Tuesday, February 12, 2008

Bob's Currency Focus - 17:30 GMT

The dollar was been sold off sharply Tuesday as news of a bail out offering for the much maligned bond insurers in the US from Warren Buffet gave sentiment a seismic lift and encouraged traders to move back into the higher-yielding currencies, mostly at the expense of the dollar and the yen. It is a rather ominous sign for greenback supporters when traders offload the currency as soon as stock markets show any inclination to rally. It is still too early to say whether the dollar has turned a corner or not, because all of the currency’s recent gains have been made during a period of extreme market turbulence and volatility. Data may also be softening out of the eurozone but the euro still has a wide band of supporters and it didn’t take the currency very long today to notch up a gain of almost a cent. A close this evening above the previous stalling point at 1.4580 would be significant and could lead to an extension of the recovery rally tomorrow, to the next level of resistance at 1.4660. There was no data of importance out in the US Tuesday but in the euro area, Germany’s ZEW expectations survey printed moderately better than forecast, though still near record low levels, while the current conditions index fell rather spectacularly this month, highlighting the degree of negative sentiment that persists within the financial business community in Germany. The euro did not react to the ZEW report and with the dollar in sell-off mode, EUR/USD is up 0.9 cents on the day, trading at 1.4590. However a late retreat of the major industrial averages on Wall Street tonight could potentially see a quick return to 1.45 for the pair. Wednesday sees a major risk event with January’s retail sales data in the US out at 13:30 GMT. The consumer is the backbone of the US economy and any sharp fall-off in the retail sales numbers will reignite concerns about a US recession, yet probably result in gains for the dollar. It is better to be out of the market at the time of Wednesday’s release and to reassess after the data is known. I still favour the euro on dips towards 1.4440, but see little prospect of the pair rallying beyond 1.4650 in the short run. It is best to sell down from prices close to 1.4660. Strategy: Sell on prices close to 1.4660 with downside price targets of 1.4585, 1.4530, 1.45 and 1.4460.

February’s consumer price inflation data was lower than expected and a rather muted headline rate of 2.2% (against a forecast of 2.3%) is not going to cause too many headaches for the Bank of England. The odds have increased for a further rate cut from the MPC when the Committee meets again in March. Sterling has got a lift from other quarters today which has helped propel cable to a 1.5 cent gain this afternoon. UK retail sales bounced back in January according to the latest survey from the British Retail Consortium – same store sales are reported as having increased by 2.6% on the year, up from a paltry 0.3% in December. Separately, a rise in risk tolerance levels has led to a demand for higher yielding currencies Tuesday and sterling has been one of the principal benefactors - the British currency has gained 1.2% on the yen. Cable could rise to 1.9650 but is likely to come under fresh selling pressure around this level, given the economic uncertainty and the prospect of further rate cuts to come from the Bank of England. If stock markets sustain their rally for another couple of days, the pound should benefit against the euro and we could see EUR/GBP dip to below 0.74. I remain bearish on sterling and favour selling cable on prices close to 1.97 with downside price targets of 1.9550, 1.95, 1.9460, 1.9420 and 1.9390.

It is hardly a surprise to see the yen plummet on a day when the principal European stock indices closed up over 3% each. The Japanese currency has lost huge ground against the euro (200 pips) and the pound, while ceding 0.55% to the dollar. If Wall Street maintains most of its gains to the close this evening, the critical Y108 price level for USD/JPY could come under threat. If the dollar manages to penetrate resistance at this line, the pair could rapidly climb towards 109 by tomorrow. The fundamentals have not changed though and the fact Tuesday’s momentous rally on stock markets has come on the back of what is principally a vacuum (no new data) lends one to be suspicious and to be very cautious. A poor US retail sales number Wednesday would be sufficient to trigger a massive reversal and turn market mood on its head yet again. Tonight’s current account and trade data out of Japan will not have any market impact and the yen’s fortunes will continue to conversely mirror those of stock markets. If long on USD/JPY and Wall Street closes on a high, I would be inclined to ride out the position until tomorrow morning, as the sentiment should carry through to Asia and put further selling pressure on the yen. Look to exit in the morning. It is difficult to see the euro warranting any gains above the Y157 price level and a downside surprise in European GDP figures Wednesday could put the single currency under pressure. I would be inclined to sell down EUR/JPY on prices near 158, especially ahead of the US retail sales number on Wednesday, which constitutes a sizeable risk event for the entire currency market. Strategy: Sell USD/JPY on prices approaching Y108, with downside price targets of 107, 106.70, 106.40 and 1.0620. Place a stop loss tight above Y108. Sell EUR/JPY on prices close to Y158 with downside price targets of Y156.50, Y156, Y155.50 and Y155.

The loonie has made steady progress today, gaining over 0.5% against the dollar and over 1% against the yen and is mostly unchanged against the euro. Concerns about future rate cuts from the Bank of Canada were temporarily forgotten as traders poured into riskier assets and commodity currencies after stock markets soared. There was no domestic data out Tuesday and the loonie’s fortunes for the remainder of this week will be shaped by global risk aversion levels, Wednesday’s US retail sales numbers and Thursday’s trade data. The greenback tried but failed to take USD/CAD above 1.0050 this morning and the pair plunged to 0.9940 before settling just above this price mark. If the loonie breaks below 0.9920 and manages to close below this level it will prove to be very important for the short-term direction of the pair, with an obvious next target being the 0.9870 price hit following the Fed’s last 50 basis point rate cut. But the loonie is significantly overvalued at present, given there may be a further 100 basis points in rate cuts from the Bank of Canada in the offing over the coming months, but as of now few are looking that far ahead and while commodity prices remain elevated the loonie is attracting support. I maintain my considerable bearish bias on the loonie but am waiting for the right shift in market tone before coming back in to sell the currency. For now I recommend sitting on the sidelines. Strategy: wait! If holding longer term longs on USD/CAD, maintain the stop loss below 0.9750.

Bob B - Feb 12

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