Wednesday, March 12, 2008

Bob's Currency Focus

The dollar has capitulated against the euro again Wednesday as skeptism grows about the impact of the Fed’s liquidity plan announced Tuesday and following reports the United Arab Emirates wishes to remove its peg from the US dollar. The dollar’s decline has hit an alarming pace with the single currency now having appreciated by 7 full cents in the past 2 weeks. Economic data out of Europe has mostly exceeded expectations over this time and has given added confidence to those that believe in the decoupled theory, helping to push the euro higher. January’s Industrial Production numbers printed higher than forecast and this was the catalyst for today’s dramatic early move which saw the euro rise to 1.5450 almost instantly. The pair rose to 1.5510 during the American session and currently trades around this level. The dollar appears incapable of sustaining any kind of correction and we may have to wait until after the Fed meeting next Tuesday, before we see any stabilisation. It appears there is no upper limit for the euro but the single currency’s gains have been so rapid that the pace of its appreciation goes well beyind the underlying fundamentals and a sharp reversal could happen at any time. The dollar must keep the euro below 1.55 if yet a new distress phase for the embattled greenback is to be prevented. It is difficult to know where a dollar rally might come from, given the extreme nature of the negative sentiment that has crippled the currency. It is pointless buying the dollar on a positional basis right now, until there is firm evidence of a top being in place. Strategy: Buy euro on dips towards 1.53, placing a stop loss below 1.5280. Upside limit targets are 1.54, 1.5450 and 1.55.

Cable rallied on the coattails of the euro Wenesday as broad dollar weakness enabled sterling to hit a fresh 2008 high of 2.0240. This came on a day when the UK Chancellor downgraded the economy’s growth forecast in his budget speech to Parliament. Sterling is likley to maintain a firmer tone against the greenback in the lead up to next week’s Fed, although there may be dips back to the 2 dollar mark. There are no data releases out of the UK through to the end of the week and sterling’s direction will be dictated by the dollar. A sharp decline in global stocks will also tend to undermine the UK currency. There is no value in selling sterling against the euro at the present price and indeed the EUR/GBP pairing could fall to 0.76, if we get some broad-based profit-taking in the euro. I do not favour selling cable until markets settle, if indeed they do, after next week’s Fed meeting.

The yen bounced back today against the dollar after having taken a hammering Tuesday. The Japanese currency is back trading clost to 102, up over 1% on the day. Today’s appreciation comes thanks to dollar weakness Wenesday, which extends across the board, even though global stocks rallied for a second consecutive day. On the homefront, Japanese quarter 4 GDP surprised forecasters, when the revised number printed at 0.9%, unchanged from the preliminary release. Most economists had expected a revision downwards. With the US currency unable to offer any resistance at present, it is now only a matter of time before the USD/JPY pairing trades below Y100. This could happen within the next week. It is dangerous to buy the yen at present values against the dollar and traders are advised to wait for rallies to at least 103.50 before shorting the pair. The yen offers definite value against the overbought euro, especially on prices approaching Y160.

The loonie has had an eventful day, virtually unchanged against the greenback, but sharply lower against the euro, sterling and the yen. The prospect of lower interest rates and contagion from the US economy are beginning to weigh on the loonie with support from elevated commodity prices unable to push the Canadian currency higher Wednesday. USD/CAD has traded within a 0.9839 to 0.9982 price range this week and neither side has managed to carve out an advantage. Greenback supporters are unlikely to weigh in heavily ahead of next week’s Fed, so the loonie should be able to counter most upside rallies. Any significant rise in risk aversion would also make the loonie vulnerable and could see it fall below parity again. There is no value in buying EUR/CAD unless the pair dips towards 1.51. I would be inclined to wait until after the Fed next week before going long on USD/CAD again.

Bob B - Mar 12