Wednesday, February 13, 2008

Bob's Currency Focus - 17:30 GMT

US retail sales caught markets off guard Wednesday when the data surprised to the upside. January’s number was expected to print at -0.4%, but instead showed an increase of +0.3%. Stock markets jumped on the news and the momentum was sufficient to take the dollar to above Y108 against the yen, a very important confidence barrier for greenback. The dollar has gained only modestly against the euro with the EUR/USD pairing spending most of the day trapped within a 1.4540 to 1.46 price range. The retail sales results don’t necessarily point to a consumer or economy that is engulfed in a recession and considering the manufacturing sector also expanded in January, albeit it modestly (following contraction in December), one must question whether the Fed has acted too aggressively when slashing interest rates by 125 basis points in an 8 day period, especially at a time when inflation was on the rise. Next week’s consumer price inflation data is going to be crucial in determining whether or not the Fed is realistically in a position to cuts rates aggressively again when it meets in March. A bad retail sales number today would probably have had the dollar perform better as it would have seen risk aversion rise and safe haven funds flow back into the dollar. Eurozone Industrial Production declined again in December, falling by 0.2%. Markets expected a rise of 0.6%. The euro economy is clearly slowing and quarter 4 GDP numbers for the Eurozone, released Thursday, is an important confidence gauge for the single currency. If growth slowed significantly more than expected in the final quarter of 2007, the ECB will come under renewed pressure to ease rates and the euro will face more downside risk. Meanwhile a stronger than expected GDP number will boost the euro. The market expects a 0.4% increase in GDP on the quarter and a 2.2% annualised rate. We are now within a 1.4480 to 1.4620 trading range and unless euro area GDP surprises to the upside tomorrow, it is difficult to see a break immediately coming on the upside. Strategy: Sell down on prices close to 1.46 with target prices of 1.4545, 1.4520, 1.4485 and 1.4445.

Governor King’s renowned caution was written all over the Bank of England Inflation Report released Wednesday morning. The report recognises the downside risks to growth but highlights heightened inflation concerns and suggests markets are pricing in more cuts than the Bank is currently willing to cede. The Report goes so far as to say further easing to the tune of 75 basis points this year could fuel greater inflation problems in 2 years time. Sterling has benefited from the ‘hawkish’ report and economic data released earlier was forgotten, including a report which revealed a slowing in wage inflation in January and the latest RICS house survey which reported the worst slowdown in the UK property market in the past 15 years. The jobless number fell by 10,000 in January, better than expected, and this at least signals there is still positive life in the economy. The pound has gained against most currencies today, appreciating 0.85% against the yen and 0.15% against the euro, while up a more marginal 0.1% against the dollar. There are no further data releases out of the UK this week, but sterling should benefit from any sustained rally on global stock markets, because of its high-yielding status. Cable looks to offer little value above 1.9650 and in fact the pair failed to breach this level earlier today. I remain bearish on the currency and see the best value coming through selling cable on prices approaching 1.97. Strategy: sell cable on prices close to 1.97 with downside price targets of 1.9605, 1.9550, 1.95 and 1.9445.

The US retail sales data was good news for Japanese exporters but bad news for the yen. As soon as the data was released the dollar shot to above that pivotal 108 line and has traded above there ever since. A close above this mark this evening will be significant and may indicate the pair has finally broken out of the recent trading range and we could see a move to Y110 over the next week. I would not buy the yen against any currency right now unless it can firmly push the US dollar back below 107.80. Both Japan’s current account and trade balance in December narrowed from the same month a year ago, while the country’s consumer confidence index fell even further in January, all suggesting the economy continues to deteriorate. Tonight sees the release of quarter 4 GDP, which is forecast to print at an annualised 1.7%, but don’t be surprised to see it print lower. Also don’t be surprised if the GDP number has no impact on the direction of the yen, regardless of how it prints. Today’s retail sales data from the US could calm stock markets over the coming days, trigger a rise in risk tolerance and lead to a deeper retreat for the yen. Buying USD/JPY with a tight stop loss below Y108 (ideally below 107.80) is the logical trade I can see right now, as we have broken out of the recent range. But given the recent volatility in the market, it is a brave trade. Strategy: wait!

Most of the commodity currencies have come under pressure in recent days with the high-yielding Aussie and Kiwi dollars performing particularly poorly Wednesday. It is unusual to see these currencies retreat when stock markets have been rallying, but concerns over global growth and weakening commodity prices have begun to weigh. The loonie has again bucked the trend and it has appreciated Wednesday against all other major currencies, gaining 1.2% against the Aussie dollar and 0.9% against the yen. Its gains against the euro (+0.22%) and against the greenback (+0.13%) were more modest. The greenback appears unable to establish itself back above the parity line and USD/CAD is being sold down on every single upside rally above the parity line. One would expect support for the loonie to erode the further into the month we get, i.e. the nearer we are to another interest rate cut from the Bank of Canada on March 4. The pair for the moment retains its bearish tone, although the downside is also struggling to make any great headway and it may take a significant data release, or major statement from the Bank of Canada, to break the logjam. Thursday sees the release of December’s trade data and this will be a key barometer for Canadian exports. If the trade surplus expands and exports are shown to have risen, it would temporary dispel theories of a strong loonie seriously damaging the country’s exporters and this should propel the loonie higher. A downside surprise on the export figure would have the opposite impact. I prefer not to trade USD/CAD until I see a clear breakout of the current range. The euro definitely offers value against the loonie on prices below 1.45, essentially as the rate differential outlook strongly favours the euro. Strategy: Buy EUR/CAD on dips towards 1.4450 with upside price targets of 1.4570, 1.46, 1.4650 and 1.47. Retain your USD/CAD longer run positions with a stop loss below 0.9750.

Bob B - Feb 13

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