Thursday, July 24, 2008

Bob's Currency Focus

Euro zone data keeps disappointing and this morning’s German Ifo business survey reported the sharpest fall in business sentiment since 2001. Also, preliminary readings for the manufacturing and services sectors of the euro area see another month of contraction in July, with the slowdown accelerating. The Ifo business climate reading fell to 97.5 in July, down from 101.3 in June. The composite PMI for the euro area (measuring both manufacturing and services economic activity) is seen as falling to 47.8 in July, from 49.3 in June. French and Italian business sentiment also fell more than expected in July and all told, economic woes for the single currency zone are mounting. It is difficult to fathom that the ECB has just hiked rates against this background and only time will tell if that policy decision was a big mistake, especially if oil prices continue to ease. The dollar has made significant gains overt the past 2 days but it is essentially only back to the levels it was trading at prior to the breakout of the Fanny Mae/Freddy Mac crisis 2 weeks ago. The real test for the dollar will be if it can break below 1.5610 against the euro and hold below this level. If we can achieve that, it may be time to look for a possible retreat all the way back to 1.5283. The euro picked itself up impressively from a low of 1.5637 to reach 1.5697 in the hour following the Ifo Business survey release and after a brief stint above 1.57 after US existing home sales numbers disappointed the pair is back around 1.5670. Oil prices will continue to play an important role in the greenback’s fortunes. There is a sense that sentiment is beginning to shift against the euro and although weak US economic data will curtail dollar gains, traders need to be on their guard for any comments from ECB and Fed officials. Any softening in tone from ECB Council members will hurt the euro. If the dollar holds below 1.5720, it is worth selling down from close to 1.57, as the pair may have another run at that key 1.5610 price level either today or tomorrow. Any break below that should see us return to 1.55, possibly by Monday. Today is a very important day for direction, because the dollar has not managed a 3 day rally against the euro for 2 months.

Sterling has had a weird couple of days. On Wednesday it rose sharply against every other major currency, although its gains against the dollar were more modest, while today it has plunged after European currencies came under pressure early this morning and after it was announced monthly UK retail sales plunged by their heaviest amount since the series began. The Bank of England minutes on Wednesday reveal Tim Besley voted for a rate hike at the MPC meeting earlier this month. It is the first time a member has voted for a rate increase since July of last year. The hawkish bias to the minutes sent sterling rising rapidly as investors began to price in the possibility of a future rate hike from the Bank of England. In fact the minutes even stated that August would be a more appropriate time to increase rates, if a rate hike was warranted. One has to wonder if the MPC is seeing the same data as the rest of us. The dollar has finally managed to break below the 1.99 support point that held firm for 10 days and if it can push sterling below 1.98, then we should have a trend reversal and the pair could go considerably lower over the next week. 1.99 is a key price barrier and if the dollar does not hold it, the pound could make another run towards the 2 dollar mark and 2.01. Tomorrow’s GDP release in the UK is crucial and if it shows a contraction, which is unlikely, then sterling will sell off very sharply. If selling down, traders should place a stop around 1.9910. The pair is still being bought on dips and remains dangerous for bears, until 1.98 is broken. Sterling could find itself pegged back towards 79.50 against the euro by early next week.

The yen has been hammered this week by the dollar, the euro and the pound. The euro registered a new lifetime high on Monday at 169.95, while the dollar hit a 7 week high against the yen yesterday just below 108. The Japanese currency has stabilised somewhat today as falling stocks and a rate cut in New Zealand has temporarily stalled the carry trade. If the current stock rally comes to an abrupt end, then the yen could gain significantly against the US dollar, given the pair currently trades 4% above the worst levels from last week. However any resumption of the stock rally will continue to see the yen out of favour and the dollar could potentially try to rally all the way to 110 over the next week. There is no value on selling the yen against any currency at current prices, given the risk, while any euro moves towards Y170 offer very good medium term value for a sell down on what is the most over-stretched of the yen crosses.

There was no economic data out of Canada on Thursday and the currency continues to trade within a tight range against the greenback, moving between 1.00 and 1.0115. While headline inflation rose to over 3% in June, the core rate was contained at 1.5% and this affirms the view the Bank of Canada will keep rates on hold for the foreseeable future. Commodity prices have come off considerable in the past week, with oil prices shedding $20, yet the loonie has managed to hold its own across the board, indeed making gains against the euro and the yen, while holding tight against the US dollar. A sustained slump in commodity prices will eventually hurt the loonie against the US currency and it is difficult to see the pair not returning to 1.02 over the next week, unless there is some renewed scare in financial markets. The loonie has also been helped by a rise in risk appetite, but that too is under threat with the recent stock rally looking shaky by Thursday. The euro has fallen to 1.58 this morning, as I projected a few days ago and there is the potential for a decline to 1.56 for EUR/CAD over the next week, if the euro continues its decline against the US dollar.

Bob B - July 24

Monday, July 21, 2008

Bob's Currency Focus

Holding in a tight range since last Tuesday’s surge to a new lifetime high. The pair peaked at 1.5906 today before declining to the 1.5850 price range, the equilibrium price for the pair over the past 4 trading days. With no data to direct price, the pair is practically in limbo today, although there remains a decidedly bullish tone as every dip in price is met with a rapid recovery. It is disheartening for dollar supporters to see that 3 days of a rally in stocks and a sharp sell-off in oil has failed to muster any rally whatsoever in the greenback and it seems the market is only interested in news that can justify sinking the US currency further. We are at a very important junction for the pair and the next move up or down could prove critical for how this pair trades through the rest of the summer. The dollar has to send the pair below 1.5750 and push towards 1.5610, otherwise another rally towards the lifetime high of 1.6025 looks certain over the next week. There are a few important indicators out in the euro zone this week, including the German Ifo business survey and preliminary readings for the manufacturing and services PMIs. These could surprise to the downside and pose some risk for the euro. It has been remarkable how silent the ECB has been over the past week in response to the recent run-up in the euro and softening economic data and this may be taken as a signal the ECB is not at all uncomfortable with the current high value of the single currency. There was ample opportunity over the past week for ECB officials to take the steam out of the euro’s rally, but it failed to do so. However, the recent rally in the pair has been wholly because of problems in the US banking sector and if risk aversion abates over the course of this week, the euro could give back most of those gains. While confidence in the US economy remains low, the euro will remain well bid and the dollar will struggle to make much progress, regardless of how the data prints. The dollar must break below 1.780 and hold below this level before we can talk about a possible reversal of sorts. On value grounds, it is worth selling at prices close to 1.59, although traders need to be aware the market may be seeking to push the pair back above 1.60 in the short term.

Sterling continues to hold its own and cable is trading on Monday in exactly the same range as on Friday last, while the pattern is identical, an early dip in the morning to 1.99 before a recovery to 1.9970 in the afternoon session. Sterling is benefiting from a temporary flow of funds into the currency and this should not be mistaken for a reversal in trend. The economic fundamentals out of the UK keep getting worse and this morning Rightmove reported house prices fell by 1.8% in June. There are a number of key releases this week in the UK, starting with Wednesday’s BoE minutes, followed by retail sales on Thursday and an advance print of quarter 2 GDP on Friday. Markets have essentially priced in a very hawkish MPC but if Wednesday’s minutes show Committee members to be more concerned about declining growth than rising inflation, then sterling could sell off very sharply. Sterling offers no value on prices near 2 dollars, even if the pair temporarily shoots above this level. When markets regain some confidence in the US currency, sterling will be an immediate target of market traders. If UK data prints on the poor side this week, the euro might also rise to above 80 pence and possibly gain some momentum to see it close in on the record price near 81 pence. I would wait until after Wednesday’s minutes before entering the market on sterling, as it in itself could trigger some very volatile trading and we will be in a much better position to judge sterling’s prospects after we have had an insight into the thinking of MPC members.

The yen fell to a record low against the euro Monday as risk tolerance levels rose thanks to 4 consecutive rallies in global stocks. The pair hit a high of 169.90, which is an extraordinary price when one considers the market panic that followed the Fannie Mae and Freddy MAC mortgage crisis in the US early last week. The euro’s price is totally exaggerated and one could do worse than sell the EUR/JPY down at the current price around 169.50. If the current rally in stocks proves to be a false dawn and risk aversion levels rise again, the yen will gain very quickly. In addition, the euro has a number of economic risk events this week, which could send the single currency lower. Economic data out of Japan will not have a market impact this week and with the calendar in the US, also on the light side, the yen’s fate against the greenback will very much depend on the performance of US stocks. There is definite value in selling down, if prices rise close to 108, as the pair actually hit a low of 103.78 last week, and the pace of the dollar’s rapid recovery might prove to have been premature.

The Loonie has taken on a firmer tone on Monday and has made modest gains across the board, against all major currencies. There was no economic data on Monday to influence the currency, although a rebound in commodity prices has offered some support. The market has been reluctant to see the loonie break parity against the greenback over the past week, but an upside surprise in Tuesday’s domestic retail sales could be the trigger the Canadian currency needs. Also this week we have got the latest consumer price inflation report on Wednesday and here again, another higher than forecast print, especially in the core rate, should send the loonie higher. The loonie should also be able to appreciate to at least 1.58 against the euro, while the currency would also benefit from any sustained rally in the US dollar, against the other majors.

Bob B - Jul 21