Wednesday, November 7, 2007

Bob's Currency Focus - 20:00 GMT

Better late than never I guess. What a wild ride we have seen today. Negative dollar sentiment reached extremes Wednesday and the greenback plummeted across the board while oil and gold rose to record high prices. The issue which apparently drove a fresh wave of panic buying during the Asian Statement was a report that the Chinese had stated their intentions to diversify their reserves away from the US dollar. This story does the rounds every few months and to be quite frank there is nothing new in it and it cannot be taken at face value. The knee-jerk reaction we have seen today is an indication of the fear and volatility gripping currency markets and is a clear indication that the dollar’s decline is no longer orderly, but rather it is panic-driven and disorderly. The market needs a dollar correction in the short-term to instil confidence, even if the longer run trend remains down. Today’s sharp move against the US currency is hardly justified but at the same it is difficult to find a compelling reason to buy the dollar with current sentiment and in any event what’s the point in positioning oneself against a trend that has barely looked back in over two and a half months. With 1.4729 having already been hit, the next major price to the upside is 1.48 and after that 1.50 will seem inevitable. A correction downwards is required before the end of this week if 1.50 is not to be breached within the next 2 weeks. All eyes will be on ECB President Jean Claude Trichet Thursday and while it is certain rates will remain unchanged, the accompanying statement delivered by Trichet will have a major impact on how currency markets play out over the rest of this month. If the ECB maintains its tightening bias and lean towards higher rates to control inflation, then we could see the euro rocket and 1.48 could be hit tomorrow evening. The ECB is under pressure to slow the euro’s appreciation and with fears of a significant slowdown in prospect for the euro area, the ECB may feel obliged to issue a balanced statement, pointing out increased downside risks for growth while maintaining its concerns over the upside risks to inflation. A neutral or dovish statement could diffuse currency markets and lead to a period of stability. This should trigger a euro retreat temporarily, possibly back to at least 1.45. With so many uncertain factors at play, it is dangerous to be trading under current conditions and traders should employ stop losses at all times.

Sterling has had another good day, thanks almost exclusively to dollar weakness and partly owing to the preference markets have shown for sterling over the other high yielders when risk aversion levels are on the rise. The market took cable to a fresh 26 year high earlier this morning, the pair hitting a very lofty 2.1071 and the pound remains well bid at 20:00GMT - at 2.1025, up a whopping 1.5 cents on the day. The pound also stabilised against the euro, the pair coming off a low of 0.70 to settle at 0.6968, marginally lower on the day. The Bank of England delivers its latest policy announcement Thursday and although there is an outside chance of a rate cut, the smart money is on no change. The Bank of England is not expected to issue a detailed statement so the market impact of tomorrow’s rate announcement will be minimal, unless there is a rate cut. Dollar sentiment aside, sterling looks totally overpriced at 2.10, when once considers the underlying fundamentals and the risks to the UK economy and a decline back towards 2.05 over the next week is likely. A broader dollar correction Thursday, should it happen, could see cable tumble two or three hundred points. Be wary around 12:00 GMT just in case the Bank of England does deliver a surprise rate cut. EUR/GBP could return to 0.6950, but the pound will find it difficult to appreciate much beyond this level.

The yen has been the strongest currency of the day, thanks to a major spike upwards in risk aversion that has triggered a flow of funds out of riskier assets into low yielding currencies like the yen and Swiss franc. The dollar is currently trading at its low of the day at 112.75 and coming off the back of another volatile trading session on Wall Street, a decline to 110 over the next 2 days is now a strong possibility. The euro has also declined sharply, falling to Y165, down 200 points on the day. The Euro could potentially return to Y162 in the next two days if volatility levels remain high. Expect a rollercoaster ride during the Asian session tonight as Asian markets react to a 350 point loss on the Dow Industrial average in New York. We should see major declines in AUD/JPY and NZD/JPY overnight.

The loonie rolled on like a juggernaut late Tuesday and early Wednesday, gaining a full 2 cents against the beleaguered dollar, the pair hitting an almost unbelievable low of 0.9059 this morning, 3 cents higher than where it was on Monday and almost 5 cents below where it was at early last Friday. We then saw quite a dramatic pullback this afternoon, the dollar reclaiming over 2 cents and the pair currently trade at US0.9285. The loonie is acting as a proxy for oil at the moment and is attracting major speculative interest as crude approaches $100 a barrel. Crude declined to below $96 today when US inventories for last week came in better than expected. As to whether todays’s retreat by the loonie is related to the retreat in oil we don’t know, but we must be at the point where most loonie backers must know the currency is now grossly overvalued and several of the existing positions were pulled today as traders saw an opportunity to get out at the best possible price. We need to witness a pullback to 0.95 before we can honestly say there is a genuine correction underway. The loonie ceded a massive 1.6% to the euro today and the pair is now back trading at the level it started the week at – 1.3590. There was no data released in Canada today while Thursday sees the release of October’s housing starts and September’s new home price index. The loonie however may again follow the fortunes of oil prices and should $100 a barrel be hit, then expect another loonie surge. Continued stock market volatility could force oil prices lower and in this scenario, the loonie might again correct lower.

Bob B - Nov 7

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