Friday, November 16, 2007

Bob's Currency Focus - 19:30 GMT

The pattern Friday has been another day of movement in both directions, with neither side managing to make a decisive move, although the euro has a firmer tone this afternoon. It is noticeable that the dollar only manages a rally against the euro when stock markets are in trouble and once the Dow pendulum swings into the green the dollar retreats and the euro mounts a counter-attack. This in essence means all other things being equal, the upside trend is as strong as ever. The euro is also gaining at the expense of other currencies with traders moving away from the pound and the commodity currencies for the safer bet of the Teflon euro. The single currency has yet to make any meaningful correction after 2.5 months of rapid gains, so traders need to be cautious as a sharp correction is a very real danger. The euro-zone’s trade balance held up well in September despite the strong currency, with a surplus of €3.1B reported for the month. Friday saw the release of data which highlighted further weakness in the US economy as Industrial Production in October fell by 0.5%, the biggest drop since March, while the Treasury Department reported a second successive month of negative inflows of foreign capital funds (TICS) in September (-$14.7B). US equity markets however are currently up with bargain hunters buying up stocks this afternoon. Stock markets have been very volatile this week and don’t be surprised if the final hour of trading tonight sees a further sell-off that puts the US indices back into the red. Don’t expect the G20 meeting this weekend to deliver any major statement on current dollar weakness, as the US Administration continues to express no concern right now for its declining currency, preferring instead to focus on the weakness of China’s reminbi. The euro is overbought and remains over-valued at price levels close to 1.47 and I prefer to sell down close to this mark.

Sterling staged a mini-comeback this afternoon with cable coming off a low of 2.0354 to once again trade above the 2.05 mark. But any significant sterling rallies are likely to attract strong selling pressure as the currency remains hindered by the Bank of England’s report on Wednesday, when markets were told of an impending economic slowdown and a series of rate cuts over the next year. Cable could easily hit 2.0250 early next week, which is the next key line of support for the pair. All of the bad news from the US is already priced into the dollar, while sterling still has some way to go, so I see the pair trending down from here to the end of the year. However sterling has certainly being oversold against the euro and a correction in the EUR/GBP pair would offer some short-term protection to the pound. A slowdown in the UK economy is likely to be accompanied by a parallel slowdown in the euro economy, but markets have yet to factor this in, because of the ongoing hawkish stance of the ECB and its President Jean Claude Trichet. EUR/GBP should be able to correct back to at least 0.71 next week from the 4.5 year high hit today, but it may well take a broader euro sell-off to get it there.

The yen pushed the dollar back below the 110Y line briefly this morning but was unable to hold below this key level and since then it has retreated to 110.60 as US stock markets moved into positive territory. Poor US data Friday failed to hurt the dollar against the yen, although the greenback did retreat against every other major currency, primarily owing to a temporary rise in risk tolerance levels. Continued market volatility is going to keep the yen as a major player and we could see new highs being reached for the currency next week, if uncertainty about the global economy and the credit pinch afflicting financial markets persists. Any statement from the G20 over the weekend expressing concern over the US dollar could trigger support and result in a sizeable correction in USD/JPY Sunday night. It is more likely though the yen’s fate will be dictated by risk tolerance levels and the currency is well-positioned to make further gains next week. The best value pair for buying the yen at the moment is EUR/JPY, particularly to sell the pair on failed rallies around Y164. There is a strong possibility of Y158 being hit later next week, if stocks continue to under-perform.

The loonie has had a good day Friday thus far, the greenback being pushed down to 0.97 cents after the Canadian currency virtually collapsed Thursday, when shedding two and a half cents against its US counterpart. The tide certainly appears to have turned for the world’s strongest currency in 2007, with a number of factors having turned against it: softer domestic economic data; a downturn in metal prices; a slowing US economy and verbal intervention by Government and Bank of Canada officials. The recent correction was probably overdone in the short-term and today saw the loonie gain some much needed respite, assisted by resurgent oil prices. The currency looks vulnerable to selling pressure at the moment and with the greenback having gone as high at 0.9886 Thursday, markets will now want to retest the parity line once more and that may happen in the next week, if risk aversion levels remain high and if commodity currencies continue to struggle. There was no domestic data out of Canada today and the next series of releases for the currency are key ones – the consumer price index for October on Tuesday and September’s Retail Sales figures next Wednesday. Over the past six months the loonie has usually strengthened ahead of key data releases, in anticipation of firm data, so next week will be a true litmus test of current market sentiment towards the currency and a major sell-off ahead of the CPI data Tuesday will not augur well for the currency’s outlook. The loonie’s sharp slide against the euro was at least halted today, with the pair retreating to 1.4280, having shot to 1.4458 overnight.

Bob B - Nov 16

PS: Have a good weekend!

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