Friday, February 8, 2008

Bob's Currency Focus - 16:00 GMT

There were unconvincing attempts to push the euro higher Friday as the currency tried to retrace some from one of its worst weeks ever against the greenback. The single currency is down 3.5 cents this week and down over 4.5 cents from the heights it reached last Friday. The euro’s weakness was essentially a self-inflicted blow from the ECB Thursday, when the Banks’ President Jean Claude Trichet signalled monetary policy had moved to a more neutral stance. The ECB is unlikely to cut rates before the summer and the intense sell-off we have witnessed is an over-reaction. The euro must recover to 1.46 quickly otherwise the dollar looks destined to test the December low of 1.4310 by early next week. The dollar’s new-found strength will be severely tested once stock markets settle and risk aversion subsides. The upside for the euro looks limited however and it may be a long time before it gets another opportunity to reach the magical 1.50 price handle. A more restrictive trading range looks the most likely outcome over the next few weeks, with any significant upside rallies being met by increasing selling pressure. Of course with markets still in turmoil because of growing concerns over the global economy, major spikes in risk aversion will most likely favour to dollar, although the US currency currently offers little yield appeal. The most profitable way forward for the next week will be to sell the pair on failed upside rallies. Strategy: sell EUR/USD on prices close to 1.4660, with downside price targets of 1.4590, 1.4535, 1.45 and 1.4460. If the euro fails to re-establish itself above 1.4520, then this form an initial a resistance level and if it holds, the pair will probably push down towards 1.4310.

Sterling also attempted something of a comeback Friday having been battered in the past week. Cable did rise to above 1.95 briefly but has since declined to 1.9450. Interest rates were cut to 5.25% Thursday but with the yield on sterling still one of the best on offer, a return to normality on stock markets will tend to boost the UK currency. With the ECB changing their policy stance this week the pound should be able to retrace further against the euro and could send the euro back to 0.7350 next week. UK economic data, apart from employment, is growing softer and the medium and longer term outlook for sterling remains uncertain at best. January’s consumer price inflation data is released Tuesday next and markets will be studying it closely to establish whether the Bank of England will be in a position to cut rates again at its March meeting. I remain bearish on sterling but would prefer to see a bounce in cable to the 1.9650 price region before entering the market with a sell order. The euro offers no value against sterling at present. Strategy: Sell cable on rallies towards the 1.9650 price region with downside price targets of 1.9550, 1.95, 1.9450 and 1.9390.

The yen has retreated modestly Friday against both the greenback and the euro and it could yet move sharply lower if stocks rally sharply on Wall Street this evening. Risk tolerance levels have risen since the major spikes in risk aversion seen on the first 3 days of this week and the market tendency over the past 2 days has been to sell the yen, particularly against the high yielding currencies, on any lulls in market volatility. The next major data indicator that may severely influence markets is next Wednesday retail sales release in the US. If stock markets settle between now and then, there is the prospect of a push towards 110 on USD/JPY. If trading short on USD/JPY, your stop should be tight above Y108 because if this key level gives way, there will be an avalanche of bids in an attempt to take the pair significantly higher. Strategy: Preference is to remain short on USD/JPY while price holds below 108. If 108 gives way, stay out of market. Sell on rallies towards 107.80 with downside price targets of 107.20, 106.80, 106.50, 106.20. The pair remains range-bound between 106 and 108 and it is worth buying on prices close to 106.

The loonie has had another monumental day, thanks to a much better than expected employment report. Quick, cruel, incisive rallies are now a trademark of the Canadian dollar and it has become the most dangerous currency to short against prior to major domestic economic releases. In fact the loonie was setting up for a good employment number for a few days as it essentially had lost no ground to the US dollar since last Wednesday, while other major currencies floundered. It has rallied every moment there has been a lull in market volatility this week, a clear signal the currency remained bullish. The 46,400 jobs gained in January printed way higher than the 8,000 expected and the unemployment rate also fell to a 33 year low. While the news is very good, it is important to note employment is a lagging indicator and the risks to the outlook for the Canadian economy from a US recession are unchanged. What today’s report may do is to dissuade the Bank of Canada from cutting rates aggressively and for the moment it looks like a 25 basis points cut in March is what the Bank may give, rather than the 50 basis points which was previously expected. Friday’s appreciation in the loonie is overdone, with the currency already having gained 1.2% against the euro and 1.3% against the dollar today. Regular upbeat employment reports out of the euro area, the UK and Australia don’t ever generate anything like the sharp type of rally for those local currencies that we are constantly seeing for the loonie. Housing starts in January also printed much higher than expected Friday, 21% up on December’s figure. Warren Buffet’s claim yesterday that his company ‘owned the Canadian dollar’ and made several hundred million dollars from it is a worrying revelation and explains to some degree the startling level of appreciation seen in the loonie in recent times, a level of appreciation that cannot be explained by the underlying fundamentals. However I remain bearish on the loonie’s outlook in the medium term as it is ludicrous to believe the Canadian economy walks scot-free from a US recession. The loonie is the most over-valued currency of all 16 most actively traded currencies. The risks for the loonie over the next week though are probably again to the upside and there will be an attempt to take out 0.9920 on USD/CAD and revisit the 0.9870 low hit in the aftermath of the Fed’s 50 basis points cut last week. We could even see a retreat back to 0.9750. The loonie is also trading 5 cents higher than it was last week against the euro and that pair is massively oversold. The euro could however be ultimately pushed below 1.43, if the loonie makes further inroads against the greenback. Strategy: Wait in the short-run. If holding positional USD/CAD trades, the stop loss needs to be below 0.9750.

Have a good weekend!

Bob B - Feb 8


Anonymous said...

Canadian employment report was a knockout. It could be a blip and companies will be more reluctant to hire this month --> most bad news from the states just surfaced this past week.


Unknown said...

You may be spot on there. I have always said employment is a lagging indicator. It amazes me that this decoupling theory, which has rung false in Europe, is still believed by many to hold up in Canada. How bizarre is that?


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