Monday, November 19, 2007

Bob's Currency Focus - 13:00 GMT

This week may be quite volatile with exaggerated moves coming in either direction, owing to thin trading conditions because of the forthcoming US Thanksgiving holiday on Thursday/Friday. If US housing data on Tuesday is much worse than expected, then a rise in negative sentiment towards the dollar could see it come under serious threat Thursday and Friday, when the US market players are sitting down to their annual turkey feast. On the same week last year the dollar came under a sharp and sustained attack when US markets were closed and the greenback subsequently found itself on a major defensive right up until the Christmas break. We could possibly see a move in the opposite direction this week as most open positions are dollar short and it won’t take much of an erosion of these positions in thin trading to send EUR/USD sharply downwards. It is a week for caution and the technicals will have a very big part to play in determining direction. Later today we will see the release of the National Association of Home Builders report for November and anything short of a poor index reading will be a surprise. Expect to see EUR/USD range trade between 1.46 and 1.47 and traders could again use any bounce in US stock markets as an excuse to drive the euro higher. Weekend comments, or the lack of them, on current dollar weakness, from the G20 group of nations has offered the US currency no respite. Meanwhile comments from OPEC that the oil exporting body is to investigate the possibility of using a currency denominator alternative to the dollar for pricing the world’s most important commodity, has undermined the dollar. Continue to buy on dips and while there is the possibility of the pair rising above 1.47 Monday, we should see quite an element of fluctuation as trading becomes choppy, so don’t stay in too long.

Sterling showed some resilience late Friday when bouncing back against the dollar and closing strongly against the euro going into the weekend. The underlying fundamentals still suggest the UK currency will come under pressure and any upside rallies are likely to attract selling pressure, particularly against the dollar, where the pound still looks elevated in price. Only negative sentiment against the dollar will prevent cable drifting lower this week and having gone as low as 2.0354 Friday it will be a surprise if the next key level of support at 2.0246 is not severely tested this week. The UK currency is oversold against the euro and it should manage to limit its losses against the single currency in the short-term and this pair looks more likely to trade between 0.7120 and 0.7180. U.K. house prices grew at their weakest annual rate for 17 months in November and are unlikely to increase at all next year, U.K. online estate agent Rightmove said Monday. Rightmove's November survey showed house prices were 0.7% lower on the month and 7.9% higher on the year, the weakest annual rise since a 6.4% increase was recorded in June 2006. This comes on the back of a series of soft indicators in the past week and October’s lending data will be studied closely when it is released early Tuesday. The possibility of the Bank of England moving earlier than expected in cutting rates cannot be ruled out and further soft data will fuel speculation about a possible hike in December. Wednesday’s minutes of the November MPC meeting will give a clearer picture as to how the balance of opinion currently sits within the Bank of England. Cable will be boosted by any bounce in stock markets Monday but there is the risk of a sharp decline back below 2.04, if risk appetite levels diminish further. It is dangerous to buy sterling at present prices, given the very real risk of a sharp move downwards, so the preferred strategy is to sell against the dollar on prices above 2.0550.

The yen is back in vogue Monday with stock markets tumbling around the world and risk tolerance on the decline. The Japanese currency has pushed the dollar back 1 yen thus far today and the pair currently trade at 110.15. It looks inevitable we will see another assault below the 110 line and if the dollar fails to hold the year’s low for the pair at 109.12, then any follow-through below this level could trigger a new wave of panic selling on the carry trade and see high yielding currencies like the Aussie and New Zealand dollar, as well as cable, retreat very sharply across the board. Trading volumes are likely to remain thin over the entire week and price moves could be very much exaggerated, so traders need to be on their guard. The yen still looks to offer the best value against the euro, but only on prices above 163. We could yet see a move below Y160 this week, particularly if the yen breaks below the key 109.12 price against the dollar. National department store sales fell for the second consecutive month in Japan in October. There is nothing in the Japanese calendar this week that is going to have much influence. Markets will continue to be driven by sentiment and yen traders need to take their cue from stock market performance. If the Dow plummets lower Monday, then look for the yen to probe to at least 109.50 against the dollar, with the potential for a further downside move overnight. A recovery on Wall Street later today will send the yen backwards temporarily, with the US dollar likely to push the pair back towards 111.20.

The loonie came under pressure Monday, the currency being sold off heavily as yet another bout of risk aversion gripped financial markets. Economic data released Monday was mixed with Wholesale Sales posting a 1.1% rise in September while foreigners sold a net CAD5.21 Billion in Canadian securities in the same month. The latter figure is important as it signals foreigners did not see Canadian denominated assets as good value on the month the loonie reached parity with the US dollar for the first time since 1976. It also follows a similar $3.82 Billion sell-off in August. The loonie is down 0.7% against the greenback and 0.6% against the euro Monday (16:30GMT). Oil prices have come off their highs earlier and are now moderately down for the day and with metals prices also in decline, the commodity currencies in general are exposed. The greenback could rise to the highs we saw last week around 0.9886 later Monday, but any recovery in stocks later this evening could trigger a sharp correction back to at least 0.9740. There are two key releases out for the loonie over the next 2 days – CPI on Tuesday and Retail Sales Wednesday and positioning prior to the actual releases will be as important as any price movement after the releases, with evidence growing in the past week that sentiment is beginning to move against the Canadian currency. The preferred position is to buy the greenback on any dips close to 0.97. The Canadian Dollar should be able to correct back to 1.42 against the euro, once markets stabilise.

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