Friday, October 12, 2007

Bob's Currency Focus

The dollar declined against most currencies Thursday, although it did manage to recoup some of its losses towards the close and gained against sterling and the yen. Despite a better than expected reduction in the country’s trade deficit and a decline in jobless numbers, traders are generally shying away from the currency as traders begin to expect a further Fed rate cut at the end of this month. Every dollar rally we are seeing is fleeting and the market is using each opportunity as a means of selling the greenback at a cut-down price. There is huge complacency out there at the moment but with the prospect of further rate cuts in the US while on hold elsewhere, nobody wants to stay on the dollar for long. Anything short of a very positive retail sales number today is unlikely to offer even short-term dollar support. Volatility in equity markets has increased and if we see a significant decline today in stocks, it may offer the dollar some protection, albeit temporary. A poor retail sales number coupled with a bounce in equities should see the dollar lose out to the euro, the AUD, CAD and NZD, although it could rise to 118 against the yen. A very positive retail sales number >0.5% should help pare back rate cut prospects and boost the dollar across the board. Against the euro, the dollar needs to break below 141.50 and 1.4130, if it to make any meaningful progress. There is also the potential for a move to 201.90 against sterling later today.

The euro was boosted early Friday by a positive set of Industrial Production numbers for the euro area in August, which came in much higher than expectations. Comments about inflation made by ECB German member Alex Weber Thursday caused some consternation in wider markets, but helped in part to give the euro a lift to 1.4240 against the dollar. Weber suggested that the ECB may have to continue to raise interest rates, even if economic growth were to continue to slow, to keep price inflation risks under control. The euro rose sharply to 0.70 against sterling yesterday and is currently trading near that price level. We may see a push back up towards 1.4250 today against the dollar, because the pair is still not overbought on the daily chart, while progress against the yen will very much depend on risk tolerance levels, which declined somewhat Thursday, after a drop in stock prices. The euro also rose to a fresh lifetime high against the Swiss franc Thursday, going over 1.68 for the first time and the pair currently trade close to that price level. An interim move to 1.6850 is possible, particularly if equity markets trade positively. There could be greater market volatility Friday and a broad fluctuation in prices, similar to what we saw on Thursday, is likely.

Sterling has struggled ever since the RICS house price index was published Thursday and cable today tested price levels just below 2.0250, having been above 2.04 early yesterday. Sentiment remains negative towards the currency and although it is gaining some protection from increased interest in carry currencies, it will probably continue to be sold off on any significant rallies, particularly against the US dollar. Although prospects of a Bank of England rate cut before the end of the year appear to be rising, markets will have to wait until next week’s consumer price inflation data before firming expectations. Sterling looks oversold against the euro and any advances towards 0.7020 should attract some selling pressure, with the potential for a near term move back towards 0.6970. If cable comes under pressure, then we could see a retreat back as far as 2.0195, but if the dollar comes under pressure because of US data, then sterling could rise back to 2.0350.

The increased appetite for the carry trade had the yen on a major defensive over the past 24 hours, although a sudden decline in risk tolerance helped the Japanese currency stabilise overnight. The yen is still vulnerable though and a retreat to 118 against the US currency Friday looks possible, if the US currency gets boosted by domestic economic data. If high yielding currencies come under threat later Friday, then the yen will profit, particularly against the AUD, NZD and sterling. Consumer sentiment rose in Japan for the first time in 5 months in September, but the data had no market impact as the yen’s price movements are currently dictated by risk tolerance levels.

The loonie hit a fresh 31 year high against the USD Thursday, the pair clocking below 0.9730. The dollar rallied to 0.9797 early Friday but the pair again came under selling pressure and is currently trading around 0.9750. August’s trade surplus in Canada came in higher than expected, although when one looks at the detail of the report it is not as positive as it appears on the surface. Exports fell by 1.8%, while imports fell 3.8%, indicating an easing in domestic consumption. With oil prices riding close to $83, the loonie will continue to be supported strongly and any rallies in the USD are likely to attract fresh selling pressure. There is no data from Canada Friday, but there is likely to be some positioning over the next few days ahead of Tuesday’s Bank of Canada meeting, so expect an increase in volatility between now and then. With few players short on CAD right now, we may see an exit of a number of long positions before Tuesday, which should give the USD the chance to correct back to at least 0.9830 before then.

Bob B - Oct 12

Thursday, October 11, 2007

Market Watch: US Exports its Deficit

Is this deliberate policy?

The US dollar has spent much of the past 6 months hitting record lows against most of the world’s leading currencies, including the pound, the euro and nearly all of the major commodity currencies: the Australian dollar, the Canadian dollar and the Norwegian Krone. The US currency has fallen 20% against the Canadian dollar (the US constitutes 80% of Canada’s exports) since March, 15% against the Australian dollar since August and 7% against the euro in the past 7 weeks. Although the dollar is the weakest of the major currencies in the world this year, US politicians have grown more vocal about the weak Chinese currency (primarily a fixed rate currency allowed to trade within a narrow band with the US dollar) and have been pushing legislative bills to penalise China for its apparent currency manipulation. Yet, is the US guilty of a similar offence and is it allowing its currency slide into the abyss, deliberately. With the US dollar index at an all-time low, many would argue the currency has already reached the abyss, yet having the worst current account deficit per capita of any leading economy, does the US Administration really want a stronger dollar?

Why might the Administration want a weaker currency?

1. With the economy slowing, a weak currency makes US exports cheaper and thus helps to stimulate activity and growth in the country’s export sector.

2. Imports become more expensive and thus US products are more competitive on the home market, again helping to stimulate domestic growth.

3. A weaker currency leads to a narrowing of the country’s trade deficit, thus improving the country’s current account and international debt liability.

4. Attracting greater foreign investment (it is now cheaper for investors to buy dollar denominated assets).

5. Encouraging greater numbers of tourists and thus greater consumption of US goods.

6. The value of the country’s own foreign currency and gold reserves increases and the net liability of previously issued debt in relative terms is reduced.

The dangers of a weaker currency ?

1. Imported Inflation. Essential imports like energy are rising in price not just on increased global demand, but also because of a weaker dollar (all major commodities are denominated in dollar). This means the US will be paying more than other countries for oil, gas etc. and the inflationary impact of higher prices will be greater in the US than anywhere else.

2. Dumping of dollar denominated assets. If investors believe the dollar is going to depreciate more and more in the longer run, they will be tempted to offload their assets sooner rather than later. The sharper the dollar decline, the more acute the investor panic and this could lead to a major dump of dollar denominated assets and by consequence higher US inflation.

3. No takers for US debt. If the yield on US bills is less than the dollar’s level of depreciation, then the attractiveness of holding US debt is diminished. Indeed, in such a scenario the only nations for whom it makes sense to continue to buy dollar-denominated asset paper would be those countries that have a currency that is aligned to the US dollar, like China and the oil-exporting nations of the Middle East. Continued dollar depreciation could force the oil-rich countries of the Middle East to break their alignment to the dollar, so as to preserve the value of their oil revenues.

4. China. Arguably the one country that benefits more than the US from a weaker dollar is China. With its currency directly aligned to the dollar, the conversion of its revenues from exports to the US into the local reminbi currency is primarily the same, regardless of the value of the US dollar. As well as this, a weaker US dollar, means a weaker reminbi relative to other world currencies and makes Chinese exports to other parts of the world all the more competitive. Also, if China continues to be the major holder of US debt, more and more control of the US economy and economic destiny will be given to the Chinese.

5. Stature. The US likes its mantle as the world’s dominant economy and owning the world’s premier currency. The dollar may become secondary in importance to the euro, or the reminbi, if it loses its credibility and role as a ‘haven’ currency and this could greatly weaken the economic influence of the US in the world.

6. A Dollar crash. Though unlikely, it is conceivable that the US dollar could become such a liability that nobody wants to hold it and a wave of panic selling / speculative overdrive could lead to a capitulation of the currency, like that seen for some Eastern currencies during the Asian financial crisis. A collapse of the dollar would plunge the world economy into crisis, but the world’s central banks and governments are unlikely to allow that to happen, not while it remains the predominant currency anyhow.

So is a weak dollar US government policy?

It is very difficult to prove but what we do know is that the current Administration has paid only lip service to the decline of its currency, so this indicates they’re untroubled. The Fed’s decision to cut rates aggressively and thus add liquidity to a domestic economy already heavily indebted, demonstrates the Fed does not expect today's US consumer to pay for the country’s massive deficit, at least not in the foreseeable future. Short-term economic gain is better than long-term pain for future generations of Americans – could this be the Fed’s thinking, or is it a case of weakening the currency to shift the US deficit problem to other parts of the world. Either way, it’s a massive gamble and somebody, somewhere will be left holding the tab.

Ted B - Oct 11

Bob's Currency Focus - 12:00 GMT

The dollar plummeted in early European trading, with the US dollar index collapsing to below 78 again, near its all-time low. New-found negative sentiment has clung to the currency since the release of the Fed minutes Tuesday, with many analysts now expecting the Fed to again cut rates at the end of this month. Last Friday’s apparent upbeat employment report is now but a distant memory. The euro rose to above 1.42 against the dollar yet again and within striking distance of the lifetime high, while the Canadian dollar and Australian dollars hit fresh 30 year and 24 year highs respectively against the beleaguered greenback Thursday morning. The dollar has managed to rise to 117.40 against the yen, which weakened across the board as the Bank of Japan kept interest rates on hold for the fourth consecutive meeting. The dollar has also held its own against the pound which is trading weaker this morning. Some of the positioning against the US dollar looks to be ambitious in the short-term, particularly with the euro, and the dollar does have a chance to reclaim some of its losses later today, particularly if we see a strong trade balance number. The currency has been struggling to hold onto any gains for long, so if you are going to back the dollar, the advice is not to sit on your positions for too long if you can help it. There is the potential for a rise to 118 against the yen and a move to 2.03 against sterling, while 1.41 against the euro is favoured ahead ahead of a fall of the lifetime high, which sits at 1.4280.

The European Commission this morning lowered its GDP forecast for quarter 3 to between 0.3% and 0.7% from 0.3% to 0.8%, while Eurostat confirmed quarter 2 GDP at a lowly 0.3%, in line with the original estimates. While the euro economy does not appear to be firing on all cylinders, it is still attracting a lot of support, being the only viable major currency alternative to an out-of-favour US dollar. With a new wave of negative dollar sentiment sweeping markets, the euro is in with a great chance of rising to above the lifetime high of 1.4280 within the next week. A weak US retail sales number Friday could provide the impetus traders need to push towards that milestone, while a period of consolidation is likely today with the currency having risen from a low of 1.4014 on Tuesday to 1.4217 this morning. A drift back to 1.4150 looks more likely in the short-term, before the next leg up. The euro rose significantly against the pound this morning, hitting a high of over 0.6970 and has the potential to reach 0.70 in the short-term, while the single currency has gained over 100 pips against the yen Thursday and at 1.6687, it is now within sight of the all-time highs near 1.70. With the carry trade back in vogue, there appears little to stop the euro reaching a new record against the yen, unless we encounter a prolonged bout of market instability, or have Central Bank intervention.

The pound came under pressure Thursday as the RICS house price survey for September reported the greatest fall in house prices in over 2 years. Despite the bad news, against the majors the pound only lost against the euro, while holding its own against the US dollar and gaining 100 pips against the yen. It remains vulnerable though as concerns about the economy’s housing sector grow, although greater interest in the higher yielding currencies will afford it some protection in the short-term. We could see the euro rise to 0.70, while a decline to below 2.03 against the dollar is possible later today. There is no further economic data out of the UK this week and the currency’s immediate fate will very much depend on US data.

As expected the Bank of Japan kept rates on hold Thursday and with Governor Fukui’s press statement lacking in clarity and seemingly riddled with contradictions, the smart money is on the Bank of Japan remaining on hold until the end of the year. The yen, not surprisingly, ceded further ground against all currencies this morning, particularly against the euro, with EUR/JPY having reached 1.67. The yen is currently at 117.50 against the dollar and could fall to below 118 later today, especially if US stock markets rally. The Japanese currency has also fallen dramatically against the commodity currencies today and with intensified interest in the carry trade as risk tolerance levels remain high, the yen looks under threat to the end of the week. The only chance of respite for the yen is if stock markets reverse rends and risk aversion levels rise.

The loonie struck yet another 30 year high today against the US dollar, with the US currency dropping to 0.9746 earlier Thursday. Rising oil prices have helped to underpin the Canadian currency, which thus far has shown no inclination to correct, following its recent rapid rise. Today’s Trade Balance number will be important to test the competitiveness of Canadian exporters, faced with a strengthening domestic currency. The figure is from August, so will not capture the most recent sharp appreciation in the currency, which occurred during September. A sharp narrowing of the trade surplus, particularly with the US would hurt the loonie and should send it into retreat. The CAD does not offer any value against the US dollar at current levels and there is the potential for a correction to 0.9830, or even higher if the trade data is bad. A much wider than expected trade surplus on the other hand could help the loonie push the dollar back to 0.97. The best cross to range trade right now remains AUD/CAD.

Bob B - Oct 11

Wednesday, October 10, 2007

Bob's Currency Focus - 12:00GMT

The Fed minutes were rather disappointing from a dollar perspective as they did not indicate that the September rate cut was a once-off and also the 50 basis point cut was unanimous and an argument was not even put forward for the smaller 25 basis point move the market was expecting. While acknowledging that the August employment report would probably be revised, the Fed was really in the dark as to growth outlook and predicted the housing sector crisis would get worse, before it got better. The minutes have fuelled expectations for a further cut in October and the market’s interpretation of such was demonstrated by both the Dow and the S&P 500 closing at record highs Tuesday. The immediate prospects of a major dollar correction look to be on hold and EUR/USD may now range trade in the 1.40 to 1.42 band, until there is some major shift in expectations. With little on the data side for Wednesday, we may initially see a euro attempt to take out 1.4160, which if it gives way could see an attempt to reach 1.42. The euro has its own issues at present though and any move towards 1.42 is likely to attract increased selling pressure. The dollar needs to recover quickly to below 1.41, or negative sentiment against the currency will intensify.

Sterling rallied very strongly late Tuesday/early Wednesday and cable went from a low of 2.0256 Tuesday to reach 2.0478 this morning. Cable looks to be living a charmed life at levels close to 2.05, particularly since the UK government yesterday downgraded its growth forecast for 2008 to between 2 and 2.5%. However comments from Mervyn King on Tuesday helped play down expectations for a near-term interest rate cut, which helped boost the pound. If cable can hold above 2.04 today, it may have a chance to try and challenge the key resistance point at 2.0490 over the next day or so, but cable does look over-priced given the underlying risks and I will be surprised if it does not return back towards 2.03 by Thursday. Sterling failed to penetrate the 0.69 level again against the euro, but it still looks to offer decent value on levels close to 0.6950. Sterling broke above the 2.40 price level against the yen for the first time since the recent bout of market volatility started in early August and we could see a further spike in GBP/JPY if the Bank of Japan gives a dovish assessment after their latest policy meeting early Thursday.

The Japanese currency has been on the defensive for the past 24 hours as markets virtually eliminate the prospects for an interest rate rise from the Central Bank Thursday. The Bank could surprise and add 25 basis points tomorrow, particularly given the current favourable price levels for the currency, but it is unlikely to do so. The currency is likely to face a bout of fresh selling, if rates remain unchanged, and we should see 118 being struck against the dollar and further weakness against the other major currencies over the next 24 hours. This weakness could prove to be short-lived, given current levels of complacency, particularly if we see any rise in risk aversion on global financial markets in the coming days. It is not a currency to buy however based on current sentiment.

