Bob's Currency Focus 17:30 GMT

EUR/USD
The euro has broken above the year’s high Tuesday and now looks dangerously poised just below the lifetime high of 1.4966, for a possible challenge of the psychologically important 1.50 price handle. The dollar was damaged by a report from Citigroup, the largest bank in the US, that it was forced to write down $18.1 Billion in mortgage losses and reported a quarterly loss of $10 billion, the single biggest loss in the company’s near 200 year history. To compound the dollar’s problems, a separate report showed retail sales declined by 0.4% in December, following a downwardly revised 1.0% gain in November. Core producer prices in the US matched the forecast and rose 0.2% in December, keeping the annual core rate at 2.0%. The headline producer prices rate fell by a marginal 0.1% in December against an expected 0.2% rise. Producer prices are notoriously volatile though and markets will look to consumer prices Wednesday for a true gauge of where US inflation stands at the moment and what wriggle room the Fed has when it meets later this month. Economic data from the euro area Tuesday was also poor with Germany’s key Zew business sentiment index declining by more than expected to -41.6, over 72 points below the historical average. The Zew index for the euro economy also declined as did the current condition index for both the German and euro area economies. Markets are notoriously slow to respond to weak euro zone data and the Zew survey result had practically no market impact, with euro trading still dominated by hawkish comments from the ECB last Thursday. The dollar did manage to push the euro to as low as 1.4830 this morning, but couldn’t hold this price level and price has since reversed by over 80 pips. The dollar might be able to hold the euro back until Wednesday’s consumer price data release, a report which should determine what policy action to expect from the Fed when it meets later this month. I expect to see price fenced in between 1.4830 and 1.4950 between now and then and if you are entering a sell order, your stop should be tight above 1.4966 as any break above this price could trigger an aggressive move upwards. Strategy: short run trades should continue to sell down on failed rallies, once price remains entrenched below 1.4966. Immediate target prices are 1.4860, 1.4820 and 1.4770. If 1.4966 gives, shorts should await a peak in price before re-entering the market.

GBP
We called for a rebound in sterling yesterday and Tuesday we have seen it, even if the consumer price inflation figures came in close to the consensus. The annual inflation rate rose marginally to 2.1% in December from 2.0% in November, but they remain significantly more benign than current inflation rates in the euro area and the US. One must wonder if the Bank of England had something else on its mind last week when it chose to hold off on cutting rates again, but I expect more than one member of the MPC voted for a cut. We will need to wait until the minutes are released next week to find out for sure. Wednesday sees the release of the UK employment data and the key indicator will be the total earnings figure (including bonus). Earnings for the 3 months to the end of November is expected to come in at a 3.9% annual rate and sterling will be hoping for something above 4% to give it some added impetus and momentum. We have witnessed a retracement of sorts today on both cable and EUR/GBP, but sterling needs to hold onto most of these gains if it is to sustain its mini-recovery. Cable prices approaching are above 1.9750 will attract selling pressure, with key resistance seen at 1.9850. The euro gave up as much as 0.86 pence today against sterling before recovering somewhat to 0.7550. There remains far more value in EUR/GBP than on cable for those contemplating buying the pound as a correction should stretch back to 0.75 at least. I myself prefer to continue to sell cable on failed rallies to around 1.9750, as the medium-term outlook for sterling remains bearish. Strategy: Sell cable on prices close to or above 1.9750, with limit prices of 1.9550 and 1.95.

Yen
The yen has had another spectacular day Tuesday with broad-based losses across global stock markets triggering a major liquidation in riskier assets, in turn leading to major gains for lower yielding currencies. A bad night on Asian markets overnight was followed by major dip on Wall Street after US economic data raised fresh recession fears. The dollar collapsed back to as low as 106.62 at one point (lowest in two and a half years), before recovering modestly to 107. The euro also fell sharply against yen, collapsing to below 159, as the yen wipes the board with all the major currencies in a topsy-turvy trading session. I mistakenly believed yesterday that a rally in European and US stock would lead to a yen depreciation overnight and this just demonstrates the current level of unpredictability in trading the Japanese currency in the current market climate. I still think we will see a major retreat by the Japanese currency once some form of sustained stability is established on global stock markets. Asiain stock are likely to come under pressure again tonight, so the yen could in fact extend its gains by the time we reach the European session Wednesday. Strategy: Wait for risk aversion levels to weaken before shorting the yen against the euro. We need to have 3 successive positive sessions (Asia, Europe and US) on stock markets before being able to gauge that risk aversion is in decline.

CAD
The loonie has done spectacularly well Tuesday, holding its own on a day when commodity currencies have generally been trounced, as risk tolerance levels dipped severely during the US session. The greenback’s failure Monday to break above 102.20 has given fresh hope to USD/CAD bears who hope the pair could still be destined to resume a downward trend. The loonie however faces a difficult next week, with no category A economic releases scheduled ahead of the Bank of Canada’s rate decision next Tuesday. With further weakness evident in the US economy and every major report out of Canada since the turn of the year disappointing to the downside, a rate cut looks assured next week. It is going to be increasingly difficult for the loonie to gain sustained support as the week progresses, unless there is a broader capitulation of the US dollar across all currencies. If one looks back to when the Bank of Canada last met in early December, one can see the loonie was trading at much the same price then as it is today. For this reason, we can argue that a rate cut is not fully reflected in the loonie’s current market price, chiefly against the US dollar. Oil prices and commodity prices in general have fallen pretty sharply today so it is difficult to know where the loonie’s support is exactly coming from, but it is likely to be temporary. Strategy: Buy USD/CAD on dips towards 1.0130 with limit target prices of 1.0190 and 1.0120. If we see a sustained break above 1.0222 limit prices should be moved to 1.0250 and 1.03. Those that remain long on USD/CAD and are in for the longer run should keep their S/L at 0.97 with a limit price of 1.05.


Bob B - Jan 15