Tuesday, December 4, 2007

Bob's Currency Focus - Dec 4 - 13:30 GMT

The euro has rallied strongly Tuesday coming off a low of 1.4635 to register at 1.4740 at 12:00 GMT. The single currency has benefited from significant bids on the EUR/GBP pair, fuelled by speculation of a possible Bank of England rate cut later this week, and the sell-off of sterling against the single currency has in turn helped the euro rise against the dollar. There is no data of any significance later today, while this morning October producer prices for the euro area printed at +0.6% for the month, higher than the forecast +0.4%. There were 2 Fed officials speaking Monday – Eric Rosengren and Janet Yellen, and both highlighted downside risks to growth in the US economy, which suggests the weight of opinion on the FOMC seems to have swung to the dovish side and a rate cut next week looks like a done deal. The ECB meet Thursday and the committee is expected to keep rates on hold and markets anticipate a hawkish bias with euro-zone inflation having hit a 6-year high in November. If the ECB does deliver a hawkish line and with the Fed set to cut next week and possibly cut rates a number of times next year, then under this scenario the dollar looks set to struggle against the euro for the foreseeable future. The only possible get-out clause for the dollar will be if the ECB choose to shift their monetary policy to a more balanced or dovish stance. The ECB could conceivably shift their stance to neutral, as recent speeches from council members point to a growing number of doves on the policy committee. Price action between now and Thursday’s ECB meeting will probably see bias to the upside, but nerves will play on traders and there is liable to be quite a bit of volatility. There appears no good reason to buy the dollar, unless the ECB are going to soften their stance and Friday’s non-farm payrolls may prove to be redundant in market terms as it appears they won’t have any impact on the Fed’s decision next week. It may well be that the Fed has already seen the payroll numbers and that they are not strong enough to dissuade the Fed from easing rates next week. Strategy: Buy on dips towards 1.4630 with stop loss at 1.46. Upside price targets are 1.47 and 1.4740. A close above 1.4750 Tuesday will mean price possibly rising to 1.48 Wednesday. Risk: Euro-zone Services PMI (09:30 GMT) on Wednesday, if much lower than forecast, could spur the ECB to soften their tone and will make the euro vulnerable to a temporary sell-off.

Sterling sold off sharply against the euro Tuesday (losing over 0.5%), giving back most of the gains it had earned over the previous 2 days. The British Retail Consortium reported total retail sales grew just 3.1% over the year to the end of November while same store sales only grew by 1.2%. Also today the CIPS Construction PMI came in at 54.3, the lowest reading in 14 months and suggesting the slowdown in the housing sector is accelerating. The soft data has made many traders nervous ahead of the Bank of England rate announcement this Thursday. As of now the probability of a rate cut is only around 35%, but Wednesday’s Services PMI will be very important in terms of giving a clearer picture ahead of Thursday’s actual rate decision. The Services sector constitutes 70% of the UK economy and if tomorrow’s PMI points to further deterioration in this sector, then it could be enough to influence the Bank of England to move on rates this week. It is dangerous to buy sterling ahead of the rate decision and indeed if the Bank of Canada moves to cut rates today, markets may view it more likely the Bank of England will follow suit later in the week. Strategy: Sell Cable on prices close to 2.07 with target prices of 2.06 and 2.0550.

The yen has rallied for a second day as global stock markets decline further and risk aversion levels continue to rise. The Japanese currency pushed the dollar to as low as 109.57 this morning but has since come off those levels to trade at around 109.80, still up 0.6% on the day. If negative sentiment carries through to Wall Street later today, the yen could push the dollar back to below 109, with a return to 108.50 a possibility over the next 24 hours. There is no data to influence the pair today and the yen’s fate will be determined by risk tolerance levels. The euro is down only marginally against the yen today – trading at around 161.80, but the pair could fall to test Y160 if stock markets continue their decline into Wednesday. Strategy: Wait for markets to stabilise before reviewing price levels and the way forward.

Today is ‘D’ day for the loonie with the Bank of Canada rate decision due out in just 30 minutes. Markets price the chances of a cut at 30% but I personally put them higher than 50%, especially since the Fed have now indicated they intend cutting US interest rates again next week, which may act as trigger today. Canadian inflation is benign and the risks to the domestic economy are major, so there appears to be no reason for the Bank of Canada not to move now. Why put off the inevitable? If the Bank believes the risks are real, which they are, then the economy will benefit in the long run if the Bank is proactive in terms of easing interest rates. The loonie is trading as if traders have the jitters and are half expecting a cut. If a cut does come, expect a whole new wave of bids for USD/CAD and the pair should easily reach 1.02. If a cut does not come, then we will get a retracement probably back to as far as 0.99 or lower today, before a resumption of the uptrend. The best value pair in the event of no rate cut is EUR/CAD, i.e. sell it down. Strategy: If not in the market already, then stay out until the dust has settled after the rate announcement. Those that are in the market and are long should move up their stop loss, in case the Bank reneges today. We will revisit the situation tomorrow.

Bob B - Dec 4


Anonymous said...

Good read on Canada interest rates. Congratulations...

Anonymous said...

Don't think King wants to cut UK rates. Sterling to rally.

Anonymous said...

what u saying now, Will?