Bob's Currency Focus - 17:30 GMT

EUR/USD
What a volatile day for currency traders and particularly for those trading the euro/dollar pairing, which took a hammering. There is no single reason we can put our finger on for the dramatic sell-off we have witnessed, which has seen EUR/USD fall from a high of 1.4860 early this morning, to a low of 1.4593 in the past hour. The euro in fact started coming under pressure against sterling and the yen late last night and when EUR/JPY established itself below Y160 and the yen continued to rally aggressively across the board this morning, the euro, with the largest ratio of long to short open contracts of all the majors, suddenly looked vulnerable. Panic selling has set in and with the euro having broken below key support at 1.4630, we could see the pair attempt to retrace all the way back to the 1.4318 low we saw in early December. Ongoing instability on the world’s stock markets will play on the nerves of those traders currently holding euro long positions and the longer this plays out the more risk evident to the downside for the euro and there may be a growing acceptance that 1.50 is not going to be achieved in these market conditions. Today’s US inflation data was worse than expected, much worse when one takes into the equation the fact retail sales declined in December and consumer confidence was running at record lows. The annual core inflation rate has risen to 2.4% while the headline inflation rate closed out 2007 at 4.1%, a 17 year high. Those analysts who have been calling for a 75 basis points rate cut from the Fed need to think again, while Fed committee members themselves need to be extremely careful in terms of what they promise markets and what they subsequently are able to deliver. Bernanke is playing a very dangerous game in telling markets the Fed is prepared to cut rates aggressively, thereby allowing markets to price in aggressive cuts and then demand even more from the Fed before the FOMC has even met, and before the Fed itself has had time to examine the current level of inflation risk. Outside of the inflation data other economic prints Wednesday proved positive for the dollar, with the Treasury International Net Capital Inflows for November rising to a handsome $150 billion, while Industrial production for December was reported flat, slightly better than the marginal 0.1% decline which was forecast. Also, US crude inventories last week rose for the first time in 2 months, a surprise reading which helped to shave $2 off the price of a barrel of oil this afternoon, supporting the dollar. In the euro zone, consumer price inflation for December was confirmed at 3.1%, the same as the preliminary forecast earlier in the month, so this had no market impact.

If the pair closes tonight below 1.4630, the pair will move into Thursday in very bearish mood. Traders need to remember however that we are not in normal trading conditions and sudden events in the current climate can move prices dramatically, in either direction. Strategy: Sell on break below 1.4590 with limit price of 1.4460, ahead of further limit target of 1.4340. Otherwise wait for upside rally before selling down on prices close to or just below 1.4770. We could be in for a further volatile trading session Thursday and housing data out of the US at 13:30 GMT will need to be watched closely.

GBP
Sterling made significant inroads on EUR/GBP Wednesday, sending the euro back below 0.7450 after the pair had hit 0.7610 at one point on Tuesday. UK wage earnings rose 4.0% on the year in the 3 months to the end of December and while above the 3.9% forecast, the figure is probably not strong enough to dissuade the Bank of England from cutting rates when it meets in February. The data from the UK thus far this week has come in better than expected for sterling, which explains why the currency has stabilised against the dollar and has now appreciated against the euro. EUR/GBP has the potential to retrace back as far as 0.7350 and the best chance of this happening quickly is if the euro continues to sell-off against the US dollar. I remain a sterling bear and am restricting my trades to GBP/USD at what look like attractive entry prices. We have not quite reached 1.9750 in recent days but have come close to 1.9730, which is also an attractive entry level. Strategy: Sell cable at prices above 1.9720 with limit target prices of 1.9580 and 1.9540.

Yen
The yen broke through all technical barriers Wednesday as it rushed to a near 3-year high against the dollar and sent the euro back as low as Y156.50. All the doom and gloom that is sending stock markets running for cover is good news for the low-yielding yen, a currency which thrives on bad economic news and recession fears. Tuesday’s nosedive on Wall Street was followed by a similar downward spiralling move on Asian stocks overnight and by early in the European session the dollar was briefly trading just below Y106. The dollar has since rebounded to Y107, but the pair broke below resistance at 106.50 and the next major milestone for the pair is Y105. If risk aversion levels stay elevated and stocks continue to struggle, Y105 is possible within the next couple of days. The speed of the yens appreciation since the turn of the year will frighten Japanese exporters and markets need to be alert for any comments on the currency from Japanese officials. Y105 now looks to be a critical level, but the yen will come under immediate selling pressure at current prices each time there is the semblance of a positive rally on global stock markets. The euro’s dip today has seen EUR/JPY retreat to below Y157. If there is not a rapid recovery for this pair, the euro could potentially fall to as low as Y155 tomorrow. Strategy: Await stabilisation of stock markets and reduction in risk aversion levels and then buy EUR/JPY. We will watch this pair closely over the coming days.

CAD
We finally saw the greenback break through key resistance barriers at 1.0222 and 1.0248 early Wednesday but the loonie has traded in very volatile fashion all day and appears to be gaining strong support from somewhere, which has seen USD/CAD trade in whiplash-like fashion all day, between 1.0152 and 1.0286. Many bears do not seem prepared to give up the gauntlet without a fight, but bulls use these erratic trading conditions to their benefit, by exiting with profits and re-entering when the price dips. There is no major data out of Canada before next Tuesday’s Bank of Canada rate announcement and as we get closer to that day, the number of sellers of USD/CAD should begin to thin with a rate cit and a dovish policy statement on the day almost a certainty. Commodity prices have come off quite sharply in the past two days but the loonie has largely managed to hold its own, but with pressure likely to intensify on the commodity currencies against increasing concerns of a global economic slowdown, the loonie should weaken. A bounce on Wall Street tonight could send the loonie higher, but from tomorrow focus will being to shift onto the Bank of Canada’s meeting next Tuesday and I expect support for the Canadian currency hard to come by. I keep the bullish bias on USD/CAD and recommend buying dips towards 1.0150, but now moving the upside target prices to 1.0250, followed by 1.0280 and 1.03. We won’t yet move the S/L from 0.97 on the longer-term long positions, but maintain the current target price of 1.05.


Bob B - 16th Jan 2008