Bob's Currency Focus - 18:45 GMT

EUR/USD
Messrs Bernanke and Trichet took centre stage Thursday - Bernanke giving his semi-annual testimony on the economy to the government Finance Committee, while Trichet was issuing a statement on ECB monetary policy soon after the MPC announced the key interest rate for the euro area was to remain at 4.0%. Bernanke testified he expects growth in the US to soften into the middle of next year, with a pick up in the latter part of 2008. He did not give any indications either way as to the future direction of interest rates. Trichet on the other hand again emphasised the upside risks to price stability over the medium term in the euro area, saying the MPC were ready to act in a firm and timely manner to keep prices under control. Although Trichet did state that on balance risks to growth were to the downside, the ECB nonetheless expects the euro area economy to grow in and around its potential rate in 2008, thus meaning the ECB retains a tightening bias. The euro jumped back up to 1.47 on the strength of a hawkish sounding Trichet but has failed to break above this level, primarily because stock markets remain in turmoil and the movement of funds into US bonds is somewhat protecting the dollar. However as neither Bernanke or Trichet failed to make any direct reference to the strong euro/weak dollar in their prepared statements this is an indication neither Central Bank is particularly worried about the current exchange rate. 1.50 now looks on the cards sooner rather than later, as many would-be dollar market entrants would have been put off by the ECB’s stance today while most of those extreme euro long positions may hold out for a better price. The market continues to show little appetite for a proper correction and any dip towards 1.46 is likely to attract fresh buying. On Friday, we have September’s Trade deficit number out of the US, but this is unlikely to have much market impact, unless it produces a major surprise. A more sustained period of stock market pressure could see the dollar make some gains, but unless it is extreme, it is unlikely to lead to any major sell-off of EUR/USD, given the outlook for interest rate differentials.

GBP
The Bank of England kept interest rates on hold Thursday and said nothing in the statement release, so we have been left guessing as to whether there was any notable shift in the stance of Committee members, until the minutes are released in a fortnight’s time. Sterling got a bounce after the announcement as the stay on rates offers the currency some short-term relief. Cable ran up to 211.16 today and is currently trading just below this level, up 1.1 cents on the day. While clearly overvalued giving the softening outlook for UK growth and UK interest rates, the extreme level of negative dollar sentiment continues to protect the pound. Sterling even managed to push the euro back to 0.6950 today but will find it difficult to make gains beyond this level. The Conference Board reported Thursday that the leading indicator for the UK economy fell 0.1% in September, the third consecutive decline in the index. While the leading indicator is not a market-moving index, the result does nonetheless validate other recent reports on economic activity which signal the UK economy is cooling. Sterling has got a temporary stay of execution from the Bank of England and there is the potential for cable to rise further if sentiment against the dollar intensifies further. There is no value though at the current price as there is a very real danger of a sharp correction downwards. Expect EUR/GBP to creep back up towards 0.70 Friday.

YEN
The yen has continued to perform strongly Wednesday as stock markets again came under pressure. The dollar is trading at two month lows of 112.28 and is not far off the year’s lows which are in the sub 112 price region. If the yen should appreciate and pushes the dollar below the pivotal Y110 price level in the coming days, it could have a major knock-on impact for the entire currency market, with the carry trade and EUR/JPY likely to come under enormous pressure. Japan’s Economy Watchers index, a survey of barbers, shopkeepers and others who deal directly with consumers, declined for a seventh month to 41.5 from 42.9 in September, the Cabinet Office said today in Tokyo, indicating merchants are the most pessimistic they've been in four years, signaling slumping wages and a weakening job market may have convinced consumers to scale back spending.. A number less than 50 means pessimists outnumber optimists. Despite this gloomy assessment, the immediate outlook for the yen depends on the performance of equity markets, although any gains the currency does make will probably be given back very quickly when markets stabilize, as long as the USD does not fall below the boom or burst 110 price mark. AUD/JPY and NZD/JPY should retreat overnight if Wall Street closes down sharply.

