Thursday, November 29, 2007

Bob's Currency Focus 18:00 GMT

The euro took a bit of a battering this morning for the second consecutive day, dropping a full cent to 1.4723, before rebounding back to the current price of 1.4770. It is encouraging for the dollar to be able to bounce back so quickly following the intervention of the Fed’s Koln Wednesday evening, who sparked the biggest rally on Wall Street for 4 years by suggesting the Fed would cut rates (effectively) to bail out financial markets. While the dollar sank in late trading Wednesday, it has since recovered and is trading higher against most currencies. US data was mixed Thursday, with quarter 3 GDP revised upwards to a staggering 4.9% annual rate (not bad for an economy said to be on the brink of a recession), jobless claims rose unexpectedly by 23K last week, while New Home Sales again disappointed, reported at a lowly 723K rate in October, against a forecast of 740k. German unemployment fell by a greater than expected 53K in October and the jobless rate in the euro-zone’s largest economy now stands at 8.6%, down from 8.7% a month earlier. Other euro area data today was mixed. Having established a break below 1.4780, there is potential for the dollar to push the euro back to 1.4660 on Friday, but it needs to close below 1.4780 this evening for the pair to retain a bearish bias. Fed Chairman Ben Bernanke speaks later this evening in Charlotte (00:00 GMT) and if he gives any hint about Fed intentions for the December meeting, it will have a major market impact. Bernanke is more tactful however and it would be some surprise were he to be blatant and commit the sort of faux-pas we got from his Vice President Wednesday. Strategy: Sell rallies above 1.4820 with target of 1.4730, moving to 1.4660, once 1.4610 gives way. Stop loss at 1.4860. Beware Bernanke Speech!

Sterling rocketed late Wednesday making significant gains against almost every currency. There didn’t appear to be any reason, other than that jolt higher yielding currencies experienced following a speech from the Fed’s Koln. Sterling has been on the back foot against the dollar and the euro for most of Thursday, although sterling is merely trading around the levels it was at on Tuesday. The latest housing survey from Nationwide reveal UK house prices fell 0.8% in November while the number of mortgage approvals reported by the Bank of England for October were 88K, down from 100K in September. Ongoing softness in the housing sector and credit stresses in financial markets add up to increased pressure on the Bank of England to cut rates sooner rather than later. MPC voting member Blanchflower (a well known dove) called for an early reduction in interest rates Thursday, while Governor King said inflation and growth risks were finely balanced when he testified in front of the Parliament Treasury Committee this morning. The Bank of England deliver their December policy statement on Thursday next and given the underlying risks for sterling, if rates are to be cut, it is likely we may start to see a greater liquidation of sterling long positions over the next week. Cable would appear to offer the best value in chipping away at the pound, but until the dollar can deliver the pair below a price of 2.0520, the best value in selling down the pair is to come in at prices over 2.07. Last night’s exaggerated rally to over 2.08 offered a huge temptation to cable bears, many of which seized the opportunity, as evidenced by the sharp decline seen Thursday. Cable could well end the week around 2.05, if the dollar sustains its broader market rally. Sterling does have the potential to appreciate back to levels around 0.7120 against the euro, but only because there are many more euro longs than sterling longs in the market and a dollar assault could hurt the euro more than the pound. Friday sees the releases of the Gfk consumer confidence index for November, but it should not have too much market impact. Be confident because you may need wide stops with current volatility. The theme will remain the same – sterling will be sold on any significant rallies. Beware the Bernanke speech tonight in case he says something that might damage the dollar and thus our immediate cable prospects. Strategy: sell cable on prices above or close to 2.07, with target of 2.06 and 2.0550. A strong close for the dollar against the pound this evening could mean we see 2.05 Friday.

to be continued....

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