Friday, November 23, 2007

Bob's Currency Focus - 16:00 GMT

Traders took advantage of thin trading conditions early Friday morning to push the euro to 1.4966, just short of the psychologically important 1.50 price level. It is a case of history repeating itself as it was on this same week one year ago that the euro made a surprise attack to take out the 1.30 price level, while US traders were sitting down to their Thanksgiving dinner. I called it yesterday, warning there may be a sharp correction downwards upon a successful/failed attempt to breach 1.50, and the euro has now fallen back to trade just around the 1.48 price handle. Data from the euro area this morning was poor, pointing to a further slowdown in the euro economy and highlighting the that economic softness is not restricted solely to the US. French consumer spending fell sharply in October, while industrial activity across the wider euro area slowed in November, based on preliminary PMI readings released Friday. There were also strong comments from ECB President Jean Claude Trichet this morning, again emphasising brutal moves in currency markets were unwelcome. Many may interpret this to mean the ECB might intervene, if the euro continues to appreciate at the current pace. 1.50 being a step too far today's market, soft euro-zone data and fear of Central Bank intervention combine to trigger a bout of profit-taking and we will need to wait until Monday when markets return to normal, to establish whether immediate direction is in fact up or down. If the dollar can close Friday below 1.4780, there is a chance we could see a broader retreat earlier next week, certainly back to 1.4660. At current prices and in such a thin market it is not worth getting involved. The time to have been in the market was this morning, to sell down the euro when it reached its inflated peak. It must be noted the euro has closed strongly most Fridays of late, and if the single currency does hold support at 1.4780, it could rally nearer to 1.4850 before the close today. Strategy: Stay out until markets normalise on Monday.

Sterling jumped on the dollar-thrashing wagon early Friday, when only a fraction of the normal market was up and running, and cable reached an improbable price of 2.0766. The move was proven to be premature however and the pair crashed back to below 2.06 soon after the European market was up and running. UK Quarter 3 GDP was revised downwards to 0.7%, from the preliminary 0.8% reported last month, but what was more significant to markets today was the mortgage lending figures released by the British Bankers Association this morning. The report from the BBA showed the number of mortgage approvals fell to 44.1K in October, from 52.6K in September. The slowdown in the housing sector and ongoing credit stresses in financial markets mean the Bank of England will possibly move to cut interest rates when they meet in a fortnight’s time, rather than wait until the new year. Expect sterling to come under increasing pressure next week, once markets return to full capacity and traders have had time to digest the significance of this week’s events. Even factoring in the negatives, sterling may be able to pull the euro back to 0.7150 early next week, as the euro remains grossly overbought against the UK currency. Cable continues to offer a good sell down opportunity and I would again sell the pair on any price close to 2.07, with price targets of 2.06 and 2.0550. I would not be surprised to see cable drop to 2.0250 next week, given the increasing probability of a December rate cut and the fact a December rate cut by the Fed (by no means guaranteed to happen) is effectively fully priced into the dollar. Strategy: Sell cable on prices close to 2.07 for limit of 2.06 and 2.0550. Sell down sterling against the Aussie dollar while stock markets are rallying.

The Japanese currency surprised this morning, making significant inroads across the board, despite a recovery in global stocks Thursday and Friday and with markets being closed in Japan Friday for a holiday. This is the first day in quite some time when the yen has rallied while stock markets were on the up. It may be an indication of just how deep the current strain of market fear runs, as the Aussie and Kiwi dollars have remained primarily on the defensive, with the carry trade also away for the Thanksgiving break. A new 2.5 year low was printed this morning for USD/JPY at 107.56, and the pivotal 2005 low of 106.47 is now within reach and could be hit next week, if risk aversion levels remain high. The yen made an even more significant move against the euro today, the single currency dropping below Y160. There is the possibility of a correction back towards Y158 early next week, if the broader flight to safety across markets continues. We must however recognise the number of yen shorts in the marketplace has been falling significantly of late and the pace of the Japanese currency’s should now begin to slow. The yen will also be forced to retreat next week if expectations for a Fed rate cut in December grow and it restores stability to US financial markets. Strategy: Stay away from yen until markets normalise (Monday).

The loonie has been stuck in a 0.98 to 0.99 range for yet another day on Friday, although the advantage looks to be with the dollar as the USD/CAD pair is continuously being bought on dips. Parity is near upon us again and I expect it to be hit within the next week, although elevated oil and gold prices will arm the loonie with some short-term resistance. It seems unlikely the Bank of Canada will wait until the first quarter of 2008 before cutting interest rates, particularly given the benign inflation data released this week. The sharp fall in base metal prices will raise doubts about global economic growth and this too will tend to undermine the loonie. The loonie looks to me to be the most vulnerable of all the major currencies right now, given its proximity to and dependence upon a US economy entering a downturn. The euro remains overbought against the Canadian currency, but now is not the time to be buying the loonie against any currency in my view, given the underlying risks. USD/CAD potentially offers the best opportunity of all the major currency pairs at the moment. Strategy - Short-term is to buy USD/CAD on dips to below or around 0.98 with targets of 0.9880 and 0.9920. Positional: buy USD/CAD at best available price (preferably below or at least close to 0.98) with stop at 0.95 and price target of 1.05 (moving stop to above 1.0 when parity convincingly broken).

Bob B - Nov 23

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