Bob and Ted's Forex Blog

The Dollar, Bernanke and the Golden Goose - Are they Coming Home to Roost?

2009-12-07T22:36:00.012Z

It is interesting to note the top three headlines on CNBC business news this evening:

‘Why are Investors so Worried about a Stronger US Dollar’

‘Fed will Keep Rates near Zero through 2010’ says Bill Gross

and

‘Rates to Remain Low’ says Ben Bernanke

Why is it that such mundane speak is making headlines all of a sudden (apologies to our other Bob on the floor)? Well it’s like this: last Friday the dollar had its only significant one-day rally in 6 months and early on Monday the unthinkable happened, i.e. the dollar sustained a rally into a second day, something that has been rather unheard of since last March. This has put the frighteners on many institutional investors, most of whom have made large profits on the back of a weak dollar, and basically on nothing else. If your reason for financial living begins to be questioned or it is beginning to wear thin, you look to your usual suspects - financial leaders like Ben Bernanke and Bill Gross to reaffirm your (albeit fundamentally flawed) strategy and have them undermine the counter view. This is exactly what has happened today although in Gross’ case he was merely putting his own spin on what Bernanke himself had just said. Why rein in the wisdom and direction of a herd when the good shepherd is on your side?

And why the sudden need to pull the rug from under the dollar? The reason is simple – Friday’s jobs report reveals that in November the US shed the lowest number of jobs it has lost in any month since the recession started 2 years ago. The marginal 11k loss caught most analysts by surprise, with even the most conservative data watchers having predicted a job loss of at least 100k. To compound matters, the number of jobs lost in October was revised downwards by a further 80K, thus the jobs report across the 2 months was far less negative than nearly everyone had anticipated.

So why is such positive news proving worrisome for US investors? Why is 'not so bad' news bad for stocks and commodities (Gold fell almost $50 an ounce last Friday). Surely in a year where there has been zero to cheer about down on Main Street some little bit of respite in the labor market would be taken positively by markets, markets that are meant to represent these same economic facts and prospects? The problem of course is that financial markets do not represent economic facts, not currently in any event. There is a massive disconnect between main street and Wall Street, something that has only widened dramatically this year, despite major assurances from Messrs Bernanke and Company following the financial market collapse last year. In just six 'primarily recessionary' months Ben Bernanke and his cohorts have managed to fuel an asset bubble in stocks and commodities which in normal boom times would take 8-10 years to build. By bending over backwards and sideways, and somersaulting over the Chinese and other US debt holders, Bernanke has pumped enough ‘money for nothing’ into the system to trigger a 60% plus rally in US stocks between March and November and to infuse sufficient panic about the US ‘well being’ that investors have flooded into all forms of anti-US wellbeing financial instruments like gold, oil, every other dollar denominated commodity known to mankind and every single currency that is not a US dollar or a US dollar proxy (such as the Yuan). The resultant depletion of the value of US denominated assets relative to other currencies is quite staggering in the context of it only taking 6 months to get there. Loose fiscal policy from the US Administration and almost limitless free money from the Fed has enabled unrepentant investment banks and other greed-driven financial institutions to say thanks by creating an enormous bubble in financial markets, the likes of which has never been seen before.

The much publicized recovery we hear about every day on CNBC and Bloomberg is another one of those recoveries that is unfortunately divorced from economic reality (we love Maria Bartiroma but pretty please they need to change those other records). Hedge fund managers are falling over themselves (many on the airwaves) to try and justify their reckless trades and investments and thus the lauding of them folk Bernanke and Gross, who always seem to serve the interests of financial markets in those high gloss towers over the economic coalface down on Main Street (well, at least Bill has a colourful reason, albeit a selfish one, but our Ben was supposed to have read the black and white pictures in those 1930s annuals). If Ben or anyone looks at the latest Commitment of Traders Report on gold, we find that there is currently almost $28 billion of speculative long positions on gold (all managed funds) against only $860 million of short positions. This means a staggering 97% of speculative trades are betting that gold is going to continue to rise in value against 3% that believe it will fall – it hit $1226 an ounce last week. Such biased positions are not sustainable in the long run. They never are. Gold is very close in bias terms to where oil was in July last year before it crashed. Other notable extremes exist for many other related instruments including silver, the Aussie dollar and the Swiss franc. Trichet used to warn of such investment extremes before but even he has gone to pasture on this one, although he is the most consistent vocal on the needs for a stronger dollar, whatever that means. Tim Geithner's vocal interventions for a stronger dollar are laughable efforts and usually tend to lead to the dollar being sold off more sharply. US policy on the dollar is kinder garden stuff and when we hear officials advocate a strong dollar it usually can be translated as meaning 'a weak dollar please, but not so weak today as it might be please - (tomorrow).'

In a market where we have instruments with anything from a 2:1 to a 30:1 bias against the US dollar, it does not require sound economic reasons for market players to buy the dollar to initiate market chaos and to force a meltdown of asset prices. It simply requires a reality check on the part of those over-zealous investors (currently the majority) and to see an inevitable move on their part to the exit stalls. When a huge Stadium becomes overcrowded panic can set in more readily and a stampede could ensue, without warning. Bernanke and the world’s governing body (Central Bankers) have once again failed to patrol this particular Stadium and their general ignorance to events and their total inability to learn any lesson from what happened just 12 months ago means that the next fatal episode will lie at the door of their layer of command. They are the upper hierarchy of the global banking system, and they will be responsible for the next bubble-bust and financial crash, soon to be visited upon us, barring a miracle. Let us just hope this particular goose does not turn out to be a Bernanke roast that ends up on our table this Christmas.

We may need Bill Gross to give up the day job and work them airwaves again to keep Ben's goose at bay (mind you, it must be tough to have to manage the world's largest bond fund during a time of great economic distress, yet have all the time in the world to talk on TV). Way to go, Bill.

Bob B - Dec 7, 2009

Has the RBA lost the plot?

2009-10-19T22:57:00.007+01:00

The Reserve Bank of Australia's decision to raise interest rates earlier this month led to a massive 8% rally in the Australian dollar against the US dollar over the past two weeks. The Australian dollar has now rallied over 50% since early March, a rally so sharp that it raises very serious questions about the currency's credibility as a reliable asset form. The currency has now seen a combined 100% swing in its valuation (50% each way) against the US dollar over the last 15 months. The Australian economy has weathered the recent recession better than all developed economies, experiencing only a temporary negative dip in GDP. How then does this explain the massive volatility in the country's currency? One thing is does demonstrate to us is that the value of the Australian dollar has very little or nothing to do with the actual performance of the Australian economy and its trade volumes, but more to do with the speculative greed driven by the 'money for nothing' monetary policy of the US Federal Reserve (and the Bank of Japan before it). The loose monetary policy of the US is seeing speculators (many of them major US investment banks) use the dollar as a funding currency to essentially sell the dollar in favour of any liquid asset that is not the US dollar. So while hundreds of thousands of American citizens find themselves being made redundant every month, hundreds of billions of the free money being given to US banks by the Fed, supposedly to stimulate the US economy, is instead being used to speculate against the US dollar and in effect bet against a credible recovery in the US, thereby triggering a rather rapid acceleration in the depletion of the wealth of the US population. The ridiculous price surges being witnessed in commodities and many currencies has absolutely zero to do with the economic principles of demand and supply and everything to do with highly leveraged risk and the unchecked and unregulated transactions of large hedge funds and investment banks.

Many Central Banks continue to misread financial markets, primarily because they have not got a clue how they are operated, let alone regulated. The Reserve Bank of Australia takes the biscuit in terms of universal ignorance and shocking misjudgment. We should not be too surprised though as the RBA is the only central bank in the developed world in recent years that intervened to try to prop up its currency at a time when it was grossly overvalued. That episode might go some way to explaining why Governor Stevens chose to hike interest rates at a time when deflation is more of a concern across the globe than inflation. The RBA have a strong Aussie dollar policy and they are prepared to risk the long-run sustainability of the Australian economy in exchange for attracting short-term funds. The US economy has suffered hugely over the past 2 years of recession and the Fed's ongoing accommodative policy of low interest rates is reflective of an economy in protracted turmoil. The most recent current account report out of the US shows the US current account deficit running at 3% of GDP over the past 12 months. The corresponding report for Australia, where the RBA has just risen interest rates, shows a deficit of 3.9%. The disconnects between the Australian dollar, interest rate policy and harsh economic reality are stark and the RBA's continual misreading of the economic world portrays Governor Stevens as a type of Alice in Wonderland type character.

Let's hope his fable does not have a sorry ending, for the citizens of Oz and all its companies that need to export to the outside world.

Bob - Oct 20

The Elastic Band that is the Dollar

2009-09-15T08:35:00.001+01:00

The dollar has fallen dramatically in recent months and it took a leg lower in the past week when increased liquidity after the summer holidays saw investors put their money into higher yielding currencies and metals. Despite the usual garb being published daily about the 'dollar being finished' and US debt spiraling out of control, there are some dangerous extremes developing in financial markets again and all the evidence points to financial markets once more being divorced from economic reality. A sharp reversal is inevitable, with the strength and severity of the reversal likely to be determined by the length of time it takes for markets to meaningfully 'correct' or pull back from these extreme levels. The longer it takes, then the more taut the elastic becomes and the more severe the reversal.

Let us look at the key events that lead me to this conclusion.

1) Gold prices.
Gold has risen sharply in the past 2 weeks, to over $1,000 an ounce for the first time since early 2008. Closer examination shows that this increase is not owing to any physical demand for the commodity but by speculative demand from money managers. Open interest hedge fund positions in gold at present, sees over 98% of hedge fund monies being net long on gold. This is an extraordinary extreme no matter how one looks at it and history tells us biased positions do not last forever and the greater the bias the greater the potential for a fall or collapse. Astute money managers should right now be reducing their exposure to gold for this reason, if for nothing else. Gold has the potential to retreat back to $800 or even less within no time, if some event triggers a sale. Central banks could deliberately bring about this collapse in the gold price, if they chose to do so, and there are several reasons why it might be in their economic interests to do so. Gold is traditionally used as a hedge against inflation but currently the globe has a deflationary problem and present and future US market rates do not hint at any looming inflationary issue for the world's largest economy. Gold prices are completely out of sync with interest rate expectations, which indicates gold prices are greatly inflated at current levels. Be warned!

2) Commodity Currencies.
The economic exaggeration currently reflected in equity prices is also evident in the price of commodity currencies. The Australian and New Zealand dollars are up over 40% against their US counterpart since March. The Canadian dollar is up over 20%. The global recovery story is only in its infancy and currency moves of the order of 40% are nonsensical, particularly for the Aussie and New Zealand dollars which represent economies with pretty dire current account deficits. This currency appreciation is based entirely on market speculation. 90% of non-commercial open interest in the Aussie dollar on September 1st was made up of speculative long positions. This represents an unsustainable extreme. It also demonstrates that Central banks have yet to grasp how speculative financial markets are free to derail competitive currency exchange. Central Banks have learned nothing from the recent market collapse and they continue to watch in silence as leveraged speculation in currencies leadings to a pronounced instability in exchange rate markets. The Australian and New Zealand dollars are due for sizeable corrections sooner or later, with both currencies currently punching well above their real exchange rate values.

3) Japanese Yen
What has been striking about the past 2 months in particular has been the replacement of the Japanese yen as the world's favourite funding currency (i.e. by speculative risk merchants) by the US dollar. What this means is that carry trades (speculative bets on higher yielding currencies) are now carried out using the US dollar (the dollar has a paltry 0-0.25% yield rate). 3 month libor rates currently have the dollar cheaper than the yen as a funding currency for the first time in many years. Carry trades, while attractive in some ways, are also very destructive to international trade competition as a large volume of speculative bets involving the same funding currency has the effect of depreciating the value of that funding currency, sometimes quite considerably. We also know that market scares lead to unwinding events that can result in a very sharp appreciation in the funding currency. We have seen this over many years with the yen and for now the dollar is the favoured vehicle for carry trades. At present almost 80% of open interest in the Japanese yen is net long, a quite remarkable position given we have had almost 6 months of unbroken growth in stock markets and sustained investment in riskier assets. It is safe to assume that the the bulk of the biased positioning in the yen right now is against the US dollar and any eventual return to impartial positioning, will result in a sharp reversal and a significant rise in USD/JPY. It is almost certain that interest rates will rise in the US before Japan and will rise much more quickly, something that will spark major capital flows from yen to dollars. The market will figure this one out eventuality, sooner rather than later, so look out for a sharp rise in USD/JPY before the end of this year.

PPP
What most speculative traders and daily analysts tend to ignore is purchasing power parity. It is almost incredulous that over a period of a few months an Australian can buy 40% more with their money than a US citizen can in US dollar terms. The prior Aussie rally to over 95 US cents can be discounted as that was driven exclusively by an asset bubble that burst last year. The differential standard of living in both the Australian and US jurisdictions has hardly changed in the past 6 months, yet the exchange rate markets that Central Banks have criminally refused to regulate now sees Australian citizens being able to buy 40% more than US citizens thanks to the unchecked greed of hedge fund managers. Of course we know that this is a false exchange rate, but at the same time it presents a fantastic opportunity for Australians to buy up US dollar denominated assets at a huge discount. Much the same can be said for Japanese and European (non-UK) investors. Because of the weak dollar exchange rate, it is an excellent time for Asian Banks to buy US Treasurys. European bonds are grossly over-priced for the Japanese and Chinese because of an inflated euro (which is over 20-25% overvalued) and the safer option in the longer run is to stick to buying US bills (forget what the doomsday merchants claim for the US, because we have learned in the past 2 years that the US is where it matters and that any negative contagion from there is global). Capital flows will eventually flow back into the US because of the gross imbalance in PPP and it will happen in a very significant way, once evidence of sustained economic recovery in the US is firmly established. The euro is currently benefiting in an environment that sees zero to minimal capital investment in the non-speculative 'real' economy,' but it will find itself out of favour when capital flows begin to pick up in earnest, quite simply because it is way too expensive to invest in the Eurozone. Even in good times, Eurozone economic growth is always a laggard behind the US and Asia.

Bob B - Sep 15, 2009

Disorderly Financial Markets

2008-10-29T17:04:00.001Z

We have entered a very strange world of whiplash-like shifts in currency prices which has made trading a highly dangerous and totally unpredictable game. Over the past week we have seen record drops in many currencies against the dollar and the yen while in the past 2 days we have seen lazarus-like recoveries for the euro, sterling and all of the commodity currencies. The bounce in stock markets over the past 24 hours does not feel real and given the economic fundamentals are deteriorating further, it is also not sustainable. There have been some farcical episodes on the world’s stock markets with the German DAX gaining 11.28% on Tuesday, thanks primarily to some bizarre trading on a sole component, i.e. Volkswagon. Sterling has gained 20 yen since its lows of last Friday, while the UK currency has earned 10 cents against the dollar since yesterday morning. Add to this the Aussie dollar being up 15% against the yen in a day and the Canadian dollar up 8 cents against the dollar in the past 20 hours and you begin to see just how disorderly and ridiculous the world’s financial markets have become. It is almost laughable, except there are some big monetary exposures behind these huge swings which are proving to be very expensive for those holding them. It is simply not worth trying to trade in these conditions, unless traders are using the swings to unwind previously exposed positions. One should not be fooled into thinking that trends are reversing, they are not. The high yielding currencies in particular could get a hammering later in the week, especially against the US currency.

There is much talk about the Japanese authorities intervening in the currency markets, following a G7 meeting of finance ministers at the weekend, when the subject was discussed. We will not know until after the event if intervention has taken place, but such has been the depreciation in the yen since Tuesday morning that it may well be possible that the Bank of Japan came in and used the global stock rally as an opportunity to sell the yen. One fact is unavoidable though and that is that the yen’s recent appreciation owes nothing to speculators forcefully moving the currency, but rather it is the result of a repatriation of funds back to Japan, as investors liquidate assets which were originally taken out using the low-yielding yen as the funding currency. For this reason, intervention could prove to be useless exercise over the long run as essentially what is happening is that the yen is returning to its base value, having been grossly under-valued for years. The Bank of Japan may even move to cut rates on Thursday in an attempt to curb the currency’s appreciation but again the net result might only be some short term respite. The yen will only truly depreciate again when risk aversion levels abate and investors feel confident to once again fund risky assets in emerging markets through the low-interest yen.

Do not trade in these market conditions! If you must, use 1:1 leverage.

Bob B - Oct 29

Currency Markets a Dangerous Sea to Swim

2008-10-21T15:34:00.004+01:00

Currency Markets have entered a state of panic these past few weeks and there is very little in the way of profitable trading to be made, with wild swings the norm on any currency pair that includes the US dollar and the Japanese yen. The US dollar in particular has reached valuation levels against some currencies that were unimaginable just 3 months ago. While I had been calling the dollar undervalued since the beginning of the year, the steep nature of the dollar’s rise is greatly out of proportion with the shift in economic fundamentals for the leading currency pairs and the dollar’s rally is now overdone. A glance at the commitment of traders report for any of the past number of weeks, a report that details the number of open currency positions on the Mercantile Exchange, makes for interesting reading as it clearly indicates that the dollar’s current appreciation has little or nothing to do with traders bets on various currencies. The dollar has appreciated as sharply as it has done because of the credit squeeze and the shortage of dollars on the open market and also thanks to the repatriation of funds back into dollar assets, primarily from the emerging markets, as investors unwind their riskier assets.

The end result is a total distortion of currency markets with some of the smaller currencies at or near capitulation status. The yen’s sharp appreciation is one of the major problems and as long as the Japanese currency remains as strong as it currently is, we will not get normality back to the markets. The yen has appreciated over 30% against Australian Dollar since July and is up 20% against most other major currencies in that period, excluding the US dollar against which it has gained 7%. In the past month, the US currency itself has gained almost 20% against the Canadian dollar, its largest trading partner.

What does all this mean for currency traders? It means the market is unpredictable and dangerous to trade. It is largely a fruitless exercise trading intra-day because fear is the King and fear rises or subsides depending upon how stock markets perform and these are currently swinging madly from one side to the other without warning. Technical indicators mean little or nothing in this market with currency prices sailing through support and resistance points as if they didn’t exist. Economic data is also largely ignored as stories about credit problems, bank rescues and fiscal bailouts take precedence.

What should one do? Nothing! Sit on the sidelines until liquidity levels reach something akin to normal. One should also remember that when liquidity levels do normalise, the US dollar and the Yen will come under intense selling pressure. Positional trading is also dangerous right now because while the value trade would appear to be to sell the dollar or the yen, the result tends to be the opposite as both currencies continue to benefit unfairly from the broader market uncertainty and traders can be left holding positions with huge deficits. EUR/GBP is the only currency pair I like at the moment and with neither side having a hold on direction it can be lucrative to trade in either direction. The range looks to be from 0.77 to 0.7850 at the moment and I have also noticed that in recent weeks, the pound usually does better during the morning session while the euro then retaliates during the US session.

Trade safely, if at all in this market, and avoid the dollar and the yen.

Bob B - Oct 21

Market Mayhem

2008-10-02T17:48:00.001+01:00

The dollar is on course for one of its best weeks in history, despite a tirade of weak economic data out of the US and a worsening of the credit crisis, with no official approval yet on the US government’s rescue package for the banking system. How can the dollar make such hay in this environment?

The answer is simple. FEAR! Logic abandoned financial markets several weeks ago and now traders and investors alike are living on their wits. The credit crisis has spread across the globe and with liquidity having dried up, markets are much thinner than normal and it does not take much to move them in one direction or the other. It has been all one way traffic this week however with the dollar and the yen taking all other major currencies to the cleaners. The euro at one stage today was down 9 cents from where it was trading against the dollar last Friday. Sterling was down 11 cents against the dollar in the same time. The euro fared even worse against the yen which has been the week’s strongest currency. Risk aversion is at an extreme level and funds are flowing into the low-yielding yen and dollar at a breath-taking pace. The commodity currencies have also been hit hard with the Aussie dollar coming off the worst. The carry trade has been completely liquidated with the yen now trading at multi-year highs against all of the high yielding currencies. We should be close to the bottom in terms of many of these currencies, but logic does not apply in the present market and economic indicators and technical charts have virtually zero influence. The greenback has today hit a 12 month high against the euro, the Aussie dollar and the Canadian dollar.

The euro has been plagued by bailout stories of European banks and this has badly damaged the once teflon currency. The short-term outlook may be unkind to the single currency but when the dust settles, the euro’s healthy current account balance should prevail over the worsening debt situation in the US. The ECB is resisting calls to cut interest rates but with some European Governments taking it upon themselves to resolve the banking crisis, the ECB’s credibility and indeed the euro itself is being undermined.

This is not a market for small traders and intra-day trading and most traders are advised to avoid it until we see some semblance of order once again. If you must trade, employ very low leverage to minimise your exposure and trade pairs that do not include the dollar or the yen. A backlash against the dollar will happen, but only once market players have calmed down and there is some evidence of light at the end of that dark tunnel.

The regular column will return next week.

Bob B - Oct 2

Bob's Currency Focus - Sep 22

2008-09-22T16:20:00.000+01:00

What does the US bailout fund mean for currency markets?

Since Friday’s US announcement of an extraordinary fund to allow financial institutions to cash in bad debts in exchange for taxpayer’s money, the dollar has got it on the chin. The creation of a help-out fund totalling $700 billion comes on top of a government bailout of AIG, which cost a further $85 billion earlier last week. As the US already has a vast current account and budget deficit, the required capital can only be provided through the issuance of government debt and the flooding of the market with dollars. This is not good for the dollar in the long run, because ultimately the more dollars on the market, the less they are worth individually. Even short term sentiment is against the dollar, despite the fact there is a global economic slowdown and investors across the world have been running for cover. Some analysts believe the final bill for the ‘bailout’ will more likely be closer to $2 trillion, an even worse prospect for the dollar. What the dollar does have going for it is the fact that there appears to be little to justify much faith in many of the other major currencies at the moment and because of this, ongoing volatility looks likely while investors weigh up the pros and cons of holding dollars versus other major currencies. The dollar’s strong Rally through July was fuelled by the repatriation of funds back to the US, rather than currency traders laying long positions on the dollar, so if these funds now dry up, given the dollar’s poor yield and rate outlook the currency will struggle and should be sold on any significant rallies. The euro should be able to make it back to 1.50 and only a firm indication of lower interest rates from the ECB is likely to terminally damage the single currency. There is the very real danger that a new commodity price bubble could form over the next couple of months, if the dollar declines too sharply. Speculators willingness to pour back into commodities en masse was evident again late last week, when oil and gold staged massive bull rallies. While Central Banks worldwide have thrown billions at the financial markets in an attempt to calm them, the massive and sudden injection of liquidity could come back to haunt Central Banks in the form of rising inflation and a return to a stagflation environment, which will temporarily put a stop to any consideration of easing in monetary policy. The commodity currencies should outperform in the coming weeks.

EUR/USD
The market is less concerned about economic data at present while traders look more towards safe havens while risk aversion and general market uncertainty persists. The dollar has been abandoned as a safe haven as investors don’t like the thought of an additional $700 billion + being printed and circulated to protect the US banking system. The euro is trading almost 5 cents above the lows from last Friday as currency traders see the euro area financial system as much more secure than that in the US while the relatively flat current account balance in the euro area immediately looks a far more attractive bet than the ballooning one in the US. EUR/USD sold off by 21.5 cents from early July to the middle of September and there is every reason to believe that a 50% retracement of that move could now be underway. That would see the euro rise to 1.4950 and indeed a return to above 1.50 is possible, especially if the deterioration in euro area economic data does not accelerate. Currency markets are a law unto themselves at the moment and one thing we can be certain of is that uncertainty itself will continue to prevail, so big swings will make short-stop trading strategies virtually redundant. Wednesday’s German Ifo survey report is the next economic event that could potentially unhinge the euro. The sharp deterioration in that survey’s index last month caused a major euro sell-off.

GBP
Sterling has gained 5 cents against the dollar since last Friday morning, something of a remarkable feat when one takes into consideration the litany of bad economic data that continues to stream out of the UK. Last week’s surprise increase in retail sales offered some level of comfort but the accuracy and veracity of the retail sales figures have come in for much criticism over recent months and this number may simply be another blip in the series. The UK, along with the US, has a worrying current account deficit and with the British economy seemingly in freefall, there is little reason to buy the pound on fundamental grounds. The pound’s only real chance of appreciation is if risk tolerance levels rise further, thus attracting additional funds into the high-yielding currencies like sterling. Cable should struggle to make it past 1.85, but if the dollar comes under increased selling pressure because of market concerns over the US financing plans, cable could return to 1.90, before the market is forced to take stock of its value once again. If the dollar manages to stage a broader rally across all markets, then cable could quickly fall back to 1.7850 over the next week.

JPY
The yen got hammered last Friday as a surge in global stocks triggered a return to risk tolerance and a resumption of the carry trade. The Japanese currency has lost 10% against both the Aussie and New Zealand dollars in the past week, while it has also ceded major ground to the euro and the pound. The US dollar is the only currency against which it is trading higher against than at the start of last week. The yen will be undermined by the ban on short selling of financial stocks which will limit the downside for global stocks and hence prevent the sort of extreme bouts of risk aversion that were so evident all last week. However, the speed with which traders have returned to carry trades looks to be over-ambitious and with stock markets trading lower thus far on Monday, we could see a forced scaling back of these positions overnight which should help the yen claw back some ground. How markets respond to the US bailout plan for banks will be pivotal for determining direction over the next week, so the reaction of US stock markets needs to be watched very closely in the coming days. Economic data will not have any major significance this week.

CAD
The loonie has broken below key resistance of 103.71 on Monday, meaning the currency has now appreciated by 4 cents against the greenback in the past 3 sessions. Nothing has fundamentally changed in the Canadian economy, but a surge in oil prices over the last few sessions aligned with renewed appetite for risk has sparked a recovery in the Canadian currency. The loonie has been carried along on the wave that has seen a very sharp sell-off of the US dollar on Monday. Canada’s healthy current account balance is also attracting investors as markets look to a huge worsening of the US debt situation with the proposal of a $700 bailout package for US banks. Volatility is likely to remain and while the loonie does now have a chance to send the greenback back as far as 1.02, any sharp up-tick in risk aversion will work against it and could see USD/CAD jump back to 1.07 by the end of the week.

Bob B - Sep 22

Bob's Currency Focus

2008-09-17T14:51:00.001+01:00

Is it the end of the world as we know it?

The Fed’s bailout of insurance giant AIG is the latest spectacular episode in what has been one of the most frightening weeks in the history of global financial markets. On Monday Lehman Brothers became the largest (by a street) bankruptcy failure in the history of Corporate America. Also on Monday, Merrill Lynch, Lehman’s closest cousin on Wall Street, was taken over by Bank of America in a rushed deal, executed just before markets opened on Monday, when Merrill was certain to be the next guillotine victim of those shorting financial stocks. Today, we learn that Lloyds TSB and HBOS (the UK’s largest mortgage lender) are on the verge of a merger, forced upon HBOS, as their share price has plummeted so much in recent days that their market capitalisation value has plunged to farcical levels. And today the Russian stock market had to be closed after its index fell 17.5% in an hour. This follows a similar closure on Tuesday, after the index lost 20%. These are scary times and the impact is resonated across currency markets as well as equity markets, with the risk aversion Japanese yen slaying all before it. It is not a market for rational trading based upon the latest economic indicator releases and technical analysis charts, but rather it is a market to best avoid, unless the trader has massive risk tolerance levels. The volatility is resulting in huge swings across most major currencies and in particular any currency pair involving the US dollar, or the Japanese yen. Logic is out the window and wide shifts in sentiment towards what is happening in wider financial markets is forcing currencies in one direction or another. A look at the latest Commitment of Traders Report essentially shows a mediocre volume of open currency trading positions against the norm, which tells us 1) liquidity levels remain dangerously low and 2) currency movements are not being influenced to any great degree by speculative currency trading, but by the repatriation of funds across exchange rate borders, primarily to Japan and the US, resulting in the yen and the dollar appreciating significantly against the other majors. The yen has now appreciated to 2-year highs against the euro and the Aussie dollar and to multi-year highs against the high-yielding pound and Kiwi dollars. The carry trade has essentially been completely liquidated in the past 2 weeks although extreme negative market sentiment could see the yen gain further, particularly against the euro.

The current market is too risky and volatile and short stops are not working. Traders are best advised to avoid the dollar and yen and to stay away from the market until it settles, or else stick to pairs like EUR/GBP, AUD/NZD and EUR/CHF. Those stuck in open positions may need to sit them out or if brave enough, to enter the market at current range extremes, and collapse the two positions at the halfway point.

Bob B

Bob's Currency Focus

2008-09-04T19:34:00.001+01:00

EUR/USD
The dollar’s relentless rally continues unabated, sending the euro to a 2008 low on Thursday of 1.4327. This happened after the ECB’s ‘no bias’ monetary policy statement when the Governing Council voted to hold rates steady. The market did go after the euro after that event believing the ECB will be forced to cut rates sooner rather than later but the dollar gained ground against all currencies, excluding the yen, after the IS reported that the US Services Sector expanded in August, with the business PMI coming in at 50.6, moderately above the 49.0 expected. Global stocks have tanked today, but the dollar continues to benefit from an inflow of safe haven flows and today it registered its highest exchange rate of the year against many currencies. The dollar and the yen seem to be the only game in town right now with investors reluctant to load bets on European or commodity currencies. Friday will offer another litmus test for the US economy when the nonfarm payrolls report is released. The omens don’t look good however, after Thursday’s initial jobless claims numbers came in at the worst level in 5 years, while both the ISM services and manufacturing reports record contractions in employment during August. It may well be a case of damage limitation and if the figure is something better than -50,000, then the dollar should not be penalised. The euro is oversold, but with support at 1.4365 taken out on Thursday, there seems little to stop the pair quickly descending to test the 1.40 level. Momentum could take the dollar there over the next week. Caution is needed however as the dollar has now registered a 10% gain against the euro in little more than 6 weeks, while the chance of a US interest rate hike seems more distant now than it did back in July. This dollar rally is not supported by any major shift in the rate outlook, which would tend to suggest it is unjustified and over-extended. Another point worth noting is that the positive economic data seen recently out of the US is nearly exclusively down to a sizeable upturn in exports, but in the past month alone the dollar has wiped out all of its losses for the year and subsequently its competitive advantage in the export market. Be warned! This dollar run is not sustainable, even if the greenback continues to make gains in the short run.

GBP/USD
The nightmare continues for sterling and at one stage today the pound was down 23 cents on the price it was trading at on August 1st. The sell-off is extreme and it is not just a dollar phenomenon because sterling is also trading at a record low against the euro and a multi-year low against the yen. The Bank of England reneged on its duty today by pressing the mute button after they voted to keep interest rates unchanged. It beggars belief that the MPC did not see fit to offer some sort of statement to address the turbulence that has been unleashed in UK financial markets at a time when the Chancellor of the Exchequer states the economy is in the worst economic downturn for 60 years. We will have to wait 2 weeks to get an insight into the MPC’s thinking but given the Bank of England’s lack of foresight and indifference to the sort of creative monetary policy adopted by the Fed, much of the blame for sterling’s sudden collapse can be laid squarely at the door of the MPC. Sterling has had only one meaningful upside day since August 1st last and a depreciation of this magnitude is almost unprecedented, for the currency of a major developing economy. The technical indicators are nearly off the chart, so extreme is the sell off in the pound. One bright spark came today when the pound did at least manage to push the euro back to the 81 pence handle, but that is scant consolation for pound supporters that see GBP/USD record new lows on an almost daily basis. Cable has to rise above 1.80 before it is safe to buy. Another weak close today could se it hit 1.75 before the next shot at a recovery.

Bob B - Sep 4

Bob's Currency Focus

2008-08-26T13:57:00.001+01:00

EUR/USD
The key question we would all like an answer to now is has the dollar rally gone too far? From 1.6035 in the middle of July to below 1.46 before the end of August is as aggressive a move as they come, but it has happened during a period when liquidity is markedly low and currency moves tend to become exaggerated. We must look for the change in interest rate differentials over this time period to determine whether or not the dollar’s rally is justified in the wider scheme of events. There is no doubting weaker euro zone data has had futures markets reassessing rate expectations for the euro area and the yield on the March forward contract has fallen to 4.11% today, from 4.61% on July 21, thus a narrowing of 0.5% in the rate differential. The yield on US treasuries has hardly moved over the past month, so therefore we can say since the euro hit its peak, rate expectations between the dollar and the euro have narrowed by 0.5%. Since the ECB started its current monetary tightening cycle way back in Dec 2005, a 1% shift in rate differentials between the US dollar and the euro has translated into an approximate 8% movement in the exchange rate. Therefore the 0.5% shift seen over the past 6 weeks should translate into roughly a 4% gain for the dollar. A 4% gain would mean EUR/USD should now be trading at around 1.5395 and not 1.4595. That suggests the current rally may be overdone by as much as 8 cents. Of course rate differentials are likely to narrow further in favour of the dollar through to the end of the year, when falling commodity costs should give the ECB greater wriggle room to consider cutting interest rates, while any pickup in economic activity in the US will bring closer the day when the Fed will be in a position to increases US rates. For now though, the market seems to have lost the run of itself and it is sheer momentum rather than economic fundamentals that is driving EUR/USD lower. It is therefore dangerous to sell the euro at the current price and while most traders would prefer to follow the trend down, one is best advised to only sell down at an attractive price (closer to 1.50), which is not currently on offer. We could witness a very sharp correction higher in the euro next week, when liquidity returns to normal after the August holiday period comes to an end. Today’s Ifo business survey for August shows sentiment amongst German business executives fell much more than expected, hitting new record lows and pointing a probable recession in the euro area’s largest economy. I previously remarked that the ECB’s rate hike in July could prove to have been a fatal error of judgement and all of the economic data we have seen since holds up that argument. Jean Claude Trichet and his colleagues have not been in touch with reality and their failure to accept the basic economic principle that slowing economic growth will always temper inflation reveals a level of naivety that is worrying. Having been largely responsible for guiding the euro’s meteoric rise over the past 2 years, the ECB may now be looking for ways of trying to cushion its fall.

GBP/USD
15 cents this month is what the dollar has gained against the pound. Gains of this magnitude in such a narrow time span are unprecedented and it must added, they are also generally unsustainable. The big problem with cable at the moment is trying to pick a bottom. It had looked last week that 1.85 might prove to be a point from which the pound would rebound, but earlier this morning the pair went as low as 1.8329 and we cannot be confident of having yet hit a bottom. A serious lack of liquidity this month has cost the pound dearly as negative sentiment against the UK currency has encouraged traders to use the rather thin trading conditions to send the currency tumbling. Cable certainly offers value to buyers at current prices, but the problem is that volatile trading could see the market move significantly lower without warning and leave positions exposed. Next week, when market liquidity will improve, we could see a greater volume of value trades come into the market and lead to a corrective bounce in the pound, possibly a sharp bounce. There is no data of any real not this week, with the exception of Nationwide house prices on Thursday, which will show a further retreat in UK house prices. With UK consumer price inflation running at 4.4%, the Bank of England, which meets next week, is not in a position to ease UK interest rates for now, thus cable’s collapse to 1.83 looks to be way overdone. A safer trade involving the pound would be to sell EUR/GBP, because with so much bad news already priced into sterling and the euro economy slowing at an equally fast pace, there is scope for a substantial pullback in EUR/GBP over the coming months.

JPY
While the dollar has steamrolled over every other major currency this month, it is only marginally higher against the yen. We have seen a major unwind in carry trades in recent weeks and this together with a rise in risk aversion on equity markets has broadly protected the Japanese currency. The euro has fallen back to the Y160 price mark and we could potentially see this pair fall to 1.45 by year end, particularly if European equity bourses remain subdued. As long as the dollar remains in vogue against other currencies, the yen will struggle to make gains against the US currency and if economic data out of the US gains more positive momentum, USD/JPY will become one of the long plays for the rest of this year, with the potential for a push towards at least 1.15 before the year end. There is the danger of a reversal in US dollar support over the next 2 weeks when liquidity levels rise and in this environment the yen could also find itself on the back foot, particularly against the euro, pound and Swiss franc, given the extent of the currency’s gains in August. Economic data out of Japan will continue to play a minor role and yen traders instead need to focus on the performance of global equity markets as well as following US economic data over the coming weeks.

CAD
The loonie has proven itself to be remarkably resilient over the past week, gaining broadly across the board against every single major currency and significantly so against the euro, pound and Australian dollar. The rollercoaster ride of commodities in the past week has failed to puncture support in the loonie, which seems to have gained a new lease of life, possibly owing to a growing appetite for North American currencies, thanks to the revival in the US dollar. Canadian economic data has printed mostly in line with expectations over the past week but the all important litmus test comes later this week, when Quarter 2 GDP is published. Following a contraction in quarter one we should see a marginal gain in growth in quarter 2 as exports grew thanks to a dramatic increase in commodity prices. If we get another contraction, Canada will officially be in a technical recession and this will hurt the loonie very badly, particularly if commodity prices continue to tumble this week. The loonie may come under pressure against the greenback and USD/CAD offers good value on any dips back towards 104.30. The key support on the downside for the greenback is 103.70 and as long as this holds the pair will remain in an uptrend. For those going long, a stop should be placed below this price level. Against the other majors, the loonie could continue to make inroads on the euro, although any break below 1.52 might be unrealistic ahead of a euro correction higher.

Bob B - Aug 26

Bob's Currency Focus

2008-08-12T13:41:00.000+01:00

EUR/USD Review
We have witnessed one of the most remarkable dollar rallies in recent times over the past couple of weeks, as the greenback has made record gains against most of the other major currencies. There has been virtual meltdown in GBP/USD and AUD/USD in the past 10 days, while the euro itself is now trading over 11 cents below the high it hit against the dollar in early July. The euro shed 4 cents alone in a 24 hour period into last Friday. The sharpness of the move has taken many in that market by surprise, but what is even more surprising is the fact that it does not appear to be justified by any major shift in economic fundamentals. There are a number of reasons for the strong rally at this time:

1) Liquidity seems to have been drained from the currency market at the moment (August holiday factor) and it does not take big volumes to shift currencies. With the trend already having shifted to the greenback a fortnight ago, the drop in liquidity is allowing exaggerated market moves, which is disproportionably benefiting the dollar. The dollar is so significantly overbought that a corrective reversal could easily manifest in a 5 cent rally in the other direction.

2) The sustained drop in commodity prices is resulting in a direct flip of trades that had worked for major funds in the first half of the year, with oil, gold, commodity currencies and EUR/USD being the big losers. Those who believed oil prices were a simple consequence of supply/demand issues are now nowhere to be seen as the speculative bubble that oil prices had become bursts spectacularly, with a barrel of crude plunging by $34 in the last 4 weeks. Depending on how far the decline in commodity prices has to go, this may determine how far the dollar’s rally might go.

3) Jean Claude Trichet’s monetary policy statement on August 7. The ECB President did make several references to an increase in the downside risks to growth in the euro area when delivering his policy statement on August 7 last. In reality, the ECB, rightly or wrongly, has not changed its policy stance as its primary concern remains the upside risks to price stability and Trichet again stated the ECB had ‘no bias’ with respect to monetary policy. However the markets responded to Trichet’s statement as if it were surprisingly dovish and sent the euro decidedly lower.

4) Eurozone economic data has pointed to a troubled euro economy for a few months but markets chose to ignore that data, preferring instead to focus on a struggling US economy and a detached from reality ECB that kept telling markets that the euro area economic fundamentals were sound. The ECB’s rate hike in July could go down as a gigantic faux-pas by a Governing Council that is clearly lacking economic foresight. Markets are now reassessing the outlook for the euro area economy and interest rate differentials going forward, which is weighing on the euro. The Fed’s policy of trying to stimulate economic growth in the US is now being rewarded by currency markets that don’t like what they see elsewhere. Of course the aggressive nature of the Fed’s rate cutting is largely responsible for the sudden run-up in commodity prices that in turn made inflation shoot up across the globe, but it now looks that this inflation spike was also a bubble and Central Banks like the ECB and Bank of England have been found wanting because they continue to fail to recognise this fact.

5) Carry Trade unwind. With some Central Banks, notably the RBA and RBNZ moving towards easing interest rates, the narrowing in rate differentials has resulted in a significant liquidation of carry trade positions in the past week. EUR/JPY is the most loaded carry trade currency pair in the basket and it has come off by over 5 yen in the past week, hurting the euro against the dollar, which has advanced against the Japanese currency. EUR/JPY is still very much over-valued in a historical context and if the carry trade comes under increased pressure, this would mean a greater sell off in EUR/JPY would pit the euro even lower against the US dollar.

6) Technical considerations. When EUR/USD broke below 1.5283 on Friday morning last, the pair went below a key technical support that had held since last March and this essentially opened the floor underneath the pair, with the next key line of support not seen until 1.4615. The pair also went below the 200 day moving average and the dip below this level has many traders now believing the longer run trend has reversed in favour of the dollar. The technical breakout has led to a loss of confidence in the euro and in some part explains the extended decline we have seen.

7) Russia and Georgia. On Friday the euro had its worst day ever against the dollar, since becoming a hard currency and while there were other factors at play, the 5 cent decline between Thursday and Friday coincided with the outbreak of hostilities between Russia and Georgia. This will not have helped the single currency, given the proximity of the EU to both countries. This probably accelerated the flow of safe haven funds into the dollar.

So where now for EUR/USD? The pair is very much oversold but in an illiquid market situation, anything could happen in the short run. There is no known support for the euro right down to about 1.4620 and given the whiplash fashion in which the market has moved of late, it is not beyond the bounds of possibility that we could see the pair slide to that level before we enter a genuine period of consolidation. Two releases this week will have a bearing on short-term direction: Wednesday’s Retail Sales out of the US and Thursday’s GDP data out of the euro area. It is conceivable the GDP data could reveal a horror story for the euro area and if the number is markedly lower than forecast, it could send the euro tumbling. The euro may have a battle to reach 1.50 before then and could find itself being sold off on any rallies towards this key mark, ahead of the US Retail Sales figures. However, given the brutality of the move to the downside, a sizeable correction upwards cannot be ruled out, especially if the euro can earn some momentum and if it pushes above 1.50 and holds there. It is a dangerous market to trade given the pair has not settled into a new trading range and the fact liquidity levels appear to be running so low.

GBP
Sterling has had an absolute nightmare against the dollar over the past 10 days, losing an average of almost a cent a day. All technical supports to the downside have given way and cable is now trading at a 2-year low. There is no arguing the current dollar rally is overdone, yet when one looks at the economic fundamentals out of the UK, it does not inspire sterling buying, even at bargain basement prices. A visit to 1.85 is now on the cards, possibly by the end of September, although this may come after a corrective retracement to at least 1.93. Even a 0.6% jump in the annual inflation rate to 4.4% in July was not enough to engineer a sterling rally. Indeed the pair sold off after the release of this data on Tuesday, which tells us in the current uncertain economic climate the market is currently more interested in currencies that are backed by growth stimulating policies like the dollar than in currencies with restrictive monetary policies like the euro and the pound. The woeful economic data out of the UK over the past few months has finally caught up with the pound and the UK currency is now vulnerable to being targeted by speculators that may see it as a soft target. I would like to see some period of consolidation before re-entering the market on sterling, but those who retain shorts on cable should move stops down to around the 1.9350 price level, which is just above the 2008 high which gave way last Friday. A corrective rally is overdue and it is dangerous to sell at current prices below 1.90, unless employing stops close to 1.9150.

JPY
The yen has more than held its own since losing the Y110 handle to the dollar late last week. While the dollar has gone on to trounce the other majors on Friday and Monday, it has hit a wall against the Japanese currency, failing to break above Y110.40. The yen is befitting from a wind-down in carry trades triggered by the decline in commodity prices, which is helping it retain its strength across the board. The shift to monetary policy easing by some Central Banks is narrowing the rate differential outlook on many of the yen crosses, which is lessening the appeal of carry trades. However, Japanese domestic economic data has been poor of late and Qtr 2 GDP released later tonight should tell us the Japanese economy contracted in the last quarter and signal it might be in technical recession right now. The yen will not be damaged to any great extent unless the data is so bad that it initiates an argument for a Bank of Japan rate cut, which seems unlikely given rates in Japan are already a lowly 0.5%. The medium term to longer term value trade on the yen crosses is still with EUR/JPY which remains close to historic highs. The pair should be sold down on any advances to the 168 / 169 price region and given the softness shown lately by the euro there is the prospect of a retreat in EUR/JPY to at least 160 before the end of the September.

CAD
The loonie is now trading at levels against the greenback last seen this time last year, around the 1.07 price handle. Last Friday’s employment report which revealed the commodity-rich Canadian economy shed over 50K jobs in July was an eye opener and suggests the economy is struggling even more than originally thought. The decline in commodity prices has hurt and given the bullish tone of USD/CAD, there is every prospect of the pair reaching 1.10 in the near-term (next month), with the possibility of a return to 1.15 by year end, if commodity prices continue to fall. I said last week that the loonie did have scope to appreciate against the euro to 1.60. Well, it has gone to as low as 1.5870 today and there is room for a return to 1.56 over the next week as greater confidence in the US economy could help the loonie appreciate against the major European currencies, as well as against the yen.

Bob B - Aug 12

Bob's Currency Focus

2008-08-05T15:56:00.001+01:00

EUR/USD
The dollar has pushed the euro to below the 1.55 price handle on Tuesday and a convincing break below here could trigger a steeper decline in the days ahead, possibly setting up a near-term test of 1.5283. Central Banks take centre stage this week, the Fed kicking off proceedings with a rate announcement later today, while the ECB issue their latest monetary policy statement on Thursday. There is certain to be no change from the Fed and with instability in the financial sector still a primary concern, it is most unlikely Bernanke & Co. will shift from their neutral policy stance, despite reservations from a number of the Fed’s hawks in recent weeks. It is possible that at least 2 members might decide to vote for a rate hike today, but they are likely to be outgunned by the majority, although the hawks’ inflation concerns may have to be accommodated by way of a stronger worded statement. There are only 10 voting members in today’s FOMC vote. Prior to the Fed’s statement release at 19:15 GMT, we had the ISM services index which came in at 49.5, ahead of a forecast for 48.6. The reading is still below 50.0, so it indicates contraction in the non-manufacturing sector, so it offers little in the way of positives for the dollar. The past week has seen a waft of softer economic data out of the euro area and with a significant contraction in the manufacturing and services sectors, declining exports and a further depressed consumer, the euro zone looks to be pushing towards a recession. Oil prices have fallen below $119 this morning and with commodity prices in general falling sharply over the past month against a slowing global economy, the ECB decision to hike rates in July is starting to look like a possible mistake. However don’t expect a climb-down from the ECB just yet and indeed if just to maintain the Governing Council’s credibility, ECB President Jean Claude Trichet is unlikely to turn dovish on inflation, although he is likely to back away from any suggestions of possible future rate hikes. The markets may place the ECB in a more neutral position this week, regardless of what Trichet says and this could see the euro retreat even further, particularly if oil prices continue to fall as this would ease inflationary pressures in the euro area and give the ECB room to ease rates later in the year. A break below 1.5460 should see us drift to 1.5350 and ultimately see the April low of 1.5283 taken out. It is conceivable it could happen this week.

GBP
Sterling has come under sustained selling pressure in the past week as wave after wave of soft economic data has finally weighed on a pound which had taken on a Teflon ‘nothing-sticks’ trait over the past 2 months. The break below 1.9650 on cable yesterday could be significant and we may now see the dollar push the pound back towards the year’s low at 1.9337. The pair dropped to 1.9528 this morning before recovering towards 1.9570 and the next important line of support on the downside is at 1.9460. June’s Industrial Production (-0.2%) and Manufacturing output data (-0.5%) for the UK was much lower than expected, while a July services PMI reading of 47.4 (slightly higher than the 47.1 print last month) is hardly a cause for celebration as it signals further contraction in the dominant services sector. With the Manufacturing and Construction PMIs deeper into contraction last month, the UK economy looks to be accelerating towards recession. The current slide in commodity prices, if it is sustained, could hurt the pound badly as it is commodity price inflation which is preventing the Bank of England from cutting interest rates. The Bank meet this Thursday and while the Committee should cut rates immediately to help stimulate the UK economy, the MPC is certain to stand pat, as the Committee is dominated by short-sighted Central Banks hawks, incapable of looking beyond a current month’s consumer price inflation report. There is absolutely no reason to buy sterling at present other than against the euro if one believes the euro economy is in as equally a bad predicament as that of the UK, but even that is a risk, because the UK’s over-dependency on the housing and financial sectors means the UK economy is likely to decelerate at a much faster pace than that of the euro area. The pound should be sold on any failed upside rallies against the dollar and there is every chance of a sub 1.90 price on cable by the end of September.

JPY
The yen has more held its own in recent days as a drop in commodity prices has led to a paring of carry trades. The US dollar has thus far failed to breach an important technical indicator at 108.50 and while this price level holds, the yen could potentially make more significant progress against the euro and the high yielding Australian and New Zealand dollars. While lower commodity prices can help raise risk tolerance levels and fuel a rally in stocks which is generally negative for the yen, a retreat in commodity prices brings closer the prospect of interest rate cuts, particularly in the euro area, UK and Australia and a narrowing of the rate differential outlook is a positive for the yen against most currencies, with the exception of the US dollar, where rates are likely to remain on hold. Tonight’s Fed rate announcement is a major risk event for the yen because if the Fed prove to be more hawkish and threaten a possible rate hike in the coming months, then this could be sufficient to see the dollar rise to 109. The reaction of stock markets will be important as an adverse reaction in equities would see risk aversion rise and this will offer some short-term protection to the Japanese currency. The value trade of all the yen crosses is on EUR/JPY, which still trades close to lifetime highs, despite a sharp deceleration in the performance of the euro area economy. This pair should be sold down on any advances to 169 and there is every chance the pair will slide back to Y165 in the very near term. If the Fed’s statement this evening is not dollar supportive, the greenback will find it difficult to break out to the upside of the recent trading range and USD/JPY could spend the next week trading largely within a narrow 106.80 to 108.50 price range.

