Thursday, April 17, 2008

Bob's Currency Focus - 14:30 GMT

The euro dipped quite sharply in a short space of time (shedding a cent and going as low as 1.5848) earlier today but it has since bounced back to over 1.59 and remains within striking distance of the record high of 1.5980 set this morning. The market seems determined to push the pair to 1.60 and it might be wise to wait until the pair peaks before planning any directional trades. A sharp retreat is overdue, but the momentum caused by a push to 1.60 could see the upside rally continue to 1.62. A failure to breach 1.60 over the coming days could lead to decline to 1.5680 by early next week. There was further hawkish rhetoric from the ECB’s Axel Weber earlier Thursday, who suggested the ECB may need to do more to keep inflation under control. Weber also suggested the strong euro was not having a dampening effect on the German economy. Weber is the most notorious of the ECB hawks however and his views cannot be taken as being representative of the wider governing council of the ECB. Elsewhere today jobless claims in the US rose by 17k last week, in line with expectations. Merrill Lynch’s worse than forecast quarterly 1 earnings report will test the resolve of Wall Street today, which rebounded strongly on Wednesday, despite worse than expected housing data. Expect the euro to keep the pressure on the dollar today and don’t be surprised to see a push through 1.60, especially if the Philly Fed manufacturing index, due at 14:00 GMT, comes in way lower than forecast. There is no value in buying the euro at the current price given the risk of a sharp pullback, but there is merit on buying on dips back towards 1.5750, until such time as a medium-term peak looks to have formed.

Sterling rallied strongly Thursday on speculation the Bank of England and mortgage lenders are close to agreeing a proposal to help ease the credit crisis in UK financial markets. The pound pushed the euro back as low as 0.8009 after the single currency earlier almost hit 81 pence for the very first time. Sterling is also back above 1.98 against the dollar, up almost a cent on the day. The bounce may prove to be temporary as the underlying fundamentals have not changed and the UK economy looks particularly vulnerable right now. I can see the euro rising to 83p or 84p in the coming months as the Bank of England are likely to continue to cut interest rates, probably in successive months, while the ECB remains on hold. With inflation remaining flat and house prices moving sharply lower while retail sales are also under pressure, the odds of a further rate cut from the Bank of England in May have increased this week. Sterling offers little value on prices above 1.9850 against the dollar and with the 7-week support at 1.9650 having given way this week we should see cable drift back towards the 1.96 price level over the next couple of days.

The yen took a hammering over the past 2 days, particularly against the euro, with the single currency rising to above Y163 for the first time since Jan 2nd. A 2-day rally in stocks has helped fuel the sell-off, although a general feeling that the global credit crunch is easing is accelerating the yen’s retreat each time stock markets start to climb higher. A certain level of complacency has crept into EUR/JPY and traders who are long in this market need to be on their guard because the fundamentals would suggest the yen is the one currency the euro should not be appreciating against. The US dollar rose to above Y102.50 today and although stocks have since gone into decline thanks to a poor earnings report from US broker giant Merrill Lynch, the pair is still holding above Y102. There is considerable potential to the downside for this pair, particularly if Wall Street has a bad day and the Philly Fed business index, due later today, prints sharply lower than forecast. AUD/JPY is proving itself to be the most reliable of the yen carry pairs but it looks over-priced right now. The pair is worth looking at in terms of buying when prices dip to around 93 again.

Headline consumer prices fell to their lowest rate since January 2007 in March (1.4%) while the core rate fell to the lowest annual rate in 3 years (1.3%). Outside of Japan, Canada is the only major country where inflation is not currently a problem. Indeed, having slashed interest rates by 100 basis points already and against a backdrop of record oil and commodity costs, the Bank of Canada may not so much be concerned with inflation, as deflation. It is clear the strong Canadian dollar vis-à-vis the greenback is having a negative impact not only on the competitiveness of Canada’s exports, but also on the competitiveness of domestically produced goods for the domestic market. A further rate cut from the Bank of Canada next Tuesday is a certainty and the probability is that Governor Carney will once again opt for an aggressive stance, i.e. cutting rates by 50 basis points. USD/CAD offered a great buy price when the pair dipped below parity shortly after the CPI data release. With the prospect of an aggressive rate cut on Tuesday next, we could see the greenback rise to take out 1.03 next week, but only if the US currency is able to halt its broader decline. Commodity prices need to be watched closely because this is offering protective support to the loonie. Any sudden collapse in oil or industrial metal prices will see the loonie come under significant selling pressure. Look to sell the loonie on any dips back towards parity with upside price targets of 1.01, 1.0170, 1.0220, 1.0270 and 1.03.

Bob B - Apr 17

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