Wednesday, December 5, 2007

Bob's Currency Focus - Dec 5: 13:00 GMT

The dollar has pared back half of the losses from Tuesday, when the pair retreated towards 1.47 after 1.4770 proved to be tough resistance for the euro to break. Euro-zone data was weak Wednesday with retail sales plummeting by 0.7% in October and growth in the dominant services sector slowing to a 2 year low, although the services PMI did come in slightly above last week’s preliminary forecast. Futures markets are beginning to price in increased chances of a 0.5% rate cut from the Fed next week and if US economic data remains weak for the remainder of this week, then the probability of an aggressive 50 basis points cut will increase. Wednesday sees the release of the ISM services PMI for November and the ADP employment report which estimates the number of jobs added in the private sector in November. Two weak reports will put added pressure on the dollar and to be honest it is hard to see how the greenback can sustain any real momentum over the next week, given the underlying risks. The ECB is the main event of this week and if the MPC maintains its hawkish inflation bias tomorrow I cannot but see 1.50 being hit within the next week. We need to be cautious though because we have already witnessed a shift in emphasis from the Central Banks in Canada and Australia over the past 24 hours and with the strong possibility of a rate cut from the Bank of England Thursday, it may well be the ECB will be forced into delivering a softer line because of wider concerns over a slowing global economy. Many traders will stay on the sidelines until after the ECB deliver their statement tomorrow and price movements between now and then may prove to be volatile and misleading. Soft US data though will increase expectations of a 50 basis point cut from the Fed and should see the euro rise to test Tuesday’s highs. Strategy: buy on any dips towards 1.4630 with target prices of 1.4730 and 1.4760, or if you want to be aggressive you can buy the euro at current levels with a stop loss just below 1.47 and a limit target of 1.4760 or 1.48.

Sterling has taken a hammering Wednesday as traders increase bets the Bank of England will move to cut rates Thursday. We have seen a spat of weaker data Wednesday, with the Nationwide consumer confidence index falling to its lowest level since February, Halifax reporting house prices fell by 1.1% in November and the CIPS services PMI for last month printing at 51.9, below the 53.0 forecast. The euro rose to a fresh 4.5 year high against the pound at 0.7234, almost a full 2% up on the 0.7090, where the pair was trading early Tuesday morning. Cable also came tumbling down, from just below the 2.06 it was trading at last night to hit a low of 2.0351 this morning. Cable could yet return to challenge key support in the 2.0246 price region over the next 24 hours. While sterling is oversold against the euro, there is too much risk in buying the UK currency ahead of the Bank of England’s rate announcement tomorrow. The pound might get some relief later today if US stock markets rally and higher yielding currencies gain some reprieve. Between now and the Bank of England announcement it is a case of sell on any significant rallies. If the Bank does not cut rates tomorrow, sterling will rebound, particularly against the euro, so anyone going short needs to be aware of the inherent risks. Strategy: Sell cable on any rallies towards the 2.05 price region, with limit targets of 2.04, 2.0360 and 2.0250. Keep a watch on Bank of England and ECB Thursday for direction on EUR/GBP. BoE cut + hawkish ECB = further sterling weakness. BoE on hold + dovish ECB = sterling rally.

The yen weakened overnight against both the dollar and the euro as Asian stock markets rallied. European stock markets have also rallied so far today, but the yen has managed to limits its losses as risk aversion levels remain high and higher yielding currencies like sterling and the Aussie dollar have sold off. The yen will come under pressure in the short-term if stock markets sustain their rally in anticipation of further rate cuts from the Fed, but any reversal in the fortunes of stocks should spark a sharp recovery in the yen. The dollar could potentially push back above Y111 later today if US data is better than expected and markets stabilize. The euro could advance to over Y163 Wednesday. Strategy: None. Await Central bank outcomes Thursday.

If you have been following my analysis you will see I called it correct on the Bank of Canada and also forecast a spike in price of USD/CAD to 1.02, which was achieved overnight. The Bank made the correct move, although their accompanying statement was relatively neutral, so aggressive selling of the loonie solely on the basis of yesterday’s outcome is hardly warranted. We will probably now enter a period of consolidation, probably within the 1.01 to 1.03 price range, but Friday’s employment report from Canada has added significance and a strong report coupled with a weak US nonfarm number and an imminent US Fed rate cut should offer some temporary respite for the loonie, at least against the US dollar. The euro appreciated to over 1.50 against the loonie early this morning and while the move looks overdone, it is quite dangerous to buy the loonie right now with underlying sentiment beginning to weigh more and more against it. Strategy: Buy USD/CAD on dips towards 1.01 with limit targets of 1.02 and 1.0250. Move the stop loss on those long-run positions up to 1.0 from 0.95 and retain the 1.05 target price.

Bob B - Dec 5


Anonymous said...

ooooops....the euro is in pain

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Bob B