Monday, January 14, 2008

Bob's Currency Focus - 15:30 GMT

The dollar plummeted overnight and in early European trading, with the euro moving to 1.4913, only half a cent shy of the all-time high set back in late November. Trading was light during the Asian session with markets in Japan closed for a holiday and the thin trading conditions were used as a vehicle to hammer the dollar, as a now common yet unfounded rumour of an inter-meeting rate cut from the Fed spread across global markets and instigated a fresh wave of negative sentiment against the greenback. To deliver an interest rate cut ahead of a meeting scheduled for just 2 weeks away would be an act of unprecedented madness by the Fed. Such a move would only serve to undermine the economy further - effectively being a confession from the FOMC that the economy was now in recession. Do not expect the Fed to act before the scheduled FOMC meeting later this month, although economic data this week, in particular Retail Sales on Tuesday and Housing Starts on Thursday, is unlikely to deliver any positive news. The euro is riding the crest of a wave, not a wave earned by stellar economic performance on the part of the euro zone, but rather a wave borne out of Central Bank rhetoric and general market acquiescence to an ECB policy mindset and outlook which is diverging more and more from the policy mindset and outlook adopted by the Fed. One of these Central Bank outlooks is very wrong of course, particularly in respect to the outlook on inflation, and we probably won’t need to go beyond this quarter before learning to which side the plaudits will come.

Having seen the euro rocket up to 1.49, markets will now want to push the pair past the lifetime high of 1.4966 and challenge the 1.50 price line. With momentum on its side, the euro will need to breach that level this week, otherwise the pair will swing the other way, perhaps sharply, as traders who are currently long on the pair, exit their positions, in a belief the euro may have peaked for now. On the economic data side, euro zone industrial production fell 0.5% in November, slightly better than the forecast decline of 0.8%, and thus the report had no market impact. There is no data due out in the US Monday, but Tuesday sees the release of December’s US retail sales numbers, while in Europe the monthly Zew business survey will be important for the euro. If the euro closes near to 1.49 today in New York, we could see an early push for the 1.4966 lifetime high on Tuesday, while any fast breach of the 1.50 handle is likely to trigger a wave of fresh protests from European politicians and possibly raise the faint prospect of some form of ECB market intervention. It is very dangerous to buy the euro at current price levels, particularly as the euro is also massively overbought against sterling and a sudden reversal in the fortunes of the single currency is a very real risk. Longer run players should be looking to the current price as a sell opportunity. Strategy: Short-term sell on failed rallies (where the euro fails to take out 1.4966) with targets of 1.47 and 1.4650.

Sterling has struggled Monday against its European counterparts and the yen, although cable remains little changed from Friday. Despite higher than expected output prices reported for UK producers in December, which raises inflationary concerns, a report from the Department of Local Government which said annual growth in UK house prices slowed to 9.5% in November from 11.3% in October, suggests a marked slowdown in the housing sector remains the major downside risk for the UK economy this year. The euro rose to above 76 pence for the first time ever this morning while sterling also fell to below 2.14 against the Swiss franc. EUR/GBP is massively overbought at present and with the euro having advanced by 10% since November, a major correction in the pair is overdue. I remain medium-term and long-term bearish on sterling but there is no value in selling the currency at current market prices. In fact sterling could get a significant temporary boost Tuesday if UK consumer prices surprise to the upside, thereby lending some justification perhaps to the Bank of England’s ‘in the end surprising’ decision to keep interest rates on hold last week. There is a further risk event for sterling before that however, when the latest RICS monthly survey on house prices is released just after midnight. This is a big week for UK data as after Tuesday’s CPI data, there is employment data Wednesday and Retail Sales numbers Friday and sterling’s immediate fate for the next 2 weeks will be decided by how all these numbers print. Strategy: sterling shorts should wait for a more attractive price on cable (above 1.9750). There is some value in short-term selling of EUR/GBP at prices above 0.76, with a retracement back to at least 0.75 likely in the short-run, unless UK data prints very negatively for the pound.

The yen rallied strong in early trading Monday as risk adverse traders reacted to Friday’s dismal close on Wall Street and others took advantage of an absence of Japanese exporters (Japan’s markets were closed overnight for a holiday), who may have sold the currency to keep its value down. The euro dropped to below Y160 briefly while the dollar spent most of the day trading below the Y108 price handle, going as low as 107.37 at one point. A broad rally across stocks in Europe Monday and in early trading in the US has seen the Japanese currency since retreat and direction for the remainder of the day will depend on how the Dow performs this evening. I maintain my view that EUR/JPY offers value in terms of buying (the only euro cross in which there is some value in buying the euro), particularly with stock markets due for a sustained rally, which could happen this week. Japanese markets return to the fray this evening and with no key economic data due for release, a follow-through upaide rally in Asian stocks tonight would force the yen lower. Strategy: Buy EUR/JPY at prices close to Y160 with limit targets of first Y162 and then Y163. Place a Stop below 159.80.

The loonie has had a year to forget thus far and is now trading at 1-month lows as it had given up all of the gains it made over the thin holiday trading period. Friday’s employment report was the last key release ahead of the Bank of Canada’s rate announcement next Tuesday and with this week’s data out of Canada all belonging to the second tier, the consensus for a rate cut next week should build as the week progresses and in this situation the loonie is going to struggle. It is only broad US dollar weakness Monday which has saved the loonie from depreciating further today, although the Canadian currency has plunged lower against a soaring euro. If the greenback makes a recovery across the broader basket of currencies expect USD/CAD to quickly challenge 102.22, which is now a critical price barrier in terms of where the pair goes next. The Bank of Canada released its quarterly business survey today and while capacity constraints remain a considerable issue, of more importance was the fact a growing number of company respondents expect inflation to soften further through 2008, an outlook which strengthens the Bank of Canada’s case for an immediate rate cut on January 22nd, possibly followed by one more cut this quarter. The greenback found support at 1.0150 this morning and this now serves as a viable entry point for USD/CAD longs. Strategy: Short-run, buy USD/CAD on dips towards 1.0150, with stop loss below 1.0130. Limit price targets are 102.20 and 102.50. Longer-term positions should remain long, with S/L at 0.97 and limit price of 1.05. S/L for these longs may be moved to parity, once 102.50 is convincingly broken to the upside.

Bob B

No comments: