Bob's Currency Focus 18:00 GMT

EUR/USD
The dollar is now proving a drag on US equities with major investment funds pumping their money into commodities instead of into stocks. Crude oil is up $4 Wednesday, copper is up 4% and gold is up $25 to a record price above $990. The weak dollar is not only causing higher inflation but it is now causing major financial market volatility with investors running scared of the beleaguered currency. The US dollar index hit a record low for the seventh consecutive session today. The euro hit a lifetime high for the 6th day out of seven, spiking sharply to hit 1.53. The euro had traded as low as 1.5145 earlier this morning. The euro’s spike coincided with comments issued by the President of OPEC who blamed high oil prices on a ‘mismanaged’ US economy. The comment could be taken as a direct criticism of Fed Chief Ben Bernanke, whose aggressive policy of interest rate cuts and dollar intransigence has led to cheaper money flooding into commodity classes, thus creating an asset bubble in both hard and soft commodities. US data was mixed Wednesday with the ISM non-manufacturing report printing better than expected, though the sector remains in contraction, while the ADP employment report estimates the private sector shed a net 23,000 jobs in February. The services PMI for the euro area had earlier printed exactly in line with forecast (52.3) while retail sales figures for January at 0.4% were also bang in line with estimate. Thursday and Friday are crucial days for the euro/usd pair with the ECB rate announcement tomorrow and February’s non-farm payroll number in the US on Friday. Given the sharp appreciation in the euro over the past week, the ECB will be under pressure to soften its policy tone and at least give some hint of a possible rate cut in the coming months. If the hawks get their way, another inflation-biased statement could be enough to send the euro to 1.54. Tomorrow’s meeting could prove to be one of the most important ever for the Committee. Rates are certain to remain unchanged, so eyes and ears will be firmly fixed on ECB President Jean Claude Trichet when he delivers his policy statement at 13:30 GMT. The dollar could benefit from a correction ahead of the meeting, if a bout of profit-taking sets in, with some traders looking to get out of the way ahead of the main event. The euro has found very strong support in the 1.5140 to 1.5160 range and this forms an immediate line of support. If an upward bias is maintained ahead of Thursday’s ECB statement (i.e. price remains above 1.5250) it could prove ominous for the dollar.

GBP
It has been an eventful day for cable with the pair hitting a low of 1.9720 this morning before rebounding by almost 2.5 cents. Sterling is currently trading comfortably above the 1.99 price area. If cable can hold its position above 1.99 into the Bank of England rate announcement tomorrow, we could see a break above the 2.00 line for the first time this year, if the Bank do what is expected and stand pat on interest rates this month. The non-manufacturing sector expanded by more than expected in February and when today’s PMI is looked at together with Monday’s manufacturing PMI, it suggests the industrial sector is proving to be resilient in the face of a major credit crisis and a slowing housing sector. Sterling could potentially earn a relief rally after tomorrow, which may benefit it more against the euro than against the dollar, depending on what happens with the ECB. I remain bearish on sterling in the medium to longer term but see no value in selling the currency against the euro or Swiss franc at present price levels. If selling down cable a stop should be placed just above the 2 dollar line because a break above this level could trigger a sharper rally to the upside.

JPY
The only currency which has fared worse than the US dollar today is the Japanese yen, at the time of print. Appetite has risen for riskier high-yielding currencies as stock markets stage a recovery. The yen, being the preferred funding currency of the carry trade, has been the principal loser. The US dollar has returned to Y104, while the euro has sailed over Y159 Wednesday, recording its single biggest day’s gain against the yen in six weeks. If the stock market rally carries over to the Asian session, the yen will retreat further, particularly against the commodity currencies. Markets remain volatile however so any sudden shift in direction could see the yen recover sharply. The best value trade on the yen right now is a sell of EUR/JPY as a rise in risk aversion in the coming days is likely to see a significant decline in that pair. Strategy: Sell EUR/JPY on prices above Y159 with limit targets of Y158, Y157.50 and Y157.10.

CAD
The loonie has gained against every other major currency today as the commodity currency shakes off the Bank of Canada 50 basis point rate cut with arrogant ease. The loonie has shown itself to be largely immune to interest rate decisions in recent months and it is the only major currency that has not been adversely affected by whatever the Bank of Canada might throw at it. Broad dollar weakness and rising commodity prices has seen the loonie push the dollar back to 0.9860 Wednesday, over one cent below the price the greenback reached on Tuesday. As long as this disconnect persists between commodity prices and a slowing global economy, the loonie looks destined to be well supported. The Bank of Canada did clearly state further easing was on the way, something which may limit the extent to which the loonie can appreciate. However a weak close below 0.9850 today could see recent lows revisited later in the week, especially if Friday’s employment data from both the US and Canada proves more positive for Canada. I am bearish on the loonie but just don’t like the market at present, with unpredictable erratic moves commonplace. For that reason I am inclined to hold off coming into the market for now, at least until after this week’s major risk events. Any dips below 1.50 on EUR/CAD offer good buy value for those waiting to pounce on an opportunity. Strategy: Wait until market USD/CAD settles and a sense of normality returns.

Bob B - Mar 5

Bob's Currency Focus - 21:30

EUR/USD
A new day and yet another set of record lows for the US dollar and US dollar index. Sound familiar? On Monday the greenback fell to a lifetime low against the Swiss franc, a lifetime low of 1.5275 against the euro and a 3-year low against the yen. In fact if the current momentum continues, the Swiss franc looks destined to reach parity against the dollar within a few weeks, while the US currency looks set to decline to 100Y. Heightened risk aversion failed to spark support for the dollar and when the ISM manufacturing report for February reported a second contraction in 3 months, the dollar plunged, before recouping most of the losses when a sympathetic bout of profit-taking set in. With markets pricing in a minimum 50 basis points rate cut from the Fed on March 14 and the ECB expected to stand pat again this week, investors can see little reason to buy the dollar. It now seems to be a question of how low the dollar will be allowed to go, as opposed to how low it can go. The weak dollar is fuelling commodity prices which are rising to farcical levels and making inflation the number one issue for most major Central Banks. With the Fed prepared to cut rates regardless of inflation concerns, investors feel justified in pouring more funds into commodities. Indeed ECB Chief Jean Claude Trichet stated today that the US needs to adopt a strong dollar policy – is he perhaps intimating the US Administration and the Fed is engaged in a weak dollar policy? For now it appears the only means of saving the dollar from further embarrassment would have to come from the ECB, possibly through the unlikely event that Trichet will signal a future rate cut from the ECB when he addresses the media this Thursday, after the Committee’s latest rate announcement.

We must wait for EUR/USD to hit a peak under which a new trading range will emerge. The euro could rise to 1.54 this week, if the ECB retains its hawkish tone and if we see more negative data from the US in the way of Wednesday’s ISM Services Report and Friday’s Payroll Report. It is still dangerous to buy at present levels for fear of a sharp reversal and positional traders may want to start looking at EUR/USD as medium term sell down value. Any rallies above 1.5250 are likely to attract strong selling pressure prior to the services PMIs on Wednesday. The first line of euro support is seen at 1.5160. Strategy: Sell on prices above 1.5250 with immediate downside price targets of 1.52 and 1.5170.

GBP
Sterling is virtually unchanged Monday, despite the CIPS Manufacturing PMI for February (at 51.3) printing higher than expected. The Bank of England may be expected to keep interest rates on hold when they meet this Thursday, but judging on how sterling is struggling against every major currency except for the dollar, markets believe the Bank of England is well behind the curve. If sterling is to stabilise, it must break the 2.00 dollar mark on cable because the pound is falling well behind its European rivals, each of which are recording new lifetime highs against the dollar on nearly a daily basis. In saying that, there is no value in selling sterling against the euro or the Swiss franc because the appreciation in these currencies looks overdone for now. Cable still offers the best value for sterling bears, while price remains below the 2 dollar line. Strategy: Sell GBP/USD on prices above 1.9920 with limit prices of 1.9820, 1.9780, 1.9740 and 1.9680. Place a stop loss above 1.9770 or 2.00.

JPY
The dollar fell to below Y103 today for the first time in 3 years and an imminent retreat to Y100 now looks on the cards sooner rather than later, particularly as risk concerns continue to dominate markets. Data out of the US Monday did little to perk up the mood, although the dollar has come off the low of Y102.60 hit during the European session. The euro also dropped to below Y156, before recovering to Y157. While concerns over the global economy and further narrowing in interest rate differentials will benefit the yen, any reprieve in global stock markets could trigger a sharp yen sell-off in the short-term, given the extent of recent gains. There is definite short-term value in buying the dollar against the yen on prices below Y103, even if there is the risk of further losses in the coming days. There is potential for the yen to extend its gains against the euro, over the medium term. It is notable that there have been few complaints from Japanese officials over the appreciation in the currency, so direct market intervention is unlikely for now.

CAD
Canada’s economy appears to be moving in the same direction as the US economy. Quarter 4 GDP stumbled to a miserable 0.2%, while the annualised growth rate at 0.8% was almost as bad as the 0.6% recorded in the US. To make matters worse, the year ended with a 0.7% contraction in growth, much worse than the -0.2% forecast. The stage looks set for a 0.5% rate cut by the Bank of Canada Tuesday and anything less at this stage will be taken as a sign of weakness and uncertainty on the part of Mr Carney, presiding over his first monetary policy decision since taking over a Governor on Feb 1st. Commodity prices are keeping the loonie inflated in value at present and speculators seem determined to bet on the commodity currency regardless of what disconnects there may be with the economy. Speculative long positions on the loonie grew by a net 17.3K last week on Chicago’s Mercantile Exchange, the highest this year. The Bank of Canada needs to be unflinching in the decision and statement it issues tomorrow. USD/CAD should rally to above parity in the event of a 50 basis points cut. Traders are advised to be ultra-cautious when trading the loonie because erratic and unpredictable movements, usually favouring the loonie, are regular occurrences of late. I prefer to buy USD/CAD and target 1.0050 in the event of a 50 basis points cut Tuesday.

Bob B - Mar 3