Bob's Currency Focus - 16:00 GMT

EUR/USD
There were unconvincing attempts to push the euro higher Friday as the currency tried to retrace some from one of its worst weeks ever against the greenback. The single currency is down 3.5 cents this week and down over 4.5 cents from the heights it reached last Friday. The euro’s weakness was essentially a self-inflicted blow from the ECB Thursday, when the Banks’ President Jean Claude Trichet signalled monetary policy had moved to a more neutral stance. The ECB is unlikely to cut rates before the summer and the intense sell-off we have witnessed is an over-reaction. The euro must recover to 1.46 quickly otherwise the dollar looks destined to test the December low of 1.4310 by early next week. The dollar’s new-found strength will be severely tested once stock markets settle and risk aversion subsides. The upside for the euro looks limited however and it may be a long time before it gets another opportunity to reach the magical 1.50 price handle. A more restrictive trading range looks the most likely outcome over the next few weeks, with any significant upside rallies being met by increasing selling pressure. Of course with markets still in turmoil because of growing concerns over the global economy, major spikes in risk aversion will most likely favour to dollar, although the US currency currently offers little yield appeal. The most profitable way forward for the next week will be to sell the pair on failed upside rallies. Strategy: sell EUR/USD on prices close to 1.4660, with downside price targets of 1.4590, 1.4535, 1.45 and 1.4460. If the euro fails to re-establish itself above 1.4520, then this form an initial a resistance level and if it holds, the pair will probably push down towards 1.4310.

GBP
Sterling also attempted something of a comeback Friday having been battered in the past week. Cable did rise to above 1.95 briefly but has since declined to 1.9450. Interest rates were cut to 5.25% Thursday but with the yield on sterling still one of the best on offer, a return to normality on stock markets will tend to boost the UK currency. With the ECB changing their policy stance this week the pound should be able to retrace further against the euro and could send the euro back to 0.7350 next week. UK economic data, apart from employment, is growing softer and the medium and longer term outlook for sterling remains uncertain at best. January’s consumer price inflation data is released Tuesday next and markets will be studying it closely to establish whether the Bank of England will be in a position to cut rates again at its March meeting. I remain bearish on sterling but would prefer to see a bounce in cable to the 1.9650 price region before entering the market with a sell order. The euro offers no value against sterling at present. Strategy: Sell cable on rallies towards the 1.9650 price region with downside price targets of 1.9550, 1.95, 1.9450 and 1.9390.

JPY
The yen has retreated modestly Friday against both the greenback and the euro and it could yet move sharply lower if stocks rally sharply on Wall Street this evening. Risk tolerance levels have risen since the major spikes in risk aversion seen on the first 3 days of this week and the market tendency over the past 2 days has been to sell the yen, particularly against the high yielding currencies, on any lulls in market volatility. The next major data indicator that may severely influence markets is next Wednesday retail sales release in the US. If stock markets settle between now and then, there is the prospect of a push towards 110 on USD/JPY. If trading short on USD/JPY, your stop should be tight above Y108 because if this key level gives way, there will be an avalanche of bids in an attempt to take the pair significantly higher. Strategy: Preference is to remain short on USD/JPY while price holds below 108. If 108 gives way, stay out of market. Sell on rallies towards 107.80 with downside price targets of 107.20, 106.80, 106.50, 106.20. The pair remains range-bound between 106 and 108 and it is worth buying on prices close to 106.

CAD
The loonie has had another monumental day, thanks to a much better than expected employment report. Quick, cruel, incisive rallies are now a trademark of the Canadian dollar and it has become the most dangerous currency to short against prior to major domestic economic releases. In fact the loonie was setting up for a good employment number for a few days as it essentially had lost no ground to the US dollar since last Wednesday, while other major currencies floundered. It has rallied every moment there has been a lull in market volatility this week, a clear signal the currency remained bullish. The 46,400 jobs gained in January printed way higher than the 8,000 expected and the unemployment rate also fell to a 33 year low. While the news is very good, it is important to note employment is a lagging indicator and the risks to the outlook for the Canadian economy from a US recession are unchanged. What today’s report may do is to dissuade the Bank of Canada from cutting rates aggressively and for the moment it looks like a 25 basis points cut in March is what the Bank may give, rather than the 50 basis points which was previously expected. Friday’s appreciation in the loonie is overdone, with the currency already having gained 1.2% against the euro and 1.3% against the dollar today. Regular upbeat employment reports out of the euro area, the UK and Australia don’t ever generate anything like the sharp type of rally for those local currencies that we are constantly seeing for the loonie. Housing starts in January also printed much higher than expected Friday, 21% up on December’s figure. Warren Buffet’s claim yesterday that his company ‘owned the Canadian dollar’ and made several hundred million dollars from it is a worrying revelation and explains to some degree the startling level of appreciation seen in the loonie in recent times, a level of appreciation that cannot be explained by the underlying fundamentals. However I remain bearish on the loonie’s outlook in the medium term as it is ludicrous to believe the Canadian economy walks scot-free from a US recession. The loonie is the most over-valued currency of all 16 most actively traded currencies. The risks for the loonie over the next week though are probably again to the upside and there will be an attempt to take out 0.9920 on USD/CAD and revisit the 0.9870 low hit in the aftermath of the Fed’s 50 basis points cut last week. We could even see a retreat back to 0.9750. The loonie is also trading 5 cents higher than it was last week against the euro and that pair is massively oversold. The euro could however be ultimately pushed below 1.43, if the loonie makes further inroads against the greenback. Strategy: Wait in the short-run. If holding positional USD/CAD trades, the stop loss needs to be below 0.9750.

Have a good weekend!

Bob B - Feb 8

Bob's Currency Focus - 18:30 GMT

EUR/USD
We have had an incredibly volatile session Thursday as stock markets in Europe plunge and the ECB moves to a more neutral stance, thus sending the euro into freefall. ECB President Jean Claude Trichet said council members neither argued for a rate cut, nor for a rate rise. This is a significant change from the last meeting, where some members were calling for a rate hike. The decision out of today was the same, but the shift in tone suggests the ECB may be positioning itself to cut rates at some future date. The euro has been trounced by every other major currency today with the exception of sterling, as the pound also went into reverse after th Bank of England cut rates in the UK and gave a downbeat assessment of the economy. Markets are in a confused state however because despite the plunge in stock markets, the high-yielding Aussie and New Zealand dollars have surged and the yen has depreciated against the US dollar. The dollar has forced the euro back to below 1.45, gaining almost 1% on the day. US economic data again disappointed with last week’s jobless claims number coming in higher than expected, while December’s pending home sales number fell 1.5%, against a forecast decline of 0.5%. German factory orders decreased 1.7% in December, but this was slightly better than forecast. The euro needs to recover quickly back towards 1.46, otherwise the dollar looks set to push the pair back to the 1.4310 low seen last December. The dollar’s advance this week is hardly deserved on the evidence of recessionary data out of the US, but with the yen remaining more or less static in value this week, the dollar has suddenly become the preferred ‘safe haven’ currency. The euro’s best chance of an impulsive rally later Thursday is if we see a recovery in US stocks on Wall Street. It is dangerous to enter the market today given current levels of volatility, but having declined by 500 pips since last Friday’s peak, the euro may offer some short-term value on Friday, once the current dollar rally bottoms out. Strategy: Wait!

GBP
The Bank of England cut rates by 25 basis points as expected, but, rather more surprisingly, the MPC issued a detailed statement, highlighting downside risks for both the domestic and global economies, as well as raising concerns about the medium-term outlook for inflation. Sterling originally gained a bounce after the announcement was made, as a rate cut had already been fully priced in, but then the pound collapsed as the Bank’s bleak assessment was taken rather indifferently by stock markets and accelerating a sell-off in European stocks. Earlier this morning a report out of the UK revealed manufacturing output declined 0.2% in December. Industrial Production also fell, by a more marginal 0.1%. The UK economy is clearly struggling at present and the Bank of England’s actions, although a help, may not be enough to avert a more serious economic downturn. Cable fell to below 1.94, down 2 cents on the day, while sterling is unchanged against the euro, the other major currency to be pummeled today. We have done pretty well from cable in the past week, since we initially recommended selling down from 1.9920. However, while still bearish on the currency, there is little value at present prices, so the best advice is to wait for a bounce in the pair to back over 1.96. Sterling should be able to push the euro back to 0.74 in the short-term, with the single currency coming under broader selling pressure. Strategy: Sell cable on rallies towards 1.9650 with price limits of 1.9540, 1.95, 1.9440 and 1.9395.

Yen
There has been a bizarre turn of events Thursday with the yen depreciating significantly against the US dollar, even when major European Stock markets were closing out their trading sessions down an average 2%. Traders have been loading carry trade positions all day on AUD/JPY and NZD/JPY, ever since the Bank of England announced a rate cut at 12:00GMT. Investors risk nerve has held thus far, helped in no small part by a modest bounce in US equities this afternoon. The Kiwi dollar is currently up 1.7% against the yen, with the Aussie dollar up 1.4%, while the greenback is up 1% against the Japanese currency on the day. The yen is virtually unchanged against the euro. The dollar does not offer any value against the yen on prices close to 108 while risk is a major issue, so this remains a good entry point for selling down. We have seen the pair spend the week sparring in the 106 to 108 price region and the two currencies should remain within this trading range until we see risk aversion levels cool somewhat. Strategy: Sell USD/JPY on prices near 107.80 with downside price limits of 106.80, 106.50 and 106.20. Place a stop loss above 108.10.

CAD
The loonie has made significant gains against the euro, pound and the yen, but it was forced to give up modest ground against the greenback. There was no domestic data out today and markets await Friday’s key employment report for January which is key to discovering whether the Canadian economy is managing stay afloat at a time when the US tinkers with recession. Today’s warning on growth risks out of Europe is not good news for the outlook of the loonie, a currency that is dependent on the wider economic growth story. In the past week we have seen the South African rand and the Norwegian Krone come under intense selling pressure, but thus far the other major commodity currencies of the loonie and the Aussie and Kiwi dollars have been spared the rod. All three of these currencies are likely to come under increasing threat in the near term, especially while volatility and risk aversion levels remain high. All three currencies are defying the underlying fundamentals which point to an at best ‘uncertain’ outlook for the global economy. The loonie today is trading 2% higher against the euro than it was this day last week. If Friday’s employment report prints another negative number, the loonie will be hammered and the greenback should rise back towards the 1.0350 by the middle of next week. However, a better than expected number and a steady unemployment rate could see the loonie push the greenback down sharply to test that critical 0.9920 support point. Strategy: wait for Friday’s employment report as this is the key to determining confidence for moving in one direction or the other. Hold onto those positional USD/CAD longs.

Bob B - Feb 7

Bob's Currency Focus - 18:00 GMT

EUR/USD
It is more a case of as you were for this pair Wednesday with traders reluctant to push price too far in one direction or the other ahead of a key ECB rate setting meeting Thursday. The euro has managed to rally to 1.4670 from a low of 1.4592 during the European session, but has since fallen back to 1.4630, around where the pair closed last evening. US productivity slowed sharply in quarter 4 although it did print higher than expected while unit labour costs for the quarter came in lower than forecast, something which will dampen immediate inflation concerns and make it easier for the Fed to cut rates further. US stock markets have rallied this afternoon and we have seen a modest return in risk appetite. It will be difficult for markets to simply erase the memory of Wednesday’s ISM survey (reporting the first contraction in the services sector for 4 years), and any immediate rebound in stocks is likely to attract fresh selling pressure. The euro will bounce back on Thursday if the ECB retains its hawkish bias. The President of the ECB delivers the Central Bank’s policy statement at 13:30 GMT. The Bank is certain to keep rates on hold and we could see the single currency drift ahead of Jean Claude Trichet’s statement, with many euro long positions coming off the table for fear of some softening in tone from the ECB. I however will not be surprised if the ECB maintains its fim inflation bias, particularly given inflation rose to 3.2% in January. Remember most members of the council are confirmed hawks. If the ECB retains its tough stance, the euro could quickly take off and we could be back above 1.48 by Friday. If they do surprise and prepare markets for a possible future rate cut, the euro will undergo a significant sell-off. We need to wait for the actual outcome Thursday before entering the market but if we do get the same hawkish stance, the euro should be bought with upside price limits of 1.4660, 1.4720, 1.4760 and 1.4810.

