Monday, November 26, 2007

Bob's Currency Focus - 18:00 GMT

A more stable day on currency markets Monday with the upsurge in liquidity removing most of the volatility we saw last Friday. The euro looks as if it wants to appreciate some more but some elements of the market are unsure and the upside was limited to 1.4885 so far today. The pair is little changed on the day and the lack of direction is not helped by the dearth of economic data. European stock markets closed lower, but US markets are flat as we speak, yet any sharp move to the downside on the Dow this evening could spell trouble for the dollar by rekindling demands for a December Fed rate cut. There is a key indicator for the euro out Tuesday in the German Ifo Business survey and it is important this key sentiment index does not disappoint greatly, to ensure the euro maintains current levels of confidence as the market seeks to challenge the 1.50 price mark this week. If the Ifo index is good we could test 1.50 later Tuesday or Wednesday, particularly with major risk indicators (consumer confidence Tue and existing home sales Wed) due out in the US over the next 2 days. For now it is a case of sitting it out and playing it safe, but as long as 1.4785 holds in the coming days, the momentum will remain bullish. If the euro again has a premature run at 1.50 (against a backdrop of any further weak euro data) we could witness another sharp retreat, one which this time might potentially bring us right back to 1.4660. Because of the very high ratio of longs in the market there remains the danger of a strong correction at any time and bidders should start to employ tighter stops. Watch the data Tuesday and listen for any Central Bank speak. Strategy: short-term buy on dips below 1.4830, using 1.48 or 1.4780 as a stop loss with targets of 1.4880 and 1.4920. Wait for opportunity to sell down the pair around 1.4940, if the euro rallies above 1.49 but fails to break above 1.4970.

This is a data light week for sterling, with nothing of any note released up to Thursday. The key question on everyone’s minds thus far is effectively ‘will they or won’t they?,’ essentially asking if the Bank of England will cut rates next week or if they will decide to wait until early 2008. Sterling is riding high again Monday, thanks primarily to a renewed interest in carry trades and the pound has risen against both the dollar and the euro today. Cable looks dangerously high to me on levels above 2.07, for a currency that might be hit with a rate cut in a little over a week’s time. Hometrack reported early Monday morning that UK house prices slowed to an annual rate of 3.6% in November, with prices actually declining by a marginal 0.2% on the month. I’m not sure who is buying sterling at present, but it is unlikely to be anyone with a longer run view, so it is dangerous to be buying cable at elevated levels, even if the dollar’s is nobody’s friend right now. I still like to sell down cable on prices around 2.07 or above, with targets of 2.06 and 2.0550. Sterling will continue to attract strong selling pressure on any runaway rallies, because there are still many wise old traders that can read between those carry lines. I still do fancy sterling though to manage to pull the euro back to 0.7150 at least, simply because the EUR/GBP pair remains overbought and the euro may have some questions to answer of its own/. Strategy: Sell cable on prices above 2.07, with target prices of 2.06 and 2.0550. Stay away from EUR/GBP but do sell the pound against the Aussie dollar when risk aversion levels fall and stock markets are rallying.

The yen struggled overnight when Asian stocks took off but has come back into its own again this afternoon with European and American stocks faltering and credits woes on the rise. A bad close on Wall Street could trigger a very bad night for Asian stock markets and possibly pave the way for new peaks for the yen. USD/JPY is now just above the 108 price mark and the pair might return to the 2.5 year low at 107.56 (set on Friday) by tomorrow morning, if Wall Street closes poorly. There are no major data releases to impact the yen tonight, but any market moves in financial markets that raise the prospect of a Fed rate cut in December will see the Japanese currency advance. The currency offers little value though at present levels, particularly since it could correct sharply the other way at any time, if risk aversion levels suddenly were to fall. My preference is to wait on opportunities to sell the yen, especially against the euro, which would seem to have more upside potential against the currency than the dollar. Strategy: Stay clear until risk aversion levels fall (stock markets rebound) then buy EUR/JPY with initial target prices of 162.00 and 163.00.

No data to influence direction Monday and USD/CAD has remained stuck in its now fairly lucrative 0.98 to 0.99 band. The loonie is still protected by high oil and gold prices, with Nymex crude once again hitting $99 a barrel earlier today before retreating to just below $98. Oil prices are however masking the underlying problems for the loonie and with quarter 3 GDP expected to print at a lowly 2.3% later this week (against 3.4% in quarter 2 and 3.95 in quarter 1), doubts about the outlook for the Canadian economy will begin to intensify in the build-up to next week’s Bank of Canada rate decision. It will be a surprise to me if more and more Canadian bulls don’t exit the market ahead of the Bank of Canada and all the risks for the loonie right now look to be to the downside. I continue to prefer buying the US dollar against the loonie on dips and indeed this has proven to have been the most profitable trading strategy across any of the major pairs in the past week. Strategy: short-term: Buy USD/CAD on dips to below or around 0.98 (stop at 0.9760) with target prices of 0.9880, 0.99 and 0.9930. Longer-run: Buy USD/CAD on prices below 0.98 with stop at 0.95 and target price of 1.02 to 1.05 (move stop to 1.0 when parity level convincingly broken).

Bob B - Nov 26


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