Bob's Currency Focus - 17:30 GMT

EUR/USD
Ben Bernanke, in a prepared statement to the Senate Thursday, indicated economic outlook for the US economy has further deteriorated. The Fed stands ready to cut rates even further to boost faltering growth the Fed Chairman hinted, contending inflation will moderate through this year, although risks remain, as evidenced by the run-up in oil prices in late 2007. There is nothing new in Bernanke’s statement but it reaffirms market expectations for another 50 basis points rate cut in March. This has helped undermine the dollar. In fact the greenback has struggled all day against all majors, with the exception of the yen, and the euro rallied to 1.4640 just before December’s US trade data was released earlier in the day. The US trade deficit narrowed by more than expected while last week’s jobless number printed moderately better than expected. The revival for equities this week and the subsequent rise in risk tolerance put the dollar under pressure again, as traders revert to the old habit of using rate outlook to determine price direction. Quarter 4 GDP in the euro area halved to 0.4% from the 0.8% pace set in Quarter 3. The annualised growth rate came in at 2.3%, just above the forecast 2.2%. There are no market-moving data releases through Friday and the dollar will be guided by underlying sentiment and risk aversion levels. Sentiment appears to have turned against the US currency again with better than expected quarter 4 GDP reports from Japan and Europe reigniting the decoupling theory. If stock markets retain the upbeat momentum, the euro could force a challenge of resistance in the 1.4660 price region. A push through this level could see the euro trading back above 1.47 within the next 24 hours. It may take a sharp sell-off on Wall Street Thursday to see the pair reverse course and move back towards 1.4540. There may be some value in selling down on prices close to 1.4660, using a tight stop above this level, but right now momentum does favour the euro.

GBP
No domestic data was released in the UK Thursday and the pound has continued its ascent against the dollar, thanks to in no small part to Mervyn King’s intervention Wednesday, when the Bank of England Governor poured cold water on expectations for an aggressive policy from the Bank of England. Cable rose to 1.9730 this afternoon, up 4.5 cents from the level it sank to immediately after the Bank of England announced a 25 basis points cut in interest rates last Thursday. Regardless of what Mervyn King may say, it does not alter the implied weakness of recent data and the perception the Bank of England is well behind the curve. Mervyn King’s twinkle-toe approach is a striking contrast to the size 14 boot approach donned by Fed Chief Ben Bernanke. Considering headline inflation in the US is running 2% higher than that in the UK and both economies have uncertain futures in 2008, it is unlikely both approaches are correct. We shall find out who deserves the kudos in due course. Cable could push to 1.98 in the short term, if the dollar remains weak across the board, but the pound will attract decent selling pressure on prices above 1.9730. I am bearish on cable above this level, even if there is a chance the pair might go higher in trying to carve out a near-term peak. The pound may be able to temporarily force the euro back below 0.74 with the prospect of a move to 0.7350 next week. If risk concerns begin to haunt markets again, the pound will tend to lose out more than the euro, given the strength of recent gains. Strategy: Sell cable on prices above 1.9720 with target prices of 1.9660, 1.9620, 1.9580, 1.9550 and 1.9510.

JPY
The yen struggled early Thursday with the positive momentum seen in equity markets Wednesday spilling over into Asia overnight, prompting investors to pile on carry trades at the expense of the low-yielding Japanese currency. The currency has since battled back to just below 108 against the dollar when the Industrial Averages on Wall Street slipped into the red. The yen is moderately weaker against all other majors today and the euro is back trading above Y158. Quarter 4 GDP in Japan surprised everyone when printing at 0.9% against a forecast of 0.3% and the annualised rate came in at 3.7% against the forecast 1.7%. It’s something of a mystery how economists came to get the forecast so badly wrong but the Government played down the data’s significance this morning, focusing instead on growth concerns for 2008. Don’t be surprised to see the GDP numbers revised downwards next month. The GDP data did not boost the yen as the currency has of late become largely immune to domestic economic data and instead the currency went into reverse gear as traders used the unit to fund carry trades. The market has clearly turned against the yen for now but if we see another sustained period of equity sell-offs, the currency will quickly be back into vogue. For now, the tendency will be to sell the yen off rallies, and the market will want to push the dollar to Y110 in the near-term, probably also leading the euro to return to Y160. There is risk in selling the yen at current prices because of ongoing market volatility and it may be wiser to wait for dips towards Y106.50, if price does go there. Strategy: Wait!

CAD
No matter what way you look at this latest Trade Report it is deeply worrying and points to more aggressive action being required from the Government and the Bank of Canada, if the country is to have any chance of being competitive in a slowing global economy. The total value of Canada’s exports declined by 3.1% in December, but in pure volume terms exports actually fell by 6.5%. The only major sector to record a gain in exports was the energy sector and that was thanks entirely to price inflation. In pure volume terms natural gas and crude petroleum exports were flat. At $2.4 billion, December’s surplus is the lowest since November 1998, while the trade surplus for 2007 as a whole was the lowest since 1999. In constant dollar terms Canada’s exports to the US fell 1.3% in December over November, while exports to its major trade partner were down 10.8% from December 2006. The US accounts for 80% of all of Canada’s exports. Imports rose in December by 0.7% but because import prices rose 3.4%, import volumes actually fell by 2.7%. Today’s report indicates there is a significant disconnect between Canada’s recent employment report and production outlook. I have always maintained labour is a lagging indicator and what today’s report signals is that Canada could be facing major job losses in the months ahead, if the slowing trend for the country’s export volumes persists. Canada’s exports to economic blocks outside the US also fell significantly in December, so the US slowdown can’t be put forward as the reason for the decline. The Canadian dollar which rocketed by 17% in value in 2007 is the principal reason. The loonie refused however to lay down after today’s report as traders continued to prefer using rising commodity prices as the driver for the currency’s value. With oil back up at $94.50 a barrel, the loonie is attracted widespread support. Having briefly touched above parity, USD/CAD has then declined back to 0.9937 as the pair retained its bearish tone. The euro rose briefly to 1.46 against the loonie this morning but the single currency too was forced to retreat to 1.4550, even on foot of that very weak Trade Report. I prefer to steer clear of USD/CAD for now but do like the euro for value on prices below 1.45. Strategy: Buy EUR/CAD on prices around 1.45 with upside price limits of 1.4580, 1.46, 1.4630, 1.4670 and 1.47. If holding longer-term USD/CAD long positions, the stop loss should be held below 0.9750.

Bob B - Feb 14

Bob's Currency Focus - 17:30 GMT

EUR/USD
US retail sales caught markets off guard Wednesday when the data surprised to the upside. January’s number was expected to print at -0.4%, but instead showed an increase of +0.3%. Stock markets jumped on the news and the momentum was sufficient to take the dollar to above Y108 against the yen, a very important confidence barrier for greenback. The dollar has gained only modestly against the euro with the EUR/USD pairing spending most of the day trapped within a 1.4540 to 1.46 price range. The retail sales results don’t necessarily point to a consumer or economy that is engulfed in a recession and considering the manufacturing sector also expanded in January, albeit it modestly (following contraction in December), one must question whether the Fed has acted too aggressively when slashing interest rates by 125 basis points in an 8 day period, especially at a time when inflation was on the rise. Next week’s consumer price inflation data is going to be crucial in determining whether or not the Fed is realistically in a position to cuts rates aggressively again when it meets in March. A bad retail sales number today would probably have had the dollar perform better as it would have seen risk aversion rise and safe haven funds flow back into the dollar. Eurozone Industrial Production declined again in December, falling by 0.2%. Markets expected a rise of 0.6%. The euro economy is clearly slowing and quarter 4 GDP numbers for the Eurozone, released Thursday, is an important confidence gauge for the single currency. If growth slowed significantly more than expected in the final quarter of 2007, the ECB will come under renewed pressure to ease rates and the euro will face more downside risk. Meanwhile a stronger than expected GDP number will boost the euro. The market expects a 0.4% increase in GDP on the quarter and a 2.2% annualised rate. We are now within a 1.4480 to 1.4620 trading range and unless euro area GDP surprises to the upside tomorrow, it is difficult to see a break immediately coming on the upside. Strategy: Sell down on prices close to 1.46 with target prices of 1.4545, 1.4520, 1.4485 and 1.4445.

GBP
Governor King’s renowned caution was written all over the Bank of England Inflation Report released Wednesday morning. The report recognises the downside risks to growth but highlights heightened inflation concerns and suggests markets are pricing in more cuts than the Bank is currently willing to cede. The Report goes so far as to say further easing to the tune of 75 basis points this year could fuel greater inflation problems in 2 years time. Sterling has benefited from the ‘hawkish’ report and economic data released earlier was forgotten, including a report which revealed a slowing in wage inflation in January and the latest RICS house survey which reported the worst slowdown in the UK property market in the past 15 years. The jobless number fell by 10,000 in January, better than expected, and this at least signals there is still positive life in the economy. The pound has gained against most currencies today, appreciating 0.85% against the yen and 0.15% against the euro, while up a more marginal 0.1% against the dollar. There are no further data releases out of the UK this week, but sterling should benefit from any sustained rally on global stock markets, because of its high-yielding status. Cable looks to offer little value above 1.9650 and in fact the pair failed to breach this level earlier today. I remain bearish on the currency and see the best value coming through selling cable on prices approaching 1.97. Strategy: sell cable on prices close to 1.97 with downside price targets of 1.9605, 1.9550, 1.95 and 1.9445.

JPY
The US retail sales data was good news for Japanese exporters but bad news for the yen. As soon as the data was released the dollar shot to above that pivotal 108 line and has traded above there ever since. A close above this mark this evening will be significant and may indicate the pair has finally broken out of the recent trading range and we could see a move to Y110 over the next week. I would not buy the yen against any currency right now unless it can firmly push the US dollar back below 107.80. Both Japan’s current account and trade balance in December narrowed from the same month a year ago, while the country’s consumer confidence index fell even further in January, all suggesting the economy continues to deteriorate. Tonight sees the release of quarter 4 GDP, which is forecast to print at an annualised 1.7%, but don’t be surprised to see it print lower. Also don’t be surprised if the GDP number has no impact on the direction of the yen, regardless of how it prints. Today’s retail sales data from the US could calm stock markets over the coming days, trigger a rise in risk tolerance and lead to a deeper retreat for the yen. Buying USD/JPY with a tight stop loss below Y108 (ideally below 107.80) is the logical trade I can see right now, as we have broken out of the recent range. But given the recent volatility in the market, it is a brave trade. Strategy: wait!

CAD
Most of the commodity currencies have come under pressure in recent days with the high-yielding Aussie and Kiwi dollars performing particularly poorly Wednesday. It is unusual to see these currencies retreat when stock markets have been rallying, but concerns over global growth and weakening commodity prices have begun to weigh. The loonie has again bucked the trend and it has appreciated Wednesday against all other major currencies, gaining 1.2% against the Aussie dollar and 0.9% against the yen. Its gains against the euro (+0.22%) and against the greenback (+0.13%) were more modest. The greenback appears unable to establish itself back above the parity line and USD/CAD is being sold down on every single upside rally above the parity line. One would expect support for the loonie to erode the further into the month we get, i.e. the nearer we are to another interest rate cut from the Bank of Canada on March 4. The pair for the moment retains its bearish tone, although the downside is also struggling to make any great headway and it may take a significant data release, or major statement from the Bank of Canada, to break the logjam. Thursday sees the release of December’s trade data and this will be a key barometer for Canadian exports. If the trade surplus expands and exports are shown to have risen, it would temporary dispel theories of a strong loonie seriously damaging the country’s exporters and this should propel the loonie higher. A downside surprise on the export figure would have the opposite impact. I prefer not to trade USD/CAD until I see a clear breakout of the current range. The euro definitely offers value against the loonie on prices below 1.45, essentially as the rate differential outlook strongly favours the euro. Strategy: Buy EUR/CAD on dips towards 1.4450 with upside price targets of 1.4570, 1.46, 1.4650 and 1.47. Retain your USD/CAD longer run positions with a stop loss below 0.9750.

Bob B - Feb 13

Bob's Currency Focus - 17:30 GMT

EUR/USD
The dollar was been sold off sharply Tuesday as news of a bail out offering for the much maligned bond insurers in the US from Warren Buffet gave sentiment a seismic lift and encouraged traders to move back into the higher-yielding currencies, mostly at the expense of the dollar and the yen. It is a rather ominous sign for greenback supporters when traders offload the currency as soon as stock markets show any inclination to rally. It is still too early to say whether the dollar has turned a corner or not, because all of the currency’s recent gains have been made during a period of extreme market turbulence and volatility. Data may also be softening out of the eurozone but the euro still has a wide band of supporters and it didn’t take the currency very long today to notch up a gain of almost a cent. A close this evening above the previous stalling point at 1.4580 would be significant and could lead to an extension of the recovery rally tomorrow, to the next level of resistance at 1.4660. There was no data of importance out in the US Tuesday but in the euro area, Germany’s ZEW expectations survey printed moderately better than forecast, though still near record low levels, while the current conditions index fell rather spectacularly this month, highlighting the degree of negative sentiment that persists within the financial business community in Germany. The euro did not react to the ZEW report and with the dollar in sell-off mode, EUR/USD is up 0.9 cents on the day, trading at 1.4590. However a late retreat of the major industrial averages on Wall Street tonight could potentially see a quick return to 1.45 for the pair. Wednesday sees a major risk event with January’s retail sales data in the US out at 13:30 GMT. The consumer is the backbone of the US economy and any sharp fall-off in the retail sales numbers will reignite concerns about a US recession, yet probably result in gains for the dollar. It is better to be out of the market at the time of Wednesday’s release and to reassess after the data is known. I still favour the euro on dips towards 1.4440, but see little prospect of the pair rallying beyond 1.4650 in the short run. It is best to sell down from prices close to 1.4660. Strategy: Sell on prices close to 1.4660 with downside price targets of 1.4585, 1.4530, 1.45 and 1.4460.

GBP
February’s consumer price inflation data was lower than expected and a rather muted headline rate of 2.2% (against a forecast of 2.3%) is not going to cause too many headaches for the Bank of England. The odds have increased for a further rate cut from the MPC when the Committee meets again in March. Sterling has got a lift from other quarters today which has helped propel cable to a 1.5 cent gain this afternoon. UK retail sales bounced back in January according to the latest survey from the British Retail Consortium – same store sales are reported as having increased by 2.6% on the year, up from a paltry 0.3% in December. Separately, a rise in risk tolerance levels has led to a demand for higher yielding currencies Tuesday and sterling has been one of the principal benefactors - the British currency has gained 1.2% on the yen. Cable could rise to 1.9650 but is likely to come under fresh selling pressure around this level, given the economic uncertainty and the prospect of further rate cuts to come from the Bank of England. If stock markets sustain their rally for another couple of days, the pound should benefit against the euro and we could see EUR/GBP dip to below 0.74. I remain bearish on sterling and favour selling cable on prices close to 1.97 with downside price targets of 1.9550, 1.95, 1.9460, 1.9420 and 1.9390.

JPY
It is hardly a surprise to see the yen plummet on a day when the principal European stock indices closed up over 3% each. The Japanese currency has lost huge ground against the euro (200 pips) and the pound, while ceding 0.55% to the dollar. If Wall Street maintains most of its gains to the close this evening, the critical Y108 price level for USD/JPY could come under threat. If the dollar manages to penetrate resistance at this line, the pair could rapidly climb towards 109 by tomorrow. The fundamentals have not changed though and the fact Tuesday’s momentous rally on stock markets has come on the back of what is principally a vacuum (no new data) lends one to be suspicious and to be very cautious. A poor US retail sales number Wednesday would be sufficient to trigger a massive reversal and turn market mood on its head yet again. Tonight’s current account and trade data out of Japan will not have any market impact and the yen’s fortunes will continue to conversely mirror those of stock markets. If long on USD/JPY and Wall Street closes on a high, I would be inclined to ride out the position until tomorrow morning, as the sentiment should carry through to Asia and put further selling pressure on the yen. Look to exit in the morning. It is difficult to see the euro warranting any gains above the Y157 price level and a downside surprise in European GDP figures Wednesday could put the single currency under pressure. I would be inclined to sell down EUR/JPY on prices near 158, especially ahead of the US retail sales number on Wednesday, which constitutes a sizeable risk event for the entire currency market. Strategy: Sell USD/JPY on prices approaching Y108, with downside price targets of 107, 106.70, 106.40 and 1.0620. Place a stop loss tight above Y108. Sell EUR/JPY on prices close to Y158 with downside price targets of Y156.50, Y156, Y155.50 and Y155.

CAD
The loonie has made steady progress today, gaining over 0.5% against the dollar and over 1% against the yen and is mostly unchanged against the euro. Concerns about future rate cuts from the Bank of Canada were temporarily forgotten as traders poured into riskier assets and commodity currencies after stock markets soared. There was no domestic data out Tuesday and the loonie’s fortunes for the remainder of this week will be shaped by global risk aversion levels, Wednesday’s US retail sales numbers and Thursday’s trade data. The greenback tried but failed to take USD/CAD above 1.0050 this morning and the pair plunged to 0.9940 before settling just above this price mark. If the loonie breaks below 0.9920 and manages to close below this level it will prove to be very important for the short-term direction of the pair, with an obvious next target being the 0.9870 price hit following the Fed’s last 50 basis point rate cut. But the loonie is significantly overvalued at present, given there may be a further 100 basis points in rate cuts from the Bank of Canada in the offing over the coming months, but as of now few are looking that far ahead and while commodity prices remain elevated the loonie is attracting support. I maintain my considerable bearish bias on the loonie but am waiting for the right shift in market tone before coming back in to sell the currency. For now I recommend sitting on the sidelines. Strategy: wait! If holding longer term longs on USD/CAD, maintain the stop loss below 0.9750.

Bob B - Feb 12

Bob's Currency Focus - 17:00 GMT

EUR/USD
Monday has been a rather quiet day with no economic data to influence direction one way or the other. French Industrial Production for December printed better than expected whereas the Italian number printed much worse than expectations, but neither release had much of a market impact. The G7 meeting at the weekend fuelled concerns about the outlook for the global economy, while comments from ECB President Jean Claude Trichet, where he appeared to scoff notions of any imminent rate cut in the euro area, helped boost the euro when markets reopened on Sunday night. The euro had pushed to as high as 1.4577 in the early morning, but thin Asian trading conditions had exaggerated the move and the pair had returned back to Friday’s trading price around 1.45 by the time the US market opened. Last week’s gains by the US currency were earned against a backdrop of heightened risk aversion with US stock markets having their worst week in years, so a return to market stability will pose a question for the dollar’s resilience and determine whether last week was indeed a trend reversal or merely a blip in the longer run uptrend. The major risk event of the week is the US Retail Sales out on Wednesday, but between now and then I prefer to buy the euro on dips, so long as 1.4440 does not give way. We have now found resistance at the 1.4580 price level and this must be broken to enable the euro retrace back to 1.4650. Strategy: buy on dips towards 1.4460 with upside price limits of 1.4520, 1.4570, 1.46 and 1.4650. Stop loss should be placed beneath 1.4440.

GBP
UK Producer Prices soared in January with core output prices rising by 1.1% in the month, signalling elevated inflation risks. This could suggest a major upside surprise is in store for us in Tuesday’s consumer price data release. Producer Input prices rose a massive 2.6% on the month in January, thanks largely to inflated energy costs. House prices slowed in December according to the latest monthly survey from the DCLG, but at a pace lower than that forecast. Cable briefly rose to above 1.95 following the inflation report, but retreated back towards 1.9480. Cable could rise to over 1.96 Tuesday if January’s consumer prices come in higher than expectations. Sterling has also made gains today against euro – EUR/GBP retreated to below 0.7450 having risen to above 0.75 at one point. I remain bearish on sterling because of the considerable downside risks to the economy but am seeking a better entry price before selling cable. A spike after tomorrow’s inflation data could offer some sell down value. Strategy: Sell cable on prices in the region of 1.9650 to 1.97 with limit prices of 1.9530, 1.9480, 1.9450 and 1.9390.

JPY
Markets in Japan were closed overnight owing to a national holiday. The currency has made gains Monday, primarily against the dollar and the euro, because of renewed risk concerns and another downturn in the performance of global stock markets. The dollar fell to as low as Y106.34, 100 points below Friday’s close, before recovering to Y107.70. The euro has done worse, currently trading around Y154.70, almost 1.4Y down on the day. USD/JPY has been stuck between 106 and 108 for the past week to 10 days and it currently offers the best value range trade of all the major pairs. My preference has been to continue to sell down on prices close to 108, but there is equal value on buying the pair on prices near 106, because despite feverish levels of risk aversion, the yen has failed to establish itself below the 106 price level against the dollar. Japanese markets return tonight and December’s trade and current account data is due for release. The data is unlikely to have any major market impact as the currency’s movements remain dictated by global risk aversion levels. Of more importance will be Wednesday’s GDP data which prints just a day before the Bank of Japan is due to deliberate on its latest round of monetary policy. Strategy: Sell USD/JPY on prices around 107.80, with stop loss above 108.10. Buy USD/JPY on prices close to 106 with Stop loss below 105.85. Limit prices 70 and 100 pips away from market entry should be good.

CAD
Growth in new house prices slowed to a marginal 0.1% in December, well below the 0.3% to 0.4% rise expected by economists. December is often a peculiar month for the housing sector so we shouldn’t place too much significance to this release. Of more importance to the loonie were remarks emanating from Finance Minister Jim Flaherty and new Bank of Canada Governor Carney over the weekend, both of whom expressed some concerns over the value of the loonie and the widening interest rate gap between the US and Canada. Carney, in his first address since he took over the Governorship, indicated his support for cutting interest rates to help stoke growth in an environment where a slowing US economy is placing demand constraints on Canada’s exports. The major question is whether Carney will be aggressive in his approach or run with a more gradual easing policy, i.e. following the 0.25% rate cuts in December and January with similar size moves in March and April. Friday’s strong employment report has pared back expectations for an aggressive policy approach, yet the loonie should struggle to attract meaningful support as this month evolves, with positional traders in particular not wanting to get caught out on the wrong side of a monetary policy move. But as long as metal and oil prices continue to trade near record levels, the loonie is unlikely to sell off significantly in the short run. 0.9920 is a critical support level for the greenback to hold in the coming days while a rally to above 1.0137 is required to establish a return to an upside trend. Wednesday’s retail sales data out of the US will be as important for the loonie as it will be for the greenback as any sharp pullback in US consumer spending will signal weakened demand for Canada’s exports and should hurt the loonie more than the US dollar. I remain bearish on the loonie but am not prepared to sell it in the short run, until we see greater evidence of some erosion in confidence in the currency. Strategy: Wait!

Bob B - Feb 11