CAD
Are we beginning to see the first glimpses of a chink in the armory of the loonie. We have now seen two rapid declines in the currency in successive days and sharpness of the moves suggest there is a sudden willingness to take on the loonie bulls, the first such move we have seen against the loonie since the global credit crisis issue first broke back in August. Canada’s Prime Minister Stephen Harper was the latest senior figure to suggest the loonie’s rapid rise was out of step with the underlying fundamentals and suggested a period of ‘reflection’ was required and that the issue was one for the Bank of Canada and not the Government. The loonie plummeted Wednesday evening, with the greenback rising to 0.94. The pair is currently trading just below this level following another highly volatile day of trading. If we are witnessing a turn in the loonie, or at least an attempt at a temporary correction, we could see the greenback rise swiftly to 0.95. The smart longer-play money should go on EUR/CAD. Today’s housing starts numbers out of Canada were broadly in line with expectations. Friday’s Trade Balance for September is key for the loonie, because the first creeks in the Canadian economy will probably be seen in its export volumes. A dramatic decline in exports or a major narrowing of the trade surplus could send another wave of Canadian dollar long positions to the exits.

Bob B - Nov 8

Bob's Currency Focus - 20:00 GMT

EUR/USD
Better late than never I guess. What a wild ride we have seen today. Negative dollar sentiment reached extremes Wednesday and the greenback plummeted across the board while oil and gold rose to record high prices. The issue which apparently drove a fresh wave of panic buying during the Asian Statement was a report that the Chinese had stated their intentions to diversify their reserves away from the US dollar. This story does the rounds every few months and to be quite frank there is nothing new in it and it cannot be taken at face value. The knee-jerk reaction we have seen today is an indication of the fear and volatility gripping currency markets and is a clear indication that the dollar’s decline is no longer orderly, but rather it is panic-driven and disorderly. The market needs a dollar correction in the short-term to instil confidence, even if the longer run trend remains down. Today’s sharp move against the US currency is hardly justified but at the same it is difficult to find a compelling reason to buy the dollar with current sentiment and in any event what’s the point in positioning oneself against a trend that has barely looked back in over two and a half months. With 1.4729 having already been hit, the next major price to the upside is 1.48 and after that 1.50 will seem inevitable. A correction downwards is required before the end of this week if 1.50 is not to be breached within the next 2 weeks. All eyes will be on ECB President Jean Claude Trichet Thursday and while it is certain rates will remain unchanged, the accompanying statement delivered by Trichet will have a major impact on how currency markets play out over the rest of this month. If the ECB maintains its tightening bias and lean towards higher rates to control inflation, then we could see the euro rocket and 1.48 could be hit tomorrow evening. The ECB is under pressure to slow the euro’s appreciation and with fears of a significant slowdown in prospect for the euro area, the ECB may feel obliged to issue a balanced statement, pointing out increased downside risks for growth while maintaining its concerns over the upside risks to inflation. A neutral or dovish statement could diffuse currency markets and lead to a period of stability. This should trigger a euro retreat temporarily, possibly back to at least 1.45. With so many uncertain factors at play, it is dangerous to be trading under current conditions and traders should employ stop losses at all times.

GBP
Sterling has had another good day, thanks almost exclusively to dollar weakness and partly owing to the preference markets have shown for sterling over the other high yielders when risk aversion levels are on the rise. The market took cable to a fresh 26 year high earlier this morning, the pair hitting a very lofty 2.1071 and the pound remains well bid at 20:00GMT - at 2.1025, up a whopping 1.5 cents on the day. The pound also stabilised against the euro, the pair coming off a low of 0.70 to settle at 0.6968, marginally lower on the day. The Bank of England delivers its latest policy announcement Thursday and although there is an outside chance of a rate cut, the smart money is on no change. The Bank of England is not expected to issue a detailed statement so the market impact of tomorrow’s rate announcement will be minimal, unless there is a rate cut. Dollar sentiment aside, sterling looks totally overpriced at 2.10, when once considers the underlying fundamentals and the risks to the UK economy and a decline back towards 2.05 over the next week is likely. A broader dollar correction Thursday, should it happen, could see cable tumble two or three hundred points. Be wary around 12:00 GMT just in case the Bank of England does deliver a surprise rate cut. EUR/GBP could return to 0.6950, but the pound will find it difficult to appreciate much beyond this level.

YEN
The yen has been the strongest currency of the day, thanks to a major spike upwards in risk aversion that has triggered a flow of funds out of riskier assets into low yielding currencies like the yen and Swiss franc. The dollar is currently trading at its low of the day at 112.75 and coming off the back of another volatile trading session on Wall Street, a decline to 110 over the next 2 days is now a strong possibility. The euro has also declined sharply, falling to Y165, down 200 points on the day. The Euro could potentially return to Y162 in the next two days if volatility levels remain high. Expect a rollercoaster ride during the Asian session tonight as Asian markets react to a 350 point loss on the Dow Industrial average in New York. We should see major declines in AUD/JPY and NZD/JPY overnight.

CAD
The loonie rolled on like a juggernaut late Tuesday and early Wednesday, gaining a full 2 cents against the beleaguered dollar, the pair hitting an almost unbelievable low of 0.9059 this morning, 3 cents higher than where it was on Monday and almost 5 cents below where it was at early last Friday. We then saw quite a dramatic pullback this afternoon, the dollar reclaiming over 2 cents and the pair currently trade at US0.9285. The loonie is acting as a proxy for oil at the moment and is attracting major speculative interest as crude approaches $100 a barrel. Crude declined to below $96 today when US inventories for last week came in better than expected. As to whether todays’s retreat by the loonie is related to the retreat in oil we don’t know, but we must be at the point where most loonie backers must know the currency is now grossly overvalued and several of the existing positions were pulled today as traders saw an opportunity to get out at the best possible price. We need to witness a pullback to 0.95 before we can honestly say there is a genuine correction underway. The loonie ceded a massive 1.6% to the euro today and the pair is now back trading at the level it started the week at – 1.3590. There was no data released in Canada today while Thursday sees the release of October’s housing starts and September’s new home price index. The loonie however may again follow the fortunes of oil prices and should $100 a barrel be hit, then expect another loonie surge. Continued stock market volatility could force oil prices lower and in this scenario, the loonie might again correct lower.

Bob B - Nov 7

Bob's Currency Focus - 15:00 GMT

EUR/USD
I’m a bit surprised that the euro managed to break above 1.4550 so easily Tuesday as I thought the pair might remain contained for a day or two ahead of the ECB on Thursday. Monday’s better than expected ISM services index reading in the US went the same way as last Friday’s nonfarm payroll report – it was ignored, and the prevailing negative sentiment against the US currency continues to dictate direction. Monday saw only temporary respite for the US currency and the euro took control of the pair again Tuesday and is already up a whopping 90 pips on the day, as of 15:00 GMT. The greenback is now being plagued by fears the credit crisis will spill even deeper over into the wider economy and that the Fed will be forced to cut interest rates further. The ECB is expected to maintain a hawkish bias this Thursday and the single currency appears to be the unit every trader wishes to be on. Central Bank intervention cannot be ruled out in the coming weeks, given the worrying nature of the dollar’s demise and the fact oil and gold prices are spiralling out of control, but EUR/USD may need to hit 1.50 before any direct intervention (Central Bank buying of dollars) is likely. So while there remains the risk a major correction downwards, the smart money is still to buy the euro on dips. We may be lucky to see any dip back to 1.44 ahead of the ECB, so anyone looking to enter the market over the next 3 days may be forced to come in at elevated prices. There is always the danger the ECB could surprise everyone and take a softer tone on the rate outlook, preferring to talk up the downside risks to growth over inflation. This is a move that in itself might diffuse currency markets and lead to a major rebalance of EUR/USD. The trading range for the pair has picked up a tier since yesterday and the range for the next 24 hours is likely to be 1.4440 to 1.4580. Sellers are tipped to come into the market at levels above 1.4550 and not look for more than 50 pips, given volatility levels.

