Bob's Currency Focus - 17:30 GMT

EUR/USD
The euro got a bounce today after losing a cent and a half to the greenback Monday during a thin trading session, owing to a holiday in the US. Price came back 230 pips from Friday’s record high by Monday’s close, but this move has more to do with profit-taking than any change in trend direction. As we speak, the pair is trading around the 1.46 price level as the euro’s advance is currently coming under selling pressure above this price level. Sentiment among German analysts and institutional investors notably deteriorated in November on fears of a considerable economic downturn in the U.S., a surging euro and soaring oil prices, an important survey from the Center for European Economic Research showed Tuesday. The think tank's economic expectations hit the lowest level since February 1993, dropping to -32.5 points in November, after an unexpectedly unchanged reading of -18.1 points in October. Euro zone industrial production fell by 0.7% from August, when a 0.2% rise was expected adding further to the argument the euro economy is slowing. The weight of negative sentiment against the US dollar however is such that it will take a sizeable shift in confidence to see the euro become the least favoured of this pair. The euro is probably over-valued, but the dollar is still not seen as a viable alternative. On Wednesday we have quarter 3 GDP for the euro zone released and October’s Retail sales in the US. A 0.6% GDP number for quarter 3 is expected in Europe and unless the actual number varies much from this figure, the market impact may prove to be minimal. The US Retail Sales numbers however are pivotal to confidence in the US economy and a poor number will raise expectations of further Fed rate cuts and undermine the dollar. A 0.2% rise in US sales is forecast, but if the number is negative, then expect to see a sharp dollar sell-off. The pair should trade in or around the 1.46 level for the rest of Tuesday and there is the possibility of a rally towards 1.4650 in the morning, unless stock markets fall sharply overnight. The euro may struggle to advance much past 1.4650 unless there is evidence of further deterioration in the US economy. The preferred strategy is still to buy the euro on dips, but volatility levels may rise Wednesday afternoon when the US data is out.

GBP
Sterling has rebounded Tuesday, having fallen spectacularly over the previous 2 sessions, when it came off over 6 cents from the 26 year high of 2.1160 set last Friday. A spike in risk aversion and general uncertainty about the future of the UK economy triggered a mass sell-off, although to be honest how cable managed to advance to 2.11 on the back of soft UK data last week remains a mystery. Sterling simply moved with the flow and got tripped up when serious questions needed to be asked. Today’s lift was sparked by Tuesday’s report that the annual inflation rate in the UK rose to 2.1% in October, from 1.8% in September. The rise was primarily driven by increased oil and food costs, but as inflation is now above the Bank of England’s 2% threshold for the first time in 4 months, it might delay any prospect of a near-term rate cut, lending sterling much needed support. However other data released Tuesday show UK house prices continue to fall. The RICS house price index reported that in October a 22.2% majority of chartered real estate agents reported house prices were lower than in the previous month. In September the equivalent reading was at -14.6%. The slowdown in the UK’s housing sector should curb aggressive sterling buying and spark selling rallies should it advance too far. The euro rose to a high of almost 0.7080 Monday and unless sterling can push the single currency back below 0.70 in the coming days, then the uptrend for euro may have resumed. It will be difficult for cable to reach 2.10 quickly again one would think, but as long as the pair remains above 2.0520, sterling should attract buying support on dips. A strong set of employment numbers Wednesday would boost sterling, although the crux will probably come on Thursday, when the retail sales numbers are out. With the euro remaining overbought, sterling does have the chance to push the single currency back below 0.70 in the next two days, if UK data is firm.

JPY - (23:00 GMT)
The yen was forced into retreat this evening as Wall Street posted its second biggest single day gains in history. Critically the Japanese currency had earlier failed to reach the highs of Monday and the 18 month low for USD/JPY – 108.93, recorded in May 2006, remains intact. Moving into the Asian session, the dollar is trading at Y111 and may temporarily move towards 112 ahead of Wednesday’s key retails sales data in the US. There is likely to be a major yen sale by carry traders during Asian and European trading, given today’s rally in stocks, and the yen is not a currency to buy tonight. Of course the situation could change dramatically Wednesday, if today’s Dow rally proves to be a false dawn and negative sentiment again takes a grip of markets. The euro has also risen to Y162 today and may rise to Y163 by tomorrow morning. Expect the yen to come under pressure on all the crosses tonight, notably against sterling, the Aussie and the New Zealand dollars. This morning’s decision by the Bank of Japan to keep rates on hold at 0.5% surprised nobody and markets don’t expect a hike before next March, despite a better than expected print on 3rd quarter GDP (2.6% annualised) reported Tuesday.

CAD
The loonie suffered its worst day in 30 years Monday when shedding 3 cents against the US dollar. On Tuesday the loonie rebounded somewhat, gaining 1.2% against the dollar but declining further against the euro, the pound and the Australian dollar. The Canadian currency was hampered by a rise in risk aversion Monday as well as a hangover from Friday’s poor trade data. A sharp fall in oil prices Tuesday kept would-be loonie supporters at bay and if commodity prices continue to come under pressure this week we could see the longs/short ratio reduce further, paving the way for a possible trend reversal, or at the very least a prolonged period of stabilisation on USD/CAD. Wednesday is dominated by US economic data and in particular retail sales. Expect USD/CAD to trade within a 0.95 to 0.97 trading range for the coming days and my preference is to buy or sell at the extremes of this range, particularly as risks for major reversals in equity markets persist, while confidence in the loonie remains relatively firm in the short-term.

Bob B - Nov 13