Wednesday, December 12, 2007

Bob's Currency Focus - 15:00 GMT

The dollar rebounded after the FOMC rate announcement, having initially softened. The euro was pushed back to 1.4640 but rallied from there this morning to once again sail over the 1.47 price line, before settling around the 1.4680 price mark. While the FOMC statement was not greeted with euphoria by stock markets, the Fed did leave open the possibility of further rate cuts and this cannot be seen as dollar positive. An element of risk aversion overnight has helped support the dollar but the currency might struggle once the full impact of the statement seeps through. The euro on the other hand has lost a little conviction in recent days and Tuesday’s downbeat Zew Business Survey will not have helped. However in data released today, Industrial Production in the eurozone rose by twice the level forecast in October while employment for the 13 nations that make up the single currency rose by 0.3% in the third quarter. Outside of the Zew survey, Data has been largely positive this week for the euro. The currency pair remains hemmed into a range between 1.46 and 1.4770 and until one side or the other convincingly breaks outside this band, we could see the pair move back and forth. Coming to print we have just witnessed a whiplash move from 1.4670 to 1.4750 and back to 1.4680 within a half an hour as the market reacted to a report from the Fed that it is teaming up with other major Central Banks to help alleviate the liquidity crisis. The pair currently trade at 1.4686 and I’m inclined to stick to the same track as yesterday. Strategy: Buy euro on dips towards 1.46, with initial target prices of 1.4720 and 1.4740. If the pair moves above 1.4770 shift the target price to 1.4840. Markets are thinning and becoming more volatile the further into December we go and Stop losses are being eaten up by rapid market fluctuations, so ensure stop losses are strategically employed or else avoid the market altogether.

Cable is going through one of those incredibly volatile periods right now and already today the pair has traded across a massive 2.25 cent price range. It rarely stays in the one direction for long and it is horrendously dangerous to trade for if you are using tight stop losses. I still prefer the downside and the pound’s rapid upside rallies of late are more to do with it being carried on the crest of a desperate-like carry wave which has reached lunatic proportions today, rather than any new-found fundamental strength behind the UK currency. UK employment is holding up well according to a report issued today and the jobless number fell by more than expected in November, although wage inflation was reported softer than expected which in essence means today’s employment report is not an obstacle for the Bank of England in deciding whether or not to cut interest rates again early in 2008. The euro quickly rose to 0.72 Tuesday having retreated back towards 0.7150 so we called that one right yesterday. Cable also fell from above 2.05 to our initial target of 2.0360. We recommend much of the same today although we move up our targets slightly from yesterday, to reflect the wider range the pair is trading in. Strategy: Sell cable on prices above or close to 2.05 with initial target of 2.0380, followed by 2.0330. Buy the euro on any dips towards 0.7150 with target of 0.7206. Sterling will also come under pressure against the yen and Swiss franc if stock markets shift into reverse gear, so keep an eye on Wall Street.

The yen has taken a battering in the past few hours as risk tolerance levels have been energised by a recovery in stock markets and nobody appears willing to miss the party. The dollar had slipped to 110.50 Tuesday after Wall Street reacted badly to the Fed’s latest rate announcement, but since then the dollar has risen to 112.46 as the silly season well and truly lands on the currency markets. To be fair, a rate cut was never going to prove to be a positive for the Japanese currency because it was sure to attract plenty of buying interest for the high-yielding currencies, with the yen preferred as the funding currency. Last night can be called a reactionary blip which triggered a sudden bout of risk aversion and gave the yen a monetary lift, which when we scrutinise it, was always only going to be like a temporary loan. The fundamentals have not changed though and the rather gloomy outlook for the US and global economies is the same, so it is only a matter of time before risk tolerance levels abate once again and the yen comes into its own. The US dollar may reach Y113.50 in the short-term but it will surely struggle beyond this level and the euro does not offer any value above Y165. Japan’s current account remains in a healthy state and October’s surplus showed an improvement of almost 50% on the same month last year. The longer run trend for USD/JPY is down but because of the interest cost in holding the yen long-term, it is not worth entering the market until we are sure the current correction upwards is complete. But there is good value in entering the market short-term during bouts of heightened risk aversion like we saw yesterday. This requires close monitoring of stock markets so it is fruitless to offer a direct strategy here.

USD/CAD is one of the few currency pairs which had shown a degree of stability over the past 24 hours and the pair’s price is virtually unchanged from the one it was trading at this time Tuesday. The US dollar firmly held its lines yesterday and today and the loonie may now be quickly running out of attempts to reclaim the coveted parity handle. Canada’s Trade Balance for October was slightly better than expected but the worrying fact from the report is that exports again fell during the month, this time by 0.5%. In fact the only reason the trade surplus increased at all is because imports fell by 2% during the same period, which in itself is hardly encouraging because it points to reduced consumption within the domestic economy. 1.0214 is the key barrier to the upside, but with resurgent oil prices offering temporary support, the loonie should be able to protect that level in the short run. Friday’s manufacturing and productivity data, if it prints on the soft side, could be a risk for the loonie. Strategy: Short-term - Buy USD/CAD on any dips to around 1.0050 with upside price targets of 1.0120 and 1.0160. Shift upside targets to 1.0220, if 1.0160 is convincingly broken. Long-term – Hold USD/CAD long positions with S/L at 0.9760 and target price of 1.05.

Bob B - Dec 12

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