Wednesday, February 20, 2008

Bob's Currency Focus - 23:50 GMT

The dollar started Wednesday strongly and had pushed the euro back by a full cent before a spectacular reversal during the US session. The pair closed the day at 1.4720, virtually the same price at which it started early this morning. As global stocks declined in Asia and Europe, the dollar attracted safe haven funds and pushed the euro back to 1.4616, after economic data revealed US inflation rose by more than expected in January. The annualised core rate now stands at 2.5%, well above the Fed’s comfort zone. Oil prices rose to an incredible $101 a barrel this evening raising further inflation concerns. However the Fed minutes of the January 30/31 meeting, released today, portrayed a dovish Committee, one more concerned about sluggish growth than spiralling inflation. Indeed the minutes signalled further interest rate cuts are on the way. It is unlikely the Fed would have sounded so soft on price concerns were the Committee in possession of today’s inflation figures, or looking at $101 oil, but markets seized the minutes to force a dollar sell-off. The irony is Wednesday’s data will restrict the extent to which the Fed can cut rates and should prove dollar positive in the medium term. US Housing Starts and Building Permits for January, also released today, were in line with forecast and didn’t have a market impact. The euro offers little immediate value above 1.4750 and it will come under selling pressure on prices around this level. The euro’s counter-rally today was more of a knee-jerk reaction to the day’s events and I would not be surprised to see the single currency forced back to 1.46 again tomorrow, especially if risk aversion returns. Strategy: Sell EUR/USD on prices close to 1.4750 with limit prices of 1.4680, 1.4640, 1.4620, 1.4590 and 1.4550.

Sterling plunged again Wednesday, cable coming perilously close to the year’s nadir of 1.9337, hit in early January. Cable hit 1.9362 before it then recovered to 1.9420 by the close. The Bank of England minutes showed all 9 members of the MPC voted for a rate cut 2 weeks ago, but perennial dove Mr Blanchflower wanted a 50 basis point cut. The Bank did cut rates by 25 basis points at that February 7 meeting. The pound needs a strong retail sales figure Thursday to earn a much needed bounce. Although I remain bearish on the currency, I see little value in selling it down at current prices. A strong retail sales figure could trigger a cable rally up to 1.96, while it could help the pound push the euro back below the 75 pence mark. The BRC retail sales figure last week points to a possible upside surprise tomorrow, but if retail sales disappoint, then cable could flirt with the year’s low. Wait for a better price on cable before re-entering the market. Strategy: Sell cable on prices close to 1.9650 with limit prices of 1.95, 1.9430 and 1.9380.

A late surge on Wall Street was bad news for the yen, which retreated sharply as carry trades returned en masse late in the session. The euro hit a high of Y159.27 its highest level since Jan 30. The dollar returned to Y108.35, having traded as low as 107.48 in the morning. Complacency has crept into the market and the yen is vulnerable to a near term retreat to Y110 against the dollar and Y160 against the euro. Direction is going to be determined exclusively by risk aversion and Thursday’s Philly Fed Index in the US could prove to be the last major risk event of the week for USD/JPY. I see better value in the yen against the euro, particularly on prices close to Y160. Strategy Sell EUR/JPY on prices near Y160 with limit prices of Y158.50, Y157.50, Y156.80 and Y155.70.

The loonie had a very volatile day, being up, then down then up again at the finish. The greenback had rocketed to a one-month high of 1.0196 before $101 oil sparked a loonie rally that saw the pair close the day at 1.0125. USD/CAD has however turned bullish in the short-term and the pair is being bought on dips and it is difficult to see this trend change unless Friday’s Retail Sales figures for Canada print better than expected. The Bank of Canada will be cutting rates on March 4 and the only question now is by how much, 25 or 50 basis points. Loonie shorts will stack up in the run up to this meeting and a close above 1.02 this week will pave the way for a crack of the year’s high before the Central Bank meeting. The Leading indicators for January printed at +0.2%, above the 0.1% expected and against a flat reading in December. Also boosting the loonie today was a report which revealed a positive capital inflow into Canadian securities in December. 1.02 and 1.0250 look vulnerable to further upside pressure from USD/CAD bulls and dips close to 1.01 are likely to attract plenty of buying support. A strong rally on stock markets over the next 24 hours will be the loonie’s best form of defence Thursday. Strategy: Buy USD/CAD on dips to 1.01 with upside price targets of 1.0170, 1.0190, 1.0215 and 1.0245.

Bob B - Feb 21

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