Bob's Currency Focus - 17:30 GMT

EUR/USD
The euro dipped to just below 1.46 early this morning only to return to 1.4680 by the US session and the single currency has had the edge in what has been another volatile trading session. A bounce in Asian equities overnight saw a dip in risk aversion levels Thursday which benefited the euro moreover the dollar, although US equities currently trade lower following a generally poor set of data releases, a frightening report from Merrill Lynch that it recorded a loss of just short of $10 Billion in the fourth quarter and a speech from Fed Chairman Ben Bernanke to the House of Representatives that highlighted further downside risks to growth projections for 2008 and nothing new on monetary policy. The housing report for today was a shocker, with Housing Starts falling by over 14% in December, against a 5% forecast drop and 2007 was the worst year for the housing construction sector in 16 years. The Philadelphia Fed Manufacturing Index plummeted to -20.9 in January, signalling the US manufacturing sector may have contracted much further this month, with manufacturing now joining housing as a depressed sector in the economy. US Jobless Claims was the only fragment of good news to emerge, with the initials claims rate falling by 21K in the latest week and hinting employment is holding up reasonably well thus far in January. The only piece of news out of the euro area was November’s trade surplus it narrowed to €2.6 Billion from a €5.2 Billion surplus in the same month in 2006. The dollar is lacking direction today as high levels of risk aversion is tending to support it while US economic data remains damning, particularly against the euro, with the ECB the only major Central Bank continuing to threaten rate hikes. Speeches from ECB officials need to be monitored closely over the coming days, because following comments from ECB member Mersch Wednesday when he talked up the downside risks to growth, there is a growing sense the ECB may be out of touch with reality in terms of its monetary policy stance. Expect trading to remain erratic and the risk in my view lies to the downside for EUR/USD with many major players reluctant to buy the single currency in current market conditions, given the large volume of euro long positions already in the market. There are no major data releases over the next 24 hours but equities need to be monitored closely to measure risk tolerance levels. Strategy: Sell EUR/USD on failed rallies towards 1.4770 and 1.4820. Trading will remain erratic into Friday and short stops will be taken out easily.

GBP
Sterling got a further bounce today, cable rising to as high as 1.9794 before retreating back towards 1.9725 at the time of print, yet sterling is still up a cent against the US currency, while appreciating 0.35% against the euro. The pound may struggle to hold onto those gains, particularly against the dollar, if Wall Street closes sharply lower as high yielding currencies will come under pressure overnight. There was no economic data out of the UK Thursday but Friday’s sees the release of December’s key retail sales number and if the figures disappoint, it will increase calls for interest rate cuts form the Bank of England and the pound will falter. The BRC retail sales index for the same month pointed to a sluggish consumer over the holiday period and lacklustre sales, so a downside surprise in the data Friday is distinctly possible. There remains scope for a further retracement in EUR/GBP to below 0.74. We maintain our bearish bias on cable however as the preferred trading approach. Strategy: Sell GBP/USD at prices around 1.98 with downside price targets of 1.9660, 1.96 and 1.9540.

Yen
The yen has had another up and down day and is largely unchanged against both the dollar and the euro on the day. Traders want to sell it, knowing it is overbought over the past week, but its movement is closely matching the movement in global stocks Thursday which have been pulling in both directions, but mostly to the downside since around 15:00GMT, when a disastrous manufacturing report and a speech on economic outlook from the Fed Chairman sent traders running for cover. The dollar went as low as Y106.50 at one point this morning but since then it has primarily traded between 107 and 107.50. The euro is virtually unchanged against the yen, managing to reach 157.86 during the afternoon, but then declining back to Y157. Stock markets have not stabilised and trading involving the yen remains choppy and erratic and is best avoided until we get a clearer directional signal. There remains a risk that EUR/JPY could dip to below Y155 and the dollar back to Y106, if Wall Street hobbles to the close and the negative sentiment follows through on the Asian session tonight. There is no data scheduled for release over the next 24 hours which can turn things around and Friday could prove to be another difficult day. Strategy: Wait for global stock markets to settle (Recovery across 3 consecutive sessions – i.e 24 hours period), then buy EUR/JPY. Stay on sideline for now.

CAD
The greenback rose to 1.03 Thursday for the first time since last September, to hit an important mark on the pair’s recovery. Trading however has been very choppy yet again, with the US currency unable to hold its gains for long, although it is being bought each time on dips to around 1.02. Data out Thursday revealed foreign investors withdrew C$4.84 Billion dollars out of the Canadian economy in November, on top of the record C$23 Billion withdrawn in October. Oil prices have declined by 50 cents thus far today, removing an important support element for the loonie. The loonie only succumbed to the greenback after Fed Chairman Bernanke’s speech to the House of Representatives today was published, which revealed the US economy may be in worse shape than previously thought. A major US slowdown or recession is bad for Canadian exports and to be more competitive in such an environment, the Canadian economy would be helped by a weaker currency. Price direction all this week has been driven by risk tolerance levels and the Bank of Canada meeting next week has largely been off the radar for many preoccupied traders. Given the Bank are likely to cut Canada’s key interest rate by 25 basis points at this meeting, there remains considerable downside potential for the loonie between now next Tuesday. Attempts by the loonie to return the US dollar to 1.02 will meet strong bid orders and it will not be a surprise if the greenback establishes itself above 1.03 going into the weekend. The loonie strengthened significantly against the euro this morning, only to give back 2 cents as the day progressed when it came under increasing pressure. Friday’s sees the releases of November’s manufacturing shipments report but it is unlikely to have any great impact. Strategy: Buy USD/CAD on dips to or below 1.02, with limit prices of 1.0270, 1.03, 1.0350 and 1.04. Those long on USD/CAD should hold their positions and maintain the target price of 1.05. The stop loss can now be moved from 0.97 to just below parity, given resistance at 1.0250 has now given way.

Bob B