Bob's Currency Focus - 15:00 GMT

As we close out a tumultuous week on financial markets, the dollar is lacking direction with traders as uncertain about the health of the wider global economy just as much as they are uncertain about what a US recession means for the country’s currency. The dramatic fall we have seen on Wall Street’s leading averages over the past 3 days is not a corrective downturn but more a true reflection of just where Corporate America currently sits not just in terms of economic performance / outlook but also how its value is seen in the eyes of investors. A disappointing economic report here and there is nothing when compared to the negative sentiment quarterly earnings reports published by Citigroup and Merrill Lynch have generated. Both banks made staggering losses of the order of $10 billion each - each the equivalent GDP of a small country. Citigroup alone had a write-down of over $18 Billion and with some analysts predicting the total write-down from the entire subprime debacle could top $300 Billion, it is clear there is plenty more bad news to come from the Financial Sector. Of course the subprime risk exposure spreads to banking institutions well beyond the shores of the US, so there are sure to be unpleasant surprises to come from other quarters of the globe. The wider global picture is now a very crucial issue for the fate of the dollar because if contagion from the US sours economic growth elsewhere and in particular if global stock markets remain under pressure (i.e. have entered a bear market), we could witness a major repatriation of funds back into dollar denominated assets and bonds and the dollar would appreciate significantly in the coming months against the European and commodity currencies, irrespective of what happens to interest rates.

EUR/USD
Today EUR/USD has been trading within the same range as Thursday, but again the euro has held the advantage for most of the day. US stock markets were expected to rally strongly Friday as a stimulus package from the Government is due to be unveiled by President Bush later today. A strong rally in stocks would tend to undermine the dollar as the rise in risk tolerance would trigger an outflow of funds that have streamed into the currency in recent days. The Friday session will probably be very volatile again and when looking at it in simple practical terms, it is difficult to understand why investors would want to buy into stocks today, a mere day after the shadow of a looming recession grew ever larger. There are no economic releases today to alter the recessionary outlook so the economic fundamental view of the world today should in essence be the same as it was yesterday. We could however see a strong surge in stocks initially, but there is a real danger of a late sell-off after the euphoria fades and grim reality returns. For that reason we could see the dollar struggle in the early part of the US session, but then rebound. Positioning for the weekend will important in the current climate, so after 17:00 GMT we should see higher than normal Friday activity in the currency markets. We may see the euro use the positive impetus generated from the US rescue package to try to take out 1.47 this afternoon but if Wall Street does not respond positively to the Bush stimulus plan, currency prices could return to where they were at this morning – EUR/USD 1.4620, while another sharp sell-off in stocks and rise in risk aversion could potentially trigger a dollar rally towards 1.4550. Strategy: Sell down on failed rallies from around the 1.4690 to 1.4720 price region. Limit target prices are 1.4635, 1.4610, 1.4590 and 1.4556.

GBP
Sterling came off 1.5 cents against the dollar as December’s retail sales out of the UK disappointed markets. The consensus was for a 0.2% gain during the holiday month following a 0.4% gain in November, but instead consumers kept their money in their pockets and sales declined by 0.4%. As well as raising greater concerns about the health of the UK economy, today’s report raises the prospects of an imminent interest rate cut from the Bank of England in February. Although inflation numbers this week printed higher than expected the change was marginal and UK consumer price inflation at 2.1% is relatively benign compared to the current inflation rates in the euro area and the US. The pound could come under stronger pressure later Friday if risk aversion levels rise and we could potentially see cable decline to the 1.9483 low seen earlier this month. A break below that level will shatter confidence and could ultimately lead to a decline all the way back to last year’s low just below 1.92 over the next week, particularly if global stocks continues to come under pressure, which will deter interest in high-yielding currencies like sterling. We maintain our bearish bias and prefer to sell cable on prices in the 1.97 to 1.98 price level. Today’s poor economic data has set sterling back against the euro with the pair revisiting 0.75. The UK currency has scope for further retracement against the single currency but will probably need a broader sell-off of the euro or renewed interest in higher-yielding currencies to help it. Strategy: Sell cable on prices above 1.97 with target prices of 1.9570 and 1.9540.

Yen
The yen has had a strong afternoon having been sold off aggressively this morning with investors betting a stimulus package announced by the US Administration Friday would lead to a strong rally on Wall Street, thereby reintroducing risk tolerance and putting the low-yielding currencies under pressure. The gamble proved to be misdirected however because as at 17:00 GMT the Dow leading stock average is down 0.51% having been up 1.5% 3 hours earlier. The dollar has declined to 106.88 against the yen from an earlier high of 107.59. The euro has fared worse, coming off a high of Y157.80 to currently trade at 156.35. Positional adjustment leading into the weekend will be important for the yen, particularly as Monday is a holiday in the US. As long as stock markets struggle, the yen will remain supported but a late rally on Wall Street will lead to the yen being ditched in favour of high yielding currencies. Trading around the yen is so erratic at present that it is dangerous to get involved, although any dollar prices around Y106 to Y106.50 look attractive bids, given the extent of recent yen gains, but entering the current market against the yen has significant risks. Strategy: remain on sidelines and await market stabilization, at which point buy EUR/JPY with target objective tba.

CAD
The loonie has settled Friday and managed to hold its own, but is coming under increasing pressure close to the 1.03 price mark. A close above that level Friday would put the loonie in a vulnerable position facing into next Tuesday’s Bank of Canada meeting. November’s retail sales numbers are released just 30 minutes before the Bank’s interest rate announcement Tuesday but are so close to the main event, they will prove largely meaningless. I expect the Bank of Canada to cut rates by 25 basis points, bringing the key interest rate for Canada to 4.0% and also to signal a possible further rate cut when the Monetary Policy Committee meets again in March. This will not be good news for the loonie and if commodity prices also decline next week, it will remove an important area of support and we could witness a spike to 1.05 in USD/CAD by the end of next week. Today’s report on manufacturing shipments which recorded a 1.1% rise in November looked impressive on the headline number but was rather less impressive when one delves into the detail of the report – the rise was thanks to the massive lift in petroleum and commodity prices during November. On the actual volume of shipments, there was no change between November and October. We will probably see a move to 103.50 ahead of Tuesday’s meeting, unless there is a broader sell-off of the greenback on Monday, when US markets are closed. USD/CAD remains the most lucrative of the major pairs to buy on dips and I remain a staunch bull on the pair. Strategy: Buy USD/CAD on dips towards 1.0220 with upside price targets of 1.03 and 1.0350. Positional longs following the trend should wait for initial price target of 1.05, with stop loss just below the parity line. We will review the positional outlook after the Bank of Canada rate announcement.

Have a good weekend!

Bob B - Jan 18

Bob's Currency Focus - 17:30 GMT

EUR/USD
The euro dipped to just below 1.46 early this morning only to return to 1.4680 by the US session and the single currency has had the edge in what has been another volatile trading session. A bounce in Asian equities overnight saw a dip in risk aversion levels Thursday which benefited the euro moreover the dollar, although US equities currently trade lower following a generally poor set of data releases, a frightening report from Merrill Lynch that it recorded a loss of just short of $10 Billion in the fourth quarter and a speech from Fed Chairman Ben Bernanke to the House of Representatives that highlighted further downside risks to growth projections for 2008 and nothing new on monetary policy. The housing report for today was a shocker, with Housing Starts falling by over 14% in December, against a 5% forecast drop and 2007 was the worst year for the housing construction sector in 16 years. The Philadelphia Fed Manufacturing Index plummeted to -20.9 in January, signalling the US manufacturing sector may have contracted much further this month, with manufacturing now joining housing as a depressed sector in the economy. US Jobless Claims was the only fragment of good news to emerge, with the initials claims rate falling by 21K in the latest week and hinting employment is holding up reasonably well thus far in January. The only piece of news out of the euro area was November’s trade surplus it narrowed to €2.6 Billion from a €5.2 Billion surplus in the same month in 2006. The dollar is lacking direction today as high levels of risk aversion is tending to support it while US economic data remains damning, particularly against the euro, with the ECB the only major Central Bank continuing to threaten rate hikes. Speeches from ECB officials need to be monitored closely over the coming days, because following comments from ECB member Mersch Wednesday when he talked up the downside risks to growth, there is a growing sense the ECB may be out of touch with reality in terms of its monetary policy stance. Expect trading to remain erratic and the risk in my view lies to the downside for EUR/USD with many major players reluctant to buy the single currency in current market conditions, given the large volume of euro long positions already in the market. There are no major data releases over the next 24 hours but equities need to be monitored closely to measure risk tolerance levels. Strategy: Sell EUR/USD on failed rallies towards 1.4770 and 1.4820. Trading will remain erratic into Friday and short stops will be taken out easily.

GBP
Sterling got a further bounce today, cable rising to as high as 1.9794 before retreating back towards 1.9725 at the time of print, yet sterling is still up a cent against the US currency, while appreciating 0.35% against the euro. The pound may struggle to hold onto those gains, particularly against the dollar, if Wall Street closes sharply lower as high yielding currencies will come under pressure overnight. There was no economic data out of the UK Thursday but Friday’s sees the release of December’s key retail sales number and if the figures disappoint, it will increase calls for interest rate cuts form the Bank of England and the pound will falter. The BRC retail sales index for the same month pointed to a sluggish consumer over the holiday period and lacklustre sales, so a downside surprise in the data Friday is distinctly possible. There remains scope for a further retracement in EUR/GBP to below 0.74. We maintain our bearish bias on cable however as the preferred trading approach. Strategy: Sell GBP/USD at prices around 1.98 with downside price targets of 1.9660, 1.96 and 1.9540.

Yen
The yen has had another up and down day and is largely unchanged against both the dollar and the euro on the day. Traders want to sell it, knowing it is overbought over the past week, but its movement is closely matching the movement in global stocks Thursday which have been pulling in both directions, but mostly to the downside since around 15:00GMT, when a disastrous manufacturing report and a speech on economic outlook from the Fed Chairman sent traders running for cover. The dollar went as low as Y106.50 at one point this morning but since then it has primarily traded between 107 and 107.50. The euro is virtually unchanged against the yen, managing to reach 157.86 during the afternoon, but then declining back to Y157. Stock markets have not stabilised and trading involving the yen remains choppy and erratic and is best avoided until we get a clearer directional signal. There remains a risk that EUR/JPY could dip to below Y155 and the dollar back to Y106, if Wall Street hobbles to the close and the negative sentiment follows through on the Asian session tonight. There is no data scheduled for release over the next 24 hours which can turn things around and Friday could prove to be another difficult day. Strategy: Wait for global stock markets to settle (Recovery across 3 consecutive sessions – i.e 24 hours period), then buy EUR/JPY. Stay on sideline for now.

CAD
The greenback rose to 1.03 Thursday for the first time since last September, to hit an important mark on the pair’s recovery. Trading however has been very choppy yet again, with the US currency unable to hold its gains for long, although it is being bought each time on dips to around 1.02. Data out Thursday revealed foreign investors withdrew C$4.84 Billion dollars out of the Canadian economy in November, on top of the record C$23 Billion withdrawn in October. Oil prices have declined by 50 cents thus far today, removing an important support element for the loonie. The loonie only succumbed to the greenback after Fed Chairman Bernanke’s speech to the House of Representatives today was published, which revealed the US economy may be in worse shape than previously thought. A major US slowdown or recession is bad for Canadian exports and to be more competitive in such an environment, the Canadian economy would be helped by a weaker currency. Price direction all this week has been driven by risk tolerance levels and the Bank of Canada meeting next week has largely been off the radar for many preoccupied traders. Given the Bank are likely to cut Canada’s key interest rate by 25 basis points at this meeting, there remains considerable downside potential for the loonie between now next Tuesday. Attempts by the loonie to return the US dollar to 1.02 will meet strong bid orders and it will not be a surprise if the greenback establishes itself above 1.03 going into the weekend. The loonie strengthened significantly against the euro this morning, only to give back 2 cents as the day progressed when it came under increasing pressure. Friday’s sees the releases of November’s manufacturing shipments report but it is unlikely to have any great impact. Strategy: Buy USD/CAD on dips to or below 1.02, with limit prices of 1.0270, 1.03, 1.0350 and 1.04. Those long on USD/CAD should hold their positions and maintain the target price of 1.05. The stop loss can now be moved from 0.97 to just below parity, given resistance at 1.0250 has now given way.

Bob B

Bob's Currency Focus - 17:30 GMT

EUR/USD
What a volatile day for currency traders and particularly for those trading the euro/dollar pairing, which took a hammering. There is no single reason we can put our finger on for the dramatic sell-off we have witnessed, which has seen EUR/USD fall from a high of 1.4860 early this morning, to a low of 1.4593 in the past hour. The euro in fact started coming under pressure against sterling and the yen late last night and when EUR/JPY established itself below Y160 and the yen continued to rally aggressively across the board this morning, the euro, with the largest ratio of long to short open contracts of all the majors, suddenly looked vulnerable. Panic selling has set in and with the euro having broken below key support at 1.4630, we could see the pair attempt to retrace all the way back to the 1.4318 low we saw in early December. Ongoing instability on the world’s stock markets will play on the nerves of those traders currently holding euro long positions and the longer this plays out the more risk evident to the downside for the euro and there may be a growing acceptance that 1.50 is not going to be achieved in these market conditions. Today’s US inflation data was worse than expected, much worse when one takes into the equation the fact retail sales declined in December and consumer confidence was running at record lows. The annual core inflation rate has risen to 2.4% while the headline inflation rate closed out 2007 at 4.1%, a 17 year high. Those analysts who have been calling for a 75 basis points rate cut from the Fed need to think again, while Fed committee members themselves need to be extremely careful in terms of what they promise markets and what they subsequently are able to deliver. Bernanke is playing a very dangerous game in telling markets the Fed is prepared to cut rates aggressively, thereby allowing markets to price in aggressive cuts and then demand even more from the Fed before the FOMC has even met, and before the Fed itself has had time to examine the current level of inflation risk. Outside of the inflation data other economic prints Wednesday proved positive for the dollar, with the Treasury International Net Capital Inflows for November rising to a handsome $150 billion, while Industrial production for December was reported flat, slightly better than the marginal 0.1% decline which was forecast. Also, US crude inventories last week rose for the first time in 2 months, a surprise reading which helped to shave $2 off the price of a barrel of oil this afternoon, supporting the dollar. In the euro zone, consumer price inflation for December was confirmed at 3.1%, the same as the preliminary forecast earlier in the month, so this had no market impact.

If the pair closes tonight below 1.4630, the pair will move into Thursday in very bearish mood. Traders need to remember however that we are not in normal trading conditions and sudden events in the current climate can move prices dramatically, in either direction. Strategy: Sell on break below 1.4590 with limit price of 1.4460, ahead of further limit target of 1.4340. Otherwise wait for upside rally before selling down on prices close to or just below 1.4770. We could be in for a further volatile trading session Thursday and housing data out of the US at 13:30 GMT will need to be watched closely.

GBP
Sterling made significant inroads on EUR/GBP Wednesday, sending the euro back below 0.7450 after the pair had hit 0.7610 at one point on Tuesday. UK wage earnings rose 4.0% on the year in the 3 months to the end of December and while above the 3.9% forecast, the figure is probably not strong enough to dissuade the Bank of England from cutting rates when it meets in February. The data from the UK thus far this week has come in better than expected for sterling, which explains why the currency has stabilised against the dollar and has now appreciated against the euro. EUR/GBP has the potential to retrace back as far as 0.7350 and the best chance of this happening quickly is if the euro continues to sell-off against the US dollar. I remain a sterling bear and am restricting my trades to GBP/USD at what look like attractive entry prices. We have not quite reached 1.9750 in recent days but have come close to 1.9730, which is also an attractive entry level. Strategy: Sell cable at prices above 1.9720 with limit target prices of 1.9580 and 1.9540.

Yen
The yen broke through all technical barriers Wednesday as it rushed to a near 3-year high against the dollar and sent the euro back as low as Y156.50. All the doom and gloom that is sending stock markets running for cover is good news for the low-yielding yen, a currency which thrives on bad economic news and recession fears. Tuesday’s nosedive on Wall Street was followed by a similar downward spiralling move on Asian stocks overnight and by early in the European session the dollar was briefly trading just below Y106. The dollar has since rebounded to Y107, but the pair broke below resistance at 106.50 and the next major milestone for the pair is Y105. If risk aversion levels stay elevated and stocks continue to struggle, Y105 is possible within the next couple of days. The speed of the yens appreciation since the turn of the year will frighten Japanese exporters and markets need to be alert for any comments on the currency from Japanese officials. Y105 now looks to be a critical level, but the yen will come under immediate selling pressure at current prices each time there is the semblance of a positive rally on global stock markets. The euro’s dip today has seen EUR/JPY retreat to below Y157. If there is not a rapid recovery for this pair, the euro could potentially fall to as low as Y155 tomorrow. Strategy: Await stabilisation of stock markets and reduction in risk aversion levels and then buy EUR/JPY. We will watch this pair closely over the coming days.

CAD
We finally saw the greenback break through key resistance barriers at 1.0222 and 1.0248 early Wednesday but the loonie has traded in very volatile fashion all day and appears to be gaining strong support from somewhere, which has seen USD/CAD trade in whiplash-like fashion all day, between 1.0152 and 1.0286. Many bears do not seem prepared to give up the gauntlet without a fight, but bulls use these erratic trading conditions to their benefit, by exiting with profits and re-entering when the price dips. There is no major data out of Canada before next Tuesday’s Bank of Canada rate announcement and as we get closer to that day, the number of sellers of USD/CAD should begin to thin with a rate cit and a dovish policy statement on the day almost a certainty. Commodity prices have come off quite sharply in the past two days but the loonie has largely managed to hold its own, but with pressure likely to intensify on the commodity currencies against increasing concerns of a global economic slowdown, the loonie should weaken. A bounce on Wall Street tonight could send the loonie higher, but from tomorrow focus will being to shift onto the Bank of Canada’s meeting next Tuesday and I expect support for the Canadian currency hard to come by. I keep the bullish bias on USD/CAD and recommend buying dips towards 1.0150, but now moving the upside target prices to 1.0250, followed by 1.0280 and 1.03. We won’t yet move the S/L from 0.97 on the longer-term long positions, but maintain the current target price of 1.05.


Bob B - 16th Jan 2008

Bob's Currency Focus 17:30 GMT

EUR/USD
The euro has broken above the year’s high Tuesday and now looks dangerously poised just below the lifetime high of 1.4966, for a possible challenge of the psychologically important 1.50 price handle. The dollar was damaged by a report from Citigroup, the largest bank in the US, that it was forced to write down $18.1 Billion in mortgage losses and reported a quarterly loss of $10 billion, the single biggest loss in the company’s near 200 year history. To compound the dollar’s problems, a separate report showed retail sales declined by 0.4% in December, following a downwardly revised 1.0% gain in November. Core producer prices in the US matched the forecast and rose 0.2% in December, keeping the annual core rate at 2.0%. The headline producer prices rate fell by a marginal 0.1% in December against an expected 0.2% rise. Producer prices are notoriously volatile though and markets will look to consumer prices Wednesday for a true gauge of where US inflation stands at the moment and what wriggle room the Fed has when it meets later this month. Economic data from the euro area Tuesday was also poor with Germany’s key Zew business sentiment index declining by more than expected to -41.6, over 72 points below the historical average. The Zew index for the euro economy also declined as did the current condition index for both the German and euro area economies. Markets are notoriously slow to respond to weak euro zone data and the Zew survey result had practically no market impact, with euro trading still dominated by hawkish comments from the ECB last Thursday. The dollar did manage to push the euro to as low as 1.4830 this morning, but couldn’t hold this price level and price has since reversed by over 80 pips. The dollar might be able to hold the euro back until Wednesday’s consumer price data release, a report which should determine what policy action to expect from the Fed when it meets later this month. I expect to see price fenced in between 1.4830 and 1.4950 between now and then and if you are entering a sell order, your stop should be tight above 1.4966 as any break above this price could trigger an aggressive move upwards. Strategy: short run trades should continue to sell down on failed rallies, once price remains entrenched below 1.4966. Immediate target prices are 1.4860, 1.4820 and 1.4770. If 1.4966 gives, shorts should await a peak in price before re-entering the market.

GBP
We called for a rebound in sterling yesterday and Tuesday we have seen it, even if the consumer price inflation figures came in close to the consensus. The annual inflation rate rose marginally to 2.1% in December from 2.0% in November, but they remain significantly more benign than current inflation rates in the euro area and the US. One must wonder if the Bank of England had something else on its mind last week when it chose to hold off on cutting rates again, but I expect more than one member of the MPC voted for a cut. We will need to wait until the minutes are released next week to find out for sure. Wednesday sees the release of the UK employment data and the key indicator will be the total earnings figure (including bonus). Earnings for the 3 months to the end of November is expected to come in at a 3.9% annual rate and sterling will be hoping for something above 4% to give it some added impetus and momentum. We have witnessed a retracement of sorts today on both cable and EUR/GBP, but sterling needs to hold onto most of these gains if it is to sustain its mini-recovery. Cable prices approaching are above 1.9750 will attract selling pressure, with key resistance seen at 1.9850. The euro gave up as much as 0.86 pence today against sterling before recovering somewhat to 0.7550. There remains far more value in EUR/GBP than on cable for those contemplating buying the pound as a correction should stretch back to 0.75 at least. I myself prefer to continue to sell cable on failed rallies to around 1.9750, as the medium-term outlook for sterling remains bearish. Strategy: Sell cable on prices close to or above 1.9750, with limit prices of 1.9550 and 1.95.

