Tuesday, February 19, 2008

Bob's Currency Focus - 17:30 GMT

US markets returned after the long weekend and whereas we have seen an initial burst of optimism on US equity markets, on currency markets the dollar has fallen sharply against the euro. The euro was boosted by remarks from the latest bulletin out of the Bank of France which seemed to criticise the Fed for being too aggressive in its monetary policy and suggests policy easing on the part of the ECB is some way off. No data to move markets Tuesday and we must wait for Wednesday’s US consumer prices and housing data releases to get some direction. Oil prices are back near $100 a barrel and gold is trading close to $930 an ounce, primarily because of a weakening dollar. Some of the high-yielding currencies have hit extremes today and traders should be on alert for a potential major sell-off of commodities and high-yielding currencies, given current inflated prices. Such a sell-off will benefit the dollar. The euro will run into immediate resistance above 1.4770 and the pair does not offer any bid value at current prices. Wednesday also sees the release of the preliminary PMI readings for the euro area’s manufacturing and services sectors. Any contraction in either reading (index <50) could trigger a sharp sell off of the single currency and we could see a quick return to 1.46. I’m inclined to sell the euro on prices around 1.4750 as it is difficult to see the euro making a run on 1.50 in the absence of Central Bank meetings or any change in the underlying fundamentals. Strategy: Sell EUR/USD on prices around 1.4750 with limit prices of 1.47, 1.4660, 1.4640, 1.46 and 1.4580. Place a stop loss above 1.4825.

Sterling has had another bad day Tuesday, even if it has held its own against the dollar. The story about Northern Rock and its nationalisation by the British Government has set a very negative tone for the pound, which has seen it capitulate by 2% against the euro over the past 36 hours. Sterling has failed to benefit from a renewed bout of interest in high-yielding currencies with traders choosing to opt for the Australian and New Zealand dollars, ahead of sterling. Although I retain my bearish stance with respect to sterling, I do believe the sell-off against the euro is overdone in the short term and can see the pound pushing the euro back towards the 0.7550 price mark in the coming days. We have to wait until Thursday and January’s retail sales figures before getting any genuine market-moving data for the UK currency. There is also no value in selling down cable at current prices and I prefer to see a bounce back to over 1.96 before re-entering cable shorts. Strategy: Wait and then sell down cable at prices around 1.9650 with downside price targets of 1.9550 and 1.95.

The yen has made moderate gains Tuesday against the dollar, while still trading close to the recent low at 159 against the euro. With markets closed in the US Monday, traders went on an equity buying spree and the resultant surge in risk tolerance brought with it a new wave of carry trades, with the low-yielding yen the major loser. There has been a determined effort to push global stock markets higher in the past week, so backing the yen in this climate is dangerous. However some of the yen carry trades are approaching critical milestone points (Y160 on EUR/JPY and 100 on AUD/JPY) and these levels may act to serve a warning to the market that the recent build-up in carry trades is too aggressive and is not sustainable. Given the weight of the build-up, a sudden shift in risk aversion would see the yen strengthen sharply, particularly against the euro and the Australian dollar. A disappointing set of economic releases in the US Wednesday, particularly with respect to housing, could trigger such a move. I do not see the euro offering value above Y160 in an era of economic uncertainty so there is value in selling down EUR/JPY on any rallies close to this level, even if it means the positions have to be held for more than a few days. Strategy: Sell EUR/JPY on prices close to Y160 with downside price targets of Y158, Y157.20, Y156.50 and Y155.50.

The loonie has dropped below the lows recorded last Friday and the USD/CAD pair is currently trading near 1.0150. Bank of Canada’s Governor Carney failed to excite markets with his speech on globalisation Monday, with no clues emanating on how low the Bank of Canada may go on interest rates at its next policy meeting on March 4. On the other hand Tuesday’s economic data out of Canada indicates the Bank of Canada could possibly cut by 50 basis points in a fortnight’s time with inflation prices slowing again in January. The core inflation rate now stands at just 1.4% while the headline rate has slowed to 2.2% from 2.4% in December. Wholesale Sales came off by 2.9% in December against expectations for a 0.1% gain and this signals the Canadian economy ground to a halt in the final quarter of 2007. The loonie’s fall Tuesday has been cushioned by a rise in commodity prices but a poor set of domestic retail sales numbers later this week would put added pressure on the currency and set up the prospect of a near-term rise to 1.0250 for USD/CAD. The greenback has at least established itself back above parity and appears to have regained the advantage. Any dips to 1.0050 should attract strong buying interest. The loonie has probably been oversold against the euro and the AUD since Friday and it has the potential for a limited correction against these two currencies. Strategy: Buy USD/CAD on any dips to around 1.0050 with upside price targets of 1.0140, 1.0175, 1.0220 and 1.0250.

Bob B - Feb 19

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