CAD
The loonie’s resilience has finally been broken by the greenback and on Tuesday USD/CAD broke out above 103.70 for the first time this year. This signals the pair is now most definitely in an uptrend and we could witness a very quick move to 105, with 108 being possible by the end of the month. Today’s Fed rate announcement will be crucial however as the greenback needs a hawkish bias to gain greater momentum. If the Fed stands pat and keep a neutral policy stance, the fate of USD/CAD over the next month will most likely rest with commodity prices, primarily oil. This Friday’s employment report out of Canada will also be important for gauging possible direction of Canadian interest rates and another negative employment number would hurt the loonie. Look for consolidation in the 103.70 to 105 price region over the next 2 days and only a break below 103.70 would mean a possible trend reversal in favour of the loonie. A rebound in oil prices would offer the Canadian currency some much-needed protection. The loonie is oversold on many of the crosses, particularly against the euro and there is some scope here for a pullback to 1.60.

Bob B - Aug 5

Bob's Currency Focus

2008-07-31T12:23:00.000+01:00

EUR/USD
After a waft of weak data the euro eventually succumbed to selling pressure this week, although it staged an impressive recovery from late Wednesday, coming off a low of 1.5522, to trade at a full cent above this level on Thursday morning. The single currency was buoyed to some degree by today’s inflation print for July, which at 4.1% is the highest rate on record, since the ECB came into existence. With the ECB’s target inflation rate at 2%, some market analysts still believe there is scope for further rate hikes from Trichet & co. There is greater evidence however that the euro economy is decelerating at an alarming pace and divergence issues between the euro’s major economic blocks is likely to become an increasing concern over the coming months. US data has mostly surprised to the upside over the course of the past week but the real test will come with Friday’s non-farm payroll number. Thursday’s GDP figure is unlikely to have any sustained impact, given its historical context and the fact the number will be distorted by the Government’s stimulus package which helped prop up consumer spending in May and June. The Initial claims number for last week will be monitored closely as an indicator of what Friday’s payroll number might look like. Oil prices rocketed by almost 5 dollars on Wednesday and if this triggers a new bout of oil buying, the dollar is going to struggle. There are so many factors at play in the market at present and plenty of uncertainty about the direction of the major economies and interest rates, while a worsening credit crisis still looms large in the background. In this environment it will be difficult for either the dollar or the euro to make huge progress without facing some headwinds. Upside surprises in GDP and the non-farm payrolls, together with falling oil prices, is what the dollar needs if it is going to end the week on a high. The biggest risk to the euro in a broader sense could come from any negative comments from ECB council members (admission that the growth slowdown is worse than ECB had anticipated) or destabilising comments from French or Italian government officials about the ECB or euro. The range should remain 1.55 to 1.5660 for now, with Friday’s non-farm number being the key scheduled event which could push the pair beyond the boundaries. There is definite value in selling down on any rallies close to 1.57.

GBP/USD
Sterling has shown remarkable resilience against the adversity of shocking economic data over the past month, data soft enough to have pared several percentage points off any other currency. GBP/USD is still trading at the higher end of its trading range over the past few months and the pound has essentially grown immune to weak domestic data. However, it is primarily negatives which are keeping the currency afloat, primarily a market belief the Bank of England will not step in to save the economy and it is believed if the Bank were to do anything it will raise interest rates rather than cut them, adding to the attraction of sterling’s high yield. Nationwide reported house prices fell 1.7% in July, for an 8.1% annual decline, the steepest drop ever in the series. The UK economy looks destined for a certain recession, if it is not in one already, and with the Bank of England uttering hawkish rhetoric, they are clearly signalling they have a very different view to the US Federal Reserve on inflation prospects, so things are going to get a hell of a lot worse in the UK economy over the coming months. Friday’s Manufacturing PMI will be important to gauge if last month’s appalling run of PMIs in the manufacturing, services and construction sectors was an unlucky once-off or the start of an accelerating deterioration in the wider economy. It is highly dangerous to buy sterling against the dollar with the economic predicament facing the UK, even if sterling does even manage to make some short-term gains. In the medium to longer term sterling looks destined for a return to at least the mid 1.80s and a sudden spike downwards in the currency cannot be ruled out, given the downside risks and the pound’s elevated value at present. The downside against the euro should be more limited in the short run as the euro area economy also slows quite sharply. The pound’s direction through to the end of the week will be determined by US economic data, but we should be looking at a return to 1.9650 over the next week. It could happen this week if US data prints stronger than expected and oil prices are subdued.

USD/JPY
The yen has come under modest selling pressure Thursday as risk tolerance levels rise thanks to two very positive days for global stocks. The Japanese currency has been protected to some degree thanks to sell-off in commodity currencies in recent days, which has seen a paring of carry trade positions, especially against the Australian and New Zealand dollars. There is still sizeable complacency in the market though and both the US dollar and the euro look to be overvalued against the yen, when taking into consideration the deterioration in economic conditions, particularly in the euro area. Friday’s non-farm payroll data out of the US will be a major test of risk tolerance and if the number prints much worse than expectations, the yen should be the biggest gainer on currency markets. There is significant selling of the US dollar above Y108.30, but if the US currency does manage to reach 109 by the end of the week it will mark a further step up in the pair’s trading range and we should see Y110 next week. However it is dangerous to sell the yen at current prices, given all the underlying risks, and there is definite medium term value in selling down the euro on any advances by the single currency towards Y170.

USD/CAD
The loonie has failed to penetrate 1.02 against the greenback since the pair sailed over this important price level several days ago. The US currency though has not managed to capitalise on its momentum and has failed miserably to reach 103. The key economic releases out of the US over the next few days will be critical and could be decisive for the future direction of the pair. The only release out of Canada is today’s monthly GDP number for May, but its significance is likely to be dwarfed by the quarterly GDP figure out of the US. Stronger than expected numbers out of the US today and tomorrow (non-farm payrolls) coupled with a further slide in commodity prices could potentially see the greenback rise to 103.77 (the year’s high) and place the pair firmly in a longer run uptrend, which could see the loonie cede 1.05 very quickly. There is some value in buying at present, with a stop tightly below 1.02. If data prints badly for the greenback, then expect 1.02 to give way very easily and the pair should quickly return to 1.0130.

Bob B - Jul 31

Bob's Currency Focus

2008-07-24T16:10:00.000+01:00

EUR/USD
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.

GBP
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.

JPY
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.

CAD
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

Bob's Currency Focus

2008-07-21T16:55:00.001+01:00

EUR/USD
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.

GBP/USD
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.

USD/JPY
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.

USD/CAD
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

The Dollar Malaise

2008-07-17T15:49:00.000+01:00

Negative sentiment towards the dollar has reached fever pitch proportions over the past week and for once it is not weak economic data that is the driving force. No, rather it is the US Government’s plans to shore up ailing mortgage lenders Fannie Mae and Freddy MAC that has put the frighteners on investors. If the US government needs to follow its plan with actual cash, the cash will come from the taxpayer, via issuance of more government debt. And let us face it, we are not talking about small numbers here, but mind-boggling figures that run into the trillions, potentially pushing the country to even more extreme debt proportions and undermining the value of the US dollar. Markets have been spooked by this prospect and a report in the Financial Times today about some sovereign wealth funds diversifying out of US dollar assets is hardly a surprise. A major loss of confidence in the future direction of the dollar on the part of major debt holders is a very serious concern for the US Treasury and it is the one thing that could potentially trigger some market intervention, if the fears of these debt holders do not abate soon. Despite clear evidence of a marked slowdown in European economies, the currencies of these countries have no difficulty hammering the dollar, on an almost daily basis at present, as the US currency appears incapable of holding onto gains for anything more than a few hours at a time. Investors have thus far been happier to forgive Europeans economies for their underperformance, rather than be caught holding low-yielding US dollars. It is clearly a mistake to believe these European economies are going to ride the storm and come out smelling of roses, but for now the focus is less on economic data and more on market fear about the future of the US financial system. Although US inflation (5% in June) is running higher than that in the euro area (4% in June) and the UK (3.8% in June), the chances of a US interest rate hike are dwindling with the Fed stating its overriding focus is a resolution of the credit crisis. The Fed expects inflation to moderate as growth eats into demand. Markets still expect to see the ECB hike at least once more, while the Bank of England is also seen leaning on the hawkish side, which is justifying the recent rush of cash into European currencies. This is merely a short run play, because eventually the European Central Banks will creak under the weight of an accelerating downturn and will need to soften their tone. When they do, it will mark the beginning of a dollar revival. If they wait too long, or believe rate hikes are the way forward even against slowing growth, then we are certainly in for an even more extended period of discontent for the US dollar.

Ted B - Jul 17

Bob's Currency Focus

2008-07-14T16:16:00.001+01:00

Currency markets are very volatile at present with the fallout from stock markets and commodity markets essentially dictating the short-term direction of all the major currencies. Economic data is hardly getting a look in as panic of financial market collapse in the US becomes the over-riding factor. One striking observation from the past few weeks is that the euro has replaced the yen as the market’s preferred ‘risk aversion’ currency, when stresses are undermining global financial markets. The primary reasons for this is the single currency’s more attractive higher yield and a hawkish ECB. All of the high yielding currencies, in particular sterling and the Aussie dollar, have done particularly well in the past month, despite the crash in global stock markets. The yen is the worst performing currency during this period, which is something of a major surprise, given the yen steamrolled everything before it during the last 3 bouts of major risk aversion in March, January and last August. Sentiment surrounding the US dollar is at an all-time low because of the Fannie Mae and Freddy Mac mortgage lending crisis in the US and because oil prices refuse to let up. Traders are using every ounce of bad news to push up the price of crude and thus put downward pressure on the dollar, which in turn gives added impetus to the spike in prices for the wider commodity class, creating a vicious cycle. It may take direct market intervention to break this cycle because commodity investors are not being deterred by the global economic slowdown theory, while confidence in the wider financial market system is at an all-time low.

EUR/USD
The euro is knocking on the door of the lifetime high of 1.6016 and while we have seen a slight retreat on Monday, the dollar came unstuck at support at 1.5840 and the pair has since advanced back towards the 1.59 line. Markets shrugged off the announcements by US Treasury and US Fed in terms of declaring financial support for the ailing mortgage lenders Fannie Mae and Freddy Mac and it is going to take something more special to regain confidence in the US financial system. Another poor economic print from the euro area Monday saw Industrial Production in May plunge by 1.9%, although this was slightly better than the forecast decline of 2.3%. Economic data is taking a back seat at present as dollar sentiment is effectively driving this pair and that sentiment has never been more negative. Tuesday sees the release of the latest ZEW investment sentiment survey from Germany and producer prices in the US, but neither is likely to have any real impact and of more importance will be the testimony before Congress by Fed Chairman Ben Bernanke in the afternoon GMT and any planted comments that may come from governing members of the European Central Bank. The euro looks dangerously overvalued but while it remains so close to the 1.60 price line, traders will want to try and challenge the record highs set back in April. On the other hand any vocal interventions by Central Bankers could send the pair spiralling back 200 points. It is best to stay on the sidelines until the pair settles down somewhat, although medium to longer term traders might see value in selling down on any prices close to 1.59.

GBP/USD
Producer prices came in slightly below expectations in June but it still has not prevented output prices from climbing the most in annual terms in 10 years. While economic activity may be depressed, prices certainly are not and markets are using price inflation to keep the pound well bid, in hope of a rather unlikely rate hike from the Bank of England in the coming months. Tuesday’s consumer price inflation numbers for June will be critical for the pound and the market has already priced in an annualised CPI rate of 3.6%, and anything significantly lower than this will hurt the pound. Like the euro, the pound offers no value on current prices against the dollar, but it is likely to continue to trade in the higher trading range of 1.9650 to 2.0050 until there is some shift in the goalposts. Investors are weighing in behind the pound on yield grounds and also because the euro looks over-priced, but it is dangerous to buy cable on prices above 1.9850, even if the pair does go higher in the short term. Cable is likely to come under increased selling pressure the closer it gets to the 2 dollar mark, particularly if economic data continues to disappoint and points to a more marked downturn for the UK economy. The euro does not offer any value above 80 pence and EUR/GBP could easily decline towards 0.79 if there is a broader US dollar recovery that sees the euro sell off more than its UK rival.

USD/JPY
The yen has resisted a sell-off on Monday despite a strong recovery in European stocks, ahead of the US bell. Some profit-taking on the euro has seen EUR/JPY return to the 1.59 line, having hit a lifetime high earlier in the session of 169.65. The US dollar is back to where it started the day at 106.26, giving up all of the day’s earlier gains. Markets have gone cold on the Fannie Mae and Freddy Mac rescue package already, which does not augur well for risk aversion as we go deep into the US trading session. The yen needs to appreciate back towards the 105 mark against the dollar, if it is to have any chance of joining the euro in severely punishing the US currency. The Bank of Japan has a rate announcement on Tuesday morning and it is certain to signal no change in rates and it is also unlikely the Bank’s Governor will signal future rate hikes when he attends his Press Conference, given the precarious economic situation in the world’s second largest economy. The yen will continue to trade on dollar sentiment and it may continue, for the time being at least, to pay second fiddle to the euro when risk aversion levels are on the up. Any dips towards 105 would offer some decent dollar buying opportunities, given the speed at which the market has been willing to sell off the yen in recent weeks. The yen is undervalued on all the crosses and the only one with some semblance of value is NZD/JPY, which has hardly moved in the past month.

USD/CAD
The loonie has powered its way to 1.0050 against the US dollar on Monday and made smaller gains against the other leading majors, as commodity currencies meet renewed demand. Oil prices rising to record highs have not hurt the loonie, while increased concerns about the US financial system are making Canadian assets look a safer bet. Friday’s marginally negative labour report has not harmed the loonie as the labour force has proven itself to be resilient amid troubling times. Volatility will remain high with the loonie and it will struggle to break parity against the greenback, while North American currencies remain largely on the defensive. The Bank of Canada has a rate announcement on Tuesday and the Central Bank is likely to leave rates unchanged for the second consecutive meeting although the accompanying statement will need to be monitored carefully because if there is emphasis on rising inflation it could signal a rate hike in the months ahead and help fuel a strong loonie rally. The likelihood is the Bank of Canada will remain neutral and the impact should be minimal on currency markets. The euro returned to over 1.61 against the loonie early on Monday, before retreating back below 1.60. There is still potential for a return to 1.58 in the days ahead, if we witness a broader euro sell-off.

Bob B

Bob's Currency Focus

2008-07-10T12:50:00.000+01:00

EUR/USD
The euro has performed remarkably well since last Thursday, when it shed 2 cents against the dollar after a less hawkish than expected monetary policy statement from the ECB. The pair has moved within a 1.5610 to 1.5750 trading range since Friday and if anything, the euro has looked the more bullish, with the market seemingly ready to jump on any reason to offload the dollar. An Iranian missile test Wednesday morning saw oil prices stall their recent decline and this has given a bearish tone to the greenback. Poor trade and industrial data out of Germany and France was ignored by markets. German exports fell a sharp 3.2% in May, from April, the 3rd month in 5 that exports have contracted, while the French trade deficit for May was wider than forecast and industrial production came off by a whopping 2.5% in May. The euro’s ability to shake off poor economic data is becoming too much of a habit of late and it is a classic case of nervous currency markets favouring directional trends over economic facts. The US dollar has been unable to sustain any rally it has undergone all year for very long and dollar bulls are proving themselves to be fear-driven creatures, jumping off the train at the slightest hint of weakness or price stalling. The G8 concluded in Japan with leaders failing to make any mention of the weak dollar, something else which has in essence given license to traders to sell the US currency without fear of market intervention. ECB President Jean Claude Trichet, in his address to the European Parliament on Wednesday, sounded much more hawkish than he did last Thursday after the rate setting meeting, and this encouraged further euro buying. The euro currently stands at 1.5710 and while there is little value in buying the single currency at these prices, any rally above that sees price go above 1.5760 might generate greater momentum and send the pair back up to 1.5820. The pair is due a retreat back to 1.55 at least, but the dollar needs something to spark the move. Bernanke addresses Congress on Thursday and any hint of a future rate hike in his testimony will fuel a strong dollar rally. There is very good medium term value in selling down EUR/USD on prices near 1.5750, because of the significant downside risks for the euro economy in the months ahead and the fact the ECB’s growth forecasts may prove to be over-optimistic.

GBP/USD
Sterling has bounced off a low of 1.9672 Wednesday to rally to 1.9836 against the dollar early Thursday, before retracing back to 1.9750. UK economic data disappointed again this week and sterling’s rise has more to do with a broadly weaker dollar than a stronger pound. The Nationwide consumer confidence survey for June reported another dip in consumer sentiment, the index falling to 61 from 65 the previous month, while HBOS reported house prices fell 2.0% alone in June. In addition the UK trade deficit was reported to have widened to £7.5B in May, marginally above expectations. Data out of the UK over the past 3 weeks has been depressing and points to an economy that is teetering on recession. However, sterling has hardly budged during this time and if anything it is now trading higher as traders bet the BoE will not cut rates while inflation is a threat and markets have priced in an actual hike in the coming months. In a normal economic cycle, the pound would now be pummelled, but the currency is currently evading collapse because the Bank of England’s hands are tied and traders are opting to persist with sterling because of its attractive yield of 5.0%. The MPC on Thursday, as expected, left rates unchanged and the Committee refrained from issuing an accompanying statement. Markets are currently rewarding higher yielding currencies, regardless of economic data and outlook and in this scenario sterling is likely to hold within current ranges, although there remains the risk of speculators going after the currency in the near future, because of the dismal economic picture in the UK. The dollar must break below 1.9650 to have any chance of pushing the pair back to the lower end of the range and the year’s lows under 1.94, otherwise the pair may well move between 1.97 and 2.00. The value trades are selling down on prices above 1.98. Sterling should be able to hold the euro below 80 pence, unless there is some hint of monetary policy easing from the Bank of England.

JPY
The yen is lower against every major currency on Thursday even though equity markets plunged in New York on Wednesday evening and the European bourses are trading between 1% and 2 % lower on Thursday. This apparent disconnect is the strongest evidence available that investors are now more concerned about yield than they are about growth and currency risk. The euro is trading close to its lifetime high against the yen even though European equities have collapsed over the past 6 weeks and economic data out of the euro area has been significantly sifter than that out of Japan. The carry trade seems determined to march on and the only event that might undermine it at the moment is if there is a sustained and convincing retreat in commodity prices, or evidence of a another major bank failure. It is fruitless buying the yen in this environment and the value trade is to buy the dollar against the Japanese currency on dips towards 105 and below 106. If Ben Bernanke’s testimony in front of Congress on Thursday gets the thumbs up from US stock markets, expect the yen to face another sell-off later today.

CAD
The loonie had one of its best days in weeks against the greenback on Wednesday, gaining almost a cent, although it failed to penetrate below the 1.01 line. Broad dollar weakness and a bounce in commodity prices helped the loonie gain some impetus. Housing Starts in Canada came off slightly in June, but were I line with forecasts and the data underscores that Canada’s housing sector is essentially free of the financial crisis currently ravaging the US housing sector. The loonie is likely to remain contained within a 1.0070 to 1.02 price range until Friday’s employment report. Another positive employment report could help push the loonie higher against all other currencies, especially if oil prices continue to trade at elevated levels, while a negative employment number could spark a significant sell-off and see USD/CAD return to 102.50 at least. If data is in Canada’s favour, look for the euro to drop to 1.58 by week’s end.

Bob B - Jul 10

The BoE is in the horns of a dilemma

2008-07-08T13:35:00.000+01:00

The Bank of England is meeting this week to deliberate on monetary policy, at a time when the UK economy looks to be slipping into a steeper downturn, while inflation is rising to new highs thanks to rocketing oil and commodity costs. It is only a few months since markets had been pricing in up to 3 further rate cuts this year, but that position was reversed when inflation bubbled back above 3% in April, then hitting 3.3% in May. The inflation rate is likely to register higher again for June when the numbers come out later in the month. Markets suddenly began pricing in rate hikes over the past month with many analysts predicting it would come as soon as this week. But in the past fortnight economic data has revealed an acceleration in the downturn of the UK economy, with the manufacturing, services and construction sectors all contracting in June, while confidence amongst consumers and businesses alike are at rock bottom. It is difficult to see how the Bank of England can raise interest rates against this backdrop, unless they wish to push the economy into an even sharper downturn and into recession.

The Governor Mervyn King has recently admitted that rising inflation is owing to spiralling costs of imported oil and commodities and short-term adjustments in interest rates is not going to alleviate this problem. What the Bank will need to determine is if an interest rate hike would be successful in anchoring inflation expectations and might ward off potential second round effects, where unions are demanding higher wages from employers. But with economic growth grinding to a halt, it is likely the labour market will soften over the next 2 quarters and wage inflation should not be an issue. Also, while inflation may rise higher in the coming months until such time as there is a stabilisation or a decline in commodity costs, inflation should moderate accordingly from the middle of next year. Indeed there is every prospect that commodity prices could collapse, given the stagnant state of the global economy and in this situation inflation could begin to decline sharply from the middle of next year. It would be totally irresponsible of the MPC of the Bank of England to raise interest rates to combat an inflation threat they largely have no control over. Indeed the MPC would be better served to coordinate actions with other major Central banks who find themselves in exactly the same dilemma. The diversification in polices of the ECB and the Fed serves to remind us no coordination currently exists.

The ECB went it alone and decided to raise interest rates last week, but economic data from the euro zone in the coming months could indicate that the ECB’s decision to tighten now was a huge mistake. In any event recent economic data out of the euro area has not been as soft as that out of the UK, while the euro economy significantly outperformed the UK economy in the first quarter of 2008, the last period for which comparative GDP data is available. Therefore, the Bank of England is not under undue pressure to follow the precedent set by the ECB.

The Bank of England is clearly not in a position to raise interest rates in the current climate and in fact there should be considerable more airing for an argument to cut them this week, than there was a month ago, even allowing for the subsequent rise in consumer price inflation. It seems certain rates will be kept on hold, given all of the risk and uncertainty currently surrounding growth and inflation. A brave decision would be to take a leaf out of the Fed’s book and to cut rates, to help stimulate growth at a crucial time for the economy, on the assumption that longer run inflation will be forced to moderate anyhow as the economy slows. Either way, markets should be on the lookout for comments from Bank of England committee members in the days after the meeting, because business and consumers alike will be looking to the Central Bank for some words of wisdom or reassurance, at a time when economic growth is deteriorating at an alarming pace. It is not beyond the bounds of possibility the MPC will break with normal tradition and issue a more detailed statement this week, even if rates are kept on hold, in an attempt to more promptly address growing fears about the state of the economy.

Sterling should continue to hold its own against the euro and the dollar, trading within recent ranges, while markets continue to rule out the possibility of rate cuts. But any sustained move against commodities will tend to undermine the pound because a relaxation in energy and food costs would make the Bank of England a certain candidate to then ease its monetary policy in the months ahead. This week’s MPC meeting could prove to be a non-event for the currency, if, as expected, rates are left on hold and the Bank does not issue any detailed statement. There is serious downside risk for the currency over the medium to longer term.

Ted B - Jul 8

Bob's Currency Focus

2008-07-07T15:12:00.000+01:00

EUR/USD
The euro fell to 1.5610 early Monday as the knock-on impact of the ECB’s more dovish than expected statement last Thursday rolled into Monday, leading to a further liquidation of euro long positions. Monday’s economic releases did not help the euro with Germany’s Industrial Production declining by 2.4% in May, the steepest decline in 9 years, against a consensus rise of 0.5%. Recent economic data out of the euro area has been very poor and the only reason the euro has held up is because of the hawkish stance of the ECB. If euro zone economic data continues to reflect a sharpening slowdown in economic activity, the ECB’s rate hike last Thursday could begin to look like a serious error of judgement and could lead to a longer run sell-off in the single currency. In fact with commodity prices at risk of a sharp decline owing to the global economic slowdown and US interest rates almost certainly at their nadir, the medium to long-term outlook for the euro over the next 6-9 months does not look particularly bright. The euro may have peaked at 1.6016 and current prices around 1.5650 would appear to offer very good medium term value, even if the euro has come off sharply in the past few days. There looks to be no reason why EUR/USD will not now retreat to test key support levels around 1.53. This is a data light week on both sides of the Atlantic and direction will be influenced more by scheduled statements from the G8 and Fed Chief Ben Bernanke than by economic data. Oil prices will continue to play a dominant role and any further rise in oil prices will be seen as a reason to sell the US currency. The G8 has been pretty much ineffective in the past in dealing with the oil/dollar crisis and it may be wishful thinking to expect anything from the Japan summit of the leaders of the 8 largest economies. Indeed a return to the usual mantra of the requirement for oil producing nations to support increased oil production will likely be laughed off by financial markets and rather than leading to support for the dollar, it may well undermine it. There is value in selling down the pair on prices close to 1.57, with the potential for a return to 1.55 or even 1.54 over the next week. Watch out for Bernanke’s speeches on Tuesday and Thursday as these are likely to be the most important events of the week. Unless the Fed Chief signals an intention to raise interest rates to offset rising inflation, the dollar will not be aided.