Yen
The yen has had another spectacular day Tuesday with broad-based losses across global stock markets triggering a major liquidation in riskier assets, in turn leading to major gains for lower yielding currencies. A bad night on Asian markets overnight was followed by major dip on Wall Street after US economic data raised fresh recession fears. The dollar collapsed back to as low as 106.62 at one point (lowest in two and a half years), before recovering modestly to 107. The euro also fell sharply against yen, collapsing to below 159, as the yen wipes the board with all the major currencies in a topsy-turvy trading session. I mistakenly believed yesterday that a rally in European and US stock would lead to a yen depreciation overnight and this just demonstrates the current level of unpredictability in trading the Japanese currency in the current market climate. I still think we will see a major retreat by the Japanese currency once some form of sustained stability is established on global stock markets. Asiain stock are likely to come under pressure again tonight, so the yen could in fact extend its gains by the time we reach the European session Wednesday. Strategy: Wait for risk aversion levels to weaken before shorting the yen against the euro. We need to have 3 successive positive sessions (Asia, Europe and US) on stock markets before being able to gauge that risk aversion is in decline.

CAD
The loonie has done spectacularly well Tuesday, holding its own on a day when commodity currencies have generally been trounced, as risk tolerance levels dipped severely during the US session. The greenback’s failure Monday to break above 102.20 has given fresh hope to USD/CAD bears who hope the pair could still be destined to resume a downward trend. The loonie however faces a difficult next week, with no category A economic releases scheduled ahead of the Bank of Canada’s rate decision next Tuesday. With further weakness evident in the US economy and every major report out of Canada since the turn of the year disappointing to the downside, a rate cut looks assured next week. It is going to be increasingly difficult for the loonie to gain sustained support as the week progresses, unless there is a broader capitulation of the US dollar across all currencies. If one looks back to when the Bank of Canada last met in early December, one can see the loonie was trading at much the same price then as it is today. For this reason, we can argue that a rate cut is not fully reflected in the loonie’s current market price, chiefly against the US dollar. Oil prices and commodity prices in general have fallen pretty sharply today so it is difficult to know where the loonie’s support is exactly coming from, but it is likely to be temporary. Strategy: Buy USD/CAD on dips towards 1.0130 with limit target prices of 1.0190 and 1.0120. If we see a sustained break above 1.0222 limit prices should be moved to 1.0250 and 1.03. Those that remain long on USD/CAD and are in for the longer run should keep their S/L at 0.97 with a limit price of 1.05.


Bob B - Jan 15

Bob and Ted's EUR/USD Outlook for week

Bob
This is a big week for the dollar as it defends its lines against a bullish euro which is seeking to reach the monumental 1.50 price level against the US currency for the first time ever. There are a lot of key data releases on the calendar, with downside risks for the dollar stemming from Retails Sales figures on Tuesday and Housing data Thursday. However the most important indicator on the calendar is Wednesday’s consumer price inflation numbers for December, which will give an indication as to just how much scope the Fed actually has for cutting interest rates. A 50 basis point cut at the end of January is a given at this stage, with Fed funds futures even pricing in the unlikely prospect of a 75 basis point cut. Either way it is difficult to see how the euro will not appreciate further against the dollar in a scenario where US interest rates are going to go lower than those in the euro zone at the end of this month and go significantly lower in the months to come. It now appears certain US interest rates will fall to at least 3.5% (and possibly to 3.25%) by March, while euro zone rates will remain on hold at 4.0% (or rise to 4.25%, if the ECB is to be listened to). That is a swing of at least 75 basis points to the euro on rate differentials from the current position and with further downside risks evident for the US economy, I believe the euro should be able to establish a period of trading above the 1.50 price level through much of the first quarter of the year. The dollar has essentially nothing going for it against the euro and with calls this week from Saudi Arabia’s largest bank for a removal of that country’s dollar peg, this adds further immediate pressure on the embattled US currency. We should see plenty of volatility this week, particularly if the euro gets close to the lifetime high at 1.4966 and edges towards the 1.50 price line. A convincing break above 1.50 could blow away all resistance that lies above this key level and we could rapidly witness a move near to 1.52. Central Banks have not issued any concerns about the euro’s lofty price level, so the chance of any market intervention from this quarter is pretty remote. The key days for price action are Monday through Thursday and upside targets are 1.4870, 1.4910, 1.4950, 1.4980, 1.50 and 1.51. Support will come at 1.4820, 1.4770, 1.47 and 1.4630.

