Friday, November 16, 2007

Bob's Currency Focus - 19:30 GMT

The pattern Friday has been another day of movement in both directions, with neither side managing to make a decisive move, although the euro has a firmer tone this afternoon. It is noticeable that the dollar only manages a rally against the euro when stock markets are in trouble and once the Dow pendulum swings into the green the dollar retreats and the euro mounts a counter-attack. This in essence means all other things being equal, the upside trend is as strong as ever. The euro is also gaining at the expense of other currencies with traders moving away from the pound and the commodity currencies for the safer bet of the Teflon euro. The single currency has yet to make any meaningful correction after 2.5 months of rapid gains, so traders need to be cautious as a sharp correction is a very real danger. The euro-zone’s trade balance held up well in September despite the strong currency, with a surplus of €3.1B reported for the month. Friday saw the release of data which highlighted further weakness in the US economy as Industrial Production in October fell by 0.5%, the biggest drop since March, while the Treasury Department reported a second successive month of negative inflows of foreign capital funds (TICS) in September (-$14.7B). US equity markets however are currently up with bargain hunters buying up stocks this afternoon. Stock markets have been very volatile this week and don’t be surprised if the final hour of trading tonight sees a further sell-off that puts the US indices back into the red. Don’t expect the G20 meeting this weekend to deliver any major statement on current dollar weakness, as the US Administration continues to express no concern right now for its declining currency, preferring instead to focus on the weakness of China’s reminbi. The euro is overbought and remains over-valued at price levels close to 1.47 and I prefer to sell down close to this mark.

Sterling staged a mini-comeback this afternoon with cable coming off a low of 2.0354 to once again trade above the 2.05 mark. But any significant sterling rallies are likely to attract strong selling pressure as the currency remains hindered by the Bank of England’s report on Wednesday, when markets were told of an impending economic slowdown and a series of rate cuts over the next year. Cable could easily hit 2.0250 early next week, which is the next key line of support for the pair. All of the bad news from the US is already priced into the dollar, while sterling still has some way to go, so I see the pair trending down from here to the end of the year. However sterling has certainly being oversold against the euro and a correction in the EUR/GBP pair would offer some short-term protection to the pound. A slowdown in the UK economy is likely to be accompanied by a parallel slowdown in the euro economy, but markets have yet to factor this in, because of the ongoing hawkish stance of the ECB and its President Jean Claude Trichet. EUR/GBP should be able to correct back to at least 0.71 next week from the 4.5 year high hit today, but it may well take a broader euro sell-off to get it there.

The yen pushed the dollar back below the 110Y line briefly this morning but was unable to hold below this key level and since then it has retreated to 110.60 as US stock markets moved into positive territory. Poor US data Friday failed to hurt the dollar against the yen, although the greenback did retreat against every other major currency, primarily owing to a temporary rise in risk tolerance levels. Continued market volatility is going to keep the yen as a major player and we could see new highs being reached for the currency next week, if uncertainty about the global economy and the credit pinch afflicting financial markets persists. Any statement from the G20 over the weekend expressing concern over the US dollar could trigger support and result in a sizeable correction in USD/JPY Sunday night. It is more likely though the yen’s fate will be dictated by risk tolerance levels and the currency is well-positioned to make further gains next week. The best value pair for buying the yen at the moment is EUR/JPY, particularly to sell the pair on failed rallies around Y164. There is a strong possibility of Y158 being hit later next week, if stocks continue to under-perform.

The loonie has had a good day Friday thus far, the greenback being pushed down to 0.97 cents after the Canadian currency virtually collapsed Thursday, when shedding two and a half cents against its US counterpart. The tide certainly appears to have turned for the world’s strongest currency in 2007, with a number of factors having turned against it: softer domestic economic data; a downturn in metal prices; a slowing US economy and verbal intervention by Government and Bank of Canada officials. The recent correction was probably overdone in the short-term and today saw the loonie gain some much needed respite, assisted by resurgent oil prices. The currency looks vulnerable to selling pressure at the moment and with the greenback having gone as high at 0.9886 Thursday, markets will now want to retest the parity line once more and that may happen in the next week, if risk aversion levels remain high and if commodity currencies continue to struggle. There was no domestic data out of Canada today and the next series of releases for the currency are key ones – the consumer price index for October on Tuesday and September’s Retail Sales figures next Wednesday. Over the past six months the loonie has usually strengthened ahead of key data releases, in anticipation of firm data, so next week will be a true litmus test of current market sentiment towards the currency and a major sell-off ahead of the CPI data Tuesday will not augur well for the currency’s outlook. The loonie’s sharp slide against the euro was at least halted today, with the pair retreating to 1.4280, having shot to 1.4458 overnight.

Bob B - Nov 16

PS: Have a good weekend!

Thursday, November 15, 2007

Bob's Currency Focus 15:00 GMT

We have seen a sell-off Thursday as the recent bout of risk aversion sent the dollar broadly higher across the board. US core consumer price inflation ticked up 0.2% in October and the annual rate has risen to 2.2% from 2.1% in September. Headline inflation rose to 3.5% and the firm numbers are likely to keep the Fed on their guard and dampen expectations of near-term rate cuts. The euro was buoyed by Wednesday’s 3rd quarter GDP rise of 0.7%, but the euro economy is expected to slowdown in quarter 4 and in any event the single currency has more than priced in all the good news to date. The euro will remain strong however as long as negative sentiment towards the US dollar persists, although with corrections seen across most other currencies in the past 3 days, it will not be a surprise to see the dollar test the 1.45 level again before the week is done. If stock markets continue their decline into Friday, then this will generally support the dollar, as investors exit higher risk assets in favour of US dollar denominated bonds. The euro needs to hold the 1.46 line today, if it is to avoid a sharp retreat. Friday sees the release of the TICS number for September (Treasury International Capital Flows) and this figure is keenly awaited, given last month we saw the worst figure on record – a $163 billion outflow. That number was glossed over at the time because the data was for the month of August, when financial markets were in total turmoil. However, another significantly negative number Friday would suggest foreign investors are turning their back on US denominated assets and could spark a sharp dollar sell-off. We should remain in a 1.45 to 1.47 price range for the next two days, with most of the activity in the middle section of the range.

3 of the last 4 days has seen sharp sterling sell-offs of over 2.5 cents against the dollar. Yesterday’s reversal is the most serious in terms of the currency’s immediate outlook, because it follows a Bank of England report that stated the Bank would need to cut interest rates a couple of times in 2008 to keep the economy on track. While many analysts were predicting as much, the fact the statement came directly from the horse’s mouth (Governor King) caused market panic and traders couldn’t sell the pound fast enough. Sterling’s decline against the euro is probably overdone, with the euro hitting a 4-year high Wednesday and going higher again Thursday (0.7166) and a short-term correction might protect the UK currency into next week. The outlook for the pound is not great though and it now appears to be a question of not if’ but ‘when’ cable falls below the key 2 dollar mark. A fall below this number could lead to a sharper decline and cable may well end the year closer to 1.90 than the current 2.05. October’s retail sales numbers were soft, but this comes after 2 months of stellar gains and the marginal 0.1% decline was in line with expectations. Sterling looks to be the currency to sell-off on rallies at present and with cable having broken below the 2.0520 support level Wednesday night, it offers a good sell-down opportunities on rallies that bring it close to 2.06. Sterling will struggle to make incisive inroads into the euro's gains from the past two days, unless the euro undergoes an overdue correction across the board, but it should be able to avoid further losses. There is the potential for cable to test the 2.0246 support before close tomorrow, if the dollar attracts broader support going into the weekend.

The Yen has appreciated again Thursday, thanks to a major rise in risk aversions levels after a 2 day break. The dollar has weakened to 110.70 this afternoon and if stock markets close weakly later today, the pair may once again test support below the 110 mark. We could potentially see a whiplash-style move in the next 24 hours to try and take out the 109.12 low hit on Monday, if volatility levels remain high. But a recovery in stocks will probably see the pair close this evening nearer to 111.50. The euro had hit Y164 Wednesday but then fell back to Y161.40 this morning. This pair will continue to fluctuate up and down until some stability returns to the market, but there could be a sharp drive below the 160 price level, if things turn nasty in the next two days. The current markets stresses are probably going to be with us in the short-term and the best way to trade the yen is to buy it on dips, with the EUR/JPY offering more value, because there is greater scope to the downside.

It is official – the loonie has turned. I’m saying it here today and am prepared to pin my colours to the mast. Early last week we saw the greenback slide to a record low of 0.9056 Canadian cents, while earlier today the pair reached 0.9785. That is a whopping 7.3 cent rise in just over a week. While the recent market turmoil has seen a broad sell-off of the commodity currencies and high yielders, no currency has done worse than the loonie, even though oil prices remain elevated. USD/CAD is now being bought on dips and not vice versa, a classic sign that the trend is changing. Last week’s trade data was rather damning in terms of exposing the adverse impact a strong loonie has on the country’s export sector. Yesterday we learned the economy probably only grew by 0.1% in October (Leading Indicators report), much lower than the 0.3% forecast and down from 0.4% in September. Today it was reported that manufacturing shipments in September fell 0.9%, while new orders received in that month were down 2.5%, which follows a sharp 5% decline the previous month. The manufacturing sector is beginning to hurt, and hurt hard, a point not lost on the Bank of Canada’s Jenkins on Wednesday. Jenkins was the latest official to warn about the economic dangers of a rampant loonie. We may well find ourselves the other side of parity before the month is out and that in itself may spark a sharper depreciation in the loonie. 0.95 looks to have formed as a solid support base and any declines to this level, offer good opportunities for buying the US dollar. 0.96 held earlier this morning and it will be interesting to see if this too holds to the end of the week. The euro has probably overdone it against the loonie this week and I’d look for a correction back towards 1.40, before contemplating coming in on this pair again.

PS: Add your vote to the loonie poll at top of page on right side.

Bob B - Nov 15

Tuesday, November 13, 2007

Bob's Currency Focus - 17:30 GMT

The euro got a bounce today after losing a cent and a half to the greenback Monday during a thin trading session, owing to a holiday in the US. Price came back 230 pips from Friday’s record high by Monday’s close, but this move has more to do with profit-taking than any change in trend direction. As we speak, the pair is trading around the 1.46 price level as the euro’s advance is currently coming under selling pressure above this price level. Sentiment among German analysts and institutional investors notably deteriorated in November on fears of a considerable economic downturn in the U.S., a surging euro and soaring oil prices, an important survey from the Center for European Economic Research showed Tuesday. The think tank's economic expectations hit the lowest level since February 1993, dropping to -32.5 points in November, after an unexpectedly unchanged reading of -18.1 points in October. Euro zone industrial production fell by 0.7% from August, when a 0.2% rise was expected adding further to the argument the euro economy is slowing. The weight of negative sentiment against the US dollar however is such that it will take a sizeable shift in confidence to see the euro become the least favoured of this pair. The euro is probably over-valued, but the dollar is still not seen as a viable alternative. On Wednesday we have quarter 3 GDP for the euro zone released and October’s Retail sales in the US. A 0.6% GDP number for quarter 3 is expected in Europe and unless the actual number varies much from this figure, the market impact may prove to be minimal. The US Retail Sales numbers however are pivotal to confidence in the US economy and a poor number will raise expectations of further Fed rate cuts and undermine the dollar. A 0.2% rise in US sales is forecast, but if the number is negative, then expect to see a sharp dollar sell-off. The pair should trade in or around the 1.46 level for the rest of Tuesday and there is the possibility of a rally towards 1.4650 in the morning, unless stock markets fall sharply overnight. The euro may struggle to advance much past 1.4650 unless there is evidence of further deterioration in the US economy. The preferred strategy is still to buy the euro on dips, but volatility levels may rise Wednesday afternoon when the US data is out.

Sterling has rebounded Tuesday, having fallen spectacularly over the previous 2 sessions, when it came off over 6 cents from the 26 year high of 2.1160 set last Friday. A spike in risk aversion and general uncertainty about the future of the UK economy triggered a mass sell-off, although to be honest how cable managed to advance to 2.11 on the back of soft UK data last week remains a mystery. Sterling simply moved with the flow and got tripped up when serious questions needed to be asked. Today’s lift was sparked by Tuesday’s report that the annual inflation rate in the UK rose to 2.1% in October, from 1.8% in September. The rise was primarily driven by increased oil and food costs, but as inflation is now above the Bank of England’s 2% threshold for the first time in 4 months, it might delay any prospect of a near-term rate cut, lending sterling much needed support. However other data released Tuesday show UK house prices continue to fall. The RICS house price index reported that in October a 22.2% majority of chartered real estate agents reported house prices were lower than in the previous month. In September the equivalent reading was at -14.6%. The slowdown in the UK’s housing sector should curb aggressive sterling buying and spark selling rallies should it advance too far. The euro rose to a high of almost 0.7080 Monday and unless sterling can push the single currency back below 0.70 in the coming days, then the uptrend for euro may have resumed. It will be difficult for cable to reach 2.10 quickly again one would think, but as long as the pair remains above 2.0520, sterling should attract buying support on dips. A strong set of employment numbers Wednesday would boost sterling, although the crux will probably come on Thursday, when the retail sales numbers are out. With the euro remaining overbought, sterling does have the chance to push the single currency back below 0.70 in the next two days, if UK data is firm.

