Wednesday, May 28, 2008

Bob's Currency Focus - 17:30 GMT

The euro made an early rally on Wednesday but topped out at 1.5760 before falling sharply. The pair has gone as low as 1.5610 today and momentum has swung in favour of the dollar. The dollar has moved with oil prices this week, losing on Monday as prices advanced, gaining on Tuesday as oil prices plunged and moving up and down with the commodity today. A serious falloff in oil prices could trigger a significant dollar rally back to the 1.53 region at least, as the interest rate outlook for the US currency is not nearly as bad as is currently priced in. A decline in oil prices would lead to a softening in global inflation and make it easier for other Central Banks, like the ECB, to cut interest rates in order to offset against weakening growth. The euro area posted a trade deficit of over EUR15 million in March, much worse than forecast, and while one month’s data does not define a trend it does suggest the strong euro is beginning to have a very negative impact on the competitiveness of exports from the euro area. US durable orders declined by 0.5% in April, slightly less than the 0.7% forecast, but when one excludes transport items, orders increased by 2.5% on the month. This data further underlines that rocketing oil prices are having a damaging impact on the wider economy, with producers of large transport vehicles and cars suffering whereas producers of other large ticket items have seen demand for the goods rise. We are likely to see further volatility through this week and the dollar will struggle to retain a firm tone, unless commodity prices continue to decline. A push through 1.56 could see the pair fall to 1.5550 and a push through here would open the pair to a wider trading range of between 1.53 and 1.58. The euro offers no value on prices close to 1.58 and the best strategy for now is to sell on any rallies that come close to this price level.

Sterling continues to live a charmed life as the currency benefits from a less chance of an immediate rate cut from the Bank of England because of the growing threat of inflation. This protection is likely to be short-lived however as the underlying fundamentals for the UK economy deteriorates and the current market is essentially masking the reality. Any sharp decline in the Gfk survey on consumer confidence Thursday could trigger a sterling sell-off. Cable offers little value on prices close to 1.9850 and this price region offers good value for shorts. Sterling is being protected in the short run as traders move from euros to pounds to balance a slight breakdown in confidence in the single currency. A rise in risk aversion would lead to a capitulation in carry trades and this is another risk to sterling over the coming days. Cable looks destined to continue to trade between 1.94 and 1.9950, with the potential for a sharp move downwards to the bottom of this range over the next week. Sterling will struggle to extend its gains against the euro beyond 0.7850 and there is the potential for a rapid return to 0.80 later in the week. Strategy: sell cable on prices approaching 1.9850 with target priced of 1.9750, 1.9710, 1.9650 and 1.96.

The yen sold off aggressively early Wednesday although it has managed to claw back some its losses since. While equities may be on the decline, currency traders have shown renewed appetite for the carry trade and all the yen crosses are up today, including AUD/JPY, GBP/JPY and EUR/JPY. The Aussie dollar has pushed above Y100 and has managed to hold it all day, despite a retreat in commodity prices and a reversal for equities. There is significant complacency in evidence out there but it is dangerous to buy the yen when the market is in this mood. The only value for selling the yen remains on USD/JPY with any dips towards Y103 offering good bid value, with Y105.50 remaining the resistance point at the top of the current trading range. The euro offers no value against the yen on current prices and even if the EUR/JPY pair does advance to Y165, there is a very real danger of a dip to Y158 over the coming weeks.

The loonie’s resilience shone through again Wednesday with the Canadian currency gaining against every major currency with the exception of the Aussie dollar. The greenback failed to extend its rally beyond 0.9950 and if the pair closes below 0.99 today, the immediate momentum will be back with the loonie. There was no economic data out of Canada today but traders need to be wary of this Friday’s GDP release because the figure is likely to be poor and it should arouse significant selling interest in the Canadian dollar if GDP comes in close to flat or negative. The Canadian economy is arguably slowing at a faster rate than that of the US and Friday’s GDP data could surprise many. If the loonie does push the greenback down to 0.9820 again, this is a good buying opportunity because with the level of risk stacked against the Canadian dollar, USD/CAD could rally sharply through parity and back to 1.02 in a couple of days. The euro also offers short-term value on prices below 1.5450 against the loonie.

Bob B - May 28