Ted
This is an important week for US data and one which could decide what the Fed does when it delivers its first policy announcement of the year at the end of January. Markets have fully priced in a 0.5% cut this month with up to a further 75 basis points in cuts expected in the coming months. The Fed probably won’t disappoint in January, especially following Mr Bernanke’s dovish statement last week, but looking further ahead, the futures markets may be overly ambitious in terms of the level of easing it is pricing in. There is very much an inflation problem in the US and while all the focus has been on downside risks to growth, if inflation ticks up over the next couple of months the Fed’s hands will be tied in terms of how much it can ease in the current cycle. In fact justifiable criticism can be directed at the Fed for playing a high risk strategy, where it has parked inflation concerns in an environment where oil prices have risen 50% and reached $100 a barrel, during the short 4 month period in which they have been easing interest rates. The Fed’s biggest mistake was to give the market 50 basis points last September, something that sparked a false rally in equities and commodities, bringing equities to unsustainable levels, but oil prices have remained elevated ever since. Were the economic slowdown we are now experiencing primarily contained to the US, the Fed’s current policy would fail spectacularly, because the dollar would depreciate even further against its major rivals, global energy costs could continue to rise and oil and import inflation would put major pressure on US consumption and force the US economy into a sustained period of stagflation. It is a very dangerous balancing act the Fed has to undertake. This week’s consumer price data on Wednesday is critical for the fate of interest rates and the dollar. Also important in terms of market sentiment will be the Retail Sales number on Tuesday. A poor retail sales result will heighten concerns about the economy, although regardless of what the number prints, it is not going to change how far the Fed can go at the end of the month and by consequence what the market has already priced in. We will begin to see a growing realisation in coming weeks of a wider global slowdown and not just a US one, and this should help the US dollar against the euro. This week will be a difficult one for the dollar, with soft data expected for some key performance indicators, but if commodity prices come under serious pressure we could see a shift back into US assets which will boost the currency. The more evidence of a global slowdown we get, the more dislocated ECB monetary policy will begin to look and the heretofore teflon euro will become vulnerable. The dollar must hold the 1.4966 level this week and if it does this against a backdrop of weak US data, it will prove that resistance at 1.50 is quite formidable. Holding the lines might spark a sharp reversal, with a break below 1.4630 opening the way for a ner-term move back to 1.45. Downside targets are 1.4830, 1.4780, 1.47, 1.4640 and 1.4590. Key resistance points are 1.4966 and 1.5010.

Bob and Ted

Bob's Currency Focus - 15:30 GMT

EUR/USD
The dollar plummeted overnight and in early European trading, with the euro moving to 1.4913, only half a cent shy of the all-time high set back in late November. Trading was light during the Asian session with markets in Japan closed for a holiday and the thin trading conditions were used as a vehicle to hammer the dollar, as a now common yet unfounded rumour of an inter-meeting rate cut from the Fed spread across global markets and instigated a fresh wave of negative sentiment against the greenback. To deliver an interest rate cut ahead of a meeting scheduled for just 2 weeks away would be an act of unprecedented madness by the Fed. Such a move would only serve to undermine the economy further - effectively being a confession from the FOMC that the economy was now in recession. Do not expect the Fed to act before the scheduled FOMC meeting later this month, although economic data this week, in particular Retail Sales on Tuesday and Housing Starts on Thursday, is unlikely to deliver any positive news. The euro is riding the crest of a wave, not a wave earned by stellar economic performance on the part of the euro zone, but rather a wave borne out of Central Bank rhetoric and general market acquiescence to an ECB policy mindset and outlook which is diverging more and more from the policy mindset and outlook adopted by the Fed. One of these Central Bank outlooks is very wrong of course, particularly in respect to the outlook on inflation, and we probably won’t need to go beyond this quarter before learning to which side the plaudits will come.