GBP/USD
Sterling is coming off the worst 2 weeks of economic data we have seen in years, with one report after another signalling a sharp downturn in the performance of the UK economy. Soft data has not been restricted to the housing sector, with economic activity in the manufacturing and services sectors entering contraction in June while the retail sector also comes under pressure. Sterling rose to 2 dollars against the dollar last week as traders speculated the Bank of England might raise interest rates to stave off the rising threat of inflation. This inflation however is commodity-driven and is outside the influence of the Bank of England and there is zero chance the MPC will move to raise rates when they meet later this week. This realisation has finally sunk in with markets and this morning the pound slid to below 1.97 against the greenback while the euro rose to above 79.5 pence. The Bank of England would normally be rushing to cut interest rates in an environment where growth is flat or negative but feel constrained by inflation concerns. In this environment the UK slowdown is only likely to become more pronounced and the medium term outlook for sterling is bleak. The Bank of England may feel forced into cutting rates, even while inflation is rising, as the Fed has done in the US, gambling that commodity prices are likely to retreat in the medium term. Mervyn King has not sown the inclination to be so creative in his policy thinking, so expect a wait and see approach this week and the Bank of England to stand pat on rates. Cable should be heading back to test the lower end of the trading range at 1.94, so it is still worth selling down on prices close to 1.97. There could be a lot of volatility this week, while any retreat in commodity prices will prove to be negative for sterling as it will relieve inflation pressures and make it easier for the Bank of England to cut UK interest rates. The euro will struggle to climb much above 80 pence against the pound, in the absence of any signal from the Bank of England to ease rates.

USD/JPY
The yen is the worst performing of all the major currencies Monday as markets use the pick-up in stocks and rumours of a G8 reference to the need for a strong dollar as a reason to offload the low-yielding Japanese currency. The yen may struggle in the short-term in a situation where G8 leaders might issue some coordinated statement on the dollar and commodity prices, as the impact could lead to a rise in stocks and risk tolerance that would undermine the yen. However, expectations from the G8 summit are probably exaggerated, particularly with respect to any direct reference being made to the dollar, and any resultant disappointment in markets could see risk aversion rise again and lead to the yen recovering somewhat against the dollar and the euro. Domestic data will not have any significant impact on the direction of the yen during this week. The euro is clearly massively over-valued against the yen at prices over Y168 but it is difficult to see the trend being reversed in the immediate term unless there is some sustained downward move against the single European currency. The only currency offering value against the yen at the present time is the US dollar and that is only on dips back towards the Y105 price level. Stock market performance will need to be monitored closely over the coming days as will the scheduled speeches from Fed Chairman Ben Bernanke.

USD/CAD
The loonie has continued its see-saw battle against the greenback over the past week and the pair remains pinned in a 1.0050 to 1.0250 price range, offering the most lucrative range-trading pair of all the majors. Soft economic data and concerns over the country’s sagging growth are preventing the loonie from getting away while equally soft economic data from the US and rising commodity prices continue to prevent the greenback from making a decisive move. The medium term outlook would tend to favour the US currency given the risk of a sharp correction in commodity prices, while any signal from Ben Bernanke that US interest rates are destined to rise could see the upside gain in the short run. Next Friday’s employment data out of Canada will be important although only a sharp decline in the employment total is likely to lead to any meaningful rally on either side, to the upside in this case for USD/CAD. In the unlikely event the G8 meeting results in some coordinated effort that sees in a retreat in commodity prices, then the loonie would also come under selling pressure. For now, expect the loonie to range between 1.01 and 1.03, with the value trades being bids on prices nearer to 1.01. The loonie could extend its rally this week against the euro, given the ECB has signalled a pause in interest rates and the euro could retreat to 1.58 at least against the Canadian currency.

Bob B - 7th July 2008

Oil crisis and forex market

2008-07-01T16:06:00.000+01:00

Oil prices have hit $143 a barrel and there appears to be little let-up as traders push the energy commodity to record highs, almost on a daily basis. At the same time the US dollar is hovering near record lows against a line of major currencies with markets continuously seeking to send the US currency lower. Commodity traders jump on any reason, no matter how minute, to send crude prices higher. The subsequent rise in oil prices is then taken as a vote of no confidence in the dollar and the greenback duly obliges, going lower in value. This would not be so bad were the related moves in some way proportionate, but the reality is that since last summer every 1% fall in the US dollar index has corresponded to a massively disproportionate 10% rise in the price of crude. Of course there are other factors driving crude prices, but it is no coincidence that oil prices began scaling the current spike around the same time the US Federal Reserve embarked upon an aggressive rate cutting campaign, a policy move that caused the US dollar to nosedive. Oil prices have reached such an alarming level that they are now having a damaging effect on global stock markets (inflated energy costs are eating into disposable income and drying up consumption demand for other products and services). US and European bourses are today officially in bear markets (the major indices having lost 20% from the peaks achieved within the past 9 months). As investors scramble for returns outside of equities, we are seeing some major fundamental disconnects in currency markets, something which has been amplified in recent weeks.

What are these disconnects?

1) A rise in risk aversion no longer translates into liquidation of carry trades. If one glances at the major carry pairs – EUR/JPY, AUD/JPY and NZD/JPY, one will notice that even in a situation where equity markets have plummeted over the past month, these carry pairs have in fact gone higher. The reason for this is twofold: a) while stocks have retreated, commodity prices have gone up and commodity currencies like the Aussie and Kiwi dollars have been well bid and b) Volatility levels as measured by the VIX indicator have remained low, even while stocks were selling off at a record pace in June. This is encouraging risk takers to keep selling the yen against higher yielding currencies.

2) Weak economic data is not weakening a currency in the current market. A case in point here is sterling, which has appreciated against every other major currency over the past 2 weeks, despite some dire economic releases from the UK which point to an ailing economy on the brink of recession. The euro has also been appreciating against a backdrop of softening economic data. Why? The Central Banks in the euro area and the UK have highlighted that they are more concerned about rising inflation trends than slowing growth conditions. The ECB is expected to raise interest rates this week at a time when the euro zone economy is slowing rather sharply, while the Bank of England has hinted the next move by the MPC is more likely to be a rate hike rather than a rate cut (markets had been expecting further cuts given the economic downturn). For the immediate term investors are more interested in higher yield, not growth prospects, and the comfort of higher interest rates is attracting their money. This of course is having a damaging effect on the dollar, with the Fed less concerned about rising inflation than the ECB and Bank of England, even though headline inflation is running higher in the US than in the euro area or in the UK.

This disconnect of course cannot last. Eventually markets will reach breaking point, which will happen when there is clear evidence of demand destruction for crude oil, or when spiralling energy inflation sparks some form of direct market intervention, or when the Fed is forced to hike US interest rates before they would like to do so. It may be premature to start expecting conciliatory tones from an ultra-hawkish ECB.

This disconnect situation does throw up some interesting medium term value trades in currency markets. The one that currently jumps out is GBP/USD, which is on offer to sell today just below the 2.00 mark. The UK economic situation is fast developing into a crisis and it is difficult to see how sterling can hold its elevated market position, regardless of what reality disconnect appears to be gripping the Bank of England. The euro also looks to have been on an extended honeymoon, although the ECB still holds considerable street cred with traders and Trichet & Co. cannot be dismissed as lightly as a Bank of England which is less than consistent in its policy approach.

Ted B - Jul 1

Bob's Currency Focus

2008-06-30T16:43:00.002+01:00

EUR/USD
Eurozone inflation has surprised on the upside, with the flash estimate for June coming in at an annualised 4.0% rate, against 3.7% in May and a forecast 3.9%. Whatever doubts may have existed about the ECB’s intentions this week have all but vanished and the Governing Council seems certain to raise rates to 4.25% when they meet on Thursday next. Opposition to the move has been mooted and the question now is not a case of whether the ECB will raise rates this week, but rather a case of whether this week’s rise will be the start in a new series of rate rises. The ECB has backed itself into a corner and markets have priced in a further rate hike by September with some analysts now expecting up to 3 rate hikes by the end of the year. Normally this would be very bullish for the currency and indeed the run-up in the euro over the past few weeks has paid testament to this. However we are now looking at a situation where the ECB will be raising interest rates at a time when there is zero or negative growth in the euro zone. An increase in interest rates will serve to expedite the economic slowdown and could potentially derail the euro later in the year. In the short-run this prospect is unlikely to deter traders, whom will want to challenge the 1.6016 high this week. The dollar is being driven by commodity prices, which in turn are influenced by the EUR/USD exchange rate, so with yield differentials set to widen, the immediate outlook for the dollar is not bright. There are a few caveats though, most notably the PMIs out of the euro area on Tuesday and Thursday Vs the US data counterparts. Also, we are dangerously close to further vocal market intervention, as spiralling oil costs sends global stocks plunging and further pits the US economy into recession. Monday sees the end of quarter 2 and some profit-taking is likely to stall the euro’s advance today, but it will continue to be bought on dips in the run-up to Thursday’s ECB. Friday’s US non-farm payroll is unlikely to play a major role in influencing currencies this week, even if we do witness some short-term volatility, because US Fed policy looks set to remain on hold for the foreseeable future. Key resistance on the upside is at 1.5840 and if that gives way, it will leave the way open for euro bulls to push to the illustrious 1.60 price mark. EUR/USD is trading at an uncomfortably high level around 1.58, yet the current risks look to be to the upside and the wise option may be to avoid the pair altogether until after the ECB on Thursday.

GBP/USD
UK mortgage approvals and mortgage lending figures fell to record lows in May, while consumer confidence has sunk to a 16 year low in June against a backdrop of falling house prices and runaway energy costs. Normally such damning data would be sufficient to send sterling packing for a couple of cents against the dollar and over half a penny against the euro, but sterling has found some back teeth in the past week and the UK currency is virtually unchanged on Monday, holding onto the significant gains it made last week against the greenback. There are a few possible reasons for this new-found resilience, one being that we are at the end of the second quarter and profit-taking has led to a liquidation of a large volume of sterling shorts, thus propelling sterling artificially higher. If this is the real reason, then expect sterling to decline, possibly sharply, from Tuesday, as we enter quarter 3. Another plausible reason is the resurgent appetite for high yielding currencies as investors are hedging against a climate of rising inflation and retreating equity values. Sterling is competing again on yield grounds as markets have written off any prospect of rate cuts from the Bank of England this year. The medium to longer term outlook for sterling remains grim however because larger funds are unlikely to want to channel long play funds into a currency where the economy is pretty much tanking. If the CIPS manufacturing and services indices, due out on Tuesday and Thursday, report a contraction in the respective sectors for June, expect sterling’s recent revival to hit a wall. We need to see cable fall below 1.98 to sell the pair again, because while price remains above this support level, bias remains to the upside. The euro could take a run at 80 pence this week against the UK currency, given an expected widening in the rate differentials. Short sterling positions on EUR/GBP could begin to stack up again from Tuesday.

USD/JPY
The yen has been dragged and pulled across the currency markets Monday, first pushing the dollar below Y105 during the morning, only to see the dollar rebound to over Y106 in the afternoon. The euro too has recovered from a low of Y166.08 in the morning to retake the Y167 price handle. Risk aversion, prominent during the Asian session, has given way to complacency as short-term players look for yield and are snapping up USD/JPY and EUR/JPY on dips. Tonight sees the release of the Bank of Japan’s quarterly Tankan Survey, one of the few indicators out of Japan that can really influence the currency market. Thanks to a Reuters slip last Friday, when the news agency inadvertently and prematurely broadcast the quarterly Tankan report results, the market already knows the survey reveals increasing pessimism about the economy and it will help cement the view that the Bank of Japan will not be in a position to start raising interest rates any time soon. The yen is not going to be able to undertake any sustained rally unless we witness a structural breakdown in EUR/JPY. That seems unlikely in the coming days with the rate differential set to widen in favour of the euro on Thursday, so the value trade remains being long on USD/JPY, particularly on dips towards Y105. There is a chance that risk aversion levels could rocket during the week, if the ECB rate announcement has an impact of destabilising the dollar and sending oil prices soaring to even higher record levels.

USD/CAD
The loonie has had a bad day at the office Monday even though GDP was reported to have risen by 0.4% in April, following a contraction over the previous 3 months. The greenback has benefited from profit-taking at the end of the quarter which has seen commodity currencies pare some of the recent gains, and this has hurt the loonie. But it is difficult to see the USD/CAD moving outside of the recent 0.9920 to 103.20 price range anytime soon and the greenback will come under selling pressure on any gains beyond 102.50. In fact Tuesday could witness a sharp reversal in the pair’s direction, if Monday’s greenback rally is nothing more than a profit-taking exercise, which seems likely. Traders should use the opportunity to exit previously stranded USD/CAD longs, rather than use it as an invitation to start going long on the US dollar. Tuesday is a holiday in Canada and this week sees a very light calendar with Friday’s IVEY PMI the only other release of note. Oil prices will continue to be an important influencing factor for the loonie and expect USD/CAD to trade between 1.0050 and 1.0250, with the risk of a breakout to the downside, if the ECB this week helps oil prices to surge. The euro offers no value against the loonie at present values (>1.60), but it is best to wait until after Thursday, before making a decision to enter the market on this trade.

Bob B - Jun 30

Bob's Currency Focus

2008-06-27T13:19:00.000+01:00

EUR/USD
Negative sentiment against the dollar hit fever pitch again over the past few days as the Fed’s rather indifferent approach to rising inflation in their monetary policy deliberations this week led futures markets to pare back expectations for future interest rate rises in the US. The dollar has got it in the neck and oil has risen to a fresh lifetime high, close to $142 a barrel. Bernanke’s credibility has been seriously undermined by recent events with the Fed Chairman seen as talking tough but lacking the conviction to follow through on his words. US stock markets are plunging in recent weeks, primarily thanks to the rash policy decisions taken by the Fed over the course of the past 9 months. If the Fed hadn’t handed the ammunition to commodity traders to more than double the price of oil over the 9 month period of its aggressive rate easing cycle, the US industrial averages might not now be facing their worst monthly performance since the age of the Great Depression. While the Fed may be dithering on inflation, the ECB’s bold determination to signal an imminent rate hike a few weeks back, could come back to haunt the Governing Council. Since that statement from ECB President, Jean Claude Trichet, euro zone economic data has pointed to a marked slowdown, with both the manufacturing and services sectors falling into contraction in June and with consumer and business confidence plummeting across the entire euro area. Add to this the fact euro equity bourses have nosedived, a euro which is rising on ECB rate expectations rather than growth fundamentals and all in all you have a situation where one would believe it is the least opportune time for Mr Trichet to announce a rate hike. However, the ECB is likely to be true to its word and we should expect euro zone interest rates to rise 0.25% to 4.25% next Thursday.

The euro is close to the recent resistance line of 1.5840 and barring some sudden reversal, this should come under threat, possibly by as early as Monday. There are some data risks for the euro next week, but on Monday, we have the CPI flash estimate, which is likely to come in at or above June’s record 3.7% rate. If it does, it will more or less seal a rate hike from the ECB next Thursday. If we see further deterioration in the manufacturing PMI (Tuesday) and Services PMI (Thursday), both of which contracted in June according to the preliminary readings, it will put added pressure on the ECB to soften its approach on Thursday. This ECB is particularly hawkish though and it is difficult to see them swaying too much from their recent tough stance, given repeated references by members of the committee to the fact the ECB’s sole mandate is to stem inflation, not to stimulate growth, as is the dual mandate of the Fed and the Bank of England. Traders need to be on the lookout for comments on currencies next week, because of the dollar’s fragile market status and runaway oil prices. Central Bank intervention is most unlikely while the Fed and the ECB are adopting opposing strategies in their respective battles with rising inflation and declining growth. The euro will be vulnerable to a sell-off on EUR/JPY if risk aversion levels remain elevated, while a ‘done and dusted’ policy statement from the ECB would also undermine the single currency, given the extent of gains achieved on the back of a very tough ECB stance. It is dangerous to buy the euro on levels close to 1.58, given all the risks, even if there is a chance of a short-term rally higher. Weak economic data out of the euro zone, some of it very significant, has failed to hold the euro back over the past 10 days, but eventually it will come home to roost, particularly if followed by further soft data next week.

GBP/USD
Sterling has got a timely boost over the past week, just at time when it was being written off. The pound has benefited from a broader collapse of the dollar this week, as well as uncertainty about the euro economy, which has helped fuel a flow of funds into the UK currency. While GDP for quarter 1 was revised down to 0.3% from 0.4%, the current account deficit narrowed sharply during the same period, surprising analysts. The principal reason for sterling’s recovery however has been the Bank of England’s shift in emphasis from growth to inflation, which has markets anticipating the next move by the MPC may be to hike rates. This has helped to attract a new wave of investors that are seeking higher yields, with the 5%-earning pound a favourite once again, if just for the short-term. Ongoing stresses in the housing sector and concerns over activity in the manufacturing and services sectors is likely to prevent frantic buying, although cable now has every chance of hitting the 2 dollar line, ahead of the big-hitting economic releases from Tuesday of next week. It is almost certain UK interest rates will be held at 5% when the MPC delivers its latest policy announcement on Thursday, and the pound’s immediate fate will depend on the fate of the dollar and what the ECB does next week. As long as cable remains above 1.98, an upside bias remains, for now, but that could revert very quickly and cable could find itself back in the middle of the recent trading range (1.94 – 1.98) before the Bank of England even delivers its statement next week.

USD/JPY
The yen broke down several price barriers over the past 24 hours as the Japanese currency has been a principal benefactor of the sudden rise in risk aversion and the market attack on the US dollar. The USD/JPY pair has fallen as low as 106.10, down from the 108.20 it was trading at early Thursday. With the Dow plunging 3% on Thursday evening and oil rocketing to record prices, traders are beginning to offload short yen positions. If the unease continues, the yen could gain appreciably, given the exaggerated price levels which still exist on the EUR/JPY and AUD/JPY carry pairs. News out overnight reveals inflation rose the highest in 10 years in May and while an annualised rate of 1.5% is unlikely to frighten too many traders, it does leave options open for the bank of Japan, if the Bank wished to hike interest rates later in the year. Trading on the yen will continue to be volatile and any sign of a return to stability in stock markets will see the yen quickly fall out of favour. It is dangerous to sell down EUR/JPY ahead of the ECB meeting next Thursday, while there may be some value in buying USD/JPY on dips, when US stocks show evidence of a recovery. The wise move may be to wait until the current downside probe has run its course, however long that might take.

USD/CAD
The loonie has hit fresh highs against the dollar on Friday, taking advantage of a weak dollar and spiralling out of control oil prices. All of the commodity currencies have performed remarkably well, despite the rise in risk aversion over the past few days, but there is an ever-growing opinion that the oil price spike is primarily a bubble and were it to prick at any time, the loonie would have most to lose of all the major commodity currencies. We could see the Canadian currency try to take out the parity line later today, especially as the USD/CAD pair has looked decidedly bearish over the past 2 weeks. Oil prices will continue to form an important support for the loonie, even in the wake of soft economic data. A break through parity could see the pair fall to take on support at 0.9970, where a further break could trigger a sharp retreat to 0.9920. The dollar needs to reclaim the 1.01 line quickly and push the pair past Thursday’s high of 1.0140, if it is to regain any sort of upside momentum.

Bob B - Jun 27

Bob's Currency Focus - 16:00 GMT

2008-06-23T16:57:00.001+01:00

EUR/USD
The euro on Monday gave back all of its gains from Friday following a poor run of data releases. The timeliness of this data could not be more significant, given the ECB is expected to a deliver a 0.25% rate hike when it deliberates next week. Germany’s monthly Ifo business survey, an important business sentiment measure for the euro area’s largest economy, fell more than expected in June, the index declining to 101.3 from 103.5, against a forecast decline to 102.5. A more damaging release came in the form of June’s preliminary PMI readings for the euro area’s manufacturing and services sectors, both of which recorded a contraction (<50) and the combined composite PMI index is now seen at 49.5, the lowest reading in 5 years. Some pressure may now be put on the ECB to suspend next week’s signalled rate hike, although the ECB is likely to stand firm against opposition and raise rates by 0.25%, if only to protect its credibility. Concerns are beginning to grow about the health of the euro zone economy and the next 10 days could prove to be a defining period for the single currency. If the Fed acts tough this week (policy statement due out on Wednesday), i.e. the FOMC points to future rate hikes, followed next week by a ‘stand pat’ ECB or an ECB which states the July rate hike is a ‘once off,’ then the euro could capitulate and we could be at 1.50 within the next 2 weeks. For now, the dollar must break below 1.5460 if it is to have any chance of giving euro supporters a bloody nose in the short-term. A break below 1.5460 should pave the way for a retreat to 1.5350 ahead of the Fed on Wednesday evening. Markets need to be on their guard for comments from members of the ECB Governing Council in the next few days, because any softening in tone ahead of next week’s key rate setting meeting will badly hurt the euro. Expect direction to gravitate more towards the lower end of 1.53 to 1.58 trading range over the coming days, with euro supporters needing a more dovish sounding Fed to boost the single currency. Between now and then, sell on any rallies back towards 1.56, with downside price targets of 1.5480, 1.5410 and 1.5360. A tough policy stance on inflation from the Fed could force the pair down to test the near 4-month low at 1.5287.

GBP/USD
Cable has proven itself to be the most lucrative of the major trading pairs over the past few months, with the pair essentially bobbing between 1.94 and 1.98 on an ongoing basis. The pound burst from its lows near 1.94 a week ago to almost hit 1.98 on Friday, thanks almost exclusively to a stunning set of retail sales figures for May, released last Thursday. As to whether one can believe the numbers is another thing, particularly when it coincides with a slowdown in money supply and a further deterioration in UK house prices. The market has gone off the idea of imminent rate cuts from the Bank of England, with some analysts even forecasting a rate hike in the near-term, and this is protecting the pound, for now. Sterling has given back almost 2 cents against the dollar on Monday as the US currency picked up gains across the board. UK data is on the light side this week, with Thursday’s Nationwide House prices likely to be the only real market moving release its side of the Atlantic. The pound’s fate over the course of the week will be determined by the markets reaction to US data and to the Fed’s statement on Wednesday next. US data has been soft of late and there is no reason to suspect anything different this week, particularly from Tuesday’s Consumer Confidence index and Wednesday’s Durable Orders numbers. Any sustained falloff in oil prices will prove to be negative for the pound as it could temporarily erode global inflation, fears which are preventing the Bank of England from cutting interest rates. Key support levels to watch are 1.9460, 1.94 and 1.9335. Anything that leads to a decline to below 1.9335 will mean a major rethink for the pair’s trading range. Barring a very tough Fed statement, cable should be contained within recent trading ranges, but the preferred trade is to sell down on any rallies above 1.9750. Target downside prices are 1.96, 1.9550, 1.9480 and 1.9410.

USD/JPY
The yen has failed to make inroads today and it has ceded Friday’s gains to the dollar. It has strengthened modestly against the euro, but only because the euro is coming off the back of some very weak economic data on Monday. With inflation the key influencing factor, yield outlook is the principal driver for currency markets right now and with no rate hikes in Japan probable this year, the low-yielding Japanese currency remains a favourite sell. This is clearly demonstrated by the fact the yen has fallen rather sharply against every other major currency in the past month, despite a significant unravelling in global stock indices. The currency is clearly undervalued, particularly against the euro, but it will struggle to make any headway against the majors in the short-term, unless we see a dramatic unwinding in the EUR/JPY cross. Any hint of an imminent rate hike from the Fed, when it deliberates this week, is likely to push the dollar higher against the yen and could open the way for a move to Y110, possibly even by the end of this week, particularly if US economic data is more robust than expected. The safest trade involving the yen probably remains a ‘bid’ on USD/JPY, when the pair dips towards Y107 or below. The yen’s exchange rate will continue to be dictated by interest rate expectations elsewhere, rather than by domestic economic data out of Japan.

USD/CAD
The loonie has essentially been stuck within a 101 to 102 trading range for the past week, with the dollar once again failing to make any real impact while momentum was on its side. The loonie is being protected by soaring oil prices and last Friday’s better than expected retail sales numbers from Canada reveals the economy has yet to capsize under the weight of a strong domestic currency. The loonie/greenback pair is lacking direction right now, though it has taken on more of a bearish tone in recent days. But the risks for USD/CAD probably lie to the upside this week, given the possibility of some hawkish rhetoric from the Fed, the risk of a retreat in oil prices and a light economic calendar in Canada. Weak economic data out of the US over the next few days could push the pair either way, as soft US economic data is not generally a positive for the loonie, because of the importance of the US economy to Canada’s huge exporting sector. There is evidence over the last week that petro traders are back on the loonie and the currency’s wider fate this week should be dictated by oil prices. 1.01 has held in recent days on USD/CAD and any price close to this level does offer a decent entry price for buyers, given the upside risks coming later in the week. Traders should be wary and use a short stop as a break below 1.01 could trigger a rapid return to the parity line. Longer run positional traders should just hold out on their long USD/CAD positions and wait for a return to 103.20 at the very least.

