Bob's Currency Focus - 14:00 GMT

EUR/USD
The euro briefly hit a new high during the Asian session, hitting 1.4530, before going into retreat. The pair went as low as 1.4444 during the European session and has since rebounded to 1.4480, as trading remains choppy. There was no data out in Europe this morning but negative sentiment continues to dominate the world’s financial markets following an announcement at the weekend that the CEO of Citigroup has resigned as the Bank is forced to increase its write down owing to the ongoing subrime crisis. Friday’s buoyant payroll numbers in the US were quickly forgotten and the dollar came under intense pressure late Friday, with the US dollar index closing at its lowest level ever at 76.30. The rise in risk aversion has failed to benefit the dollar as currency markets (rather mistakenly) see the credit crisis issue as predominantly an American problem. The euro should continue to be well bid in the lead-up to this Thursday’s ECB meeting, with markets expecting the ECB to maintain a hawkish bias, although interest rates are expected to be kept on hold. The technical indicators all point to the euro as significantly overbought right now and there must be scope for a mini-correction back to at least 1.44 over the next 2 days. There is little value in buying the euro at present levels, so wait for a dip closer to 1.44. Today’s ISM Services PMI in the US will be important for short-term confidence and it may well surprise to the upside, given the substantial job gains reported for the Services sector in last Friday’s nonfarm payroll release. I expect a trading range of 1.4410 to 1.4530 to be maintained into Tuesday.

GBP
Sterling came off rather sharply Monday following some very weak data released earlier this morning. There was a sharp decline in the CIPS services PMI in October, while both manufacturing and industrial production in September also surprised to the downside. Cable went from its high of 2.09 hit late on Friday to hit 2.0787 a short while ago. Cable’s price still remains elevated though, as the pound continues to be protected by weak dollar sentiment. There is the potential of a sharp pullback to 2.05 during this week, if the dollar is able to stage a broader correction. Some traders may be holding out for a stab at 2.10 but such a move would appear to be totally unjustified when one looks at the underlying fundamentals. Cable now offers good sell down value on any upside rallies that see the price close to 2.09. The dollar needs to break below 2.0750 if it is to gain any real downside momentum. Sterling is also likely to come under increased pressure against the euro during the rest of this week as the policy stances of both the ECB and the Bank of England are expected to differ – both Banks have rate announcements this Thursday. The euro has the potential to test 0.7020 over the next few days, while sterling should struggle to make any progress below 0.6950, having ceded this level to the euro Monday morning. Sterling will also remain under pressure on the yen and swiss crosses, while risk aversions levels remain high.

Yen
The yen has appreciated sharply early Monday thanks to the Citigroup story which has seen stock investors head for the exits, helping the lower-yielding currencies to make gains. The dollar is now down to 114.10 and if the pair falls below 114, we could potentially see a near-term move to 113.30, even as soon as later today. The euro also came under pressure against the Japanese currency and dipped to 164.95 in early European trading, before bouncing back to 165.25. As long as markets remain spooked by the subprime fiasco and stock markets sell off, the yen should continue to advance at the expense of all other major currencies and we could see the euro fall to 164 over the course of today if US stock markets react badly to the Citigroup news story. The yen has gained almost 200 points against the pound already today (now at 237.35) and we could potentially see GBP/JPY return to the 235 price mark over the next 24 hours. Watch out for a stock market revival, because this will see a rapid reversal in the yen’s fortunes.

CAD
The loonie rallied hard early Monday for no particular reason and hit new highs against both the US dollar (new 50 year high) and the euro. USD/CAD went as low as 0.9305 before rebounding to 0.9345 as risk aversion gripped the currency markets. Canada’s much better than expected employment report Friday had see the loonie reach new levels, although yet again the relative sharpness of the move against the US dollar was unjustified, particularly since the US nonfarm payroll number for October was twice the forecast figure. There is too much complacency emanating from loonie traders at present and the currency has evolved into a major speculative bubble. There remains the risk that the currency could move higher, since its ascendancy has neither been curtailed nor stalled at any particular price level to date. But it must be remembered the loonie has effectively advanced almost 13 cents against the US dollar since early September, without any correction whatsoever, so a sharp correction is overdue. We may have to listen for verbal intervention from the Bank of Canada for some signal that might trigger a real sell-off of the currency. At prices below or close to 1.35, the euro does offer good value against the loonie, particularly as the ECB is expected to sound hawkish this Thursday, which should keep the euro firmly bid. I would like to see the dollar form a meaningful support base, before going long on USD/CAD.

Bob B - Nov 5