Thursday, December 6, 2007

Bob's Currency Focus Dec 6 14:00 GMT

We saw quite a dramatic capitulation of this pair Wednesday, with the euro ceding almost 1.7 cents on the day, which is an unprecedented level for this pair. I’m inclined to believe the move had more to do with the closure of positions ahead of today’s key Central Bank announcements, rather than a fresh wave of new positions coming in behind the dollar. We are entering quite a thin trading period in the run-up to Christmas with many fund traders squaring their positions prior to the year end, so erratic moves will not be uncommon through the remainder of December. The US data yesterday was mixed for the dollar moreover being wholly positive, despite the market rally we witnessed. Activity in the services sector, as given by the latest ISM survey, slowed more than expected in November while unit wage costs in the third quarter actually declined. The ADP employment report, which signalled a surprise 189K gain in jobs in the private sector last month, is notorious for being inaccurate and there is no guarantee that the non-farm payroll report on Friday is going to reflect such any such surprise gain in employment. The reality is that the Fed is going to cut rates next week and the ECB has not cut rates today. The ECB has primarily maintained a hawkish bias and gave a balanced assessment of the euro economy today which in essence means the rate differential outlook into 2008 strongly favours the euro. The ECB is unlikely to raise rates soon but with the Fed set to cut several times more, it is difficult to favour the dollar over the euro at the moment from a fundamental perspective. I continue to favour buying the euro upon dips and I maintain we could yet see 1.50 hit before the end of next week. The euro has jumped from a low of 1.4523 this morning to now hit 1.46, and while there will remain some nervousness ahead of Friday’s US non-farm payroll data, the euro looks set to resume the upside trend ahead of the Fed next week. German factory orders soared by 4% in October, 8 times higher than forecast and suggests the strong euro certainly has not led to any deterioration in manufacturing in the euro’s premier economy. US jobless numbers fell by 15K last week and rises expectations for a positive non-farm number Friday. Strategy: Buy euro on dips with price targets of 1.4610, 1.4650, 1.47 and 1.4760.

PS: ECB President Jean Calude Trichet stated in his press conference a short while ago that some members of the MPC today favoured and voted for a rate hike.

The Bank of England followed the example set by the Bank of Canada Tuesday to shift policy and move to monetary easing. The 0.25% rate cut delivered today will have surprised many but the prospects of a rate cut have been increasing all week, owing to softer economic data and markets essentially pricing in a cut. Sterling had sold off prior to the announcement and in fact has since rallied as traders believed Wednesday’s sharp sell-off had gone far enough, for now. Sterling will continue to come under pressure if further economic data prints to the soft side as it will raise the belief that today’s Bank of England move is only the first stage in a prolonged monetary easing cycle, which many believe will stretch well into 2008. Cable has been protected by broader dollar weakness this afternoon and this might continue as markets next look to the Fed which meets next week. There is a chance of an aggressive 0.5% cut by the Fed next week, but this may be totally dependent upon Friday’s nonfarm payroll number. Sterling has sold off somewhat against the euro but is still below yesterday’s record 5 year lows, but there is a risk of a further attack on EUR/GBP, particularly if the euro launches a broader market rally. On the data side, industrial production and manufacturing output released earlier today came in higher than forecast, growing at 0.4% and 0.5% respectively on the month, which at least signals that the manufacturing sector in particular is holding up well. Strategy: Our target 2.0246 has been reached and given the sharp move and the anticipation of a Fed rate cut, I’m not inclined to sell cable at current price levels. It may be worth buying cable on dips below 2.02 as there is the prospect of a corrective return to 2.04, particularly with the dollar likely to come under pressure leading into the Fed policy meeting. Much will also depend on the US non-farm number tomorrow and I would recommend being out of the market before this data is released (13:30 GMT). Sterling has now taken on a negative tone on the broader market and there is little value in buying it against any currency other than the dollar at the moment.

The Japanese yen lost further ground Thursday against both the euro and the dollar and the US currency has now appreciated to Y111.25, close to the recent highs. There may be a push to try and force the pair towards 112, but the dollar looks to offer very little value above this level, when once considers the US Fed is set to cut rates next week to try and stimulate economic growth in the world’s largest economy. The yen’s market price however looks set to be overtaken by events and if global stock markets sustain their rally through to the Fed meeting, then with risk aversion levels in decline the yen is going to be on the defensive. We have not seen any major outlay on the carry trade in the past 24 hours, despite stock market moves, so the yen has not slipped as far as it might have done. High volatility is likely to be the order of the day and the yen will be pulled in both directions. Any sharp reversal in US stock markets later today should see money flow back into the yen and see the currency rise against the dollar. Revised GDP numbers for Qtr 3 are released tonight but these are unlikely to have any market impact. Strategy: Sell USD/JPY on any moves towards Y112, with target prices of Y111 and Y110.50. A strong non-farm payroll number Friday will favour high yielding currencies over the yen and traders should exit the market before the data is released (13:30 GMT.

Canadian data Thursday was fairly robust with Building Permits rebounding by 6.8% in October, following a decline of 1.7% the previous month. Business activity picked up in November as evidenced by the IVEY purchasing managers index, which rose to 58.7 against 57.1 in October. Oil prices continue to fall (down a further $1 a barrel today) and with base metal prices in retreat owing to concerns over the global economy, the Canadian dollar will remain under threat. The loonie pushed its Us counterpart back to 1.01 over night but was unable to hold that level and the pair quickly rallied to 1.0193 this morning. The pair looks range-bound between 1.01 and 1.02 for now with the smart money buying the pair on dips. The immediate outlook for the currency will be determined by Friday’s employment data and another robust report could see the loonie temporarily correct back to parity with the greenback. However traders are looking for opportunities to sell the currency and should we see a negative employment number coupled with a strong US non-farm number, USD/CAD could rise to 1.03 tomorrow. The loonie has corrected somewhat against the euro, but this has more to do with the broader euro sell-off we saw yesterday than any new-found loonie strength. Strategy: Buy USD/CAD on dips towards 1.01 with upside price targets of 1.0180 and 1.0250. Friday’s trading between 12:00GMT and 14:00GMT will be volatile and intra-day range-traders should exit beforehand. Longer run – retain open long positions with S/L just below parity and upside price target of 1.05.

Bob B – Dec 6

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