The loonie, as is its form over the past 6 months, blew away any notion of a recovery in USD/CAD Tuesday, as the currency pushed the US dollar right back below the 0.98 price line from the 0.9895 price the dollar had reached earlier yesterday. The loonie was underpinned by recovering oil prices which jumped by over $1.20 a barrel Tuesday. While the loonie does look grossly over-priced, it is unlikely to encounter any major selling pressure unless we see a sharp decline in commodity prices and/or strong intervention by the Bank of Canada. The market has more or less dismissed any chance of a rate cut from the Bank of Canada next week, particularly after the strong employment report that was published last Friday. The euro slipped to a 16 month low of 1.3810 against the Canadian currency Tuesday, while sterling slipped below CAD2.00. The euro looks to offer good value at levels close to 1.38 against the currency. The loonie is up an incredible 23.5% against the yen since March and with the pair fast approaching 1.20, the pair is being set up for a very sharp tumble, when risk aversion returns to currency markets. For the moment expect an attempt to take out 1.20 on the CAD/JPY cross, particularly while the yen remains exposed to the carry trade.

Bob B - October 10

Tuesday, October 9, 2007

Bob's Currency Focus 12:00 GMT

Friday’s euro rebound proved to have been a false move and with the positive US payrolls report continuing to boost the dollar ahead of tonight’s FOMC minutes release, the euro has been pushed to as low as 1.4014 Tuesday morning. We’re likely to be in a narrow range (1.410 – 1.4050) up until the minutes come out at 18:00GMT. The likelihood is that the minutes will dampen expectations of a further rate cut in October, especially given Friday’s boost in employment, so we should see the dollar try to take out 1.40 this evening and if it pushes below 1.3980, we could see a decline right back to 1.39, even tonight. If the minutes are favourable towards the greenback and the currency fails to take advantage – i.e. does not break or hold below 1.40, then we could witness the sort of negative sentiment backlash that we saw on Friday, with the euro bouncing strongly back up to 1.41. The biggest danger to the dollar this evening is if the Fed minutes reflect a serious downgrading to US growth prospects, which could trigger a rapid dollar sell-off and see the euro back up at 1.4130 by the time we get to discuss the pair again tomorrow.

Cable has slipped further this morning, falling to 2.0283, ahead of a budget statement by the Chancellor of the Exchequer at 14:30 GMT. The data out of the UK was good this morning, with the trade deficit having narrowed (albeit against a higher than originally forecast July number), while the British Retail Consortium reported that retail sales rose much more than expected in September. Add to this the NEISR GDP forecast of 0.7% for quarter 3 and it would tend to suggest that the rumours of the economy’s demise might be somewhat exaggerated. Sterling is being sold off on the fear the UK Government may reduce the country’s growth forecast in today’s Parliamentary budget presentation. You could have made up to 100 pips had you followed my assessment yesterday. Cable’s current price I do not like as I still maintain a downside bias, but any rebound back towards 2.04 should offer a good sell opportunity. Sterling has also weakened against the euro today, but I would be inclined to sell from any euro rallies back up towards 0.6950, with a target price of 0.69.

The yen has strengthened across the board Tuesday, as markets are wary of selling the currency too aggressively ahead of Thursday’s interest rate announcement. Although the Bank of Japan is unlikely to raise rates, the sharp sell-off of the currency in the past 3 weeks has brought about a temporary air of caution. Domestic data out of Japan today was poor, with the country’s economy watcher’s confidence survey slipping even further in September to 42.9 from 44.1 a month earlier – well below the boom or bust 50 point level. The dollar managed to hit 117.60 against the yen Monday before retreating modestly but the yen has held the upper hand Tuesday and the pair has gone as low as 117.03. Any price around or just below 117 offers a good buy opportunity, with 117.50 a fairly easy target. 118 is a possibility tonight if the Fed minutes spur a major dollar rally. A broad recovery in stock markets Tuesday could also see the yen slip back to 1.65 against the euro.

