than expectations. Comments about inflation made by ECB German member Alex Weber Thursday caused some consternation in wider markets, but helped in part to give the euro a lift to 1.4240 against the dollar. Weber suggested that the ECB may have to continue to raise interest rates, even if economic growth were to continue to slow, to keep price inflation risks under control. The euro rose sharply to 0.70 against sterling yesterday and is currently trading near that price level. We may see a push back up towards 1.4250 today against the dollar, because the pair is still not overbought on the daily chart, while progress against the yen will very much depend on risk tolerance levels, which declined somewhat Thursday, after a drop in stock prices. The euro also rose to a fresh lifetime high against the Swiss franc Thursday, going over 1.68 for the first time and the pair currently trade close to that price level. An interim move to 1.6850 is possible, particularly if equity markets trade positively. There could be greater market volatility Friday and a broad fluctuation in prices, similar to what we saw on Thursday, is likely.

GBP
Sterling has struggled ever since the RICS house price index was published Thursday and cable today tested price levels just below 2.0250, having been above 2.04 early yesterday. Sentiment remains negative towards the currency and although it is gaining some protection from increased interest in carry currencies, it will probably continue to be sold off on any significant rallies, particularly against the US dollar. Although prospects of a Bank of England rate cut before the end of the year appear to be rising, markets will have to wait until next week’s consumer price inflation data before firming expectations. Sterling looks oversold against the euro and any advances towards 0.7020 should attract some selling pressure, with the potential for a near term move back towards 0.6970. If cable comes under pressure, then we could see a retreat back as far as 2.0195, but if the dollar comes under pressure because of US data, then sterling could rise back to 2.0350.

Yen
The increased appetite for the carry trade had the yen on a major defensive over the past 24 hours, although a sudden decline in risk tolerance helped the Japanese currency stabilise overnight. The yen is still vulnerable though and a retreat to 118 against the US currency Friday looks possible, if the US currency gets boosted by domestic economic data. If high yielding currencies come under threat later Friday, then the yen will profit, particularly against the AUD, NZD and sterling. Consumer sentiment rose in Japan for the first time in 5 months in September, but the data had no market impact as the yen’s price movements are currently dictated by risk tolerance levels.

CAD
The loonie hit a fresh 31 year high against the USD Thursday, the pair clocking below 0.9730. The dollar rallied to 0.9797 early Friday but the pair again came under selling pressure and is currently trading around 0.9750. August’s trade surplus in Canada came in higher than expected, although when one looks at the detail of the report it is not as positive as it appears on the surface. Exports fell by 1.8%, while imports fell 3.8%, indicating an easing in domestic consumption. With oil prices riding close to $83, the loonie will continue to be supported strongly and any rallies in the USD are likely to attract fresh selling pressure. There is no data from Canada Friday, but there is likely to be some positioning over the next few days ahead of Tuesday’s Bank of Canada meeting, so expect an increase in volatility between now and then. With few players short on CAD right now, we may see an exit of a number of long positions before Tuesday, which should give the USD the chance to correct back to at least 0.9830 before then.

Bob B - Oct 12