Tuesday, December 18, 2007

Bob's Currency Focus - 14:00 GMT

The pair is trading within a narrow range Tuesday as the dollar’s sharp advance over the past 3 days stalled. US economic data Monday was mixed although a sizeable jump in international capital inflows reported for October was a big positive for the greenback, after 2 months of negative inflows in August and September. European industrial activity slowed again in December according to preliminary data released Monday and increasing concerns over growth in the single currency zone is certainly beginning to nullify the hawkish rhetoric from the ECB as we move to close out the year. In data just released Tuesday, US housing starts resumed their decline in November although the 3.7% fall on the month was lower than the 5.7% which was forecast and October’s rise was revised to +4.2% from +3.0%. Building permits fell 1.5% in November, exactly in line with projections. The eurozone recorded a trade surplus of €6.1B in October, twice what was forecast and much higher than the €3.7B recorded for September. Trading volumes are thinning out as we move towards the big holiday period and technical traders may well be the kingpins through to the end of the year. Fundamentals will take a back seat as the major trading desks wind down and square their positions for the year end. We are now hemmed into a 1.4330 to 1.4452 price range and whichever side manages a break outside this level may well take ownership of price direction over the coming days. I favour the euro purely on the fundamentals but am not entering the market with any great confidence while liquidity is tightening. Strategy: Tentative buy on dips towards 1.4350 with price targets of 1.4420 and 1.4445. Trade lightly in this market!

November inflation data was a major disappointment for any traders hoping for a sterling rebound. The pound gained Monday primarily on the assumption November CPI data would come in higher than forecast. It was a fair assumption given the upside surprises already seen in the US and eurozone inflation reports for the same month. In fact not only did the headline inflation rate remain steady at 2.15 (against a forecast of 2.2%) but the core rate actually narrowed to 1.4% (1.6% forecast) from 1.5% in October. Analysts may argue the retail price index, which grew to 4.3% from 4.2%, is a truer reflection of UK domestic inflation, but the fact is today’s report gives the Bank of England further wriggle room to reduce UK interest rates and a cut as early as January can’t be ruled out. All eyes will now be on Wednesday’s Bank of England minutes to ascertain how many members of the MPC voted for the cut in early December, which will help determine if the mood on the Committee is strong enough to see interest rates fall more aggressively than originally thought possible. Sterling could sell off dramatically tomorrow if the Bank of England minutes reveal a decisive 7-2 or greater majority in favour of December’s rate cut. This is no time to be buying the pound even if technical corrections and thin trading conditions see it rally. The outlook is grim for sterling both medium term and long term and if cable breaks convincingly below the 2 dollar mark, there may be no way back. The 2 dollar line could fall after tomorrow’s Bank of England minutes although a slender vote count of 5-4 should work in sterling’s favour, at least in the short-term. The euro is a good buy against the pound on any dips towards 0.71, while cable is a good sell on prices above 2.03. Strategy: Buy the euro against the pound at prices below 0.7120 with target prices of 0.7175 and 0.72. Sell cable on rallies close to 2.03 with price targets of 2.0150, 2.0090 and 1.9950.

The yen continues to struggle, despite broad underlying negative sentiment across global equity markets, and with risk tolerance levels on the rise Tuesday as stocks rebound, it may slip further later today. It is unusual to see the Japanese currency while risk aversion levels are running high, although this could have more to do with squaring of positions before the year end rather than anything more fundamental. Traders don’t wish to hold low-yielding currencies over the holiday period if they can help it. The chief hope for the Japanese currency is if stock markets continue to under-perform all the way up to the end of the week, something which should ward off any further wholesale sell-off of the currency. In economic data, department store sales bounced back in November recording a rise of 0.9%, following 1.4% decline in October. End of year market conditions do not favour the yen the further into the week we go and it is a risky buy, although it could still benefit from any further sharp reversals in stock markets. Strategy: Park the yen (do not trade) until after the holiday period.

The loonie had one of its best days in recent months Monday as the Canadian currency launched a bewildering counterattack, culminating in sharp gains across the board. USD/CAD came off almost 2 cents from its mid-session high of 2.0226 to dramatically collapse to 2.0030, before a close of 2.0053. Against the euro, the loonie made even more striking gains as that pair traded across a 3 cent range. The rally was baffling in that Canadian economic data Monday was worse than bad (capital inflows were a record -$24.32 Billion in October) and commodity prices retreated. I can only assume the currency rally was owing to some major repatriation of funds into Canada because from a fundamental and technical perspective, the loonie should have weakened against the greenback, given the data and because the greenback broke through technical resistance Friday. We have seen a similar pattern Tuesday, with the greenback rising to 1.0140 after the release of Canada’s inflation data, only for the loonie to push the pair back to below 1.0060 within 20 minutes. If we focus on the economic data, it makes sobering reading for loonie bulls because November’s core inflation rate at 1.6% is now at a 17 month low and opens the door for a further Bank of Canada rate cut, possibly as early as January. In addition Canada’s Leading Indicator for November shows the economy didn’t grow at all in the month of November (reported flat) after a marginal 0.1% rise in October. This does not augur well for quarter 4 GDP. After 2 days of such negative data, one would normally expect the loonie to have retreated sharply but thus far this has not happened. Rather than scratch our heads too much, we should put it down to holiday madness and use the data and the loonie’s distorted current value as an opportunity to sell the currency. Strategy: short-term – buy USD/CAD at any price close to 1.0050 (S/L just below parity) with upside targets of 1.0130, 1.0180 and 1.0220. The euro is good value at any price close to 1.4450 on EUR/CAD and our limit targets here are 1.46 and 1.47. Long-run – maintain long USD/CAD positions with S/L at 0.9750 and upside target of 1.05.

Bob B - Dec 18

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