GBP
Cable shook off Monday’s reversal to rebound somewhat on Tuesday, hitting a high of 2.0902 early this afternoon, over a cent higher than yesterday’s close. Retail Sales numbers from the BRC released today reveal a pretty severe slowdown in same store sales in October (down to 1% year on year) while total retail sales also slowed (to 3% from 4.95 in September). Although the UK think tank group NEISR estimate GDP for the 3 months to the end of October steady at 0.7% - the same as September, one cannot get away from the fact that UK economic data is beginning to soften. Cable is merely riding the dollar negative wave at present, but there is the real risk of a major reversal in this pair, once a broader dollar correction is underway. One cannot justify buying sterling at levels close to 2.09, so even in the short-term prices in this vicinity offer good sell-down value. The weaker than expected data over the past week may give some traders the jitters ahead of the Bank of England rate announcement on Thursday. While a rate cut still looks unlikely, the fact a surprise rate cut is even remotely possible means several sterling traders may run for the exits ahead of Thursday’s MPC decision and cable could fall to at least 2.07 before then. It is dangerous to buy cable against the backdrop of weak UK data, even if negative dollar sentiment remains extreme in the short-term. The euro, as I forecast yesterday, is beginning to creep back up to the 0.70 mark against the pound, hitting 0.6980 today. I expect this trend to continue and we could see 0.7020 threatened by Thursday evening. Sterling has weakened significantly against the Swiss franc over the past 2 days and may weaken further if market volatility continues. The pound did however manage to recover to 238 against the yen as a recovery in stock markets Tuesday meant the yen fared even worse against all the majors than the dollar.

Yen
The yen suffered this morning as a bounce in European equities saw the currency ditched in favour of higher yielding currencies. The yen fared particularly badly against the euro which hit a high of Y167.05 this morning, having come off a low of Y164.95 Monday. Volatility has however returned to US stock markets Tuesday and the dollar has fallen to 114.34 against Japanese currency, having traded above 114.70 earlier this morning. If the Dow plunges later today, the yen may finally break below the key 114 price mark against the dollar and we could see a spike down to 113.30. A broader sell off of the carry trade could see the yen appreciate back to 166 and possibly 165.50 against the euro. Traders need to be wary of a rebound in stock markets, as this coupled with a rate hike from the Reserve Bank of Australia tonight, could send the yen spiralling downwards, particularly against the Aussie and New Zealand dollars. On the economic data front, Japan’s leading indicator came in at 0.0 in September, signalling growth prospects for the next 6 months are seen as non-existent, which hardy cements confidence in the underlying fundamentals for the yen.

CAD
We have witnessed yet another 50 year low for USD/CAD Tuesday as the pair tumbled below 0.93 to temporarily bottom out at 0.9234. The pair is now trading at 0.9253, 0.86% lower than Monday’s record low close. There is absolutely no support for the dollar against the loonie in the market and how low the pair might yet go is anyone’s guess. This analyst is convinced that intervention of some variety is becoming more and more likely with each day because it is blatantly clear the extent of the loonie’s appreciation has more to do with the underlying force of currency speculation than the underlying economic fundamentals. We have covered the oil conundrum previously and that is primarily a red herring for trying to justify appreciation in the CAD. The Bank of Canada is not scheduled to meet again until December 4th, but can the Bank afford to wait that long? The IVEY Purchasing Managers Index (measures activity for Canada’s industrial sector) for October came in above expectations Tuesday, but the IVEY is a narrow survey and is often discounted. In other data released, building permits unexpectedly fell 1.7% in September (2% gain forecast). The loonie has appreciated 3.75% against the dollar since the beginning of last week and by 12.4% in the past 8 weeks. That means the loonie is currently appreciating at an average rate of 0.33% per day, across a two month period. That is unprecedented and unsustainable, but my advice is not to back against it until we see it bottom out. The Speculative interest in the loonie should not be underestimated and it remains dangerous to trade against it. The Euro dipped to 1.3436 against loonie today and rebounded to go back over 1.35, only to fall again to the current price of 1.3457. The euro should maintain a firm bid in the build up to Thursday’s ECB, when a hawkish bias is expected to be iterated by the ECB President, but stops should be employed at all times on EUR/CAD, given the aggressive nature of the loonie’s recent moves.

Bob B

Bob's Currency Focus - 14:00 GMT

EUR/USD
The euro briefly hit a new high during the Asian session, hitting 1.4530, before going into retreat. The pair went as low as 1.4444 during the European session and has since rebounded to 1.4480, as trading remains choppy. There was no data out in Europe this morning but negative sentiment continues to dominate the world’s financial markets following an announcement at the weekend that the CEO of Citigroup has resigned as the Bank is forced to increase its write down owing to the ongoing subrime crisis. Friday’s buoyant payroll numbers in the US were quickly forgotten and the dollar came under intense pressure late Friday, with the US dollar index closing at its lowest level ever at 76.30. The rise in risk aversion has failed to benefit the dollar as currency markets (rather mistakenly) see the credit crisis issue as predominantly an American problem. The euro should continue to be well bid in the lead-up to this Thursday’s ECB meeting, with markets expecting the ECB to maintain a hawkish bias, although interest rates are expected to be kept on hold. The technical indicators all point to the euro as significantly overbought right now and there must be scope for a mini-correction back to at least 1.44 over the next 2 days. There is little value in buying the euro at present levels, so wait for a dip closer to 1.44. Today’s ISM Services PMI in the US will be important for short-term confidence and it may well surprise to the upside, given the substantial job gains reported for the Services sector in last Friday’s nonfarm payroll release. I expect a trading range of 1.4410 to 1.4530 to be maintained into Tuesday.

GBP
Sterling came off rather sharply Monday following some very weak data released earlier this morning. There was a sharp decline in the CIPS services PMI in October, while both manufacturing and industrial production in September also surprised to the downside. Cable went from its high of 2.09 hit late on Friday to hit 2.0787 a short while ago. Cable’s price still remains elevated though, as the pound continues to be protected by weak dollar sentiment. There is the potential of a sharp pullback to 2.05 during this week, if the dollar is able to stage a broader correction. Some traders may be holding out for a stab at 2.10 but such a move would appear to be totally unjustified when one looks at the underlying fundamentals. Cable now offers good sell down value on any upside rallies that see the price close to 2.09. The dollar needs to break below 2.0750 if it is to gain any real downside momentum. Sterling is also likely to come under increased pressure against the euro during the rest of this week as the policy stances of both the ECB and the Bank of England are expected to differ – both Banks have rate announcements this Thursday. The euro has the potential to test 0.7020 over the next few days, while sterling should struggle to make any progress below 0.6950, having ceded this level to the euro Monday morning. Sterling will also remain under pressure on the yen and swiss crosses, while risk aversions levels remain high.

Yen
The yen has appreciated sharply early Monday thanks to the Citigroup story which has seen stock investors head for the exits, helping the lower-yielding currencies to make gains. The dollar is now down to 114.10 and if the pair falls below 114, we could potentially see a near-term move to 113.30, even as soon as later today. The euro also came under pressure against the Japanese currency and dipped to 164.95 in early European trading, before bouncing back to 165.25. As long as markets remain spooked by the subprime fiasco and stock markets sell off, the yen should continue to advance at the expense of all other major currencies and we could see the euro fall to 164 over the course of today if US stock markets react badly to the Citigroup news story. The yen has gained almost 200 points against the pound already today (now at 237.35) and we could potentially see GBP/JPY return to the 235 price mark over the next 24 hours. Watch out for a stock market revival, because this will see a rapid reversal in the yen’s fortunes.

CAD
The loonie rallied hard early Monday for no particular reason and hit new highs against both the US dollar (new 50 year high) and the euro. USD/CAD went as low as 0.9305 before rebounding to 0.9345 as risk aversion gripped the currency markets. Canada’s much better than expected employment report Friday had see the loonie reach new levels, although yet again the relative sharpness of the move against the US dollar was unjustified, particularly since the US nonfarm payroll number for October was twice the forecast figure. There is too much complacency emanating from loonie traders at present and the currency has evolved into a major speculative bubble. There remains the risk that the currency could move higher, since its ascendancy has neither been curtailed nor stalled at any particular price level to date. But it must be remembered the loonie has effectively advanced almost 13 cents against the US dollar since early September, without any correction whatsoever, so a sharp correction is overdue. We may have to listen for verbal intervention from the Bank of Canada for some signal that might trigger a real sell-off of the currency. At prices below or close to 1.35, the euro does offer good value against the loonie, particularly as the ECB is expected to sound hawkish this Thursday, which should keep the euro firmly bid. I would like to see the dollar form a meaningful support base, before going long on USD/CAD.

Bob B - Nov 5