Monday, February 11, 2008

Bob's Currency Focus - 17:00 GMT

Monday has been a rather quiet day with no economic data to influence direction one way or the other. French Industrial Production for December printed better than expected whereas the Italian number printed much worse than expectations, but neither release had much of a market impact. The G7 meeting at the weekend fuelled concerns about the outlook for the global economy, while comments from ECB President Jean Claude Trichet, where he appeared to scoff notions of any imminent rate cut in the euro area, helped boost the euro when markets reopened on Sunday night. The euro had pushed to as high as 1.4577 in the early morning, but thin Asian trading conditions had exaggerated the move and the pair had returned back to Friday’s trading price around 1.45 by the time the US market opened. Last week’s gains by the US currency were earned against a backdrop of heightened risk aversion with US stock markets having their worst week in years, so a return to market stability will pose a question for the dollar’s resilience and determine whether last week was indeed a trend reversal or merely a blip in the longer run uptrend. The major risk event of the week is the US Retail Sales out on Wednesday, but between now and then I prefer to buy the euro on dips, so long as 1.4440 does not give way. We have now found resistance at the 1.4580 price level and this must be broken to enable the euro retrace back to 1.4650. Strategy: buy on dips towards 1.4460 with upside price limits of 1.4520, 1.4570, 1.46 and 1.4650. Stop loss should be placed beneath 1.4440.

UK Producer Prices soared in January with core output prices rising by 1.1% in the month, signalling elevated inflation risks. This could suggest a major upside surprise is in store for us in Tuesday’s consumer price data release. Producer Input prices rose a massive 2.6% on the month in January, thanks largely to inflated energy costs. House prices slowed in December according to the latest monthly survey from the DCLG, but at a pace lower than that forecast. Cable briefly rose to above 1.95 following the inflation report, but retreated back towards 1.9480. Cable could rise to over 1.96 Tuesday if January’s consumer prices come in higher than expectations. Sterling has also made gains today against euro – EUR/GBP retreated to below 0.7450 having risen to above 0.75 at one point. I remain bearish on sterling because of the considerable downside risks to the economy but am seeking a better entry price before selling cable. A spike after tomorrow’s inflation data could offer some sell down value. Strategy: Sell cable on prices in the region of 1.9650 to 1.97 with limit prices of 1.9530, 1.9480, 1.9450 and 1.9390.

Markets in Japan were closed overnight owing to a national holiday. The currency has made gains Monday, primarily against the dollar and the euro, because of renewed risk concerns and another downturn in the performance of global stock markets. The dollar fell to as low as Y106.34, 100 points below Friday’s close, before recovering to Y107.70. The euro has done worse, currently trading around Y154.70, almost 1.4Y down on the day. USD/JPY has been stuck between 106 and 108 for the past week to 10 days and it currently offers the best value range trade of all the major pairs. My preference has been to continue to sell down on prices close to 108, but there is equal value on buying the pair on prices near 106, because despite feverish levels of risk aversion, the yen has failed to establish itself below the 106 price level against the dollar. Japanese markets return tonight and December’s trade and current account data is due for release. The data is unlikely to have any major market impact as the currency’s movements remain dictated by global risk aversion levels. Of more importance will be Wednesday’s GDP data which prints just a day before the Bank of Japan is due to deliberate on its latest round of monetary policy. Strategy: Sell USD/JPY on prices around 107.80, with stop loss above 108.10. Buy USD/JPY on prices close to 106 with Stop loss below 105.85. Limit prices 70 and 100 pips away from market entry should be good.

Growth in new house prices slowed to a marginal 0.1% in December, well below the 0.3% to 0.4% rise expected by economists. December is often a peculiar month for the housing sector so we shouldn’t place too much significance to this release. Of more importance to the loonie were remarks emanating from Finance Minister Jim Flaherty and new Bank of Canada Governor Carney over the weekend, both of whom expressed some concerns over the value of the loonie and the widening interest rate gap between the US and Canada. Carney, in his first address since he took over the Governorship, indicated his support for cutting interest rates to help stoke growth in an environment where a slowing US economy is placing demand constraints on Canada’s exports. The major question is whether Carney will be aggressive in his approach or run with a more gradual easing policy, i.e. following the 0.25% rate cuts in December and January with similar size moves in March and April. Friday’s strong employment report has pared back expectations for an aggressive policy approach, yet the loonie should struggle to attract meaningful support as this month evolves, with positional traders in particular not wanting to get caught out on the wrong side of a monetary policy move. But as long as metal and oil prices continue to trade near record levels, the loonie is unlikely to sell off significantly in the short run. 0.9920 is a critical support level for the greenback to hold in the coming days while a rally to above 1.0137 is required to establish a return to an upside trend. Wednesday’s retail sales data out of the US will be as important for the loonie as it will be for the greenback as any sharp pullback in US consumer spending will signal weakened demand for Canada’s exports and should hurt the loonie more than the US dollar. I remain bearish on the loonie but am not prepared to sell it in the short run, until we see greater evidence of some erosion in confidence in the currency. Strategy: Wait!

Bob B - Feb 11

1 comment:

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