Having seen the euro rocket up to 1.49, markets will now want to push the pair past the lifetime high of 1.4966 and challenge the 1.50 price line. With momentum on its side, the euro will need to breach that level this week, otherwise the pair will swing the other way, perhaps sharply, as traders who are currently long on the pair, exit their positions, in a belief the euro may have peaked for now. On the economic data side, euro zone industrial production fell 0.5% in November, slightly better than the forecast decline of 0.8%, and thus the report had no market impact. There is no data due out in the US Monday, but Tuesday sees the release of December’s US retail sales numbers, while in Europe the monthly Zew business survey will be important for the euro. If the euro closes near to 1.49 today in New York, we could see an early push for the 1.4966 lifetime high on Tuesday, while any fast breach of the 1.50 handle is likely to trigger a wave of fresh protests from European politicians and possibly raise the faint prospect of some form of ECB market intervention. It is very dangerous to buy the euro at current price levels, particularly as the euro is also massively overbought against sterling and a sudden reversal in the fortunes of the single currency is a very real risk. Longer run players should be looking to the current price as a sell opportunity. Strategy: Short-term sell on failed rallies (where the euro fails to take out 1.4966) with targets of 1.47 and 1.4650.

GBP
Sterling has struggled Monday against its European counterparts and the yen, although cable remains little changed from Friday. Despite higher than expected output prices reported for UK producers in December, which raises inflationary concerns, a report from the Department of Local Government which said annual growth in UK house prices slowed to 9.5% in November from 11.3% in October, suggests a marked slowdown in the housing sector remains the major downside risk for the UK economy this year. The euro rose to above 76 pence for the first time ever this morning while sterling also fell to below 2.14 against the Swiss franc. EUR/GBP is massively overbought at present and with the euro having advanced by 10% since November, a major correction in the pair is overdue. I remain medium-term and long-term bearish on sterling but there is no value in selling the currency at current market prices. In fact sterling could get a significant temporary boost Tuesday if UK consumer prices surprise to the upside, thereby lending some justification perhaps to the Bank of England’s ‘in the end surprising’ decision to keep interest rates on hold last week. There is a further risk event for sterling before that however, when the latest RICS monthly survey on house prices is released just after midnight. This is a big week for UK data as after Tuesday’s CPI data, there is employment data Wednesday and Retail Sales numbers Friday and sterling’s immediate fate for the next 2 weeks will be decided by how all these numbers print. Strategy: sterling shorts should wait for a more attractive price on cable (above 1.9750). There is some value in short-term selling of EUR/GBP at prices above 0.76, with a retracement back to at least 0.75 likely in the short-run, unless UK data prints very negatively for the pound.

Yen
The yen rallied strong in early trading Monday as risk adverse traders reacted to Friday’s dismal close on Wall Street and others took advantage of an absence of Japanese exporters (Japan’s markets were closed overnight for a holiday), who may have sold the currency to keep its value down. The euro dropped to below Y160 briefly while the dollar spent most of the day trading below the Y108 price handle, going as low as 107.37 at one point. A broad rally across stocks in Europe Monday and in early trading in the US has seen the Japanese currency since retreat and direction for the remainder of the day will depend on how the Dow performs this evening. I maintain my view that EUR/JPY offers value in terms of buying (the only euro cross in which there is some value in buying the euro), particularly with stock markets due for a sustained rally, which could happen this week. Japanese markets return to the fray this evening and with no key economic data due for release, a follow-through upaide rally in Asian stocks tonight would force the yen lower. Strategy: Buy EUR/JPY at prices close to Y160 with limit targets of first Y162 and then Y163. Place a Stop below 159.80.

CAD
The loonie has had a year to forget thus far and is now trading at 1-month lows as it had given up all of the gains it made over the thin holiday trading period. Friday’s employment report was the last key release ahead of the Bank of Canada’s rate announcement next Tuesday and with this week’s data out of Canada all belonging to the second tier, the consensus for a rate cut next week should build as the week progresses and in this situation the loonie is going to struggle. It is only broad US dollar weakness Monday which has saved the loonie from depreciating further today, although the Canadian currency has plunged lower against a soaring euro. If the greenback makes a recovery across the broader basket of currencies expect USD/CAD to quickly challenge 102.22, which is now a critical price barrier in terms of where the pair goes next. The Bank of Canada released its quarterly business survey today and while capacity constraints remain a considerable issue, of more importance was the fact a growing number of company respondents expect inflation to soften further through 2008, an outlook which strengthens the Bank of Canada’s case for an immediate rate cut on January 22nd, possibly followed by one more cut this quarter. The greenback found support at 1.0150 this morning and this now serves as a viable entry point for USD/CAD longs. Strategy: Short-run, buy USD/CAD on dips towards 1.0150, with stop loss below 1.0130. Limit price targets are 102.20 and 102.50. Longer-term positions should remain long, with S/L at 0.97 and limit price of 1.05. S/L for these longs may be moved to parity, once 102.50 is convincingly broken to the upside.


Bob B