Tuesday, April 15, 2008

Bob's Currency Focus - 14:30 GMT

My apologies for the long absence, but Bob broke his wrist and had been unable to do the updates for the past number of weeks. He has now returned and the frequency of articles should increase to at least one every 2 days.

The unpopularity of the US dollar continues and the euro is beginning to look comfortable above 1.58, meaning a rise to above 1.60 now appears more probable than not. This morning’s much poorer than expected ZEW survey for Germany did not lead to any major euro sell-off although it did temporarily stall the single currency’s upward momentum. The firm stance being taken by the ECB is outweighing data prints at present and with the G7’s limp statement being all but ignored, traders are queuing up to buy the euro on dips. The dollar needs to quickly push the pair below 1.57 and hold below this level, if the euro is to be prevented from hitting further lifetime highs this week. While dangerous to buy the euro at the current elevated prices from a positional perspective, there is certainly value in buying on dips, employing relatively tight stops. Tuesday’s producer prices came in higher than expected in the US but this is unlikely to deter the Fed from cutting rates further, given the Fed has put concerns about inflation on the back burner. US markets did get a boost though from a surprisingly positive reading from the New York Fed manufacturing survey for March. Meanwhile oil prices have climbed to yet a fresh record, with Nymex crude trading above $113.50 for the first time. This can be put down to the weak dollar and the fact confidence in the US currency is at an all time nadir. Look to buy on dips towards 1.5680 and 1.56. There is some value on selling at prices above 1.5870, placing a stop above the lifetime high of 1.5912.

Sterling got trounced by the euro Tuesday as new economic reports out of the UK point to a sharpening downturn in the British economy. The RICS house price survey for March reports prices are falling at their fastest pace in 30 years, while the British Retail Consortium reported UK retail sales declined on a year on year basis in March, the first time this has happened in over 2 years. Annualised Inflation meanwhile was flat in March, printing at 2.5%, the same rate as in February, despite rising energy costs. The deteriorating situation is likely to increase the chances of a further rate cut from the Bank of England in May. While sterling is going to struggle, there appears little value in buying the euro against the pound on prices above 0.8050. It is certainly worth selling down cable on rallies above 1.9850. We could see cable fall to 1.95 before the end of this week.

The yen is more on the defensive Tuesday as risk tolerance levels rise thanks to European stocks rallying to the upside for the first tine in 5 sessions. The Japanese currency slipped against the dollar, while the euro is trading above Y160 for most of the day. The yen’s movement will continue to follow the fortunes of stock markets, but any slide back towards Y100 against the dollar would offer a reasonable buy opportunity on USD/JPY, given stocks have retreated for 5 consecutive days and may be due a relief rally. The euro offers little value above Y160 in the current market and I would be inclined to sell down EUR/JPY on any advances towards Y161.50. The euro is the only major currency not to have declined significantly against the yen in recent months and there remains the risk of a sharp decline to Y145 in the coming months, if the ECB is finally forced to signal monetary easing is on the way.

The loonie is the only major currency to have fared worse than the dollar over the past month and this has occurred despite record high oil prices, a rebound in Canadian exports, a stable housing sector and a solid labour market. It is the first of the commodity currencies to have been driven backwards in a meaningful way and while traders decoupled it from the dollar this time last year, when the loonie began its incredible 6-month 26 cent rally against the greenback, the Canadian currency has once more been coupled with the fortunes of the US economy, as the outlook for Canada is seen to be maligned by a US recession. Any trader watching USD/CAD closely in recent weeks will have recognised that the pair has become the most range-bound pair in the pack. We have seen sizeable moves between 1.0030 and 1.03 on almost a daily basis and the impetus favours the upside, so the pair should be bought on dips, particularly towards or below 1.01. It is difficult to see the greenback making any headway above 1.03 unless there is a broader strengthening in the US currency.

Bob B - Apr 15

1 comment:

Anonymous said...

welcome back!