Monday, March 3, 2008

Bob's Currency Focus - 21:30

A new day and yet another set of record lows for the US dollar and US dollar index. Sound familiar? On Monday the greenback fell to a lifetime low against the Swiss franc, a lifetime low of 1.5275 against the euro and a 3-year low against the yen. In fact if the current momentum continues, the Swiss franc looks destined to reach parity against the dollar within a few weeks, while the US currency looks set to decline to 100Y. Heightened risk aversion failed to spark support for the dollar and when the ISM manufacturing report for February reported a second contraction in 3 months, the dollar plunged, before recouping most of the losses when a sympathetic bout of profit-taking set in. With markets pricing in a minimum 50 basis points rate cut from the Fed on March 14 and the ECB expected to stand pat again this week, investors can see little reason to buy the dollar. It now seems to be a question of how low the dollar will be allowed to go, as opposed to how low it can go. The weak dollar is fuelling commodity prices which are rising to farcical levels and making inflation the number one issue for most major Central Banks. With the Fed prepared to cut rates regardless of inflation concerns, investors feel justified in pouring more funds into commodities. Indeed ECB Chief Jean Claude Trichet stated today that the US needs to adopt a strong dollar policy – is he perhaps intimating the US Administration and the Fed is engaged in a weak dollar policy? For now it appears the only means of saving the dollar from further embarrassment would have to come from the ECB, possibly through the unlikely event that Trichet will signal a future rate cut from the ECB when he addresses the media this Thursday, after the Committee’s latest rate announcement.

We must wait for EUR/USD to hit a peak under which a new trading range will emerge. The euro could rise to 1.54 this week, if the ECB retains its hawkish tone and if we see more negative data from the US in the way of Wednesday’s ISM Services Report and Friday’s Payroll Report. It is still dangerous to buy at present levels for fear of a sharp reversal and positional traders may want to start looking at EUR/USD as medium term sell down value. Any rallies above 1.5250 are likely to attract strong selling pressure prior to the services PMIs on Wednesday. The first line of euro support is seen at 1.5160. Strategy: Sell on prices above 1.5250 with immediate downside price targets of 1.52 and 1.5170.

Sterling is virtually unchanged Monday, despite the CIPS Manufacturing PMI for February (at 51.3) printing higher than expected. The Bank of England may be expected to keep interest rates on hold when they meet this Thursday, but judging on how sterling is struggling against every major currency except for the dollar, markets believe the Bank of England is well behind the curve. If sterling is to stabilise, it must break the 2.00 dollar mark on cable because the pound is falling well behind its European rivals, each of which are recording new lifetime highs against the dollar on nearly a daily basis. In saying that, there is no value in selling sterling against the euro or the Swiss franc because the appreciation in these currencies looks overdone for now. Cable still offers the best value for sterling bears, while price remains below the 2 dollar line. Strategy: Sell GBP/USD on prices above 1.9920 with limit prices of 1.9820, 1.9780, 1.9740 and 1.9680. Place a stop loss above 1.9770 or 2.00.

The dollar fell to below Y103 today for the first time in 3 years and an imminent retreat to Y100 now looks on the cards sooner rather than later, particularly as risk concerns continue to dominate markets. Data out of the US Monday did little to perk up the mood, although the dollar has come off the low of Y102.60 hit during the European session. The euro also dropped to below Y156, before recovering to Y157. While concerns over the global economy and further narrowing in interest rate differentials will benefit the yen, any reprieve in global stock markets could trigger a sharp yen sell-off in the short-term, given the extent of recent gains. There is definite short-term value in buying the dollar against the yen on prices below Y103, even if there is the risk of further losses in the coming days. There is potential for the yen to extend its gains against the euro, over the medium term. It is notable that there have been few complaints from Japanese officials over the appreciation in the currency, so direct market intervention is unlikely for now.

Canada’s economy appears to be moving in the same direction as the US economy. Quarter 4 GDP stumbled to a miserable 0.2%, while the annualised growth rate at 0.8% was almost as bad as the 0.6% recorded in the US. To make matters worse, the year ended with a 0.7% contraction in growth, much worse than the -0.2% forecast. The stage looks set for a 0.5% rate cut by the Bank of Canada Tuesday and anything less at this stage will be taken as a sign of weakness and uncertainty on the part of Mr Carney, presiding over his first monetary policy decision since taking over a Governor on Feb 1st. Commodity prices are keeping the loonie inflated in value at present and speculators seem determined to bet on the commodity currency regardless of what disconnects there may be with the economy. Speculative long positions on the loonie grew by a net 17.3K last week on Chicago’s Mercantile Exchange, the highest this year. The Bank of Canada needs to be unflinching in the decision and statement it issues tomorrow. USD/CAD should rally to above parity in the event of a 50 basis points cut. Traders are advised to be ultra-cautious when trading the loonie because erratic and unpredictable movements, usually favouring the loonie, are regular occurrences of late. I prefer to buy USD/CAD and target 1.0050 in the event of a 50 basis points cut Tuesday.

Bob B - Mar 3

No comments: