Friday, November 2, 2007

Bob's Currency Focus - 14:30 GMT

Kick me when I’m down, whether I am good or bad, seems to line that springs to mind when looking at the dollar’s performance thus far Friday. One could sense the market’s appetite to go for the kill from the off this morning, when the euro moved up close to the all-time high at 1.45, before the key payroll data from the US was even released. A bad number was going to be jumped upon and were the number bad we were looking at 1.4550 and above. The market did not anticipate the figure of 166K we subsequently got – twice the estimate, but with no dollar bulls in the market, traders of EUR/USD – who are over 85% long in the market at the last count, held their nerve and their positions and after a paltry dip to 1.4450, the pair sprung upwards to hit a fresh lifetime high at 1.4521. It’s rather baffling in a sense but it is a demonstration, if one was needed, of just how negative current sentiment is against the dollar. In the days of old a nonfarm number that was twice the forecast would have seen a dollar rally of 150 pips and it would have held those gains. What is rather more alarming about today’s price action though is that despite a 370 point collapse in the Dow on Thursday, the euro entered today’s US session stronger than it was at the same time yesterday. Does this mean the euro has now become the new safe haven currency when risk aversion levels are high? This is a highly unusual occurrence and merely underlines the extreme bullish tone that the euro currently commands and the flight to anywhere away status of the US dollar. October’s manufacturing PMI for the euro area reported a significant slowdown over the month with the key index falling to 51.5 from 53.2 in September. Germany’s index fell to 51.7 (forecast was 53.6) from 54.9 a month earlier and indicates the euro zone’s manufacturing sector is coming under increasing pressure. The market ignored the data, preferring to stick to the overriding market sentiment. A considerable amount of poor economic data out of the euro area of late has been ignored, while preference has been given to inflation and the ECB’s hawkish bias. It is difficult to see how the euro can possibly sustain a price above 1.45 on recent events, particularly seeing as a Fed rate cut in December looks off the agenda, following today’s payroll data. I would not buy the euro at levels close to 1.45. My instinct is that we could see a reversal on Monday once the impact of today’s US payroll report has sunk in (if it does not trigger a move today) and we should see a retreat back to 1.4350 at least, early next week.

Sterling held up remarkably well Thursday and Friday (currently 2.0832) when a sharp tumble in global stock markets failed to trigger any great sell-off in the high-yielding pound, while the Aussie and Kiwi dollars crashed. The pound has thrived on negative US dollar sentiment this past week and on Thursday hot a fresh 26 year high of 2.0875. While such levels, on the face of it, don’t appear sustainable, it is worth noting that sterling has gained very little against the US currency in recent months, when compared with most other currencies, so all we are currently witnessing is more a stabilisation of the UK currency. Friday’s construction PMI index reported a sharp pick-up in activity in the sector during October, the index rising to 64.8 from 60.2 a month earlier. Sterling gave back much of its quick-won gains against the euro in the past 24 hours as a rise in risk aversion levels called a halt to the expansion of the carry trade which had picked up pace following the US Fed’s rate cut announcement on Wednesday. Cable does look vulnerable at present levels above 2.08, but there is some chance sterling could sprint to 110 before we see a true correction. However it is dangerous to buy cable at the present price because any correction downwards could be sharp, probably bringing us to 2.0525 at least. Cable is overbought following a 5 cent move in the past week and we should see the pair selling off a bit early next week, even if there is a bold move to hit 2.10 beforehand. The pound offers good value on prices close to 0.70 against the euro and there does remain the chance of a very temporary correction back to 0.69, although next Thursday is a risk day for sterling on this cross, as both the ECB and Bank of England meet and with the Bank of England expected to keep rates on hold and say nothing, the ECB is expected to keep rates on hold and deliver a hawkish message in response to highest inflation figure seen in the euro area for 25 months. This could send EUR/GBP on an upside rally. Sterling will remain vulnerable on the yen and Swiss franc crosses, if risk aversion levels remain high.

The yen is the proverbial yoyo of the week, appreciating sharply as stock markets fall and depreciating just as quickly as stock markets look like they may recover. Volatility has been pretty sizeable which explains the seesaw price direction, but one cannot trade the yen right now, without placing limit and stop orders, because otherwise you miss the moves. It is worth noting that despite all the doom and gloom that follows the US dollar traders still prefer it to the yen, all other things being equal. The only way the yen is going to push into a real trend pattern is if the token bearish effort we are seeing in stock markets is to be sustained for a period of time (weeks, not 1-2 days). We saw the dollar quickly advance to 115.50 after today’s nonfarm payroll report, but soon after the pair was trading back at 114.80, as US stock markets went negative for the day. It is a foolhardy game trying to trade the yen against a backdrop of stock market volatility and the best advice is to stay away from it for now. The euro is trading at the midpoint of the day’s trading range Friday (166.12) and once suspects the pair is destined for 168+ next week, with the prospect of a hawkish sounding ECB. This of course will change, if stock markets continue to misbehave and tumble lower. The dollar should be able to move to 116.50, under stable conditions.

It’s almost a daily occurrence trying to explain a new high being hit by the Canadian dollar and today is no exception as we saw the loonie smash Wednesday’s historic low of 0.9416 to bring the anchor down by almost another cent Friday to 0.9325. Today’s rally was sparked by a much higher than forecast jobs gain in October (+63K vs +15K forecast), while the unemployment rate fell to 5.8% from 5.9% the previous month. The market moved ominously prior to the release again, bringing the loonie down close to the previous low. This appears to happen before each key economic release out of Canada of late, where the subsequent report exceeds market expectations. Could it be a leak or is it just down to a perceptive market. There is something troubling however about the fact that USD/CAD has absolutely no support levels to fall back on. There is not a bull in sight it seems and on current performance the loonie makes the euro look like a pussycat. Will the loonie ever stop appreciating? The next Bank of Canada meeting should be particularly interesting. While today’s data was indeed robust and points to a tightening labour market, it is a lagging indicator and is never going to reflect the risks associated with an export-oriented economy that has a currency which has grown 20% in value in 7 months against the currency of the country that constitutes 80% of its exports. The loonie hit 123.60 against the yen today, which is nearly 27% above what it was trading at on March 5th and one may be forgiven for mistaking the loonie for a Chinese stock, rather than a major currency. The loonie offers no value at current price levels, but I’m reluctant to trade it at all until we see some evidence of a corrective tone.

Bob B - Nov 2

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