Thursday, November 22, 2007

Bob's Currency Focus - 17:00 GMT

Little activity on the currency market today with US markets closed and markets elsewhere taking a breather. Volatility has been surprisingly low, considering the negative sentiment that carried over from Wall Street Wednesday and the extreme overbought levels of this pair. Equity markets have settled across Europe Thursday, although risk aversion levels have not disappeared, as evidenced by the reluctance of traders to re-enter the carry trade. Industrial orders in the euro area fell by a significant 1.6% in September with the annual rate slowing to 2.0% from 5.2% in August. Economists had forecast a 0.5% drop on the month and an annualised growth rate of 6.7%. The adjusted current account for the euro area also narrowed much more than expected in September, to €0.6B from €4.5B a month earlier. Currency markets remain immune to less than positive news from the euro area and today’s disappointing data had no market impact on the teflon euro. The single currency had rallied to a new lifetime high of 1.4872 overnight and with the pair currently in and around 1.4850 and not having dipped below 1.4820 all day, it will be a surprise if there is not a run on the 1.49 line (at least - remember what happened on this week last year?) before tomorrow. The main reason why the euro won’t reach 1.50 this week might be upside exhaustion, with far too many euro long positions in the market. Friday’s flash PMI data for the euro-zone could potentially put a fly in the ointment however, particularly if any of the indices report a contraction. The indices are due out at 09:00 GMT - see link to calendar at end of page. There is little value in buying the euro at current prices and I prefer to wait for a correction, before entering at a more attractive bid price, but I might sell once the euro has made a run (failed or otherwise) on the 1.50 price mark. Strategy: Sit and wait. But sell if there is a contracting PMI reported for the euro area Friday.

Cable has held up remarkably when one considers the chances of a December rate cut are increasing all the time. Sterling is being protected by dollar weakness and the general market preference currently being given to the major European currencies. Cable may rise higher if the euro makes a run on the 1.50 price level, but any significant rallies are likely to attract selling interest and in this regard sterling is very vulnerable. Total Business Investment in quarter 3 disappointed, coming in flat against the previous quarter and if Friday’s BBA mortgage lending figures report soft, sterling may come under more immediate pressure. The euro is clearly overbought against sterling, but it may not retreat until there is a broader euro sell-off which should come when the current rally against the US dollar stalls. Strategy: Sell any cable rallies close to 2.07, with targets of 2.06 and 2.0550. Sell down sterling against the Aussie dollar while risk aversion levels are falling.

The yen has held its own Thursday even though the Japanese Nikkei and European Stock markets rallied, so the move towards 106.50 will have to wait. The yen not being sold off thus far today has more to do with the lack of liquidity than anything else, so if Asian stocks rally tonight, the yen should retreat. There may be some reluctance on the part of carry traders to enter the fray after the thrashing they have taken in recent days and with trading conditions running thin we could witness lots of volatility across the yen carry trade pairs until Friday’s close. The dollar should be able to push the yen back above the Y109 mark tonight with the chance of a return to Y110 tomorrow, if risk aversions levels fall. The euro has been trading around the Y161 mark for most of the day, but it could return to Y162.50 over the next 24 hours. The Japanese currency is unlikely to be able to make much headway while US markets are closed, but traders thinking of selling the currency need to keep a close eye on stock markets and need to allow for increased volatility because of the thin trading conditions. Strategy: Stay away from yen until market conditions normalise (wait until next Monday).

The loonie has traded in a 0.9789 to 0.9880 range with the US dollar all day, which is a good performance considering the loonie is coming off the back of some very negative reports for the currency in the past 2 days. It now seems certain the Bank of Canada will be cutting rates soon, to try to avoid any serious deterioration in the economy and the first cut could come in December. This is very negative for the loonie and while the euro has made very significant gains in recent days, the loonie still looks well priced against the US dollar, when one looks at the level of bad news already priced into the US currency. There is no data between now and the end of the week and while elevated oil and gold prices are temporary offering some currency support, the broader weakness seen in base metal prices will tend to undermine the outlook for the Canadian economy and it is difficult to see how the loonie cannot weaken further from here. Strategy: Buy USD/CAD on dips below 0.98, with targets of 0.9880 and 0.9920. A longer run position is to buy USD/CAD and hold the position with a longer run target of 1.05+, against a stop at 0.95. I'm now a loonie bear :-) and bullish USD/CAD.

Bob B

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