Monday, January 28, 2008

Bob's Currency Focus - 17:30 GMT

It will be a tough week for the greenback with the currency likely to come under selling pressure early on as markets price in a further 50 basis points rate cut from the Fed on Wednesday next. There are other key data releases with quarter 4 GDP the same day as the Fed and on Friday there is January’s employment report and the ISM Manufacturing Index. Anything short of a 50 basis points cut from the Fed Wednesday will disappoint stock markets and probably lead to a bounce in the dollar, although probably a very temporary one. The Fed did not communicate much to markets last week when they cut by 75 basis points in their surprise emergency move and markets will be studying this week’s accompanying statement closely to extrapolate the Fed’s current thinking on the economy and also for clues as to likely future policy moves. If quarter 4 GDP earlier Wednesday prints higher than 2%, it will signal markets may have been too pessimistic in their outlook for the US economy and it could cast some doubts over how much the Fed will subsequently cut later the same day. Thursday’s inflation data (Core Personal Consumption index) will be of secondary importance this week unless the Fed had issued a fresh inflation warning in its policy statement. Friday’s payroll data will however be critical in shaping immediate confidence post-Fed and a negative jobs number will increase consensus that the US is already in recession and it may trigger a sharp rise in risk aversion which will temporarily benefit the dollar. A strong employment number will tend to undermine The ISM manufacturing index is also seen as a key recessionary indicator, particularly since the index contracted to a 47.5 reading last month. A further decline in the index this week will also raise fears over a recession and if it follows a negative non-farm payroll number, Friday could prove to be a very testing day for global financial markets, although the dollar might likely get a short-term lift.

The euro rose sharply Monday, taking the pair back near the 1.48 line and the euro is currently lingering just below this key level. On the data front, M3 money supply in the euro area narrowed slightly in December while US new home sales slumped by a further 4.6% in December, recording the lowest annual rate for 12 years. Markets are anxiously waiting key events due out later in the week and the New Home Sales figure only caused a temporary blip before dollar selling pressure resumed. The euro may have its best chance of reaching the coveted 1.50 price level this week and much will depend on how global stock markets respond to the Fed’s rate announcement and the other key US data due for release this week. A positive response from stock markets is more likely to damage the dollar, such are the contradictions that currently dictate market direction. The dollar is going to struggle to make an impression before the Fed, and we could see the euro attempt to rise towards the 1.49 line before then. There is little value at current prices because if markets fears were to suddenly flare up, the euro could quickly decline by as much as 3 cents. The best option may be to buy only on dips back towards 1.4650 using a tight stop, or to wait for a sell opportunity when this week’s major risk events are done. Strategy: buy euro on dips to 1.4650 with upside price targets of 1.4750, 1.4790, 1.4820 and 1.4870. Place a tight S/L just below 1.4640.

Sterling has held its own again the dollar Monday but has badly struggled against the euro, giving up all of the hard-won gains from Friday. The pound was put under some pressure during the Asian session when a report in the Guardian quoted Bank of England voting member Blanchflower as saying that waiting to cut UK interest waits was akin to playing the fiddle while Rome was left to burn. Although Mr Blanchflower’s views are well known and he was the only member of the MPC to have voted for a cut at the January meeting, his illustration was strong enough to remind traders that the Bank of England’s next monetary policy meeting is only a week away, when a rate cut is much more likely. The euro has risen to 0.7450 against the pound and there may be a chance of a temporary return to 0.75, if the euro is elsewhere able to sustain its rise against the dollar. I remain bearish on sterling but still see some chance of cable moving to 2.01 in the short-term because of the risk calendar in the US over the next few days so prefer to wait before entering the market. It is dangerous to buy into the dollar before the Fed meeting. Strategy: Wait for cable to peak this week, possibly around 2.01, and then sell down with limit prices of 1.99, 1.9850, 1.9770 and 1.9650.

The yen failed to make much progress Monday despite a sharp sell-off in Asian stocks overnight, something which carried through into the European session, before a modest turnaround was seen early in the US trading session. Complacency has returned in mega-fashion with all the high yielding currencies and commodity currencies being bet on Monday, ahead of the Fed’s rate announcement Wednesday. The assumption is commodity prices and the carry trade will benefit from the Fed’s expected 50 basis points cut and many fund managers can’t wait until the actual event, so are piling on their positions now. Of course it is ridiculous in the sense that more and more evidence is emerging of a broader global slowdown, something which is likely to lead to a prolonged retreat in commodity prices, but as of now markets are looking no more than a few days ahead. The yen is unlikely to be a benefactor ahead of Wednesday and indeed not immediately after the Fed’s Statement is released, if the rate announcement is responded to positively by Wall Street. The Japanese currency may however bite back at the end of the week once reality begins to take foot once again and risk aversion levels rise once more. There is a significant set of data indicators out in Japan tonight, including house-holding spending, unemployment and retail sales numbers for December. With concerns over a possible Japanese recession growing more vocal, these data releases offer a timely test. The data is however unlikely to influence the currency markets, which will continue to be dominated by pre-Fed sentiment. The dollar is likely to remain in a 106.50 to 107.50 price range against the yen, while the euro has a chance to exceed the key Y160 price level during the course of this week, before the downtrend resumes. Strategy: Buy EUR/JPY on dips towards Y155 with price limits of Y156.50, Y157 and Y158.

The loonie declined for a short while this morning, the greenback rising to 1.0119 before the pair retreated somewhat sharply during the course of the day, with the loonie now testing levels once more around the 1.0030 price level. The Canadian currency has been the strongest supported currency since the middle of last week, despite a further Bank of Canada rate cut and further soft data in the shape of Friday’s consumer price index for December. The pair looks to be on another collision course around the parity line and with US dollar sentiment very low in anticipation of a further rate cut from the Fed Wednesday, I will be surprised if the pair does not break below the parity line by tomorrow. I remain medium to long-term bearish on the loonie, although the currency is now exploiting the greenback’s Fed vulnerability to stage a sizeable correction, which could see the pair go as low as 0.9850 or 0.9750, before the uptrend resumes. It is a twitchy time for those holding long positions on the pair, but if you are not over-exposed, I wouldn’t despair as the medium-term outlook for the loonie is not good (increased evidence of a global slowdown which will put commodity currencies under pressure, further bank of Canada rate cuts and further soft Canadian data), something which is being largely ignored by the big funds that have catapulted the loonie back into contention. The high yielding currencies and commodity currencies could all seriously come off the rails by the end of the week, once markets have to deal with the reality of a downturn once more and have to suspend calls for the Fed to again cut interest rates, for a few weeks at least. The euro has offered some good temporary value against the loonie on levels around 1.4750, with prices again rising towards 1.49, although traders need to be aware that a break below the parity line on USD/CAD would trigger a lift for the loonie on all the crosses. Strategy: Wait until after Fed on Wednesday for USD/CAD. Buy EUR/CAD on dips to 1.4750 with limit prices of 1.4850, 1.49 and 1.4960, but exit if loonie breaches parity against the greenback.

Bob B - Jan 28

No comments: