Monday, February 25, 2008

Bob's Currency Focus - 18:00 GMT

The pair continues to trade within a narrow range Monday as the market is uncertain about price direction. There is a reluctance to push the euro towards the lifetime highs in the absence of major economic data or Central Bank policy updates, while by the same token the dollar is failing to attract any meaningful support and the negative sentiment that dogged the currency from the middle of last week still remains. We will need to see a break out of the current 1.4760 to 1.4860 price range to get an idea of where the pair may be headed through the remainder of this week. There are several speeches from Fed officials this week, including the Fed Chief’s semi-annual testimony in front of the Monetary Policy Committee on Wednesday. This will need to be monitored closely. US January existing home sales came in slightly higher than expected, 4.89 million Vs a forecast 4.80 million, and it has raised some hopes the housing crisis may be near a bottom. Stocks rallied in the immediate period following the news. A sustained rally in stocks this week will tend to support the euro in the short-term, as traders focus on interest rate differentials and yield. Germany’s February Ifo Business Survey is a risk for the euro Tuesday, but only if the index falls well below expectations. I still do not see any value in buying the euro at present levels and believe there is good value in selling down on prices close to 1.4850. Strategy: Sell on prices near 1.4850 with limit targets of 1.4780, 1.4755, 1.4730, 1.47 and 1.4660.

Cable has held firm Monday, the pound holding onto the 3 cent gain it made since last Wednesday. 1.97 is proving difficult to break and unless we see broader deterioration in the dollar over the next few days, the pound will struggle from here. Direction this week will be determined by sentiment towards the US currency and the pound will find it difficult to attract strong support, with traders having one eye on the Bank of England meeting next week. There are no genuine market-moving economic releases in the UK this week, although any decline in house prices from the Nationwide survey or a fall-off in the Gfk consumer confidence index, both released later in the week, will undermine the UK currency. There is definite value in selling cable down on prices above 1.97, with a distinct chance of a quick return to 1.95 over the coming days, especially if risk aversion levels are elevated. Meanwhile a poor Ifo survey result from Germany Tuesday could plunge EUR/GBP back below 0.75. Strategy: Sell cable on prices around 1.97 with downside price targets of 1.9605, 1.9555, 1.95 and 1.9460.

The yen sold off sharply from the moment markets opened Sunday night with risk-taking and the carry trade back in vogue, thanks to Wall Street’s strong reversal to the upside late Friday. The euro has gone above Y160 Monday, while the dollar briefly returned to above Y108, having gone as low as 106.70 Friday evening. There is a high degree of complacency creeping back into the market, with traders determined to back currencies on the basis of yield, but traders need to be alert to a sudden shift in risk, which could trigger a sharp rally for the yen, particularly against the euro. The euro does not offer any value at Y160, even if it manages to consolidate above this in the short-term. The dollar is very well supported below Y107 and offers a good buy opportunity on prices below this level. Strategy: Buy USD/CAD on dips to 106.80 with upside price targets of 107.50, 108 and 108.30.

If anyone truly knows the reason for the loonie’s monumental rally today, against every other currency, then you might share your insight with us please. It is totally inexplicable from a logical perspective. There was no economic data out of Canada and commodity prices are generally softer today. There must have been a single movement of funds somewhere to explain today’s move, because based on the recent trend and on economic events, both recent and future, the loonie should be in retreat this week. The Bank of Canada is expected to cut rates when it meets next week on Mar 4. There is no domestic data of influence ahead of Friday, when the Qtr 4 current account balance is released. The best way to look at today’s downside move in USD/CAD is that it represents a buy opportunity. It is difficult to see the loonie staying on the right side of parity against the greenback with a rate cut imminent within the next week. There are two speakers from the Bank of Canada tomorrow testifying on the impact of the Canadian dollar on the Canadian economy and this represents immediate downside risk for the loonie. Strategy: Buy USD/CAD on dips to 0.9960 with upside price targets of 1.0050, 1.0120, 1.0170, 1.0190 and 1.0250.

Bob B - Feb 25

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