Monday, February 4, 2008

Bob's Currency Focus 15:30 GMT

The pair is lacking direction Monday on a day when economic data is scarce and a sense of normality has returned to equity markets. The euro did race towards 1.4850 earlier this morning but was unable to stay there and has struggled to make an impression since, although the single currency is still modestly ahead on the day with the dollar broadly weaker against all currencies. Eurozone producer prices for December printed in line with expectations but with consumer prices last week rising to a 9 year-high at 3.2%, the ECB is unlikely to soften its stance when it meets this Thursday and the euro should remain well bid in the run-up to that meeting. The euro’s failure to break above 1.4966 Friday and its subsequent sharp retreat, following release of the first negative employment figure out of the US in 4 years, could indicate the euro has limited scope for further appreciation, but traders should be wary of selling the euro ahead of this week’s policy statement from the ECB. The ECB is on a different road to the Fed and if it chooses to deliver another strongly worded statement about inflation risks this week, the euro could benefit significantly. Over the next 24 hours the pair should remain within a 1.4770 to 1.4870 price range, unless there is a significant shift in risk aversion and stock markets decline sharply, something that would tend to benefit the dollar. Strategy: Buy euro on dips towards 1.4770 with upside price targets of 1.4830, 1.4850 and 1.4880.

Sterling rebounded Monday, recouping almost 50% of the losses it incurred last Friday against both the dollar and the euro. The currency will come under pressure though as the week unfolds with the Bank of England widely expected to cut interest rates by a quarter of a percentage point when the Monetary Policy Committee (MPC) makes its latest policy announcement this coming Thursday. Expansion in the construction sector slowed to its slowest pace in 2 years in January, further evidence of a deteriorating economy. The pound will be hurt of there is a sell off in global stocks and given the wider downside risks for the currency because of expectations of an interest rate cut, we could see the pound fall back to 1.95 by Thursday. Cable offers good sell-down value on levels approaching 1.9850 and traders should not be frightened to hold their short positions right up until after the Bank of England decision. There is an outside chance of a 50 basis points cut from the MPC, but I wouldn’t count on it because this particular Committee has been slow to act in a meaningful way. Strategy: Sell cable on prices between 1.9770 and 1.9850 with downside price targets of 1.9650, 1.9570 and 1.9510.

The yen has been forced to retreat for most of Monday with the appetite for carry trades on the increase, ahead of an expected rate hike from the Reserve Bank of Australia tonight. The Japanese currency has held remarkably firm against the dollar in the past week even though stock markets rallied by over 5%. This is because the yield spread between the two currencies narrowed to 2.5% following the Fed’s additional 50 basis points rate cut announced last Wednesday, making the dollar a less attractive bet for carry traders. This is a week mostly devoid of meaningful data both in Japan and the US and USD/JPY direction this week will track the performance of equities. Expect the pair to trade within a 106 to 108 price range for the week unless risk aversion levels rocket upwards. The euro has a chance to reach Y160 over the coming days, particularly if the ECB deliver a hawkish statement next Thursday. There is little value on the yen at current prices, given the risks of a sudden change in risk aversion, so traders are best advised to wait until prices move to the peripherals of existing trading bands. Strategy: Sell USD/JPY on advances towards 108 with limit prices of 107, 106.50 and 106.25.

The loonie rallied strongly Friday against all major currencies, particularly the euro, pound and the dollar. This happened despite a fall of nearly $3 in the price of oil and a recessionary employment number out of the US. One would normally expect a decline in US employment to hurt the loonie - it will have a detrimental effect on Canada’s exports. But the loonie is largely trading contrary to the underlying fundamentals thanks to speculative funds that continue to see most commodity currencies as sure bets. The greenback did launch an offensive Monday, rising back above parity, but the rally was all too brief and again lacked conviction and the loonie was quickly able above to recover. USD/CAD maintains a short-term bearish tone and I prefer to avoid the pair until we have a sustained break above the parity line. The key data for the loonie this week will be Wednesday’s IVEY PMI and Friday’s January Employment Report. The euro fell very sharply against the loonie last Friday and after a rally Monday which saw the pair rise 130 pips, the pair is down 100 pips from the highs to 1.4736. The euro does in my view offer value on prices below 1.47. Strategy: buy EUR/CAD on prices between 1.4650 and 1.47 with price limits of 1.4790, 1.4830 and 1.49. Use a stop loss. Hold tose positional USD/CAD longs with S/L below 0.9750.

Bob B - Feb 4

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