Bob's Currency Focus - 14:00 GMT

EUR/USD
The pair is trading within a narrow range Tuesday as the dollar’s sharp advance over the past 3 days stalled. US economic data Monday was mixed although a sizeable jump in international capital inflows reported for October was a big positive for the greenback, after 2 months of negative inflows in August and September. European industrial activity slowed again in December according to preliminary data released Monday and increasing concerns over growth in the single currency zone is certainly beginning to nullify the hawkish rhetoric from the ECB as we move to close out the year. In data just released Tuesday, US housing starts resumed their decline in November although the 3.7% fall on the month was lower than the 5.7% which was forecast and October’s rise was revised to +4.2% from +3.0%. Building permits fell 1.5% in November, exactly in line with projections. The eurozone recorded a trade surplus of €6.1B in October, twice what was forecast and much higher than the €3.7B recorded for September. Trading volumes are thinning out as we move towards the big holiday period and technical traders may well be the kingpins through to the end of the year. Fundamentals will take a back seat as the major trading desks wind down and square their positions for the year end. We are now hemmed into a 1.4330 to 1.4452 price range and whichever side manages a break outside this level may well take ownership of price direction over the coming days. I favour the euro purely on the fundamentals but am not entering the market with any great confidence while liquidity is tightening. Strategy: Tentative buy on dips towards 1.4350 with price targets of 1.4420 and 1.4445. Trade lightly in this market!

GBP
November inflation data was a major disappointment for any traders hoping for a sterling rebound. The pound gained Monday primarily on the assumption November CPI data would come in higher than forecast. It was a fair assumption given the upside surprises already seen in the US and eurozone inflation reports for the same month. In fact not only did the headline inflation rate remain steady at 2.15 (against a forecast of 2.2%) but the core rate actually narrowed to 1.4% (1.6% forecast) from 1.5% in October. Analysts may argue the retail price index, which grew to 4.3% from 4.2%, is a truer reflection of UK domestic inflation, but the fact is today’s report gives the Bank of England further wriggle room to reduce UK interest rates and a cut as early as January can’t be ruled out. All eyes will now be on Wednesday’s Bank of England minutes to ascertain how many members of the MPC voted for the cut in early December, which will help determine if the mood on the Committee is strong enough to see interest rates fall more aggressively than originally thought possible. Sterling could sell off dramatically tomorrow if the Bank of England minutes reveal a decisive 7-2 or greater majority in favour of December’s rate cut. This is no time to be buying the pound even if technical corrections and thin trading conditions see it rally. The outlook is grim for sterling both medium term and long term and if cable breaks convincingly below the 2 dollar mark, there may be no way back. The 2 dollar line could fall after tomorrow’s Bank of England minutes although a slender vote count of 5-4 should work in sterling’s favour, at least in the short-term. The euro is a good buy against the pound on any dips towards 0.71, while cable is a good sell on prices above 2.03. Strategy: Buy the euro against the pound at prices below 0.7120 with target prices of 0.7175 and 0.72. Sell cable on rallies close to 2.03 with price targets of 2.0150, 2.0090 and 1.9950.

JPY
The yen continues to struggle, despite broad underlying negative sentiment across global equity markets, and with risk tolerance levels on the rise Tuesday as stocks rebound, it may slip further later today. It is unusual to see the Japanese currency while risk aversion levels are running high, although this could have more to do with squaring of positions before the year end rather than anything more fundamental. Traders don’t wish to hold low-yielding currencies over the holiday period if they can help it. The chief hope for the Japanese currency is if stock markets continue to under-perform all the way up to the end of the week, something which should ward off any further wholesale sell-off of the currency. In economic data, department store sales bounced back in November recording a rise of 0.9%, following 1.4% decline in October. End of year market conditions do not favour the yen the further into the week we go and it is a risky buy, although it could still benefit from any further sharp reversals in stock markets. Strategy: Park the yen (do not trade) until after the holiday period.

CAD
The loonie had one of its best days in recent months Monday as the Canadian currency launched a bewildering counterattack, culminating in sharp gains across the board. USD/CAD came off almost 2 cents from its mid-session high of 2.0226 to dramatically collapse to 2.0030, before a close of 2.0053. Against the euro, the loonie made even more striking gains as that pair traded across a 3 cent range. The rally was baffling in that Canadian economic data Monday was worse than bad (capital inflows were a record -$24.32 Billion in October) and commodity prices retreated. I can only assume the currency rally was owing to some major repatriation of funds into Canada because from a fundamental and technical perspective, the loonie should have weakened against the greenback, given the data and because the greenback broke through technical resistance Friday. We have seen a similar pattern Tuesday, with the greenback rising to 1.0140 after the release of Canada’s inflation data, only for the loonie to push the pair back to below 1.0060 within 20 minutes. If we focus on the economic data, it makes sobering reading for loonie bulls because November’s core inflation rate at 1.6% is now at a 17 month low and opens the door for a further Bank of Canada rate cut, possibly as early as January. In addition Canada’s Leading Indicator for November shows the economy didn’t grow at all in the month of November (reported flat) after a marginal 0.1% rise in October. This does not augur well for quarter 4 GDP. After 2 days of such negative data, one would normally expect the loonie to have retreated sharply but thus far this has not happened. Rather than scratch our heads too much, we should put it down to holiday madness and use the data and the loonie’s distorted current value as an opportunity to sell the currency. Strategy: short-term – buy USD/CAD at any price close to 1.0050 (S/L just below parity) with upside targets of 1.0130, 1.0180 and 1.0220. The euro is good value at any price close to 1.4450 on EUR/CAD and our limit targets here are 1.46 and 1.47. Long-run – maintain long USD/CAD positions with S/L at 0.9750 and upside target of 1.05.


Bob B - Dec 18

Bob's Currency Focus - Sun Dec 16

EUR/USD
What a remarkable couple of days Thursday and Friday for the greenback, gaining 3 cents against the single currency, 2 cents of which came on the final day of the week. There is a combination of reasons for the move, principal among them being US inflation numbers for November which printed higher than expected and which suggests the Fed is more limited in its ability to aggressively ease rates in the coming months. Headline consumer price inflation has hit 4.3%, the highest in 2 years, with the core rate rising to 2.3%, the second monthly rise in the key annualised rate which is now inching further away from the Fed’s 1-2% comfort zone. Other US economic data last week was much stronger than expected with Retail Sales in November rising 1.2%, the highest in 6 months, and Industrial Production jumping 0.3% after falling half a percentage point in October. The consumer spending data in particular means the dire forecasts for quarter 4 GDP in the US are probably greatly exaggerated. Meanwhile the euro performed worse than most currencies over the past few days so we have also witnessed a broader correction in the single currency, further explaining the crash against the greenback. There will probably be a reassessment of sentiment for the US currency as we move closer to Christmas and a failure by the euro to quickly recapture the 1.45 price handle could mean a further slippage to 1.4350 and result in an eventual retreat all the way back to 1.3850. The underlying fundamentals for the euro have not changed however and with the Fed likely to remain under pressure to cut rates while the ECB remains on hold, the medium term outlook still looks to favour the euro. One important observation from Friday is that the dollar was the chief beneficiary from a rise in risk aversion levels as stock markets came under pressure. The yen, which is generally the chief benefactor during bouts of risk aversion, was distracted Friday following a weak domestic economic report (quarterly Bank of Japan Tankan Survey) but the Japanese currency could resume its role as main beneficiary if risk aversion levels remain elevated into this week. This might put an end to the dollar’s steep ascent. Strategy: Wait.

GBP
Cable plunged Friday and the pound lost almost 3 cents on the day. Cable closed the week below 2.0180 and the dollar is now within striking distance of the psychologically important 2 dollar line for the first time since August. There was no economic data out of the UK Friday and it was broader dollar strength that proved the pound’s undoing. Against this the UK currency did manage to appreciate against the euro, pushing the single currency back below 0.7150. November’s consumer price inflation is out Tuesday and if it prints much higher than expected, the pound might temporarily be able to push the euro back to 0.71. I still do not like the outlook for sterling and prefer to sell the currency after failed rallies, where a better entry price is available. Strategy: Wait until better price available on cable. Sell the pound against the Swiss franc on prices close to 2.33 with a target price of 2.30.

JPY
The yen declined further against the dollar Friday as the yen was punished for a poor quarterly Tankan survey report with big manufacturing and non-manufacturing firms in Japan returning a pessimistic outlook for the first quarter of 2008. This being said, the yen is never one to respond in a meaningful way to its own domestic data and with some economists downgrading the prospects for the extent of US rate cuts following the release of a robust set of inflation numbers for November, the dollar extended its gains through to the week’s close. US stock markets closed significantly down Friday and with the high yielders all retreating sharply against the greenback, it is something of a surprise the yen did not benefit more and facing into elevated risk aversion levels Monday, the dollar offers no value at prices close to Y113.50 and we could in fact witness a sharp retreat towards Y112. With the euro under broader pressure, the yen should be able to push the single currency back towards 162, if stock markets continue to struggle Monday. Strategy: sell USD/JPY at prices close to 113.50 with initial target of 112.50. Sell EUR/JPY at prices above Y163.50 with target of Y162. Monitor stock market performance closely.

CAD
The loonie had a very good day Friday, coming off a 3 month low against the greenback to close 0.3% higher, while the Canadian currency also made strong gains against all the European currencies and the Aussie dollar. The loonie jumped on the coattails of the greenback Friday as the North American currencies rallied strongly. The parity line however looks to be behind USD/CAD and we could see this pair go significantly higher this week as we move into the holiday period and more positions are closed out. There are still far more loonie longs than shorts in the market, so there remains the risk of further sharp depreciation for the loonie in the near-term. This Tuesday sees the release of November’s inflation data and if it is returned soft, the loonie will face a further sell-off because benign inflation makes it easier for the Bank of Canada to further cut rates in early 2008. Expect the loonie to give back most of Friday’s gains against the US dollar on Monday. Strategy: Buy USD/CAD on price drifts towards 1.0120, setting an initial limit target of 1.0220 with 1.0270 next. Positional traders should remain long on USD/CAD, keeping the target price of 1.05. We will look to move up our S/L from 0.9760 once price has been established above 1.02.


Bob B - Dec 16