Monday, July 21, 2008

Bob's Currency Focus

Holding in a tight range since last Tuesday’s surge to a new lifetime high. The pair peaked at 1.5906 today before declining to the 1.5850 price range, the equilibrium price for the pair over the past 4 trading days. With no data to direct price, the pair is practically in limbo today, although there remains a decidedly bullish tone as every dip in price is met with a rapid recovery. It is disheartening for dollar supporters to see that 3 days of a rally in stocks and a sharp sell-off in oil has failed to muster any rally whatsoever in the greenback and it seems the market is only interested in news that can justify sinking the US currency further. We are at a very important junction for the pair and the next move up or down could prove critical for how this pair trades through the rest of the summer. The dollar has to send the pair below 1.5750 and push towards 1.5610, otherwise another rally towards the lifetime high of 1.6025 looks certain over the next week. There are a few important indicators out in the euro zone this week, including the German Ifo business survey and preliminary readings for the manufacturing and services PMIs. These could surprise to the downside and pose some risk for the euro. It has been remarkable how silent the ECB has been over the past week in response to the recent run-up in the euro and softening economic data and this may be taken as a signal the ECB is not at all uncomfortable with the current high value of the single currency. There was ample opportunity over the past week for ECB officials to take the steam out of the euro’s rally, but it failed to do so. However, the recent rally in the pair has been wholly because of problems in the US banking sector and if risk aversion abates over the course of this week, the euro could give back most of those gains. While confidence in the US economy remains low, the euro will remain well bid and the dollar will struggle to make much progress, regardless of how the data prints. The dollar must break below 1.780 and hold below this level before we can talk about a possible reversal of sorts. On value grounds, it is worth selling at prices close to 1.59, although traders need to be aware the market may be seeking to push the pair back above 1.60 in the short term.

Sterling continues to hold its own and cable is trading on Monday in exactly the same range as on Friday last, while the pattern is identical, an early dip in the morning to 1.99 before a recovery to 1.9970 in the afternoon session. Sterling is benefiting from a temporary flow of funds into the currency and this should not be mistaken for a reversal in trend. The economic fundamentals out of the UK keep getting worse and this morning Rightmove reported house prices fell by 1.8% in June. There are a number of key releases this week in the UK, starting with Wednesday’s BoE minutes, followed by retail sales on Thursday and an advance print of quarter 2 GDP on Friday. Markets have essentially priced in a very hawkish MPC but if Wednesday’s minutes show Committee members to be more concerned about declining growth than rising inflation, then sterling could sell off very sharply. Sterling offers no value on prices near 2 dollars, even if the pair temporarily shoots above this level. When markets regain some confidence in the US currency, sterling will be an immediate target of market traders. If UK data prints on the poor side this week, the euro might also rise to above 80 pence and possibly gain some momentum to see it close in on the record price near 81 pence. I would wait until after Wednesday’s minutes before entering the market on sterling, as it in itself could trigger some very volatile trading and we will be in a much better position to judge sterling’s prospects after we have had an insight into the thinking of MPC members.

The yen fell to a record low against the euro Monday as risk tolerance levels rose thanks to 4 consecutive rallies in global stocks. The pair hit a high of 169.90, which is an extraordinary price when one considers the market panic that followed the Fannie Mae and Freddy MAC mortgage crisis in the US early last week. The euro’s price is totally exaggerated and one could do worse than sell the EUR/JPY down at the current price around 169.50. If the current rally in stocks proves to be a false dawn and risk aversion levels rise again, the yen will gain very quickly. In addition, the euro has a number of economic risk events this week, which could send the single currency lower. Economic data out of Japan will not have a market impact this week and with the calendar in the US, also on the light side, the yen’s fate against the greenback will very much depend on the performance of US stocks. There is definite value in selling down, if prices rise close to 108, as the pair actually hit a low of 103.78 last week, and the pace of the dollar’s rapid recovery might prove to have been premature.

The Loonie has taken on a firmer tone on Monday and has made modest gains across the board, against all major currencies. There was no economic data on Monday to influence the currency, although a rebound in commodity prices has offered some support. The market has been reluctant to see the loonie break parity against the greenback over the past week, but an upside surprise in Tuesday’s domestic retail sales could be the trigger the Canadian currency needs. Also this week we have got the latest consumer price inflation report on Wednesday and here again, another higher than forecast print, especially in the core rate, should send the loonie higher. The loonie should also be able to appreciate to at least 1.58 against the euro, while the currency would also benefit from any sustained rally in the US dollar, against the other majors.

Bob B - Jul 21

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