Tuesday, February 5, 2008

Bob's Currency Focus - 17:00 GMT

The euro went sharply into reverse gear Tuesday when economic data for the 15-member nation currency area printed much weaker than expected. The services PMI for January fell to 50.6 from 53.1 in December while Retail Sales printed -2.0% on the year against a downwardly revised -1.2% in November. Pressure will now be on the ECB to soften their stance this Thursday and while the prospects of a rate cut are non-existent, markets will be looking to the ECB to balance growth risks with inflation concerns and leave open the opportunity of a rate cut some time later this year. Risk aversion rocketed this afternoon after an ISM report revealed that the US services sector contracted in January, the first contraction in the index since March 2003. The PMI nosedived to 44.6 from a revised reading of 54.4 for December. A reading under 50 signals contraction in the industry. Stock markets have plummeted Tuesday, particularly in Europe with some of the major indices down between 3% and 4%. The euro has fallen to as low as 1.4628 having opened at 1.4821 and it is on track to record one of its worst single day performances ever against the dollar. Volatility is high and whiplash like moves is making intraday trading very dangerous. There may now be an attempt to push the euro down towards 1.45 in the next few days but today’s dollar rally is overdone and a sizeable retracement is possible, particularly with many traders expecting the ECB to maintain its cautious stance this Thursday. It is not worth venturing into the market until we see some sort of order return. Strategy: Wait!

Cable fell Tuesday, the pound ceding ground to a broad dollar-based rally. The CIPS services PMI for January printed slightly higher than expected and led to important support for sterling against the euro and the single currency was pushed back to below 74.5 pence. Sterling will struggle to gain protracted support ahead of Thursday’s Bank of England meeting, and while sterling could decline to 1.95 at least, the pound should at least be able to fend off any major advance by the euro. The recommended trade is to sell cable on rallies back above 1.9750, although with stock markets in sharp decline today, sterling may find it difficult to launch a major recovery. Strategy: sell cable at prices above 1.9750 with limit prices of 1.9650, 1.96 and 1.9550.

Despite fear gripping stock markets today, the yen has been unable to make any major progress and is hovering around the Y107 price level against the dollar. The dollar did advance to 107.76 earlier this morning after the Reserve Bank of Australia’s rate hike announcement led to a bout of yen selling, to fund carry trades. There was no economic data out of Japan overnight and the currency’s movement for the remainder of this week will be determined by risk tolerance levels, influenced by the performance of global stock markets. We move into the Asian session tonight on the back of significant share price losses and it would be foolhardy to sell the yen against any currency just now. The dollar does not offer any value at prices close to 108 and I would again sell down on any rallies approaching this mark. Strategy: sell USD/JPY on prices between 107.60 and 107.90 with limit prices of 106.80, 106.50, 106.10 and 105.75. Place a Stop Loss just above 108.10.

The loonie has come off sharply today against the greenback but the Canadian currency has performed better than most other commodity currencies and it has in fact made further gains against the euro. There was no domestic data released in Canada and the loonie has moved with the risk flow, but the greenback has failed to hit the highs of 1.0085 that we saw last week and unless we have a close near to or above this level, we could again see a sharp reversal down towards 0.9920, something that has been a feature of the USD/CAD pairing over the past week. Oil prices have fallen by $1.50 Tuesday and gold is down sharply, but other base metal prices are only down marginally and this is helping to afford the loonie some element of protection. The loonie does have some key data releases in the next 3 days, starting with Wednesday’s IVEY PMI. If the IVEY PMI prints under 50 for the second consecutive month, it will put paid to the decoupling theory and hint that Canada may also have entered a recession, along with the US. Friday’s payroll data should give some further clues. Given that surprises in domestic data may print to the downside, particularly for the employment numbers, and the fact concerns over global growth are on the rise, it is dangerous to back the loonie this week. The fundamentals are stacking higher against the loonie this week and the currency’s impressive 2-week rally may be coming to an end. Strategy: Buy USD/CAD on dips towards 0.9920 with upside price targets of 1.0010, 1.0030, 1.0070, 1.0115 and 1.0170. Our target for our positional trades remains 1.05. If you are holding EUR/CAD long positions, exit at 1.48, given renewed risks for the euro.

Bob B - Feb 5

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