Bob's Currency Focus 15:00 GMT

EUR/USD
We have seen a sell-off Thursday as the recent bout of risk aversion sent the dollar broadly higher across the board. US core consumer price inflation ticked up 0.2% in October and the annual rate has risen to 2.2% from 2.1% in September. Headline inflation rose to 3.5% and the firm numbers are likely to keep the Fed on their guard and dampen expectations of near-term rate cuts. The euro was buoyed by Wednesday’s 3rd quarter GDP rise of 0.7%, but the euro economy is expected to slowdown in quarter 4 and in any event the single currency has more than priced in all the good news to date. The euro will remain strong however as long as negative sentiment towards the US dollar persists, although with corrections seen across most other currencies in the past 3 days, it will not be a surprise to see the dollar test the 1.45 level again before the week is done. If stock markets continue their decline into Friday, then this will generally support the dollar, as investors exit higher risk assets in favour of US dollar denominated bonds. The euro needs to hold the 1.46 line today, if it is to avoid a sharp retreat. Friday sees the release of the TICS number for September (Treasury International Capital Flows) and this figure is keenly awaited, given last month we saw the worst figure on record – a $163 billion outflow. That number was glossed over at the time because the data was for the month of August, when financial markets were in total turmoil. However, another significantly negative number Friday would suggest foreign investors are turning their back on US denominated assets and could spark a sharp dollar sell-off. We should remain in a 1.45 to 1.47 price range for the next two days, with most of the activity in the middle section of the range.

GBP
3 of the last 4 days has seen sharp sterling sell-offs of over 2.5 cents against the dollar. Yesterday’s reversal is the most serious in terms of the currency’s immediate outlook, because it follows a Bank of England report that stated the Bank would need to cut interest rates a couple of times in 2008 to keep the economy on track. While many analysts were predicting as much, the fact the statement came directly from the horse’s mouth (Governor King) caused market panic and traders couldn’t sell the pound fast enough. Sterling’s decline against the euro is probably overdone, with the euro hitting a 4-year high Wednesday and going higher again Thursday (0.7166) and a short-term correction might protect the UK currency into next week. The outlook for the pound is not great though and it now appears to be a question of not if’ but ‘when’ cable falls below the key 2 dollar mark. A fall below this number could lead to a sharper decline and cable may well end the year closer to 1.90 than the current 2.05. October’s retail sales numbers were soft, but this comes after 2 months of stellar gains and the marginal 0.1% decline was in line with expectations. Sterling looks to be the currency to sell-off on rallies at present and with cable having broken below the 2.0520 support level Wednesday night, it offers a good sell-down opportunities on rallies that bring it close to 2.06. Sterling will struggle to make incisive inroads into the euro's gains from the past two days, unless the euro undergoes an overdue correction across the board, but it should be able to avoid further losses. There is the potential for cable to test the 2.0246 support before close tomorrow, if the dollar attracts broader support going into the weekend.

Yen
The Yen has appreciated again Thursday, thanks to a major rise in risk aversions levels after a 2 day break. The dollar has weakened to 110.70 this afternoon and if stock markets close weakly later today, the pair may once again test support below the 110 mark. We could potentially see a whiplash-style move in the next 24 hours to try and take out the 109.12 low hit on Monday, if volatility levels remain high. But a recovery in stocks will probably see the pair close this evening nearer to 111.50. The euro had hit Y164 Wednesday but then fell back to Y161.40 this morning. This pair will continue to fluctuate up and down until some stability returns to the market, but there could be a sharp drive below the 160 price level, if things turn nasty in the next two days. The current markets stresses are probably going to be with us in the short-term and the best way to trade the yen is to buy it on dips, with the EUR/JPY offering more value, because there is greater scope to the downside.

CAD
It is official – the loonie has turned. I’m saying it here today and am prepared to pin my colours to the mast. Early last week we saw the greenback slide to a record low of 0.9056 Canadian cents, while earlier today the pair reached 0.9785. That is a whopping 7.3 cent rise in just over a week. While the recent market turmoil has seen a broad sell-off of the commodity currencies and high yielders, no currency has done worse than the loonie, even though oil prices remain elevated. USD/CAD is now being bought on dips and not vice versa, a classic sign that the trend is changing. Last week’s trade data was rather damning in terms of exposing the adverse impact a strong loonie has on the country’s export sector. Yesterday we learned the economy probably only grew by 0.1% in October (Leading Indicators report), much lower than the 0.3% forecast and down from 0.4% in September. Today it was reported that manufacturing shipments in September fell 0.9%, while new orders received in that month were down 2.5%, which follows a sharp 5% decline the previous month. The manufacturing sector is beginning to hurt, and hurt hard, a point not lost on the Bank of Canada’s Jenkins on Wednesday. Jenkins was the latest official to warn about the economic dangers of a rampant loonie. We may well find ourselves the other side of parity before the month is out and that in itself may spark a sharper depreciation in the loonie. 0.95 looks to have formed as a solid support base and any declines to this level, offer good opportunities for buying the US dollar. 0.96 held earlier this morning and it will be interesting to see if this too holds to the end of the week. The euro has probably overdone it against the loonie this week and I’d look for a correction back towards 1.40, before contemplating coming in on this pair again.

PS: Add your vote to the loonie poll at top of page on right side.

Bob B - Nov 15