JPY - (23:00 GMT)
The yen was forced into retreat this evening as Wall Street posted its second biggest single day gains in history. Critically the Japanese currency had earlier failed to reach the highs of Monday and the 18 month low for USD/JPY – 108.93, recorded in May 2006, remains intact. Moving into the Asian session, the dollar is trading at Y111 and may temporarily move towards 112 ahead of Wednesday’s key retails sales data in the US. There is likely to be a major yen sale by carry traders during Asian and European trading, given today’s rally in stocks, and the yen is not a currency to buy tonight. Of course the situation could change dramatically Wednesday, if today’s Dow rally proves to be a false dawn and negative sentiment again takes a grip of markets. The euro has also risen to Y162 today and may rise to Y163 by tomorrow morning. Expect the yen to come under pressure on all the crosses tonight, notably against sterling, the Aussie and the New Zealand dollars. This morning’s decision by the Bank of Japan to keep rates on hold at 0.5% surprised nobody and markets don’t expect a hike before next March, despite a better than expected print on 3rd quarter GDP (2.6% annualised) reported Tuesday.

The loonie suffered its worst day in 30 years Monday when shedding 3 cents against the US dollar. On Tuesday the loonie rebounded somewhat, gaining 1.2% against the dollar but declining further against the euro, the pound and the Australian dollar. The Canadian currency was hampered by a rise in risk aversion Monday as well as a hangover from Friday’s poor trade data. A sharp fall in oil prices Tuesday kept would-be loonie supporters at bay and if commodity prices continue to come under pressure this week we could see the longs/short ratio reduce further, paving the way for a possible trend reversal, or at the very least a prolonged period of stabilisation on USD/CAD. Wednesday is dominated by US economic data and in particular retail sales. Expect USD/CAD to trade within a 0.95 to 0.97 trading range for the coming days and my preference is to buy or sell at the extremes of this range, particularly as risks for major reversals in equity markets persist, while confidence in the loonie remains relatively firm in the short-term.

Bob B - Nov 13

Monday, November 12, 2007

Bob and Ted's Outlook for Week

The dollar came back from a battering last week to close on a slightly more positive note, coming off a record low Friday (1.4751) to end the week at 1.4677. It was a quiet week for economic data and September’s improvement in the US trade balance was not sufficient to spark any meaningful recovery. We saw a marked decline in equity markets last week and with risk aversion on the rise, this coming week could prove very volatile. The ECB kept rates on hold last Thursday and its President Jean Claude Trichet remained hawkish in his policy assessment, placing somewhat more emphasis on the upside risks to price stability than on the downside risks to economic growth. Markets have been unimpressed by the prospect of the Fed remaining on hold through to the end of the year and futures markets are now beginning to price in a further rate cut for the US in December. In this context the medium term outlook very much favours the euro with 1.50 a very realistic target by early December. We could see a correction however in the short-term with rises in risk aversion prompting a yen appreciation that might see a sizeable liquidation of the EUR/JPY carry, sending the euro temporarily weaker against the greenback. We also have a number of major releases this week, most notably Germany’s ZEW survey Tuesday, euro quarter 3 GDP Wednesday, US Retail Sales Wednesday and US Consumer Price Inflation Thursday. If US Retail sales are weak it should fuel speculation of a further rate cut and this will damage the dollar. Euro zone GDP is expected to be strong and the biggest downside risk to the euro is heightened market volatility which may offer short-term dollar protection. Wait for the early week correction to settle before entering long on the euro. Support should be strong at 1.45 and below this at 1.4406. Upside price targets are 1.46, 1.4650, 1.4680, 1.4710, 1.4740 and 1.48. Key support levels are at 1.4406, 1.4440, 1.45 and 1.4570.

The dollar made significant gains against all currencies except the yen, swiss franc and euro on Friday. With equity markets in a downward spiral, more funds will flow into the US bonds in the early part of the week, which could see the dollar appreciate strongly against all currencies except the yen. The current air of gloom is being led by major write-downs by financial institutions because of the ongoing subprime debacle, rather than any wider deterioration in the US economy. The credit crisis is not restricted to the US and the dollar has rather unfairly borne the brunt of the currency market reaction to date. Any assumption the Fed is simply going to keep cutting interest rates to bail out Wall Street is misguided and with key inflation numbers being released in the US this week, this data may well dispel any notion that the Fed has a lot of flexibility to work with. A robust set of US inflation numbers next Thursday for October (the month oil prices went through the sky) could see inflation become a major problem once again, which in turn will be dollar positive. A firm set of US retail sales numbers on Wednesday will also be a major boost to markets in general. The euro has largely been living a charmed life in recent weeks as traders have pushed it higher and higher, choosing to ignore the soft data from the euro area over the past month. Germany’s ZEW index on Tuesday will be an important measure of current business sentiment surrounding the value of the single currency. There is plenty of room to the downside this week, with technical indicators all showing the pair excessively overbought, and downside targets are 1.4630, 1.46, 1.4550, 1.4530, 1.45, 1.4450, 1.4410, 1.4350 and 1.43. The lifetime high at 1.4751 should hold, with support coming in below this at 1.4720 and 1.4690.

Bob B / Ted B - Nov 12