I said yesterday that the loonie had the potential to correct quickly to 0.99 against the USD and this morning the pair hit 0.9895. Oil prices fell back sharply Monday and are down again in trading Tuesday and a fall in oil prices could help to extend the correction to 0.9950, with the possibility of a near-term move back to parity, if the US Fed minutes dampen expectations of further US rate cuts and we see a broader decline in commodity prices. Canada’s housing starts data for September have just come in 60K above expectations – up nearly 20% from August and is a reminder to would-be CAD sellers, like me, just how firm the domestic economy is right now. Tomorrow we will look in more detail at the CAD crosses, once the Fed minutes are out of the way.

Bob B - Oct 9

Monday, October 8, 2007

Bob's Currency Focus - 12:00 GMT

The fundamentals influenced this morning as Friday’s rather positive US payroll report saw the dollar rally and push the euro back down towards 1.4080. Monday is a holiday in the US and we should be range-bound within Friday’s limits of 1.4032 to 1.4156 today, with the bias to the downside. The Fed are unlikely to cut rates later this month and indeed they could remain on hold for the remainder of the year as the prospects of a major US economic calamity appear to be receding. The dollar is clearly undervalued and with a slowing euro economy, EUR/USD may have a significant top in place at 1.4280. The euro offers little value close to 1.42 and any rallies near to this level will offer an attractive selling opportunity. We are sure to see institutional buying close to 1.40, and buying close to this level with stops just below 1.40 will be popular. With the prospects of a more meaningful correction improving for the dollar, selling down on failed upside rallies from around the 1.4150 to 1.42 price level may be the more astute move for now. 1.4085, 1.4050 and 1.4035 are the more immediate target levels ahead of 1.40.

Sterling has been written off by many currency analysts in recent weeks, yet the currency is more than holding its own against the dollar, while it has strengthened against the euro and the yen in the past week. Uncertainty about the euro economy and a renewed appetite for the carry trade is giving the pound important protection. Sterling has a good chance to push the euro back to 0.6850 this week, if market interest in higher yielding currencies intensifies. Cable should primarily trade in the 2.03 to 2.0440 price range for the next day or two, until a decisive move is made by one side or the other. It currently offers a good sell opportunity from above 2.04, particularly as the fundamentals on the US dollar side appear to have improved. Downside price targets are 2.0370, 2.0330 and 2.03. We need a close below 2.03 before we set our sights lower.

The yen has weakened dramatically since Friday as positive US economic data has fuelled a fresh sell-off of carry-trade funding currencies like the yen and the Swiss franc. We are likely to see the dollar rise to 118 in the short-term, before the yen offers any significant resistance. Monday’s break above 117.20 has seen the dollar rise to its highest level against the Japanese currency in over 2 months. There is an outside chance of a BoJ rate increase on Thursday, but it is unlikely with the economy having just posted its sixth consecutive month of price deflation. If the BoJ stands pat on rates, then expect a fresh wave of yen selling with many traders likely to offload the currency before the Bank make their announcement. A dollar rally to 119 later this week, where the 100 day SMA price currently resides, is a possibility.

I covered the loonie’s latest leg upwards in detail in last Friday’s analysis. With Monday being a holiday in both the US and Canada, we won’t see much activity on the pair until Tuesday. The loonie offers no value at current levels and there is plenty of room for a near-term correction in USD/CAD, certainly back up to 0.99, just below the previous 30 year low for the pair, which was taken out last Friday. Friday’s low of 0.9775 should act as a very strong support and a solid anchor/stop when buying the pair. The ratio of CAD longs to shorts in the market at present is almost 85% to 15% and we are likely to see an exodus of some of those CAD longs ahead of next week’s Bank of Canada monetary policy meeting, which is a major risk event for the currency. A rise back up to parity before then is a possibility, particularly if the US dollar can sustain a broader based recovery. AUD/CAD may be the safest cross to trade for range-traders, with both currencies equally overbought across the currency spectrum.

Bob B - Mon Oct 8 2007