Bob B - Jun 23

Bob's Currency Focus

2008-06-11T12:26:00.003+01:00

EUR/USD
The dollar rallied to its biggest 2 day gain over the euro since 2005, thanks to dollar defensive comments on Monday from Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke. Paulson stated the US Administration had not ruled out intervention in currency markets to help halt the dollar’s slide, while Fed Chairman Bernanke, speaking in Boston on Monday night, upped his hawkish tone on inflation, leading futures markets to price in higher US interest rates for later this year. US economic data has yet to point to any justification for a rise in interest rates and the timing of Bernanke’s comments may simply be an attempt to halt the surge in oil prices, by way of encouraging a stronger US dollar. Thus far markets have taken him at his word, but we saw a similar move on Tuesday of last week after Bernanke stated the Fed was ‘attentive’ to the dollar, only for the Chairman to be upstaged by ECB President Jean Claude Trichet on Thursday, who dropped a bombshell about an imminent rise in euro area interest rates. Markets will be looking ever closer at economic data for an indication of which way the market should lean and tomorrow’s retail sales out of the US will be an important barometer, but of more importance will be Friday’s consumer price inflation numbers. Oil prices too need to be watched closely and if commodity markets push the price of crude higher, it will undermine dollar confidence and potentially lead to another sudden sharp decline in the US currency, almost without warning. US crude inventory data released on Wednesday afternoon will have a significant impact for the direction of oil prices for the remainder of this week. Range trading between 1.54 and 1.5550 is likely in the lead up to Thursday’s US retail sales data and if economic data, particularly the CPI numbers on Friday, favours the US currency, we could witness a test of key support levels below 1.53 before the end of the week. If oil prices soar, traders need to be on guard for possible market intervention (vocal at first), if EUR/USD returns back above 1.58. Aggressive dollar selling is dangerous in this environment, particularly with a G8 summit this coming weekend.

GBP/USD
Cable took something of a battering on Tuesday, sterling losing a full 2 cents, as the UK currency retreated against a broadly stronger dollar. UK data has remained soft and the medium to longer term outlook for sterling is bleak, especially against the dollar. Sterling has held its own against the euro this week, but this is due to the fact the euro was sold off more aggressively against the US currency than sterling, rather than any shift in fundamentals. In fact the fundamental outlook for sterling against the euro has worsened for the UK currency, since last week’s ECB announcement of a pending rate hike in the euro area. Today’s labour data out of the UK revealed the claimant count rose for the 4th consecutive month in May and the unemployment rate ticked up 0.1% to 5.3%. Of more immediate significance is the GDP number for the 3 months to the end of May from the NIESR think tank group, which reveals a sharp slowdown in growth in the UK economy over the past month - GDP slowed to 0.2% from the 0.4% reported in the 3 months to the end of April. Sterling’s only real form of protection right now is high commodity costs, something which is keeping UK inflation rates elevated and preventing the Bank of England from cutting interest rates. But any sharp falloff in commodity prices will probably see sterling fall sharply against the dollar, as markets start to raise bets on pending rate cuts in the UK. Cable offers good sell down value on any prices over 1.9750 against the dollar, with the prospect of a challenge of the year’s lows around 1.9330 over the next week, while there is every likelihood the euro will return to over 80 pence sterling, although this is a more dangerous trade, given the potential for growing weakness in the euro economy.

USD/JPY
Complacency has returned in major fashion as witnessed by a virtual collapse of the Japanese yen in recent weeks, at a time when equity markets have been slumping. Although Japan’s economy grew faster than any of the other G7 economies in the first quarter, the low-yielding yen has found itself out of favour as Central Banks notch up their hawkish rhetoric and threaten higher interest rates. The yen has fallen to a year’s low against the euro and to a 14-week low against the dollar with traders anxious to place bets on a widening of interest rate differentials on USD/JPY and EUR/JPY. A weakening yen is unlikely to deter Japanese authorities and it is most unlikely the Bank of Japan will follow the Fed and the ECB and threaten higher rates in the world’s second largest economy. The Bank of Japan deliberate on monetary policy this Thursday and while rates are certain to remain on hold, if the Bank’s Governor delivers a passive statement on the rate outlook, the yen will likely come under further selling pressure. However traders need to be very attentive to what is happening on equity markets and given the extent to which the yen has been sold off recently, there is every chance of a sharp correction higher if credit woes intensify. The G8 meeting this coming weekend could also destabilise currency markets, but it is certain the yen will not come in for any direct comment. If anything is said at the G8, it will probably be a call for a stronger dollar and this should push USD/JPY even higher in the short term. The yen is out of favour right now, but because of the danger of a reversal, it may be wise to avoid trading it. Buying on sharp dips on USD/JPY probably offers the best value trade currently, given the calls for a stronger dollar.

USD/CAD
The decision to stand pat on rates surprised markets, although the switch to a more hawkish line by many of the world’s central banks over the past week meant holding rates steady was a safer play for Bank of Canada on Tuesday. The loonie got a timely boost and prevented the dollar from rallying towards the year’s highs at 103.70, while the Canadian dollar also gained a tidy 2 cents against the euro. It is difficult to see the loonie extending its gains much further, particularly against the greenback, because the rate outlook has shifted in the US currency’s favour following Bernanke’s comments earlier in the week. Commodity currencies have taken on a softer tone this week, with the Aussie and New Zealand dollars in retreat and falling below key support levels, so the loonie’s reprieve could be short-lived. Oil prices will remain a dominant factor in influencing direction and elevated prices will offer important protection, although any collapse in the price of crude will encourage a sell-off in the loonie, given the weak economic fundamentals emanating from Canada in recent weeks. We should range trade between 1.0120 and 1.0320 for now, but the risks are for a breakout to the upside, given the broader and firmer tone earned by the greenback in recent days. The loonie should be able to trade below 1.60 against the euro, with the possibility of a pullback to 1.56 before the end of the week. The value trade is to buy USD/CAD on dips towards 1.0130, with target prices of 1.0210, 1.0240 and 1.03.

Bob B - Jun 11

Woeful error of judgment questions credibility of the ECB

2008-06-09T14:21:00.000+01:00

On June 5th last, Jean Claude Trichet shook the world’s financial markets when he made what now looks like being his bravest statement since becoming ECB President, when he boldly signalled to the world’s media the ECB may raise interest rates when they meet again in July. To be fair to Trichet his statement was merely echoing the sentiment of the ECB’s Governing Council which had just deliberated on monetary policy for the 15-nation euro economic block. Markets were taken completely by surprise by the remarks as most Central Bank analysts had expected the next move in ECB interest rates to be down, albeit much later in the year. While inflation is running at a 16-year high in the euro zone, the recent surge in consumer price inflation is not because of excess consumption or demand from a slowing economy and an increasing cash-strapped euro area population, but rather because of a spike in global oil and commodity prices. These commodities are priced in dollars and only a rebound in the US dollar or some major global demand destruction is going to curb commodity price inflation. As to how the ECB believed a direct threat to raise euro zone interest rates exactly at the time the US Dollar was attempting to steer a tentative path to recovery is a mystery, but the record jump in crude oil prices witnessed in the 31 hours following Mr Trichet’s bombshell, would suggest the ECB’s strategy has backfired rather spectacularly already. Oil prices jumped a staggering $16.50 during this 31-hour period, or 13.5%, with oil futures posting lifetime gains on both Thursday and Friday’s sessions. The euro jumped 4 cents against the dollar over the same period and rose to its highest level against the yen in a year and this on a week when eurozone economic data added to growing evidence of a sharpening downturn in the euro area economy.

Spain’s Prime Minister, this past weekend, was correct to question the wisdom of Mr Trichet’s remarks and he essentially blamed the ECB President for the spike in oil prices seen at the end of last week. The nature in which the ECB ignored and steamrolled comments made by Fed Chairman Ben Bernanke earlier in the week, about the benefits of a stronger US dollar, does not augur well for a coordinated effort by the World’s Central Banks to solve the global inflation problem, a problem which is fast becoming a crisis. The ECB’s glaring lack of insight begs one to question the relevance and comprehensiveness of the data models used by ECB staff in making projections used in advising the Governing Council in its decision making process. A rate rise now by the ECB means higher inflation for the euro area, given trends and the driving factors behind the recent rally in commodity prices and this should have been known in advance of last week’s ECB meeting. As evidenced last Thursday and Friday, monetary policy which translates into a weaker dollar in the current climate means a disproportionate increase in fuel and food commodity prices for everyone, including all euro zone citizens. Why did the ECB Governing Council ignore this in its deliberation? The second round inflation effects that so concern the ECB is certain to become a self-fulfilling prophecy, if first round inflation is merely being fuelled by calamitous ECB monetary policy. This policy could trigger a vicious cycle that sees the ECB having to hike again and ultimately not only send the euro economy into a damaging recession, but it could lead to a major divergence in performance of the constituent states of the euro area. A divergence in performance will lead to greater political sniping and undermine not just the ECB’s credibility, but its very independence.

The ECB may feel it will lose face if it now fails to follow through with a July rate hike, having quite clearly signalled its new-found ‘heightened alertness’ last week. However, in light of the rapid evidence we have seen of how commodity traders have shown their willingness to translate this ‘heightened alertness’ into ‘heightened price inflation’, it means if the ECB is to follow through with this ill-timed threat, it may well constitute the most serious ‘dearth of alertness’ ever displayed by an ECB Governing Council, one for which all euro area inhabitants could pay very dearly, for some considerable time to come. Many would ague they are already paying too much.

Ted B

What did Bernanke mean by ‘attentive’ to the dollar?

2008-06-04T14:38:00.000+01:00

Ben Bernanke’s unusual comments on Tuesday when linking a weakening dollar with inflation threw financial markets into a spin and sparked a mini exodus of dollar short position from the currency markets. The euro fell by 2 cents against the greenback in the matter of a couple of hours. Currency markets have since stabilised and it remains to be seen whether Bernanke’s verbal intervention will help fuel a more sustained dollar rally. It is highly unusual for a Fed Chairman to make a direct reference to the dollar’s valuation as it is generally the responsibility of the Treasury Department to talk about Exchange rates. Heretofore Treasury Secretary Hank Paulson’s limp statements about a ‘strong dollar’ being Administration policy have fallen on deaf ears within financial markets. Most traders believe the US Administration has taken on a role of indifferent to the dollar’s demise, believing a weak dollar would stimulate the US economy, through making the country’s exports more competitive.

So why has Bernanke chosen to speak now? It is a stark admission from the Fed Chairman that inflation is a major problem at a time when the US economy is screeching to a halt. With headline inflation running at 4% even before $4 gas hit the pumps in May, it is clear that the path to economic recovery is threatened by spiralling inflation costs. This inflation is exclusively driven by rocketing energy and food costs, thanks to spiralling commodity prices denominated in US dollars. The more the dollar declines, the higher commodity prices go and the greater the impact on US inflation, i.e. US inflation is essentially an imported problem. Of course dollar weakness only accelerated after the Fed embarked upon an aggressive rate cutting campaign in September last with 325 basis points shaved off the Fed Funds rate by April. The US dollar has lost more than 10% against the euro in this time while oil prices have increased by 80%. The Fed believed at the time that inflation would gradually moderate as the economy slowed. They were clearly wrong. Nobody knows to what extent speculation has contributed to driving commodity prices to record highs, but the dramatic rise in oil prices over the past 9 months has directly coincided with the Fed’s aggressive easing policy and there is a very strong correlation between the two. The Fed failed miserably to recognise that a unilateral interest rate policy would stoke inflation risks and pose major difficulties for US consumers, long before the policy had time to bed down and have a real positive impact in stimulating the economy.

The Fed clearly cannot turn around now and raise US interest rates to curb this rising inflation because it would be an admission the FOMC got it desperately wrong and the Subsequent loss of credibility might fatally undermine a financial system already reeling from the recent subprime debacle. Bernanke now hopes external factors might do the Fed’s work for it and hence this public ‘attentive’ eye on the dollar. A rebound in the dollar would certainly force a liquidation of speculative positions in dollar denominated commodities, thus resulting in a fall in commodity prices, thereby easing US imported inflation, in oil and food. What is uncertain at this stage is if Bernanke meant this ‘attentive’ statement to act as a ‘veiled threat’ to speculators and hedge fund managers, i.e. hinting at possible currency market intervention to curb the dollar’s decline, or whether it is an ‘invitation signal’ to market players to now buy the dollar, because the Fed has come to the end of its easing cycle. The latter is most likely what Bernanke had in mind, but if currency markets fail to pick up on his invitation and dollar bears rule the roost and send the currency lower over the coming months, then the Fed will not only look as if it is the one which got got it wrong, but it will also be seen to look powerless to do anything about it, something that could have serious implications for the direction of currency markets, and indeed the dollar, over the next number of years.

Ted B – Jun 5

Bob's Currency Focus - 12:30 GMT

2008-06-03T13:48:00.000+01:00

EUR/USD
The euro has staged a recovery Tuesday, pushing back above 1.56 against the dollar with the dollar being hurt by a Wall Street Journal report that US investment bank Lehman Brothers needs to raise extra capital while the euro is boosted as markets anticipate a firm stance on inflation from the ECB in its policy statement this coming Thursday, following a jump in the annualised inflation rate to 3.6% for the single currency economy. Quarter 1 GDP for the euro area was revised to 0.8% today from the 0.7% originally reported last month and producer prices in the euro area rose a record 6.1% on the year in April , something that is sure to fuel further hawkish rhetoric from the ECB. The ECB could decide to up the ante this week given the explosion seen in fuel costs over the past month and this could see the euro advance, even if the move is temporary. There is little value in selling the euro ahead of the ECB, given the underlying risks, although any advance back towards 1.58 offers good sell down value. US data has proven to be more robust than expected over the past week but the critical test will come this Friday with May’s employment report. Wednesday’s ADP employment report and the ISM services PMI will give the market some direction ahead of Friday. All told, we are likely to remain in a tight range ahead of the ECB on Thursday, but any gains earned by the euro on Thursday could be cancelled out by a better than expected non-farm payroll number on Friday. With the rate outlook quite uncertain at present, i.e. rates are expected to be kept on hold in both jurisdictions for the foreseeable future, the risks over the medium term remain to the downside because of the elevated value of the euro and the potential for further deterioration in euro area economic data. Keep a close watch on Wednesday’s Services PMI from the euro area because if it dips below 50, it will shake confidence in the single currency ahead of the ECB on Thursday.

GBP/USD
Sterling is mostly unchanged Tuesday after giving up much of last week’s gains in a single session on Monday. Economic data out of the UK continues to get worse and after a flat reading yesterday for the manufacturing sector in May, the construction sector on Tuesday reported its steepest decline in 11 years in May. Add to this the woes currently being experienced by the UK financial sector and we begin to see an economy on the brink. Wednesday’s CIPS services PMI reading will complete the economic picture ahead of Thursday’s Bank of England meeting. If this reading reports a contraction (<50) in the non-manufacturing sector, we could see sterling nosedive ahead of the MPC rate announcement on Thursday. Sterling is essentially being protected by the MPC’s hawkish stance on inflation with markets pricing out the prospect of any imminent rate cuts, but a sharp deterioration in economic performance could erode that confidence in the currency and send it into freefall, particularly against the dollar. Cable does not offer any value on prices over 1.98, given the stresses in the UK economy and the fact the US Fed is more or less done cutting rates and the pair should come under ongoing selling pressure on prices above this level. A break below support at 1.96 could see the pair slide all the way back to 1.94 later in the week. If the Bank of England surprises markets and cuts rates this Thursday, then expect sterling to sell off broadly across the board.

USD/JPY
The yen advanced again on Tuesday but has failed to hold onto its gains and is currently trading lower against every other major currency as risk appetite outscores risk aversion in the currency markets, despite global stock markets trading in the red for the past 24 hours. There is little in the way of domestic data out of Japan this week and the yen’s fortunes are wholly dependent on broader risk sentiment with the demand for carry trades likely to keep the currency under pressure. The dollar keeps bouncing back from any dips in the USD/JPY exchange rate and the value buy is on this pair, with dips towards 103 offering good short - medium term value. If US data surprises to the upside this week and stock markets recover, the dollar could rally to above Y106 for the first time this quarter. The euro offers little value at current prices and while EUR/JPY could approach Y165 around the time of the ECB meeting later in the week, this may offer a good sell down opportunity, with the possibility of a return to 1.58 over the next month. The yen remains under pressure against the high yielding aussie and kiwi dollars but any prick in the commodity price bubble would see these pairs plunge and they offer little medium term value.

USD/CAD
The loonie gave up parity against the greenback for the first time in 2 weeks on Monday but has steadied today as the US currency failed to extend its rally beyond 1.0026. Friday’s negative GDP number is unlikely to be forgotten so quickly though and with a Bank of Canada monetary policy meeting on the horizon next week, the loonie may likely come under further selling pressure, particularly if oil prices retreat. A rate cute now seems likely next Tuesday, even if the Bank keeps it to 25 basis points. The strength of the loonie now appears to be a bigger risk to the Canadian economy than a US slowdown, as Canada’s economy underperformed the US economy by a full percentage point in the first quarter, despite the well-documented woes in the US. The Bank of Canada must be very worried by the fact the loonie has failed to depreciate at all despite rate cutes equalling 150 basis points since last November and an economic performance which now registers as the worst across all G8 countries for the past 6 months. It seems speculators cannot easily be dissuaded from buying the loonie or Canadian energy and resource stocks while commodity prices are on the rise, regardless of how the domestic economy performs. This Friday’s labour figures for May will be an important gauge for the economy, although it may not greatly influence the Bank of Canada’s decision next Tuesday. Fear over a potential rate cut is likely to lead to an exodus of Loonie longs over the next week and we should see a climb to 1.02 between now and then for USD/CAD. The euro could also extend its gains against the loonie this week as the ECB meeting on Thursday is likely to reaffirm the divergent positions of the two Central Banks.

Bob B - Jun 3

Bob's Currency Focus - 17:30 GMT

2008-05-28T18:43:00.000+01:00

EUR/USD
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.

GBP/USD
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.

USD/JPY
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.

USD/CAD
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

Market Watch: Will the oil bull cause its own downfall?

2008-05-21T15:56:00.005+01:00

The US dollar has been hammered since late last week, falling to a 24-year low against the Aussie dollar, a 1-month low against the euro and a 2-month low against the Canadian dollar this week. Although US interest rates appear to be on hold for now, the recent rally in the greenback has hit a wall and the currency has reversed course, as rising inflation across the globe cuts off the prospect of rates cuts by the world's Central Banks. Indeed rate hikes across the globe are back on the agenda as oil prices have hit $130 a barrel. Oil prices are 100% higher than they were this month in 2007 and 160% higher than in January of last year. Oil prices are now a huge risk to the health of the global economy and the frenzy-like price spike underway poses a policy dilemma for Central Bankers, let alone governments. The Fed won’t be thanked by many for their contribution to the commodity price bubble, a bubble which took off in earnest when the Fed embarked upon its aggressive rate easing cycle last September. This policy track, primarily for the benefit of financial markets, was not reciprocated by the ECB or most other Central Banks. It is plain nonsense to suggest rocketing oil prices are merely the result of an economic supply and demand imbalance. Demand growth for oil has slowed since oil prices were trading at $50 a barrel in early 2007. The global economy was booming back then but global GDP is expected to slow to a paltry 1.8% in 2008, according to the latest IMF forecast. If oil demand was kept in check at $50 during boom times, why must it fetch $130 during the bad times, which have arrived only 16 months later? US inflation is running at 3.9% over the past 12 months, euro area inflation at 3.3% and oil price inflation at 100%.

Oil demand relative to the oil price is also distorted as governments of many of the emerging economies (from where the bulk of global growth in demand originates) shield the end consumer by subsidising all imported oil and gas. Were consumers in China to be burdened with the massive inflation seen in oil and gas prices, it is not possible the growth in Chinese demand for these commodities could be sustained at current prices. In a sense, the subsidising governments are doing global consumers a disservice by interfering with the normal supply and demand mechanics of a free market. But the governments of emerging economies are not alone in price tampering as some governments in the developed world traditionally load domestic taxes on oil and gas, while wealth creation funds (hedge funds), that have no interest in buying the actual physical product let alone helping the end consumer, are allowed to push the price around significantly, generating exaggerated price movements through applying loosely regulated risk leverage to their bets. And it is worth noting that hedge funds don’t tend to short commodities in a bull market. A glance at last week’s non-commercial trades on the New York Mercantile Exchange reveals there is approximately two long positions against every short position on Nymex for non-commercial traders and in terms of volume, there is 5 times as much funds invested in non-commercial Nymex positions than there is in the euro currency. Looking in more detail, up to last week, there were more speculative shorts than longs on the euro, thus traders were net short on the euro. This confirms that the often referenced correlation between EUR/USD and oil prices has disappeared for immediate term because the bullish run-up in oil failed to pause, after we saw a temporary stabilisation in the dollar.

So what are the options and how can economic reality be brought to bear on oil prices? There are a few considerations to ponder:

1) OPEC announces it is increasing production output before the scheduled September meeting. This has been tried and tested many times before and previous token gestures to increase output have been met by higher oil prices. How come? There is not a supply shortage and there is no logic in rising output if it widens the gap between supply and demand. Politicians who believe the route to lower oil prices is taking a trip to the Middle East to plead for some announcement of a marginal increase in output, need to be brought into an economics class for a reality lesson.

2) China announces it is lifting its oil and gas subsidies and recent price increases are passed onto the consumer. This would definitely work and the very threat of subsidies being lifted would force a mass sell-off of those speculative long positions on the futures and options markets. Were other emerging economies to follow suit, oil prices could tumble dramatically and crude could easily fall to below $80 a barrel by the end of the third quarter. Of course a well-coordinated campaign on the part of the emerging economies to lifting subsidies could be a major triumph for these governments, because a dramatic fall in oil prices would essentially mean the end consumer does not pay any more anyway while the governments save themselves a fortune on subsidy costs. The risk associated with this strategy is that if oil prices did not fall, the removal of the subsidies would see substantial additional costs loaded onto the consumer and it would seriously dampen the pace of growth in those emerging economies. In any case, even if the governments fail to act now, they will not be able to afford to subsidise oil at consistently escalating price levels indefinitely and the price burden will eventually be passed onto the consumer.

3) A strong US dollar rebound would slow oil price inflation. While crude may have outperformed all other commodities over the past 9 months, the rapid run up in commodity prices over this period is directly related to a plunging dollar. Many commodities, including oil and gold, act as a hedge against a falling dollar and were the dollar to bounce back significantly, the heat would be taken out of the bull market in oil. The question remains as to what might force a dollar recovery strong enough to deter the commodity bull. The funny thing is it will probably be the runaway bull itself which will ultimately lead to some marked appreciation in the dollar. Why so? Inflation is rising everywhere, not just in the US, at a time when broad-based demand is slowing, which poses something of an economic contradiction. The real reason for the spike in producer and consumer prices is that hyper-inflation has entered dollar-denominated commodities, including industrial metals and soft commodities, although the principal contributor to hyper-inflation is the run-up in oil prices. If the dollar continues to fall indefinitely and commodity prices rise at the same disproportionate rate as seen in the past year, the world economy is set for a major recession, characterised by hyper-inflation and rising interest rates. It was the Fed’s unilateral policy that led to this commodity bubble in the first place and it may be that only the Fed can reverse it. A sudden downturn for the euro area economy should help the Fed, albeit by proxy, as this would trigger dollar appreciation, but failing this, further rises in commodity prices on the back of a weakening dollar will mean inflation (headline and core) comes knocking hard and the Fed will eventually be forced to answer its own door.

Ted B - May 21

Bob's Currency Focus - 12:15 GMT

2008-05-20T13:44:00.001+01:00

EUR/USD
The euro has hit a high for the month on Tuesday, reaching 1.5673, with the dollar retreating broadly across the board. Rocketing oil prices are having an adverse impact on the dollar over the past week and it will probably take a sustained reversal in energy prices to provoke a meaningful rally for the greenback. German producer prices came in twice as high as expected for April and with costs spiraling everywhere at present, the inflation threat is fast becoming the dominant market influence. Of course the trigger for the current rally in oil was the Fed’s monetary easing policy which began last September and while this policy has helped to ease the credit crisis, it has also resulted in a significant increase in the cost of living for everyone, thanks to the frenzy-like rally experienced in commodity prices. The impact on consumer discretionary spending should not be underestimated, even if equity markets have failed to notice the threat to date. Consumer and business sentiment indicators should be watched very closely over the coming weeks as these will give more of a current market insight than actual growth and output numbers. Germany’s important ZEW survey, released Tuesday, pointed to further decline in confidence on the part of investors in May. The result was a surprise as a marginal improvement was expected. This did not stop the euro rally and the single currency is currently trading at more than a cent up on the day. There is no chance of a rate cut from the ECB in the immediate future and with inflation further on the rise, it is a rate hike that is beginning to look the more likely. There is the possibility of a push to 1.5720 for EUR/USD, before a sharp pullback to below 1.55. The US calendar is relatively bare this week with Producer Prices today and Friday’s Existing Home Sales the highlights. There are more significant indicators out of the euro area this week – the German Ifo survey is released Wednesday and the preliminary readings for the May PMIs are out on Thursday. The euro is overvalued, even if dollar confidence is low and any downside surprises in the Ifo and PMI numbers could trigger major rallies to the downside for EUR/USD.

GBP/USD
Sterling has benefited handsomely from a dollar retreat and cable rose to 1.9665 earlier today, up almost 2 cents from last night’s close. There was no data out of the UK and sterling’s surprising rally is thanks to an influx of funds into the high yielding currencies and a fall in confidence for the dollar. The pound is unchanged against the euro, down against the franc and up against the yen. The fundamentals have not changed and the fact remains the UK economy is slowing and economic data is deteriorating, so sterling remains exposed to sharp sell-offs, on any meaningful rallies, particularly against the dollar. Attention tomorrow will switch to the Bank of England’s minutes from their May meeting, when they are released at 08:30 GMT and with inflation riding high, a hawkish set of minutes seems likely, possibly ruling out a rate cut in June. Inflation is an issue for all Central Banks at the moment, but the high inflation threat is likely to offer nothing more than temporary protection to sterling, given the eroding growth fundamentals in the UK. Cable should be sold down on any rallies close to 1.9770 and a return to 1.9400 is a high probability over the course of this week. There is little value in buying the euro against sterling at present prices, although a break above 80 pence could trigger a momentum-driven rise to 81 pence. Sterling is exposed on the yen and Swiss crosses, if stock markets extend their declines through to Wednesday.

JPY
The yen has made modest gains against the dollar Tuesday, but has lost against every other major currency as the Bank of Japan stands pat on interest rates. The Central Bank also today warned of the downside risks to the economy, thereby ruling out the prospect of a near-term rate hike and fuelling a new wave of carry trades. The Aussie dollar has risen to Y100 today despite a sharp decline in equities in both Asia and Europe, while the euro has risen to Y163. While risk appetite remains high the yen is going to struggle to make any headway and it will be prone to immediate sell-offs on any significant rallies. The dollar is currently hemmed into a 103 to 105.50 price range, but the smart money is buying the pair on dips. The euro is over-extended against the yen and while there is a chance of a rally to Y165, there is the risk of a return to Y158, especially if the decline in stocks continues as a theme this week. AUD/JPY should be watched closely as this is the standard bearer for the carry trade and a rally that extends to above Y100 could spark a further wave of carry buying, particularly for the high-yielders.

CAD
The loonie has been on a remarkable rally over the past week, gaining substantially against every other major currency, with the exception of the Aussie dollar. On Tuesday USD/CAD hit a low of 0.9874 and is currently trading just above this price level. Economic data has proven to be of only secondary importance to commodity prices when determining price direction for the loonie and the Canadian currency is the benefactor behind a major speculative drive in the past week. There are some important data releases out this week, with consumer price inflation and retail sales numbers out on Wednesday and Thursday respectively. Even a poor set of data numbers may not derail the loonie as it has shown itself to be pretty much immune to adverse economic data throughout this year. Any prick in the commodity bubble would be much more damaging for the loonie’s immediate fortunes and a reversal in oil prices could signal a sharp retreat in the Canadian currency. A dip below 0.9850 is possible today but a sharp return back above the parity line for USD/CAD is most probably in the coming days. The euro looks to offer good value against the loonie on any dips to or below 1.54, with a probable return to 1.56 later in the week.

Bob B - May 20

Bob's Currency Focus - 15:30 GMT

2008-05-15T17:06:00.000+01:00

EUR/USD
US stock markets are proving themselves to be immune to bad news of late and today’s data: disappointing industrial production numbers for April; an increase in last week’s jobless numbers; negative net treasury capital inflows for March; near-record high oil prices, have failed to spook investors with the US industrial averages all trading flat at the time of print. The dollar is holding its own against the euro, although the pair did rise towards 1.5550 this morning after a thriving set of GDP numbers out of Germany. The euro area own annualised GDP figure for quarter 1 was seen at 2.2%, against a 1.9% forecast, meaning the euro area economy grew at a steady pace in the first 3 months, despite the turmoil across the Atlantic. The problem with GDP data is that it is old history as soon as it is released and while today’s results are encouraging, more recent economic data out of the eurozone points to a significant deterioration in the performance of the euro economy in quarter 2. Add to this the presumption that the Fed is done cutting US interest rates and it is difficult to find good reason to aggressively sell the dollar off against the single currency. While some analysts attempt to suggest US inflation was under control following yesterday’s CPI data release (core at 2.3% and headline at 3.9%), the fact remains inflation is well above what should be the Fed’s tolerance rate, at a time when the US economy is in protracted period of stagnant growth and there is little cause for cheer. This news should prove to be positive for the dollar in the medium term though, as it suggests US interest rates may begin to rise as soon as a real pickup in growth is evidenced. Expect EUR/USD to remain trapped in a 1.5287 to 1.56 price range for the foreseeable future, but the better trade would appear to be to sell down on failed rallies close to the 1.56 price band. Friday’s US housing starts and building permits data will be important for gauging immediate dollar confidence, but it is unlikely to have a huge impact, unless the actual results are sharply different to the forecast. There is potential for a dip to 1.5350 by Friday, but it is safer to sell on prices closer to 1.5550, to avoid being caught on the wrong side.

GBP/USD
The data keeps on getting worse out of the UK and what is really worrying for sterling is the fact Wednesday’s spike in consumer price inflation (from 2.5% in March to 3.0% in April) failed to lead to any meaningful rally in the pound and indeed cable came within 0.3 cents of hitting the year’s low, which was registered way back in January. Cable looks certain to move downwards through the remainder of this year and the pace of the downtrend is most likely to be dictated by US data. The Bank of England has a very difficult task on its hands with UK inflation and growth now accelerating in opposite directions. The Bank’s measly offering of 0.75% in rate cuts in response to one of the greatest credit debacles ever to have hit the economy could see Governor King and his colleagues vilified if commodity-driven inflation now pushes the UK economy over the brink, into a prolonged period of stagflation and into recession. If the Bank of England was to take a leaf out of the Fed’s book, then the MPC might proceed and cut interest rates even in an environment of rising inflation. The problem is that the current bout of global inflation has been largely created by the Fed’s recent round of policy easing and aggressive rate cutting by other Central Banks might only exacerbate the inflation issue. The UK economy has bleak outlook through the rest of this year and the trading opportunities look to be on sterling shorts. 1.96 on cable should be a decent barrier on the upside and any rallies that come near this price line offer good selling value. Downside targets are 1.9430 and 1.94, but look for 1.9337 to be taken out in the coming days, opening the way for a decline to 1.92, as early as next week.

JPY
The yen has taken on a decidedly weaker tone this week, losing out significantly to the euro and the dollar as traders seem happy to run with the ‘worst is over’ theory and sell the Japanese currency at each opportunity. The yen has gained modestly today with global stock markets marginally in the red, but it is still 2 cents off Monday’s opening price against the dollar, while the euro is trading between Y162 and Y163, well above recent average price levels. The dollar now looks comfortable trading in the 104 to 105.50 price region and that pair could push up a notch next week, is risk tolerance aversion remains low. There remains huge complacency on the part of investors, particularly with oil prices again edging near recent highs and there is always the danger of a sudden liquidation of positions which would see the yen appreciate rapidly. There is no value in buying the dollar on prices close to Y105 and traders are best advised to wait for dips back towards the 103 price region. The euro is overpriced against the yen on anything above Y163 and a sell down from above this price level offers good value, with the prospect of a decline back to 1.58 over the next couple of weeks. Tonight sees the release of quarter 1 GDP data out of Japan but the data is unlikely to have a major market impact, with global risk tolerance the current driving factor behind the currency’s movement.

CAD
The loonie is the best performing of all major currencies this week, having pushed the dollar back to the parity line and sending the euro back below 1.55. The recent rally is owed exclusively to rising oil prices with the loonie once again the subject of major commodity-driven speculative buying. The Bank of Canada must be wondering what it has to do to curb the loonie’s rise, with the 1.5% in rate cuts delivered since December appearing to have made little difference. If the current commodity price acceleration is indeed a bubble, Canada’s economy could be in for quite a nasty shock over the upcoming quarters. Manufacturing shipments in March declined 1.6%, but this was offset by a 2.9% rise in new orders. There is no further data out of Canada this week and the loonie’s fate is likely to be determined by oil prices. We could see a possible dip to below 0.9940 against the greenback, but it is highly dangerous to sell USD/CAD at current prices given the likely prospect of sharp reversal, with a return to at least 1.02 highly likely. When oil prices finally begin to retreat, the loonie should enter a prolonged period of decline. Strategy: Buy on dips towards 0.9960, with upside price targets of 1.0070, 1.0130, 1.0170 and 1.0220.

Bob B - May 16

Bob's Currency Focus

2008-05-07T12:57:00.000+01:00

EUR/USD
This week is relatively quiet in terms of key data and the main event is Thursday’s ECB meeting. While rates are certain to be kept on hold, markets will be looking for any shift in tone from the Bank’s monetary policy committee in the accompanying release. We have witnessed deterioration in the performance of the euro economy in the past month and while the Committee may point to further downside risks to growth, any such reference is likely to be offset by a hawkish statement on inflation. The ECB is not likely to let its guard down at a time when oil prices are trading at $122 a barrel and Euro zone inflation remains elevated at 3.3%. Euro area retail sales in March disappointed yet again coming in negative both on the month and on the year, while German factory orders also declined surprisingly in March. The euro has dipped sharply back to 1.5410 from the high of 1.5595 hit on Tuesday and the dollar looks poised to test key support at 1.5350, unless Thursday’s ECB statement is seen as providing additional hawkish bias. The euro is currently capped around the 1.56 price mark and the downtrend looks set to continue as long as the pair remains below this key price level. The catalyst for a further leg down in the pair could be oil prices. If crude oil sells off sharply, it will renew interest in the dollar and this could trigger a move to 1.5280 in EUR/USD. It is best to sell on prices close to 1.56 at present, with target prices of 1.5430, 1.54, 1.5360, 1.5341 and 1.53. Traders need to be cautious on Thursday because recent history has shown us that hawkish ECB statements tend to trigger strong short-term rallies for the euro.

GBP/USD
I called it last week when looking for a sell-off on cable and today the pair fell below the critical 1.96 support line, a price level which has held for the past 2 months. With the Bank of England meeting Thursday and sterling coming off the back of a string of weak economic indicators, the pound could dip to 1.94 against the US currency over the next 2 days. Tuesday’s services PMI signalled the UK services sector grew at its slowest pact in over 5 years and on Wednesday there was the print of negative industrial and manufacturing output numbers for March. Sterling has been protected to some degree in the past few weeks by fresh concerns over the euro economy and a revival in stock markets, something that has drawn temporary funds into the high-yielding pound. On Wednesday however the euro rose back above 79 pence, although it has since dipped below this level once again. There is an outside chance of a rate cut from the Bank of England on Thursday and sterling will struggle to attract buying support between now and 12 noon tomorrow. With 1.96 support having given way on cable, the bias certainly favours the downside and cable should be sold down on any rallies towards 1.98. Sterling risks a retreat to 80 pence against the euro this week.

USD/JPY
The yen retreated across against the dollar Wednesday as a pick-up in stock markets led to a sell-off of the low yielding yen and Swiss franc. The carry trade has moved with a vengeance in recent weeks and today AUD/JPY is trading just below Y100, having been as low as Y87 just 6 weeks ago. Weak economic data is failing to put a dent in risk appetite as investors believe the worst in the financial market crisis is behind us. A slowing global economy has failed to dampen investor demand for commodities and it is this which is driving the current wave of support in the carry trade. There is a major disconnection however between the economic fundamentals and the prices of many asset classes and the current move away from the Japanese yen could prove to be premature. The yen will need a significant downturn in global stock indices to trigger a sustainable rally, but until this happens the currency will remain vulnerable. The US dollar will struggle to break above Y106, but the best value in terms of buying the yen remains against the euro, with any advances towards Y165 offering medium term sell-down value.

USD/CAD
The loonie has been the strongest currency amongst all the principals this week, making significant advances against all the major currencies. The move has been primarily driven by runaway oil prices, although Tuesday’s IVEY PMI reading, which printed higher than expected, was also a welcome boost. It is difficult to see the loonie sustaining any break below the parity level against the greenback, particularly as the Fed signalled a pause in US interest rates last week. Any falloff in the price of oil could trigger a sharp reversal and see the greenback rise back towards 102 in the next day or two. The loonie is also vulnerable to a sharp correction against the euro, with the ECB meeting on Thursday likely to see the Bank’s monetary policy committee reiterate its hawkish stance on euro zone inflation and interest rates. There is definitely value in buying EUR/CAD around the current price of 1.5450, while the greenback offers real value on prices close to parity against the Canadian currency. Oil prices will be the principal driver of the loonie through the remainder of this week.

Bob B - May 7

What does Fed pause mean for currency markets?

2008-05-01T14:28:00.000+01:00

The Fed appeared to signal a pause in its easing cycle Wednesday when stating ‘The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity’. Of course the downside risks to growth are still highlighted, as they should, but the Fed’s policy of aggressively cutting rates in recent months has failed to translate into lower borrowing costs for consumers while the credit crunch persisted. Markets won’t be convinced the Fed will remain on hold if economic data deteriorates further, particularly in terms of employment. But for now, the Fed would appear to have adopted a ‘wait and see’ policy and this will have implications for currency markets as we move into the summer and through the remainder of the year. With interest rate differentials a major factor in determining exchange rates, we need to look at currency pairs where the rate differential is likely to narrow or widen in favour of the US dollar over the coming quarters.

The only major currency for which we can say with a degree of certainty that interest rates are going to be cut is sterling. Rates in the UK currently stand at 5.00%, having been cut by 75 basis points since last November. The UK economy is slowing, house prices are falling rapidly, inflation is significantly lower than in the euro area, the credit crisis is taking its toll on UK business and the UK itself has a vast current account deficit, all which point to a need for lower interest rates and a weaker currency. We could see UK interest rates cut by a further 100 basis points this year, something which is going to undermine the country’s currency. Cable is currently riding high close to 1.99, but we could easily see it fall to 1.85 or much lower this year, if interest rate differentials between the UK and the US narrow by a further 100 basis points.

In terms of the yen, the dollar has fallen from a high of Y124 last year to a low of just below Y96 earlier this year. Currently trading around Y104, the dollar has an opportunity to appreciate significantly against the Japanese currency, even if interest rates remain on hold in both jurisdictions over the next 6 months, because the dollar offers a higher yield to investors (2% Vs 0.5%). The key driver for any acceleration in this exchange rate will be a return to broader market stability and a rise in risk tolerance levels. We could see the dollar appreciate back up to Y112 through this year.

The EUR/USD currency pair is something of a conundrum but the net risks to the pair are to the downside. With inflation riding high in the euro area, the ECB will not move to cut rates unless there is a marked slowdown in inflation and a significant deterioration in the euro economy. However, some economies within the euro block are struggling, notably Spain and Italy, while a diversification in the performance of France and Germany is becoming ever more noticeable. This poses a major headache for the ECB and it threatens the euro’s ability to sustain its 2.5 year rally against the dollar, at least in the medium term. Interest rate differentials are unlikely to widen in favour of the euro over the next 12 months and with the heightened risk of a sharp downturn in the performance of the euro economy, the euro is beginning to look like an unattractive proposition against the dollar through the remainder of this year. The next leg in EUR/USD could be to the downside and it could prove to be quite a sharp move, especially if the ECB is forced to cut euro area interest rates later this year. A return to 1.45 is probable, with a chance of a retreat to 1.38, if interest rate differentials look like narrowing significantly. If the US enters a prolonged recession and the Fed move to further cut US interest rates, then of course the euro may benefit, but it is very difficult to see the pair sustaining any rally back above 1.60. The Swiss franc will most likely follow the euro’s fortunes, although it will perform better if Swiss interest rates remain on hold when euro rates are cut.

A broader dollar rally should trigger a fall in commodity prices and in turn in the commodity currencies which appreciated sharply over the past year, notably the Canadian dollar, Norwegian Krone and the Australian dollar. The Australian dollar will be protected to a degree because of its higher yield attraction but the Norwegian Krone in particular could fall significantly, especially if oil prices come off sharply and if there is a general malaise within the wider European economy. The Canadian dollar has not looked comfortable on prices higher than parity against its US counterpart and with growth in Canada coming to a near standstill, Canada needs some respite from its currency, to allow the economy breathe again. The greenback could appreciate sharply against the loonie and a return to at least 1.10 looks very achievable.

The above synopsis does not mean we are going to witness a long-term reversal in the dollar trend, which is downwards, but the fundamentals are stacking up to favour a sustained period of relief and a medium-term retracement for the embattled greenback. It is only a stronger dollar that can deflate the commodity price bubble and relieve the current spate of rising global inflation.

Ted B - May 1

Bob's Currency Focus - 15:30 GMT

2008-04-30T16:52:00.001+01:00

EUR/USD
Trading has been somewhat tentative on Wednesday ahead of the Fed’s monetary policy announcement later this evening. The dollar has managed to retain most of the gains earned from last week and pushed the euro to as low as 1.5526 this morning, before the euro rallied to send the pair back to where it started the day, i.e. 1.5565. Economic data out of the euro area continues to soften and today’s inflation estimate for April, which printed at 3.3%, is down from 3.6% in March. This suggests any notion of an imminent rate hike from the ECB is not part of the equation. Germany’s employment data for last month also printed softer than expected and with euro area business confidence plunging to the lowest level seen since 2005 (according to the latest economic survey from the EU), the euro is going to find it difficult to regain the sort of momentum that saw it rise to a record 1.60 just last week. US GDP data for Quarter 1, reported up a paltry 0.6% on the year, had little market impact and the immediate direction of the dollar will be determined by the US Fed statement later this evening. A 0.25% cut looks assured, but all eyes will be on the accompanying statement. There have been suggestions of a pause after tonight’s policy announcement, something which is certain to benefit the dollar in the short to medium term. It is conceivable the Fed will deliver a 50 basis points cut, especially if the Fed intends to signal the easing cycle is over. The FOMC members will be privy to the latest employment numbers, due for publication this Friday, and this could determine what way the Committee leans today. The euro is vulnerable for a retreat to 1.5280, at least, if the FOMC statement favours the dollar. There is also a risk the Fed may signal it is not yet done in this easing round and it might choose to point to ongoing risks for US growth prospects, something that could spark a major dollar sell-off. There is no real benefit in trying to trade Fed’s hand and the market’s subsequent reaction and my advice is to stay away from the market until the dust settles.

GBP/USD
Cable has been trading erratically within a 1.96 to 2.0024 price range for the past few weeks, with neither side able to establish control. However, with so much bad news priced into the dollar already and the interest rate differential outlook for the 2 currencies looking to favour the dollar in the medium to longer-term period, it is very dangerous to buy cable on prices close to the 2 dollar mark. In fact, if the Fed point to a pause in interest rates following today’s rate decision, sterling could come off more than most currencies given the Fed decision is likely to have little bearing on the direction of UK interest rates, which are headed lower regardless. UK house prices are slowing at the fastest pace in 12 years according to the latest survey from Nationwide and this survey comes hot on the heels of similarly bleak house surveys earlier in the month. The Bank of England meets again next week and a further rate cut is certain to be on the agenda, even if the two established hawks on the MPC voted against a rate cut at the last meeting. If US data this week supports a pause in US interest rates, then cable could move to 1.95 by Friday. Of key importance to the pound will be Thursday’s CIPS manufacturing index. If this prints higher than expected, then it could cast doubt on a Bank of England rate cut next week and it might earn the pound some respite, if temporary. The euro has finally some under some selling pressure and the pound could push the single currency back towards 78 pence yet again, although the pound is likely to come under heavy selling pressure after any meaningful rally.

USD/JPY
The yen was sold off sharply against the dollar during the early part of the US trading session with many traders gambling the Fed will signal a pause in its monetary policy. A bounce in global stock markets has also hampered the Japanese currency which sold off broadly, particularly against the high yielding currencies like the Aussie dollar, New Zealand dollar and sterling. The Bank of Japan kept Japan's rates on hold at 0.5% earlier today and the Central Bank downgraded its GDP forecast for 2008, from 2.15 to 1.5%. In other domestic data out today, industrial production slipped by 3.1% in March from a year earlier while household spending was down by 1% over the same period. If the Fed gives a more upbeat assessment of the US economy for the remainder of the year, then the yen could become the biggest loser with traders likely to target the USD/JPY carry and attempt to send the pair back towards 108 over the next week. If the Fed disappoints markets and we witness a fresh bout of risk aversion, the yen will benefit. There is blatant complacency in the carry trade, which is somewhat premature given global economic data has in fact been deteriorating and not getting better. There is no value in trading the yen ahead of the Fed announcement and perhaps even less still to trade it immediately after the rate announcement is made. The yen offers best value on EUR/JPY with a return to Y160 likely on value grounds alone, even if there is a sudden yen sell-off this evening.

CAD
The loonie has performed remarkably well this week and it has made significant gains against the euro and the Swiss franc, having hit major lows early last week. The loonie pushed the euro back as far as 1.5618 this morning – at one point recently the euro was worth 1.63. The loonie is benefiting from a market assumption that a pause in US interest rates translates into a pause for Canadian interest rates, but if the assumption surrounding the Fed fails to hold true this evening, expect the loonie to retreat against the euro. GDP in February fell by 0.2%, following a 0.6% rise in January. Input prices rose sharply in March but because consumer prices remained mooted, it means producers are not passing on the bulk of these increases to Canadian consumers, probably because of the increased competition from South of the border. USD/CAD remains the most range-bound pair of all the majors – trading between 1.00 and 1.03, but the risks are that the pair could push higher in the medium term, so buying on dips to around 1.0050 may be the best strategy for now.

Bob B - Apr 30

Bob's Currency Focus - 14:30 GMT

2008-04-25T15:26:00.000+01:00

EUR/USD
The euro has peaked for now and with speculation rising that a rate cut from the Fed next week could be the last before then pausing, many traders are reluctant to pour back into the euro in the run-up to that event. The euro has lived a charmed life in recent weeks because the penetration of the 1.60 price barrier was achieved because of an aggressive determination by a more illiquid market to see the mark being hit, moreover any radical shift favouring the euro in the underlying fundamentals. The ECB’s hawkish stance remains intact but the meteoric rise in energy costs has put paid to any idea the Fed might be cutting interest rates to 1% in the coming months. Even were the ECB to stand pat for the remainder of this year, US inflation risks would suggest that, after next week’s Fed rate decision, we are unlikely to see any great widening of US and Euro zone interest rates through to the end of the year. A strengthening dollar would have the impact of dampening global inflation and if growth data in the Euro zone continues to soften further, the likelihood of an ECB rate cut before the end of the year would rise and the euro will go into reverse gear. Traders will still be willing to jump on the euro on any dips in the short-term because the single currency’s rapid rise since last September has made the currency look too much like a sure thing to many, come what may. If the Fed signals a pause in rates in its latest statement next Wednesday, presumably after having cut the Fed Funds rate to 2%, then the euro will be in trouble and the peak of 1.6015 hit earlier this week could begin to look like a colossus. Between now and then we may range between 1.55 and 1.5750, but if the dollar breaches the 1.5550 support level, the pair could conceivably fall to 1.5341, the point which is the next proven level of euro support. Whether 1.50 or 1.60 will give way first could very much depend on the Fed’s statement next week.

GBP/USD
Sterling has held its own over the past two days at a time when the US dollar has appreciated sharply against other currencies. The pound is in effect benefiting from the fact other currencies have been excessively over-extended against the dollar and the close-out of a large quantity of these positions has seen many currencies, the euro and Swiss franc in particular, lose out spectacularly. This has automatically pushed up the value of the pound against its European rivals. However, if the dollar falters again, sterling will likely fall against the euro. Quarter 1 GDP out of the UK was in line with forecast, rising 0.4% on the quarter and 2.5% on the year. The UK economy, despite the ghastly picture painted, performed reasonably well under the circumstances and has out-performed the US economy significantly thus far this year. The problem for sterling is that there is a consensus view that the economy is going to deteriorate from here and that the housing sector is going to plunge deeper into crisis. The Bank of England is going to be under pressure again to cut rates when it meets in May and as long as the rate differential outlook continues to disfavour sterling, the pound will feel the heat, particularly following any rallies. If the euro continues to fall against the dollar it might help the pound push the euro back to 78 pence, otherwise a broader euro rally is likely to see a return to 80 pence. Cable offers little value above 1.98 and offers an opportunity to sell down on prices close to 1.99. Cable could possibly fall to 1.95 next week, if the Fed signals a shift in policy towards a pause in rates, after next Wednesday’s FOMC meeting.

JPY
The yen has gained 2 yen against the euro in the past 2 days but its gains are wholly attributable to a stronger US dollar which has seen a close-out in over-extended positions on the euro, while it has also benefited from a fall in commodity prices which has led to a shaving of carry trade positions, particularly in AUD/JPY and NZD/JPY. Last night’s CPI data release in Japan revealed that inflation in the world’s second strongest economy rose to an annualised 1.2% in March, in line with expectations, yet at an unprecedented level for an economy that has been gripped by deflation for much of the past 7 years. If the worst of the credit crisis has passed, a return to normality could raise the prospect of an increase in Japanese interest rates later in the year. Aggressive selling of the yen on longer-run positional grounds could be a mistake, especially against the euro. In the short-term however the yen could find itself on the defensive against the US dollar and we could see USD/JPY rise to 108 in the next couple of weeks, if the Fed hints at a pause in its monetary easing. A sharp decline in commodity prices will protect the yen as it will benefit from the subsequent unwinding of carry trades. The euro offers little or no value on any prices close to Y165 and this is the one pair where the yen may still offer real value, but the yen’s wider fortunes will depend on the reaction of global markets to the Fed’s policy announcement next week.

CAD
The loonie has performed exceptionally well over the past two days and has recouped all of the losses it incurred (against all currencies except the greenback that is), after the Bank of Canada cut the overnight lending rate by 50 basis points to 3.0% on Tuesday. The Canadian currency still carries appeal to investors as long as commodity prices remain relatively elevated. Oil has bounced back Friday following two days in retreat and this has boosted the loonie, along with a new inflow of funds back into North American assets. There was no domestic data out of Canada Friday. USD/CAD remains range-bound between 1.00 and 1.03 and offers good value for bids on prices close to 1.0050 and for sells on prices above 1.0250. Most of the price action this week has been in the 1.01 to 1.02 price region with bias marginally favouring the upside. If the US Fed signal a pause in its easing policy next week, the Bank of Canada is likely to follow suit and this could spark a major loonie rally against the euro and the yen.

Bob B - Apr 25

Bob's Currency Focus - 12:30 GMT

2008-04-23T13:33:00.002+01:00

1.60 has been breached
The euro crossed the 1.60 line on Tuesday April 22nd 2008 for the first time ever. It is worth noting that it only took the euro just under 2 months to go from 1.50 to 1.60. Previously it took 5 months for the euro to appreciate from 1.40 to 1.50, while it had taken all of 10 months to move to 1.40 from 1.30. To what can we attribute the acceleration in pace of the euro’s appreciation against the greenback? Undoubtedly the Fed’s aggressive policy of monetary easing against a static and stubborn ECB has been the primary driver, yet the quickening pace of the dollar’s demise in recent weeks is adding a new dimension – extreme complacency. The failure of the world’s major Central Banks to address the alarming price distortions being witnessed across both currency and commodity markets has only served to feed this complacency and has led to greater price distortions and rampant speculatively-induced inflation, at a time when the global economy is by all accounts slowing. It is no coincidence that oil prices spiked towards $120 a barrel on exactly the same day as the dollar ceded another key price level to the euro. We now have the bizarre situation where a high euro, rather than curbing inflation, is in fact fuelling it. Energy and food prices are rising as the euro rises, but at a much faster pace, forming major price bubbles across nearly all the commodity classes. Global inflation will only slow this year if we see a dollar recovery, simply because global inflation is being driven by commodity prices, which in turn are priced in dollars that is under sustained attack. Were the ECB to be ultra-brave and be creative in its policy outlook it might see that a softening in its policy stance would trigger a dollar rebound, which in turn would prick the price bubble in the commodity classes and drive global inflation lower, not just for the US, but also for the euro zone and the wider globe. Most ECB policymakers however are traditionalists and creativity is not part of their make-up.

EUR/USD
The dollar declined across the board Tuesday as yet another poor set of housing sales numbers raised concerns as to whether the housing slump has yet hit a bottom and supporting the view that the world’s largest economy is now in a protracted recession. In the euro zone, the flash estimate for the services PMI in April came in higher than expected, while the manufacturing PMI was lower than expected. The composite index is seen as unchanged from March and this will be used as evidence by the ECB that its current monetary policy stance is the right one. Of more concern is the fact that consumer spending in France fell sharply by 1.7% in March. Tightening credit conditions, lower confidence and rising energy and food costs is having an adverse impact on the consumer, at least in the euro zone’s second biggest economy. The euro’s rise to 1.60 yesterday was inevitable given the solid support eh euro has gained on any dips against the dollar in recent weeks. We have not heard too many strong complaints from the euro area and it may well be that traders will be given a free ride to take the pair possibly towards 1.62, before the market looks more closely at value again. However a failure to sustain a price above 1.60 could be read by many that the euro has peaked for now and a sharp reversal back to 1.57, or even lower, is possible over the coming days. It is high risk to buy the euro at current price levels, given the correlation between the dollar and oil prices at the moment. Any sharp reversal in oil prices is likely to trigger a wave of selling on EUR/USD. Oil prices need to be followed closely in the coming days, as the commodity’s current spike is driven almost entirely by speculative interests and Nymex came closer to hitting an unprecedented $120 a barrel on Tuesday. Strategy: Look to sell down EUR/USD on value grounds, taking prices close to 1.60. Place a stop above 1.6060.

GBP/USD
The Bank of England minutes surprised Wednesday when they revealed there was a 3-way split in the vote on interest rates earlier this month. Only 6 members voted for the 25 basis points cut which was subsequently adopted, 2 members voted to stand pat and one member of the Committee (Mr Blanchflower) preferred a 50 basis points cut. Doubts have been raised about just how aggressive the MPC will be in cutting rates in the coming months and this helped give sterling a temporary lift this morning. In other data released today, the BBA reported that March saw the lowest number of mortgage approvals on record, the figure falling to 35.4K from 43.9K a month earlier. The UK housing sector is in a major downward spiral and Thursday’s retail sales numbers for March will be crucial for determining where interest rates may go to next. Cable looks to be way over-priced anywhere near 2.00 and even a temporary dollar revival could easily see the pound plunge back towards 1.96. The euro is also inflated in value at the moment and it is not worth buying the single currency against the pound on prices above 0.80. Strategy: sell cable on prices above 1.9950 with price targets of 1.9810, 1.9760, 1.9725, 1.9675 and 1.9620. Place a stop loss above 2.0025.

JPY
The yen has struggled to make inroads over the past week and has fallen to a multi-month low against the euro (164.96). It has held its own against the dollar in recent days having dipped to 104.65 last week, but the yen is trading a long way off the highs it hit last month. Many traders believe the worst is behind us in terms of the credit crisis and the appetite for carry trades is on the rise and this is something that has seen the Aussie dollar in particular rise spectacularly against the yen in the past week. Of course with the US likely in recession and a slowdown accelerating elsewhere, this complacency may be premature and ill-placed and we may still see a significant spike in risk aversion, particularly over the next 2 weeks, when key data releases are scheduled out of the US. The best value trade for the yen is against the euro and will not be difficult for the EUR/JPY pair to return to Y160 from the highs around Y165 seen over the past 24 hours. Japan’s trade surplus narrowed significantly in March and it has deepened concerns the world’s second largest economy could follow the US into recession because of its dependency on the export sector. The yen could benefit from a sell-off in commodities which would diffuse the carry trade and send the Japanese currency significantly higher against the high-yielding currencies such as the Aussie and New Zealand dollars. Strategy: Sell EUR/JPY on prices close to Y165, with target of Y161.

CAD
The Bank of Canada cut rates by a further 50 basis points on Tuesday, bringing the base rate to 3.00%, down from the 4.5% from late last year. The Bank’s statement hinted at further rate cuts but said it was dependent on the performance of the US economy. There is confidence that domestic demand in Canada is holding up well despite the sharp downturn south of the border. The statement has removed the word ‘imminent’ in terms of the pace of its easing policy, which suggests rates could remain on hold at the next meeting, unless there is a sharp deterioration in the performance of the economy. The loonie is now very unattractive on yield grounds but remains supported by high commodity prices and the currency is unlikely to capitulate while oil prices remain so elevated. The loonie is also likely to appreciate sharply against currencies such as the euro and the yen, if the US economy were to show signs of a rebound. Canada’s interest rates have been cut thanks to the US economy’s malaise and a sharp rebound in the US economy will see the loonie strengthen. The biggest risk to the loonie in the short-term is any sharp reversal in oil prices, which would see the loonie sell-off intensify, primarily against the US dollar. For now, the currency is range-bound and there is value in buying USD/CAD on dips towards the parity line, with the upside currently capped at 1.03.

Bob B - Apr 23

Bob's Currency Focus - 14:30 GMT

2008-04-17T15:18:00.000+01:00

EUR/USD
The euro dipped quite sharply in a short space of time (shedding a cent and going as low as 1.5848) earlier today but it has since bounced back to over 1.59 and remains within striking distance of the record high of 1.5980 set this morning. The market seems determined to push the pair to 1.60 and it might be wise to wait until the pair peaks before planning any directional trades. A sharp retreat is overdue, but the momentum caused by a push to 1.60 could see the upside rally continue to 1.62. A failure to breach 1.60 over the coming days could lead to decline to 1.5680 by early next week. There was further hawkish rhetoric from the ECB’s Axel Weber earlier Thursday, who suggested the ECB may need to do more to keep inflation under control. Weber also suggested the strong euro was not having a dampening effect on the German economy. Weber is the most notorious of the ECB hawks however and his views cannot be taken as being representative of the wider governing council of the ECB. Elsewhere today jobless claims in the US rose by 17k last week, in line with expectations. Merrill Lynch’s worse than forecast quarterly 1 earnings report will test the resolve of Wall Street today, which rebounded strongly on Wednesday, despite worse than expected housing data. Expect the euro to keep the pressure on the dollar today and don’t be surprised to see a push through 1.60, especially if the Philly Fed manufacturing index, due at 14:00 GMT, comes in way lower than forecast. There is no value in buying the euro at the current price given the risk of a sharp pullback, but there is merit on buying on dips back towards 1.5750, until such time as a medium-term peak looks to have formed.

GBP
Sterling rallied strongly Thursday on speculation the Bank of England and mortgage lenders are close to agreeing a proposal to help ease the credit crisis in UK financial markets. The pound pushed the euro back as low as 0.8009 after the single currency earlier almost hit 81 pence for the very first time. Sterling is also back above 1.98 against the dollar, up almost a cent on the day. The bounce may prove to be temporary as the underlying fundamentals have not changed and the UK economy looks particularly vulnerable right now. I can see the euro rising to 83p or 84p in the coming months as the Bank of England are likely to continue to cut interest rates, probably in successive months, while the ECB remains on hold. With inflation remaining flat and house prices moving sharply lower while retail sales are also under pressure, the odds of a further rate cut from the Bank of England in May have increased this week. Sterling offers little value on prices above 1.9850 against the dollar and with the 7-week support at 1.9650 having given way this week we should see cable drift back towards the 1.96 price level over the next couple of days.

JPY
The yen took a hammering over the past 2 days, particularly against the euro, with the single currency rising to above Y163 for the first time since Jan 2nd. A 2-day rally in stocks has helped fuel the sell-off, although a general feeling that the global credit crunch is easing is accelerating the yen’s retreat each time stock markets start to climb higher. A certain level of complacency has crept into EUR/JPY and traders who are long in this market need to be on their guard because the fundamentals would suggest the yen is the one currency the euro should not be appreciating against. The US dollar rose to above Y102.50 today and although stocks have since gone into decline thanks to a poor earnings report from US broker giant Merrill Lynch, the pair is still holding above Y102. There is considerable potential to the downside for this pair, particularly if Wall Street has a bad day and the Philly Fed business index, due later today, prints sharply lower than forecast. AUD/JPY is proving itself to be the most reliable of the yen carry pairs but it looks over-priced right now. The pair is worth looking at in terms of buying when prices dip to around 93 again.

CAD
Headline consumer prices fell to their lowest rate since January 2007 in March (1.4%) while the core rate fell to the lowest annual rate in 3 years (1.3%). Outside of Japan, Canada is the only major country where inflation is not currently a problem. Indeed, having slashed interest rates by 100 basis points already and against a backdrop of record oil and commodity costs, the Bank of Canada may not so much be concerned with inflation, as deflation. It is clear the strong Canadian dollar vis-à-vis the greenback is having a negative impact not only on the competitiveness of Canada’s exports, but also on the competitiveness of domestically produced goods for the domestic market. A further rate cut from the Bank of Canada next Tuesday is a certainty and the probability is that Governor Carney will once again opt for an aggressive stance, i.e. cutting rates by 50 basis points. USD/CAD offered a great buy price when the pair dipped below parity shortly after the CPI data release. With the prospect of an aggressive rate cut on Tuesday next, we could see the greenback rise to take out 1.03 next week, but only if the US currency is able to halt its broader decline. Commodity prices need to be watched closely because this is offering protective support to the loonie. Any sudden collapse in oil or industrial metal prices will see the loonie come under significant selling pressure. Look to sell the loonie on any dips back towards parity with upside price targets of 1.01, 1.0170, 1.0220, 1.0270 and 1.03.

Bob B - Apr 17

Bob's Currency Focus - 14:30 GMT

2008-04-15T15:34:00.001+01:00

My apologies for the long absence, but Bob broke his wrist and had been unable to do the updates for the past number of weeks. He has now returned and the frequency of articles should increase to at least one every 2 days.

EUR/USD
The unpopularity of the US dollar continues and the euro is beginning to look comfortable above 1.58, meaning a rise to above 1.60 now appears more probable than not. This morning’s much poorer than expected ZEW survey for Germany did not lead to any major euro sell-off although it did temporarily stall the single currency’s upward momentum. The firm stance being taken by the ECB is outweighing data prints at present and with the G7’s limp statement being all but ignored, traders are queuing up to buy the euro on dips. The dollar needs to quickly push the pair below 1.57 and hold below this level, if the euro is to be prevented from hitting further lifetime highs this week. While dangerous to buy the euro at the current elevated prices from a positional perspective, there is certainly value in buying on dips, employing relatively tight stops. Tuesday’s producer prices came in higher than expected in the US but this is unlikely to deter the Fed from cutting rates further, given the Fed has put concerns about inflation on the back burner. US markets did get a boost though from a surprisingly positive reading from the New York Fed manufacturing survey for March. Meanwhile oil prices have climbed to yet a fresh record, with Nymex crude trading above $113.50 for the first time. This can be put down to the weak dollar and the fact confidence in the US currency is at an all time nadir. Look to buy on dips towards 1.5680 and 1.56. There is some value on selling at prices above 1.5870, placing a stop above the lifetime high of 1.5912.

GBP
Sterling got trounced by the euro Tuesday as new economic reports out of the UK point to a sharpening downturn in the British economy. The RICS house price survey for March reports prices are falling at their fastest pace in 30 years, while the British Retail Consortium reported UK retail sales declined on a year on year basis in March, the first time this has happened in over 2 years. Annualised Inflation meanwhile was flat in March, printing at 2.5%, the same rate as in February, despite rising energy costs. The deteriorating situation is likely to increase the chances of a further rate cut from the Bank of England in May. While sterling is going to struggle, there appears little value in buying the euro against the pound on prices above 0.8050. It is certainly worth selling down cable on rallies above 1.9850. We could see cable fall to 1.95 before the end of this week.

JPY
The yen is more on the defensive Tuesday as risk tolerance levels rise thanks to European stocks rallying to the upside for the first tine in 5 sessions. The Japanese currency slipped against the dollar, while the euro is trading above Y160 for most of the day. The yen’s movement will continue to follow the fortunes of stock markets, but any slide back towards Y100 against the dollar would offer a reasonable buy opportunity on USD/JPY, given stocks have retreated for 5 consecutive days and may be due a relief rally. The euro offers little value above Y160 in the current market and I would be inclined to sell down EUR/JPY on any advances towards Y161.50. The euro is the only major currency not to have declined significantly against the yen in recent months and there remains the risk of a sharp decline to Y145 in the coming months, if the ECB is finally forced to signal monetary easing is on the way.

CAD
The loonie is the only major currency to have fared worse than the dollar over the past month and this has occurred despite record high oil prices, a rebound in Canadian exports, a stable housing sector and a solid labour market. It is the first of the commodity currencies to have been driven backwards in a meaningful way and while traders decoupled it from the dollar this time last year, when the loonie began its incredible 6-month 26 cent rally against the greenback, the Canadian currency has once more been coupled with the fortunes of the US economy, as the outlook for Canada is seen to be maligned by a US recession. Any trader watching USD/CAD closely in recent weeks will have recognised that the pair has become the most range-bound pair in the pack. We have seen sizeable moves between 1.0030 and 1.03 on almost a daily basis and the impetus favours the upside, so the pair should be bought on dips, particularly towards or below 1.01. It is difficult to see the greenback making any headway above 1.03 unless there is a broader strengthening in the US currency.

Bob B - Apr 15

Bob's Currency Focus - 17:00 GMT

2008-03-18T17:26:00.000Z

Fed to the rescue:
The Federal Reserve’s extraordinary intervention to underwrite JP Morgan’s $2 per share takeover of Bear Stearns saved Wall Street from a mauling Monday, as stock markets elsewhere across the globe sold off on news of the collapse of one of Wall Street’s premier financial institutions. Stock markets have rebounded in a major way Tuesday as investors are confident the Fed will slash the Fed Funds rate this evening, by 100 basis points. Anything less could prove to be a disappointment and might lead to a sharp sell-off of stocks. Inflation control and the dollar have taken a back seat as the Fed puts all its focus and basis points into salvaging a failing economy. There has been heightened speculation of possible intervention in the FX markets to curb the dollar’s sharp demise but so far there has been little in the way of concern voiced from the ECB and the Fed or US Administration, which might suggest any intervention is imminent. The dollar plummeted to record lows across the board Monday with the euro hitting 1.59, the Swiss franc appreciating above parity and the yen hitting a 13 year high. Those holding dollars or dollar denominated assets will likely be forced to watch their investments whittle away further before any coordinated action takes place.

EUR/USD
With no peak yet confirmed and the euro striking fresh highs almost every day, in view of today’s downside risks to the dollar, there is little reason to believe the tide is about to turn just yet. All the technical indicators point to the pair being massively overbought and a significant dollar correction is overdue, but sentiment is the overriding factor right now and traders are running scared of the US dollar and rallies by the US currency are not allowed to gain any momentum and generally lead to sharp retaliation attacks on the other side. The euro has gained 9 cents in the 3 weeks, since it first breached the lifetime high set in November last and it is currently on the sharpest incline rally in the currency’s history. The fundamentals don’t offer any comfort for the dollar and with interest rate differentials set to widen to 2% today, after the Fed’s latest policy decision, a rise to 1.60 looks unstoppable, unless there is some sort of orchestrated intervention by Central Banks. With volatility levels at extreme levels, 1.60 could be struck today or tomorrow. Traders need to be on the lookout for a possible sharp correction lower, which could occur at any time, especially if there is some signal from the Fed that the cycle of rate cuts is at an end. Short stops are unlikely to work today as volatility levels are liable to increase dramatically around the time of the Fed’s rate announcement at 18:15 GMT. US producer prices rose by the fastest level in over a year in February, while housing starts declined by more than expected last month, underlining the fact the housing sector crisis has still to hit a bottom. Strategy: Stay out of market Tuesday and await sell down correction opportunity.

GBP
Cable bounced back nicely today as UK inflation in February printed at 2.5%, up from 2.2% in January. This has pared back expectations for aggressive rate cuts from the Bank of England and has helped sterling make long overdue gains against the euro, Swiss franc and yen, as well as the dollar. The Bank of England was forced on Monday to inject extra liquidity into the system as the global credit crisis threatened to destabilise the British financial system. The UK economy’s reliance on Financial Institutions coupled with a growing housing crisis is likely to limit any bounce in sterling, although a return of risk tolerance and corrections in the yen and Swiss franc will tend to benefit the pound in the short-term. Cable could retest the year’s high at 2.0395 later today or tomorrow, if the dollar comes under pressure after the Fed rate announcement. It is best to wait until the aftermath of today’s Fed before entering sterling shorts again. Strategy: wait!

JPY
The yen has been in retreat mode for the past 24 hours as market fear is replaced by risk-taking in the build-up to this evening’s fed rate decision. The dollar is trading 2.5 yen above the 13-year record set Monday at 95.78. The dollar could go higher if risk tolerance levels intensify, although a 1% cut in US interest rates would see the rate differential dwindle to a mere 1.5% and greatly reduce the yield benefit of being long on USD/JPY. The yen has faltered badly against the euro and all the high yielders Tuesday as the carry trade stages something of a comeback. The yen’s immediate fate depends on market reaction to tonight’s fed rate announcement and how stock markets fare Wednesday, once the initial impact has passed. Yen selling on a positional basis is dangerous because of the ongoing stresses in financial markets, although there may well be value in being short on the yen against the Aussie and Kiwi dollars over the next 24 hours.

CAD
The loonie has remained in the 0.98 to 1.00 range again thus far this week, although the greenback did penetrate the parity line briefly Monday. The loonie was undermined by a fall in commodity prices Monday and a general rise in risk aversion which hampered all of the commodity currencies. Today saw the release of February’s inflation report and although the core rate crept up to 1.5%, the headline rate fell to 1.8% from 2.2% and the numbers will permit the Bank of Canada to continue with its easing policy when it meets next month. The loonie has a distinctly firmer tone Tuesday as traders anticipate a widening in the interest rate gap between Canada and the US by as much as 100 basis points this evening. We could see a return to 0.98, although any surprise injection of broader support for the dollar could see the greenback rise to above parity. The loonie has capitulated against the euro in the past 2 weeks but should be able to correct somewhat if today’s Fed action helps to calm financial markets. It is dangerous to enter the market this evening as stops will give way too easily and the wise action would be to do nothing until tomorrow.

Bob B - Mar 18

Bob's Currency Focus

2008-03-12T18:10:00.000Z

EUR/USD
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.

GBP
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.

JPY
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.

CAD
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

Bob's Currency Focus 18:00 GMT

2008-03-05T18:47:00.000Z

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

2008-03-03T21:25:00.000Z

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

Market Watch: US Inflation and Growth Disconnect

2008-02-27T17:06:00.002Z

In recent days we have seen oil hit $102 a barrel or 100% higher than what it traded at this time last year, gold hit a record $964 an ounce Wednesday and copper rose to $387 a pound, up close to 30% this year alone. At the same time the US dollar index has hit a record low of 74.30, down almost 11% from the same time last year. One might legitimately ask why oil is twice the price it was last year if the world is gripped by an economic slowdown and why are copper prices shooting through the roof when new home sales in the US are at a 2-decade low? The US economy grew a paltry 0.6% year-on-year in quarter 4 and is probably close to negative growth this quarter, yet US headline inflation is running at 4.3% and yesterday US producer prices recorded their highest year-on-year increase since 1981. Normally if the economy slows, prices cool and inflation should soften. So what’s so different now?

1) Investors believe the global economy is sufficiently decoupled from the US economy that economic growth can prosper in Europe, Asia and the emerging economies, even in the face of a US recession. Investors have poured masses of speculative funds into hard and soft commodities which sent the prices of base metals, energy and food soaring over recent months, fuelling inflation.

2) The US Federal Reserve is largely acting in isolation in its aggressive attempts to ease credit tightening and stimulate economic growth. The resultant shift in interest rate differentials between the US and in particular Europe has seen the dollar plummet, meaning the cost of US imports has surged, pushing US domestic inflation higher.

3) Monetary policy easing (cutting interest rates) has the effect of stoking inflation and it is noticeable that the sharp run-up in commodity prices over the past 6 months has coincided with a new cycle of monetary easing on the part of the Fed.

4) There is no evidence yet of dampening demand in the US for oil or for food commodities despite the sharp increase in prices. The market seems determined to push prices to breaking point limit. The relationship between supply and demand has little bearing in establishing an equilibrium price in today’s commodity market. In the short to medium term, commodity prices are being driven by speculative interests.

What’s next?
1) Stagflation. The US is currently in a period of zero growth and increasing prices. The most worrying aspect is that this stagflation is widening - inflation continues to rise and growth stagnates. It could be the second half of this year before the US can breathe again. A ‘decoupled’ global economy would make it more difficult for the US economy to recover, because this would keep commodity prices elevated and make it more difficult for the Fed to cut interest rates further. In a decoupled scenario, were the Fed to ignore price stability and continue to cut rates, it could tip the economy over a more precarious edge.

2) The euro. US inflation is being driven by a weak dollar and unless the greenback stabilises or strengthens against the euro, this situation is likely to get worse. The ECB’s view of the world is different to that of the Fed and the ECB is against cutting interest rates in the current environment. As long as the euro is appreciating against the dollar, investors will feel justified in pouring more speculative funds into commodities, thus pushing up the dollar price of oil, copper, corn etc. and forcing higher inflation, particularly in the US. We are close to the point where direct market intervention on the part of Central Banks to prop up the dollar is close to being on the agenda. The level of dollar depreciation seen in recent days is not sustainable in the longer run and while the sell-off continues, the disproportionate rise in commodity prices is compounding the inflation risks in every major economy, not just the US.

3) The flu. The decoupling theory may not hold true and it may well be the case that the US is simply at the front-end of a severe global-wide economic slowdown. There is plenty of soft data emanating from Europe, the UK and Japan to back up this theory. The US has sneezed and while officials elsewhere have been slow to react, it is only a matter of time before we see a sharper deterioration in the health of other major economies. This will cause a serious rethink and lead to a cooling in commodity prices, which will ease US inflation. In this situation look for a strong bounce in the dollar.