GBP
Sterling held steady Wednesday as markets believed the currency sold off sufficiently ahead of the Bank of England rate announcement tomorrow. On the domestic data side, consumer confidence plunged further in January according to the latest Nationwide Survey while the British Retail Consortium reports shop prices rose marginally in January to an annualised 1.2% rate, against a 1.0% rate in December. Cable has traded around the 1.96 price level all day but there is a good chance of a dip to 1.95 before the MPC delivers its policy decision at 12:00 GMT Thursday. Markets now expect a 25 basis points cut, but if the Bank surprises and delivers an aggressive 50 basis points, sterling will fall sharply and cable could revisit the year’s low at 1.9337 later Thursday. If the Bank does not cut tomorrow, any bounce we may immediately see in sterling will prove to be short-lived, as markets will become more firmly entrenched in the opinion the Bank is well behind the curve. Rallies to 1.97 between now and tomorrow morning are worth selling down with limit prices of 1.9550 and 1.95 being realistic targets. After an initial spike downwards, expect sterling to bounce in the aftermath of a 25 basis points cut. The fate of sterling against the euro will very much depend on the ECB Thursday, moreover the Bank of England. A more dovish sounding ECB could see sterling appreciate sharply against the euro (if the bank of England delivers a 25 basis points cut), with the chance of a euro retreat to 0.7350 by Friday, whereas a hawkish ECB should see the single currency move back towards 0.7550. I remain bearish on sterling in the medium term, but the best short-term opportunities may have already passed. Strategy: Sell cable on any rallies towards 1.97 with limits prices of 1.9550 and 1.95. Aim to exit trade before the Bank of England announcement.

Yen
The yen has held most of its gains from Tuesday with carry traders reluctant to move to the Japanese unit as a funding currency following the volatile trading session witnessed Tuesday. In domestic news, Japan’s leading indicators rose to a reading of 40.0 in December, up from a lowly 18.2 in November, meaning that although economic outlook is seen in a more optimistic light than the previous month the pace of growth will remain stagnant (denoted by the index coming in below the 50.0 boom or bust line). The yen could sell off late tonight against the dollar and the euro if Wall Street rallies strongly to the close, but any losses incurred by the yen should be limited because of the broader negative sentiment that still abounds. The Aussie and New Zealand dollars have held most of their gains from last week against the yen despite the sharp dip in market sentiment this week, but another night of misery for stocks should trigger a significant bout of selling on AUD/JPY and NZD/JPY. Strategy: Sell USD/JPY on any rallies above 107.70 with target prices of 106.80, 106.50 and 106.20. Place a stop loss above 108.10. Do not trade EUR/JPY ahead of Thursday’s ECB meeting.

CAD
The loonie declined this morning but came back strongly this afternoon to be the best performer of all the major currencies on the day, gaining 0.4% against both the euro and the greenback and 0.6% against the yen. The modest bounce in equities was sufficient to drive the loonie up, although the currency was aided by a better than expected IVEY PMI survey for January which suggested business activity in Canada expanded following a month of contraction in December. The IVEY survey is renowned as a hopelessly inaccurate guide for gauging economic performance, but in the current climate all good news is worth taking and also it won’t have been lost on traders that the Canadian dollar fell by over 1% when news of a contraction in the IVEY index was reported last month. Building Permits in December rose 0.4% against a forecast decline of 0.5%, but this data had little market impact. The next key release for the loonie is this Friday’s employment report and the outcome may well determine the direction of USD/CAD for the remainder of the month. A further rise in risk aversion later today or tomorrow should see the loonie retreat and key resistance in the 1.0120 price range could come under threat. Otherwise we may see the loonie send the dollar back below parity and quickly descend upon that critical 0.9920 price level, where price has stalled 3 times in the past week. I am still bearish on the loonie but am not inclined to enter the market until the greenback firmly establishes itself back above the parity line. Anyone currently long on EUR/CAD in a short-term context should aim to exit their positions ahead of the ECB policy statement at 13:30 Thursday, as this is a high risk event, which could go the wrong way.

Bob B - Feb 6

Bob's Currency Focus - 17:00 GMT

EUR/USD
The euro went sharply into reverse gear Tuesday when economic data for the 15-member nation currency area printed much weaker than expected. The services PMI for January fell to 50.6 from 53.1 in December while Retail Sales printed -2.0% on the year against a downwardly revised -1.2% in November. Pressure will now be on the ECB to soften their stance this Thursday and while the prospects of a rate cut are non-existent, markets will be looking to the ECB to balance growth risks with inflation concerns and leave open the opportunity of a rate cut some time later this year. Risk aversion rocketed this afternoon after an ISM report revealed that the US services sector contracted in January, the first contraction in the index since March 2003. The PMI nosedived to 44.6 from a revised reading of 54.4 for December. A reading under 50 signals contraction in the industry. Stock markets have plummeted Tuesday, particularly in Europe with some of the major indices down between 3% and 4%. The euro has fallen to as low as 1.4628 having opened at 1.4821 and it is on track to record one of its worst single day performances ever against the dollar. Volatility is high and whiplash like moves is making intraday trading very dangerous. There may now be an attempt to push the euro down towards 1.45 in the next few days but today’s dollar rally is overdone and a sizeable retracement is possible, particularly with many traders expecting the ECB to maintain its cautious stance this Thursday. It is not worth venturing into the market until we see some sort of order return. Strategy: Wait!

GBP
Cable fell Tuesday, the pound ceding ground to a broad dollar-based rally. The CIPS services PMI for January printed slightly higher than expected and led to important support for sterling against the euro and the single currency was pushed back to below 74.5 pence. Sterling will struggle to gain protracted support ahead of Thursday’s Bank of England meeting, and while sterling could decline to 1.95 at least, the pound should at least be able to fend off any major advance by the euro. The recommended trade is to sell cable on rallies back above 1.9750, although with stock markets in sharp decline today, sterling may find it difficult to launch a major recovery. Strategy: sell cable at prices above 1.9750 with limit prices of 1.9650, 1.96 and 1.9550.

YEN
Despite fear gripping stock markets today, the yen has been unable to make any major progress and is hovering around the Y107 price level against the dollar. The dollar did advance to 107.76 earlier this morning after the Reserve Bank of Australia’s rate hike announcement led to a bout of yen selling, to fund carry trades. There was no economic data out of Japan overnight and the currency’s movement for the remainder of this week will be determined by risk tolerance levels, influenced by the performance of global stock markets. We move into the Asian session tonight on the back of significant share price losses and it would be foolhardy to sell the yen against any currency just now. The dollar does not offer any value at prices close to 108 and I would again sell down on any rallies approaching this mark. Strategy: sell USD/JPY on prices between 107.60 and 107.90 with limit prices of 106.80, 106.50, 106.10 and 105.75. Place a Stop Loss just above 108.10.

CAD
The loonie has come off sharply today against the greenback but the Canadian currency has performed better than most other commodity currencies and it has in fact made further gains against the euro. There was no domestic data released in Canada and the loonie has moved with the risk flow, but the greenback has failed to hit the highs of 1.0085 that we saw last week and unless we have a close near to or above this level, we could again see a sharp reversal down towards 0.9920, something that has been a feature of the USD/CAD pairing over the past week. Oil prices have fallen by $1.50 Tuesday and gold is down sharply, but other base metal prices are only down marginally and this is helping to afford the loonie some element of protection. The loonie does have some key data releases in the next 3 days, starting with Wednesday’s IVEY PMI. If the IVEY PMI prints under 50 for the second consecutive month, it will put paid to the decoupling theory and hint that Canada may also have entered a recession, along with the US. Friday’s payroll data should give some further clues. Given that surprises in domestic data may print to the downside, particularly for the employment numbers, and the fact concerns over global growth are on the rise, it is dangerous to back the loonie this week. The fundamentals are stacking higher against the loonie this week and the currency’s impressive 2-week rally may be coming to an end. Strategy: Buy USD/CAD on dips towards 0.9920 with upside price targets of 1.0010, 1.0030, 1.0070, 1.0115 and 1.0170. Our target for our positional trades remains 1.05. If you are holding EUR/CAD long positions, exit at 1.48, given renewed risks for the euro.

Bob B - Feb 5

Bob's Currency Focus 15:30 GMT

EUR/USD
The pair is lacking direction Monday on a day when economic data is scarce and a sense of normality has returned to equity markets. The euro did race towards 1.4850 earlier this morning but was unable to stay there and has struggled to make an impression since, although the single currency is still modestly ahead on the day with the dollar broadly weaker against all currencies. Eurozone producer prices for December printed in line with expectations but with consumer prices last week rising to a 9 year-high at 3.2%, the ECB is unlikely to soften its stance when it meets this Thursday and the euro should remain well bid in the run-up to that meeting. The euro’s failure to break above 1.4966 Friday and its subsequent sharp retreat, following release of the first negative employment figure out of the US in 4 years, could indicate the euro has limited scope for further appreciation, but traders should be wary of selling the euro ahead of this week’s policy statement from the ECB. The ECB is on a different road to the Fed and if it chooses to deliver another strongly worded statement about inflation risks this week, the euro could benefit significantly. Over the next 24 hours the pair should remain within a 1.4770 to 1.4870 price range, unless there is a significant shift in risk aversion and stock markets decline sharply, something that would tend to benefit the dollar. Strategy: Buy euro on dips towards 1.4770 with upside price targets of 1.4830, 1.4850 and 1.4880.

GBP
Sterling rebounded Monday, recouping almost 50% of the losses it incurred last Friday against both the dollar and the euro. The currency will come under pressure though as the week unfolds with the Bank of England widely expected to cut interest rates by a quarter of a percentage point when the Monetary Policy Committee (MPC) makes its latest policy announcement this coming Thursday. Expansion in the construction sector slowed to its slowest pace in 2 years in January, further evidence of a deteriorating economy. The pound will be hurt of there is a sell off in global stocks and given the wider downside risks for the currency because of expectations of an interest rate cut, we could see the pound fall back to 1.95 by Thursday. Cable offers good sell-down value on levels approaching 1.9850 and traders should not be frightened to hold their short positions right up until after the Bank of England decision. There is an outside chance of a 50 basis points cut from the MPC, but I wouldn’t count on it because this particular Committee has been slow to act in a meaningful way. Strategy: Sell cable on prices between 1.9770 and 1.9850 with downside price targets of 1.9650, 1.9570 and 1.9510.

Yen
The yen has been forced to retreat for most of Monday with the appetite for carry trades on the increase, ahead of an expected rate hike from the Reserve Bank of Australia tonight. The Japanese currency has held remarkably firm against the dollar in the past week even though stock markets rallied by over 5%. This is because the yield spread between the two currencies narrowed to 2.5% following the Fed’s additional 50 basis points rate cut announced last Wednesday, making the dollar a less attractive bet for carry traders. This is a week mostly devoid of meaningful data both in Japan and the US and USD/JPY direction this week will track the performance of equities. Expect the pair to trade within a 106 to 108 price range for the week unless risk aversion levels rocket upwards. The euro has a chance to reach Y160 over the coming days, particularly if the ECB deliver a hawkish statement next Thursday. There is little value on the yen at current prices, given the risks of a sudden change in risk aversion, so traders are best advised to wait until prices move to the peripherals of existing trading bands. Strategy: Sell USD/JPY on advances towards 108 with limit prices of 107, 106.50 and 106.25.

CAD
The loonie rallied strongly Friday against all major currencies, particularly the euro, pound and the dollar. This happened despite a fall of nearly $3 in the price of oil and a recessionary employment number out of the US. One would normally expect a decline in US employment to hurt the loonie - it will have a detrimental effect on Canada’s exports. But the loonie is largely trading contrary to the underlying fundamentals thanks to speculative funds that continue to see most commodity currencies as sure bets. The greenback did launch an offensive Monday, rising back above parity, but the rally was all too brief and again lacked conviction and the loonie was quickly able above to recover. USD/CAD maintains a short-term bearish tone and I prefer to avoid the pair until we have a sustained break above the parity line. The key data for the loonie this week will be Wednesday’s IVEY PMI and Friday’s January Employment Report. The euro fell very sharply against the loonie last Friday and after a rally Monday which saw the pair rise 130 pips, the pair is down 100 pips from the highs to 1.4736. The euro does in my view offer value on prices below 1.47. Strategy: buy EUR/CAD on prices between 1.4650 and 1.47 with price limits of 1.4790, 1.4830 and 1.49. Use a stop loss. Hold tose positional USD/CAD longs with S/L below 0.9750.

Bob B - Feb 4