Monday, December 3, 2007

Bob's Currency Focus 15:00 GMT

An up and down session Monday thus far with neither side able to push home an advantage. The euro did have a sharp run to just over 1.47 this morning but came back down equally sharply and the pair has since traded primarily in the 1.4650 to 1.4670 price range. Data was mostly positive for both currencies Monday as the respective Manufacturing PMIs for November printed slightly higher than forecast. Euro-zone unemployment also fell to 7.2% in October, down from 7.3% a month earlier. The fundamentals would appear to have shifted more in the euro’s favour in the past week, but there appears to be some degree of nervousness in pushing the single currency to 1.50 in the short-term and we may well witness a correction back to 1.45 before the upside trend gathers pace again. We probably won’t get a true picture of immediate direction until after the ECB this Thursday and non-farm payrolls on Friday. Also of importance to the euro this week is Wednesday’s services PMI, which is expected to report a sharp decline in the dominant sector for November. We may range trade for the rest of today between 1.46 and 1.47. US treasury yields have plummeted in the pas few days and the 2-yr bond now yields just 2.95 with the 10-yr bond at 3.91%. The bond market suggests aggressive cuts by the US Fed and this is not dollar positive in the medium term. There is the danger of a sharp impulsive rally against the dollar at any time. Strategy: buy on any dips towards 1.4630 with upside target prices of 1.4675 and 1.47.

Sterling is the strongest currency in the basket Monday and the pound has launched significant rallies against the dollar, the euro and the Swiss franc. This strength is thanks to the CIPS Manufacturing PMI for November, which printed higher than expected at 54.4 against a 52.5 forecast. Traders are more confident buying the pound today believing the CIPS PMI result reduces the chances of a Bank of England rate cut this Thursday. Odds of a rate cut are probably at best 35%-40%, but it is concerns over the housing sector downturn and ongoing credit stresses in financial markets that are the real drivers for a near-term cut, so today’s wave of support for sterling is probably a little over the top and has inflated the pound’s short-term value, particularly against the euro. We have the BRC retail sales numbers released at midnight tonight and this will give a flavour of the current consumption appetite of the UK consumer and this may have more influence on the Bank of England than the manufacturing PMI. Sterling will benefit if the stock market rally continues, especially if a rate cut this week is further discounted. There are risks however and sterling rallies may be met by equally sharp sell-offs as the week progresses. Sterling could come off sharply against the Swiss franc if stock markets begin to tumble once again. Strategy: Sell down cable on prices above 2.07 with a target price of 2.0550. Any break below 2.0520 will probably mean a further decline to 2.0370 before there is any further bounce.

The Japanese currency made a strong recovery against both the dollar and the euro Monday, having come off sharply last Friday, against the dollar in particular. Asian stock markets were mixed overnight and an element of risk aversion has crept back in which has seen the yen broadly supported. The yen is up 0.4% against the greenback and the single currency today. Japanese data will play second fiddle this week and the yen’s fate lies with the fortunes of equity markets and risk tolerance levels. A sell-off on Wall Street into the close Monday could see the yen push the dollar back below Y110 as we head into the Asian session. By the same token a strong rally on US stock markets could see the dollar advance back towards Friday’s high of Y111.33. Strategy: Stay clear for now.

After a brief period below parity against the dollar Monday morning the loonie has since ceded the parity line as the decline continues. There was no data out of Canada Monday but the currency was not helped by a further drop in oil prices, while many traders are nervous about the prospect of a rate cut from the bank of Canada Tuesday and are simply giving the Canadian currency a wide berth. Last week’s GDP numbers were stronger than forecast and if the Bank of Canada fail to cut rates tomorrow, the loonie should be able to push the dollar back below the parity line once again. A rate cut could see the dollar appreciate to over 1.02 very rapidly, even ahead of the key payroll figures due for release for both countries later this week. I am now a loonie bear so will only sell the currency, but would prefer to see price drift back to between 0.9250 and 0.9550 before coming in again. There is major risk in having an open position on the loonie going into Tuesday’s rate decision and the more astute approach would be to have an advance buy order in place to pick up the directional move (if rates are cut), as USD/CAD will probably move very sharply in the period immediately following the rate announcement. Strategy: Buy on any dips to between 0.9920 and 0.9950 with target prices of 1.0020 and 1.0035. Exit live open positions before Bank of Canada rate announcement.

Bob B - Dec 3

No comments: