Tuesday, November 6, 2007

Bob's Currency Focus - 15:00 GMT

I’m a bit surprised that the euro managed to break above 1.4550 so easily Tuesday as I thought the pair might remain contained for a day or two ahead of the ECB on Thursday. Monday’s better than expected ISM services index reading in the US went the same way as last Friday’s nonfarm payroll report – it was ignored, and the prevailing negative sentiment against the US currency continues to dictate direction. Monday saw only temporary respite for the US currency and the euro took control of the pair again Tuesday and is already up a whopping 90 pips on the day, as of 15:00 GMT. The greenback is now being plagued by fears the credit crisis will spill even deeper over into the wider economy and that the Fed will be forced to cut interest rates further. The ECB is expected to maintain a hawkish bias this Thursday and the single currency appears to be the unit every trader wishes to be on. Central Bank intervention cannot be ruled out in the coming weeks, given the worrying nature of the dollar’s demise and the fact oil and gold prices are spiralling out of control, but EUR/USD may need to hit 1.50 before any direct intervention (Central Bank buying of dollars) is likely. So while there remains the risk a major correction downwards, the smart money is still to buy the euro on dips. We may be lucky to see any dip back to 1.44 ahead of the ECB, so anyone looking to enter the market over the next 3 days may be forced to come in at elevated prices. There is always the danger the ECB could surprise everyone and take a softer tone on the rate outlook, preferring to talk up the downside risks to growth over inflation. This is a move that in itself might diffuse currency markets and lead to a major rebalance of EUR/USD. The trading range for the pair has picked up a tier since yesterday and the range for the next 24 hours is likely to be 1.4440 to 1.4580. Sellers are tipped to come into the market at levels above 1.4550 and not look for more than 50 pips, given volatility levels.

Cable shook off Monday’s reversal to rebound somewhat on Tuesday, hitting a high of 2.0902 early this afternoon, over a cent higher than yesterday’s close. Retail Sales numbers from the BRC released today reveal a pretty severe slowdown in same store sales in October (down to 1% year on year) while total retail sales also slowed (to 3% from 4.95 in September). Although the UK think tank group NEISR estimate GDP for the 3 months to the end of October steady at 0.7% - the same as September, one cannot get away from the fact that UK economic data is beginning to soften. Cable is merely riding the dollar negative wave at present, but there is the real risk of a major reversal in this pair, once a broader dollar correction is underway. One cannot justify buying sterling at levels close to 2.09, so even in the short-term prices in this vicinity offer good sell-down value. The weaker than expected data over the past week may give some traders the jitters ahead of the Bank of England rate announcement on Thursday. While a rate cut still looks unlikely, the fact a surprise rate cut is even remotely possible means several sterling traders may run for the exits ahead of Thursday’s MPC decision and cable could fall to at least 2.07 before then. It is dangerous to buy cable against the backdrop of weak UK data, even if negative dollar sentiment remains extreme in the short-term. The euro, as I forecast yesterday, is beginning to creep back up to the 0.70 mark against the pound, hitting 0.6980 today. I expect this trend to continue and we could see 0.7020 threatened by Thursday evening. Sterling has weakened significantly against the Swiss franc over the past 2 days and may weaken further if market volatility continues. The pound did however manage to recover to 238 against the yen as a recovery in stock markets Tuesday meant the yen fared even worse against all the majors than the dollar.

The yen suffered this morning as a bounce in European equities saw the currency ditched in favour of higher yielding currencies. The yen fared particularly badly against the euro which hit a high of Y167.05 this morning, having come off a low of Y164.95 Monday. Volatility has however returned to US stock markets Tuesday and the dollar has fallen to 114.34 against Japanese currency, having traded above 114.70 earlier this morning. If the Dow plunges later today, the yen may finally break below the key 114 price mark against the dollar and we could see a spike down to 113.30. A broader sell off of the carry trade could see the yen appreciate back to 166 and possibly 165.50 against the euro. Traders need to be wary of a rebound in stock markets, as this coupled with a rate hike from the Reserve Bank of Australia tonight, could send the yen spiralling downwards, particularly against the Aussie and New Zealand dollars. On the economic data front, Japan’s leading indicator came in at 0.0 in September, signalling growth prospects for the next 6 months are seen as non-existent, which hardy cements confidence in the underlying fundamentals for the yen.

We have witnessed yet another 50 year low for USD/CAD Tuesday as the pair tumbled below 0.93 to temporarily bottom out at 0.9234. The pair is now trading at 0.9253, 0.86% lower than Monday’s record low close. There is absolutely no support for the dollar against the loonie in the market and how low the pair might yet go is anyone’s guess. This analyst is convinced that intervention of some variety is becoming more and more likely with each day because it is blatantly clear the extent of the loonie’s appreciation has more to do with the underlying force of currency speculation than the underlying economic fundamentals. We have covered the oil conundrum previously and that is primarily a red herring for trying to justify appreciation in the CAD. The Bank of Canada is not scheduled to meet again until December 4th, but can the Bank afford to wait that long? The IVEY Purchasing Managers Index (measures activity for Canada’s industrial sector) for October came in above expectations Tuesday, but the IVEY is a narrow survey and is often discounted. In other data released, building permits unexpectedly fell 1.7% in September (2% gain forecast). The loonie has appreciated 3.75% against the dollar since the beginning of last week and by 12.4% in the past 8 weeks. That means the loonie is currently appreciating at an average rate of 0.33% per day, across a two month period. That is unprecedented and unsustainable, but my advice is not to back against it until we see it bottom out. The Speculative interest in the loonie should not be underestimated and it remains dangerous to trade against it. The Euro dipped to 1.3436 against loonie today and rebounded to go back over 1.35, only to fall again to the current price of 1.3457. The euro should maintain a firm bid in the build up to Thursday’s ECB, when a hawkish bias is expected to be iterated by the ECB President, but stops should be employed at all times on EUR/CAD, given the aggressive nature of the loonie’s recent moves.

Bob B

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