Friday, February 1, 2008

Bob's Currency Focus - 18:00 GMT

It has been a volatile day of trading, the dollar fending off an attack on the lifetime high by the euro, sterling sinking without trace and commodity currencies rallying like the world was entering a new boom period. The US dollar’s failure to hold onto any gains for anything more than a fraction of an hour is a very worrying sign and the greenback is only advancing during bouts of high risk aversion (meaning rallies are effectively the result of a close-out of dollar short positions). This has been a most difficult week for the US currency with lots of high risk events, most of which printed poorly and undermined the currency. Friday’s data was mixed but offered little cheer with the Labor Departments monthly employment report revealing the economy lost 17,000 jobs in January, the first decline in employment for 4 years. There was better news when the ISM manufacturing index printed at 50.5, indicating expansion in the sector in January, following contraction in December. Ironically enough it was the ISM report which sent the dollar tumbling once again, as it helped lift stocks and risk tolerance, leading to a scramble to sell the greenback against the ‘risky currencies’ Aussie, Kiwi and Canadian dollars. Stocks had earlier opened on a high note, thanks to a timely news story reporting Microsoft had made a bid for Yahoo. The non-farm data however is a signal all is not well in the economy and this news will carry through as a hangover into next week, regardless of how the session ends today.

The euro shot to 1.4945 immediately after the Labor Department reported contraction in the US jobs total in January. Resistance around the lifetime high held firm however and the euro came crashing down to briefly dip below 1.48, before recovering to 1.4840. The dollar struggled against most other currencies this afternoon so today’s reversal is a false move and is the result of profit-taking. As long as the euro remains above 1.48, the lifetime high at 1.4966 will remain within reach. The lifetime barrier needs to be breached soon if 1.50 is ever to be hit. Next week could be the single currency’s final chance, with the ECB scheduled for Thursday. If the ECB maintain their hawkish stance, then the euro could be pushed over the line. January’s manufacturing PMI for the euro area printed better than expected Friday, but the more important services PMI will be watched closely when it is released Tuesday. As long as the euro remains above 1.4770, there is value in keeping faith in the upside trend, but with a 3-peak top formation in place, caution is required. Strategy: buy euro on dips back towards 1.4770 with upside price limits of 1.4850, 1.4880, 1.4915, 1.4945 and 1.4980. If buying the euro at current levels, tight stops must be employed.

Cable took a pounding Friday, coming off a high of 1.9935 to sink back to 1.9650. Hopefully you took my advice yesterday and if you did, you should have done very well. The CIPS manufacturing index, reported at 50.6, fell to near 2.5 year low signalling a an accelerating slowdown in the UK economy. For next week’s Bank of England it is not now so much a case of will they cut rate, but by how much? The prospect of a 0.50% reduction is now very real, but we must remember this particular MPC is dominated by hawks and has been slow to act in the past. Sterling’s sell-off against the euro has been overdone, but it is a high risk strategy to buy the pound against anything ahead of next Thursday’s meeting. I retain my bearish bias on cable, but hope to see something of a bounce before entering the market again. Strategy: Sell cable on prices above 1.98 with limit prices of 1.9650, 1.96, 1.9540 and 1.9480.

The yen was spared most of the frantic price action we saw Friday with the Japanese currency largely unchanged against the dollar and up moderately against the euro on the session. Risk tolerance has held despite a negative employment report from the US and the yen has sold off against the high-yielders and commodity currencies. There was no domestic data overnight and the yen has simply moved with the markets’ reaction to US data. Yesterday we called for a sell down of the EUR/YEN, if price near 159 and if the non-farm number from the US was negative. You should probably exit this trade now, with price currently at 157.50, in case Wall Street rallies to the close this evening and you get caught by a market moving in the opposite direction. The dollar is going to struggle to get back to Y107 because those holding short dollar positions will not be in a rush to run to the exits just yet. We recommend staying away from trading the yen until we see how Asian markets respond on Sunday to today’s events.

The loonie and the dollar are having a rare tussle for supremacy around the parity line and the loonie has certainly had the better of it in the past 3 days and the pair is now back below 0.9950. The is pair giving off a strong bearish tone, which is probably owing to the renewed appetite for the commodity currencies which has persisted since the Fed’s emergency rate cut last week. There are some key risk events for the loonie next week, most notably Friday’s employment report, but before that we will get the IVEY business PMI on Wednesday, which recorded a contraction a month ago. The loonie also battered the euro today, sending the single currency toppling from a high of 1.4940 to a low a short while ago of 1.4730. The loonie remains in my estimation the most over-valued currency by far but certain forces are determined to keep it elevated. If the pair closes below 0.9920 this evening, the loonie will attempt to test the 0.9870 low hit on Wednesday and if this gives, a return to 0.9760 looks to be on the cards. Although bearish on the loonie, I’m reluctant to buy the greenback against it until we have established a firm break back above the parity line. The euro certainly offers value on prices around 1.47 against the loonie, particularly leading into what should be another hawkish ECB statement next Thursday.

Have a great weekend!

Bob B

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