Ted B - Feb 27

Bob's Currency Focus - 19:00 GMT

2008-02-26T19:26:00.000Z

EUR/USD
The dollar tanked across the board Tuesday and the euro is now within reach of the lifetime high at 1.4966. The pair currently trades above the key 1.49 line. So what has changed to bring about this situation? The euro got a boost from Germany’s Ifo business survey for February which surprised to the upside and suggests the German economy at least remains resilient in the face of a US slowdown. Stock markets appear to have grown immune to bad news and are ready to rally on any hint of a positive. This increase in risk tolerance is resonating through currency markets with the dollar being targeted because of its negative rate outlook, versus the euro in particular. A rate cut by the ECB is off the agenda for the foreseeable future, following today’s Ifo report. US data again disappoints with consumer confidence hitting a 5-year low in February, producer prices increasing by twice the forecast in January and house prices falling by the most in 2 decades in December according to the most recent Case Shiller report. The euro looks poised to once again take on 1.4966 and attempt to vault the 1.50 price handle. Its chance may come on Wednesday, if Fed Chief Bernanke, in his testimony to the House Monetary Policy Panel, signals further aggressive rate cuts may be on the way. There is no value in buying the euro at present prices, given it is at a price level from where it had failed to progress on 3 previous occasions. Dollar sentiment is so negative right now it is difficult to see where a downside rally is going to come from. It will most likely take a rise in risk aversion and a downturn in stock prices to trigger it. Strategy: Sell down on prices close to 1.4930, but place a stop loss above 1.4966. Hold other short positions, in anticipation of a reversal.

GBP
Cable has advanced to 1.9850 as the pound seized on broad-based dollar weakness to push the pair close to the year’s highs, which are around 1.9957. UK economic data printed weak though it got lost in a cloud of dollar gloom. Total Business Investment in Quarter 4 was a negative 0.5%, against a 0.9% gain in quarter 3. The CBI Retail survey for February posts a sharp decline in confidence by retailers and signals there are difficult months ahead for the retail trade. Cable’s ability to reach 1.9957 may be dependent on the euro hitting 1.50 against the dollar. If the euro prevails it will spark a fresh bout of dollar-selling which will benefit the pound and should see cable return to the 2 dollar mark. I remain bearish on sterling but prefer to see the current dollar sell-spree pass before getting too involved in the market. Cable has now rallied 5 cents from last week’s low and it is difficult to see it going much higher on fundamental grounds. Comments today from the Bank of England’s Rachel Lomax were generally supportive of sterling – she intimated the Bank’s hands may be tied because of rising inflation. However if data continues to disappoint, markets will price in expectations of further rate cuts. The rise in risk tolerance is protecting sterling against the euro, as traders pour money into the higher-yielding pound and EUR/GBP should be able to slide to 0.75 in the short-term, so long as the interest in carry trades persist. Cable should be able to hold below 1.9957 bar another dollar collapse and a sell down on prices near this price would seem to offer the best value. Other short positions should be held in anticipation of resumption to the downside. Strategy: Sell cable on prices close to 1.9957 with downside price targets of 1.9730, 1.9670, 1.9605, 1.9550 and 1.95.

JPY
The yen has held up remarkably well Tuesday as currency markets have been dictated by dollar weakness rather than preference for riskier assets. The yen has gained over 70 pips against the dollar and has held its own against the euro, though the single currency is again trading above the key Y160 price line. The only major currencies the yen has lost ground against today are sterling and the Canadian dollar. Stocks have now rallied strongly over most of the past week and may be due a reality check, i.e. correct downwards, something which would benefit the yen. Wednesday will be an important day for the immediate direction for the yen, because if stock markets react negatively to Ben Bernanke’s semi-annual testimony on monetary policy, the yen will be the principal benefactor. It is not worth selling the yen ahead of tomorrow’s speech, particularly as a capitulation by the dollar against the euro (to 1.50) will also trigger a sharp pullback in USD/JPY. I recommend avoiding the yen for the present, because we are at a critical juncture across currency markets and the yen’s direction will very much depend on the immediate fate of the dollar.

CAD
Every USD/CAD bull on earth is wondering what has hit them in the past 36 hours. It was not outlandish to have expected a rise to 1.03 this week as we look ahead to an expected rate cut from the Bank of Canada next Tuesday. Instead we have seen as sharp a reversal as the market has ever witnessed with the loonie soaring by 3% and 3 cents in under 2 days. We cannot put it down to US dollar weakness because the loonie has also surged by over 2% against every other major currency, including the other commodity currencies. There was no economic data out of Canada and the Bank of Canada members due to speak today had not even uttered a word before USD/CAD had collapsed to 0.9850. Would day traders really buy the loonie in such volumes in the absence of data and days before an expected rate cut? No! It is a very curious market move and borders on the ridiculous. We have witnessed similar moves in the recent past of course, something which makes shorting the loonie an occupational hazard. Liquidity involving the loonie poses very serious questions at times like this and logic is very much out the window. A return to over $100 oil prices will help justify a strong loonie, but the currency is trading well above its real value. Wait for a bottom in USD/CAD to form before entering the market again. There may be an attempt to take out the December low at 0.9855. Strategy: Wait!

Bob B - Feb 26

Bob's Currency Focus - 18:00 GMT

2008-02-25T18:12:00.000Z

EUR/USD
The pair continues to trade within a narrow range Monday as the market is uncertain about price direction. There is a reluctance to push the euro towards the lifetime highs in the absence of major economic data or Central Bank policy updates, while by the same token the dollar is failing to attract any meaningful support and the negative sentiment that dogged the currency from the middle of last week still remains. We will need to see a break out of the current 1.4760 to 1.4860 price range to get an idea of where the pair may be headed through the remainder of this week. There are several speeches from Fed officials this week, including the Fed Chief’s semi-annual testimony in front of the Monetary Policy Committee on Wednesday. This will need to be monitored closely. US January existing home sales came in slightly higher than expected, 4.89 million Vs a forecast 4.80 million, and it has raised some hopes the housing crisis may be near a bottom. Stocks rallied in the immediate period following the news. A sustained rally in stocks this week will tend to support the euro in the short-term, as traders focus on interest rate differentials and yield. Germany’s February Ifo Business Survey is a risk for the euro Tuesday, but only if the index falls well below expectations. I still do not see any value in buying the euro at present levels and believe there is good value in selling down on prices close to 1.4850. Strategy: Sell on prices near 1.4850 with limit targets of 1.4780, 1.4755, 1.4730, 1.47 and 1.4660.

GBP
Cable has held firm Monday, the pound holding onto the 3 cent gain it made since last Wednesday. 1.97 is proving difficult to break and unless we see broader deterioration in the dollar over the next few days, the pound will struggle from here. Direction this week will be determined by sentiment towards the US currency and the pound will find it difficult to attract strong support, with traders having one eye on the Bank of England meeting next week. There are no genuine market-moving economic releases in the UK this week, although any decline in house prices from the Nationwide survey or a fall-off in the Gfk consumer confidence index, both released later in the week, will undermine the UK currency. There is definite value in selling cable down on prices above 1.97, with a distinct chance of a quick return to 1.95 over the coming days, especially if risk aversion levels are elevated. Meanwhile a poor Ifo survey result from Germany Tuesday could plunge EUR/GBP back below 0.75. Strategy: Sell cable on prices around 1.97 with downside price targets of 1.9605, 1.9555, 1.95 and 1.9460.

JPY
The yen sold off sharply from the moment markets opened Sunday night with risk-taking and the carry trade back in vogue, thanks to Wall Street’s strong reversal to the upside late Friday. The euro has gone above Y160 Monday, while the dollar briefly returned to above Y108, having gone as low as 106.70 Friday evening. There is a high degree of complacency creeping back into the market, with traders determined to back currencies on the basis of yield, but traders need to be alert to a sudden shift in risk, which could trigger a sharp rally for the yen, particularly against the euro. The euro does not offer any value at Y160, even if it manages to consolidate above this in the short-term. The dollar is very well supported below Y107 and offers a good buy opportunity on prices below this level. Strategy: Buy USD/CAD on dips to 106.80 with upside price targets of 107.50, 108 and 108.30.

CAD
If anyone truly knows the reason for the loonie’s monumental rally today, against every other currency, then you might share your insight with us please. It is totally inexplicable from a logical perspective. There was no economic data out of Canada and commodity prices are generally softer today. There must have been a single movement of funds somewhere to explain today’s move, because based on the recent trend and on economic events, both recent and future, the loonie should be in retreat this week. The Bank of Canada is expected to cut rates when it meets next week on Mar 4. There is no domestic data of influence ahead of Friday, when the Qtr 4 current account balance is released. The best way to look at today’s downside move in USD/CAD is that it represents a buy opportunity. It is difficult to see the loonie staying on the right side of parity against the greenback with a rate cut imminent within the next week. There are two speakers from the Bank of Canada tomorrow testifying on the impact of the Canadian dollar on the Canadian economy and this represents immediate downside risk for the loonie. Strategy: Buy USD/CAD on dips to 0.9960 with upside price targets of 1.0050, 1.0120, 1.0170, 1.0190 and 1.0250.

Bob B - Feb 25

Bob's Currency Focus - 17:30 GMT

2008-02-21T18:25:00.000Z

EUR/USD
Another shocking set of economic reports from the US Thursday has seen the dollar on the defensive and pushed the pair above the 1.48 price handle. The Philly Fed business index for February printed at -24 against a forecast -10 and it suggests next week’s ISM national manufacturing index could contract, i.e. return a reading of less than 50. Gold hit a new milestone of $950 today and with oil trading at $100 it signals major funds are being stockpiled on traditional dollar hedges. If the dollar continues to depreciate, inflation is going to become more of a problem in the US and stagflation will grow to more extreme levels. The Fed (from the minutes released yesterday) is interpreted as having gone soft on inflation and the FOMC is expected to continue to cut interest rates, even against a backdrop of rising inflation. The euro is now just 1.5 cents away from the lifetime high but it is difficult to see the single currency having a chance in taking out 1.50 in the absence of major data releases or key monetary policy announcements. There are no further data releases in the US this week. But the euro has a risk event of its own Friday, when the preliminary PMI readings for the area’s manufacturing and services sectors are released. If either reading comes in below 50 (contracts), the immediate theme will shift from US interest rates to euro growth and the euro will likely encounter heavy selling pressure. The euro looks inflated in value at any price above 1.48 as it is and it offers a live sell-down opportunity - the euro’s invincibility is much less now than it was when the currency previously occupied these lofty heights. Strategy: Sell EUR/USD on prices above 1.4820 with downside limit prices of 1.4750, 1.4710, 1.4670 and 1.4620.

GBP
Sterling earned a stay of execution thanks to a firm retail sales reading for January – sales rose 0.8% on the month against the 0.2% forecast. When one looks into the detail, the headline number was less impressive as shoppers were enticed into buying through aggressive discount campaigns operated by retailers. Nonetheless the report does suggest the Bank of England may not cut rates at their March meeting, although there are still some key economic releases between now and the next meeting in a fortnight’s time. Sterling has risen 2 cents against the dollar today, but only made a modest 0.25 pence gain against the euro. If the dollar’s demise continues though, the pound has plenty more scope to the upside against the greenback than the euro has, something which might benefit the UK currency against the euro in the coming days. But risk aversion looks to be on the rise this evening on the US session and cable will struggle to make it much past 1.9650 in this environment. I remain bearish on sterling and prefer to sell down cable on prices close to 1.9650 with limit prices of 1.9550, 1.95, 1.9440 and 1.9380.

JPY
I said yesterday the Philly Index was the last major event risk for USD/JPY this week. The Index printed much worse than expected and has again raised fears the US economy may be in recession. The sharp dollar sell-off has seen the dollar retreat 100 points from the high of Y108.31 recorded this morning. The yen needs a sustained sell-off on Wall Street this evening if it is to hold or even extend these gains. The Japanese currency is virtually unchanged against the euro today while it is down 0.4% to the pound. The best value continues to be on offer against the euro which is trading just above Y159. It is difficult to see the euro sailing past Y160 in a recessionary environment and after a few weeks in recovery mode, we could soon see reversal to the downtrend for this pair. Strategy: Sell EUR/JPY on prices close to Y160, with limit price targets of 158.80, 158, 157.50, 156.80 and 155.50.

CAD
A second successive day of gains for the loonie against the greenback, although trading has been choppy and directionless, so the pair could yet settle anywhere before the close later today. There was no data out in Canada but US data printed negative and the loonie benefited from a broad dollar sell-off. The loonie was also aided by a further rise in commodity prices with extreme price levels being breached on a number of the metals Thursday - Canada is one of the world’s largest exporters of both precious and industrial metals. If the loonie can manage to hold the greenback below 1.01 to the close, a strong retail sales report Friday could give the loonie a final opportunity to retake the parity line ahead of the Bank of Canada meeting on March 4. It is unlikely the loonie will attract significant buying support the closer we get to that key interest rate decision. The loonie should also have earned muscle today from the transfer of this month’s oil contract funds, i.e. conversion of $US oil revenues for Canadian oil companies into Canadian dollars. The risk for the loonie remains very much to the downside over the next 10 days, with sharp moves likely if Canadian economic data prints weak. Overall there is the prospect of a USD/CAD rally to at least 102.20 within the next few days. Strategy: Buy USD/CAD on dips to 1.0080 with upside price limits of 1.0135, 1.0170, 1.0195, 1.0215 and 1.0245. Warning: an upside surprise in Friday’s retails sales numbers will spark a loonie rally.

Bob B - Feb 21

Bob's Currency Focus - 23:50 GMT

2008-02-20T23:54:00.002Z

EUR/USD
The dollar started Wednesday strongly and had pushed the euro back by a full cent before a spectacular reversal during the US session. The pair closed the day at 1.4720, virtually the same price at which it started early this morning. As global stocks declined in Asia and Europe, the dollar attracted safe haven funds and pushed the euro back to 1.4616, after economic data revealed US inflation rose by more than expected in January. The annualised core rate now stands at 2.5%, well above the Fed’s comfort zone. Oil prices rose to an incredible $101 a barrel this evening raising further inflation concerns. However the Fed minutes of the January 30/31 meeting, released today, portrayed a dovish Committee, one more concerned about sluggish growth than spiralling inflation. Indeed the minutes signalled further interest rate cuts are on the way. It is unlikely the Fed would have sounded so soft on price concerns were the Committee in possession of today’s inflation figures, or looking at $101 oil, but markets seized the minutes to force a dollar sell-off. The irony is Wednesday’s data will restrict the extent to which the Fed can cut rates and should prove dollar positive in the medium term. US Housing Starts and Building Permits for January, also released today, were in line with forecast and didn’t have a market impact. The euro offers little immediate value above 1.4750 and it will come under selling pressure on prices around this level. The euro’s counter-rally today was more of a knee-jerk reaction to the day’s events and I would not be surprised to see the single currency forced back to 1.46 again tomorrow, especially if risk aversion returns. Strategy: Sell EUR/USD on prices close to 1.4750 with limit prices of 1.4680, 1.4640, 1.4620, 1.4590 and 1.4550.

GBP
Sterling plunged again Wednesday, cable coming perilously close to the year’s nadir of 1.9337, hit in early January. Cable hit 1.9362 before it then recovered to 1.9420 by the close. The Bank of England minutes showed all 9 members of the MPC voted for a rate cut 2 weeks ago, but perennial dove Mr Blanchflower wanted a 50 basis point cut. The Bank did cut rates by 25 basis points at that February 7 meeting. The pound needs a strong retail sales figure Thursday to earn a much needed bounce. Although I remain bearish on the currency, I see little value in selling it down at current prices. A strong retail sales figure could trigger a cable rally up to 1.96, while it could help the pound push the euro back below the 75 pence mark. The BRC retail sales figure last week points to a possible upside surprise tomorrow, but if retail sales disappoint, then cable could flirt with the year’s low. Wait for a better price on cable before re-entering the market. Strategy: Sell cable on prices close to 1.9650 with limit prices of 1.95, 1.9430 and 1.9380.

JPY
A late surge on Wall Street was bad news for the yen, which retreated sharply as carry trades returned en masse late in the session. The euro hit a high of Y159.27 its highest level since Jan 30. The dollar returned to Y108.35, having traded as low as 107.48 in the morning. Complacency has crept into the market and the yen is vulnerable to a near term retreat to Y110 against the dollar and Y160 against the euro. Direction is going to be determined exclusively by risk aversion and Thursday’s Philly Fed Index in the US could prove to be the last major risk event of the week for USD/JPY. I see better value in the yen against the euro, particularly on prices close to Y160. Strategy Sell EUR/JPY on prices near Y160 with limit prices of Y158.50, Y157.50, Y156.80 and Y155.70.

CAD
The loonie had a very volatile day, being up, then down then up again at the finish. The greenback had rocketed to a one-month high of 1.0196 before $101 oil sparked a loonie rally that saw the pair close the day at 1.0125. USD/CAD has however turned bullish in the short-term and the pair is being bought on dips and it is difficult to see this trend change unless Friday’s Retail Sales figures for Canada print better than expected. The Bank of Canada will be cutting rates on March 4 and the only question now is by how much, 25 or 50 basis points. Loonie shorts will stack up in the run up to this meeting and a close above 1.02 this week will pave the way for a crack of the year’s high before the Central Bank meeting. The Leading indicators for January printed at +0.2%, above the 0.1% expected and against a flat reading in December. Also boosting the loonie today was a report which revealed a positive capital inflow into Canadian securities in December. 1.02 and 1.0250 look vulnerable to further upside pressure from USD/CAD bulls and dips close to 1.01 are likely to attract plenty of buying support. A strong rally on stock markets over the next 24 hours will be the loonie’s best form of defence Thursday. Strategy: Buy USD/CAD on dips to 1.01 with upside price targets of 1.0170, 1.0190, 1.0215 and 1.0245.

Bob B - Feb 21

Bob's Currency Focus - 17:30 GMT

2008-02-19T17:37:00.000Z

EUR/USD
US markets returned after the long weekend and whereas we have seen an initial burst of optimism on US equity markets, on currency markets the dollar has fallen sharply against the euro. The euro was boosted by remarks from the latest bulletin out of the Bank of France which seemed to criticise the Fed for being too aggressive in its monetary policy and suggests policy easing on the part of the ECB is some way off. No data to move markets Tuesday and we must wait for Wednesday’s US consumer prices and housing data releases to get some direction. Oil prices are back near $100 a barrel and gold is trading close to $930 an ounce, primarily because of a weakening dollar. Some of the high-yielding currencies have hit extremes today and traders should be on alert for a potential major sell-off of commodities and high-yielding currencies, given current inflated prices. Such a sell-off will benefit the dollar. The euro will run into immediate resistance above 1.4770 and the pair does not offer any bid value at current prices. Wednesday also sees the release of the preliminary PMI readings for the euro area’s manufacturing and services sectors. Any contraction in either reading (index <50) could trigger a sharp sell off of the single currency and we could see a quick return to 1.46. I’m inclined to sell the euro on prices around 1.4750 as it is difficult to see the euro making a run on 1.50 in the absence of Central Bank meetings or any change in the underlying fundamentals. Strategy: Sell EUR/USD on prices around 1.4750 with limit prices of 1.47, 1.4660, 1.4640, 1.46 and 1.4580. Place a stop loss above 1.4825.

GBP
Sterling has had another bad day Tuesday, even if it has held its own against the dollar. The story about Northern Rock and its nationalisation by the British Government has set a very negative tone for the pound, which has seen it capitulate by 2% against the euro over the past 36 hours. Sterling has failed to benefit from a renewed bout of interest in high-yielding currencies with traders choosing to opt for the Australian and New Zealand dollars, ahead of sterling. Although I retain my bearish stance with respect to sterling, I do believe the sell-off against the euro is overdone in the short term and can see the pound pushing the euro back towards the 0.7550 price mark in the coming days. We have to wait until Thursday and January’s retail sales figures before getting any genuine market-moving data for the UK currency. There is also no value in selling down cable at current prices and I prefer to see a bounce back to over 1.96 before re-entering cable shorts. Strategy: Wait and then sell down cable at prices around 1.9650 with downside price targets of 1.9550 and 1.95.

JPY
The yen has made moderate gains Tuesday against the dollar, while still trading close to the recent low at 159 against the euro. With markets closed in the US Monday, traders went on an equity buying spree and the resultant surge in risk tolerance brought with it a new wave of carry trades, with the low-yielding yen the major loser. There has been a determined effort to push global stock markets higher in the past week, so backing the yen in this climate is dangerous. However some of the yen carry trades are approaching critical milestone points (Y160 on EUR/JPY and 100 on AUD/JPY) and these levels may act to serve a warning to the market that the recent build-up in carry trades is too aggressive and is not sustainable. Given the weight of the build-up, a sudden shift in risk aversion would see the yen strengthen sharply, particularly against the euro and the Australian dollar. A disappointing set of economic releases in the US Wednesday, particularly with respect to housing, could trigger such a move. I do not see the euro offering value above Y160 in an era of economic uncertainty so there is value in selling down EUR/JPY on any rallies close to this level, even if it means the positions have to be held for more than a few days. Strategy: Sell EUR/JPY on prices close to Y160 with downside price targets of Y158, Y157.20, Y156.50 and Y155.50.

CAD
The loonie has dropped below the lows recorded last Friday and the USD/CAD pair is currently trading near 1.0150. Bank of Canada’s Governor Carney failed to excite markets with his speech on globalisation Monday, with no clues emanating on how low the Bank of Canada may go on interest rates at its next policy meeting on March 4. On the other hand Tuesday’s economic data out of Canada indicates the Bank of Canada could possibly cut by 50 basis points in a fortnight’s time with inflation prices slowing again in January. The core inflation rate now stands at just 1.4% while the headline rate has slowed to 2.2% from 2.4% in December. Wholesale Sales came off by 2.9% in December against expectations for a 0.1% gain and this signals the Canadian economy ground to a halt in the final quarter of 2007. The loonie’s fall Tuesday has been cushioned by a rise in commodity prices but a poor set of domestic retail sales numbers later this week would put added pressure on the currency and set up the prospect of a near-term rise to 1.0250 for USD/CAD. The greenback has at least established itself back above parity and appears to have regained the advantage. Any dips to 1.0050 should attract strong buying interest. The loonie has probably been oversold against the euro and the AUD since Friday and it has the potential for a limited correction against these two currencies. Strategy: Buy USD/CAD on any dips to around 1.0050 with upside price targets of 1.0140, 1.0175, 1.0220 and 1.0250.

Bob B - Feb 19

Bob's Currency Focus - 17:30 GMT

2008-02-14T17:41:00.000Z

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

2008-02-13T17:55:00.000Z

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

2008-02-12T17:37:00.000Z

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

2008-02-11T17:27:00.000Z

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

Bob's Currency Focus - 16:00 GMT

2008-02-08T17:03:00.000Z

EUR/USD
There were unconvincing attempts to push the euro higher Friday as the currency tried to retrace some from one of its worst weeks ever against the greenback. The single currency is down 3.5 cents this week and down over 4.5 cents from the heights it reached last Friday. The euro’s weakness was essentially a self-inflicted blow from the ECB Thursday, when the Banks’ President Jean Claude Trichet signalled monetary policy had moved to a more neutral stance. The ECB is unlikely to cut rates before the summer and the intense sell-off we have witnessed is an over-reaction. The euro must recover to 1.46 quickly otherwise the dollar looks destined to test the December low of 1.4310 by early next week. The dollar’s new-found strength will be severely tested once stock markets settle and risk aversion subsides. The upside for the euro looks limited however and it may be a long time before it gets another opportunity to reach the magical 1.50 price handle. A more restrictive trading range looks the most likely outcome over the next few weeks, with any significant upside rallies being met by increasing selling pressure. Of course with markets still in turmoil because of growing concerns over the global economy, major spikes in risk aversion will most likely favour to dollar, although the US currency currently offers little yield appeal. The most profitable way forward for the next week will be to sell the pair on failed upside rallies. Strategy: sell EUR/USD on prices close to 1.4660, with downside price targets of 1.4590, 1.4535, 1.45 and 1.4460. If the euro fails to re-establish itself above 1.4520, then this form an initial a resistance level and if it holds, the pair will probably push down towards 1.4310.

GBP
Sterling also attempted something of a comeback Friday having been battered in the past week. Cable did rise to above 1.95 briefly but has since declined to 1.9450. Interest rates were cut to 5.25% Thursday but with the yield on sterling still one of the best on offer, a return to normality on stock markets will tend to boost the UK currency. With the ECB changing their policy stance this week the pound should be able to retrace further against the euro and could send the euro back to 0.7350 next week. UK economic data, apart from employment, is growing softer and the medium and longer term outlook for sterling remains uncertain at best. January’s consumer price inflation data is released Tuesday next and markets will be studying it closely to establish whether the Bank of England will be in a position to cut rates again at its March meeting. I remain bearish on sterling but would prefer to see a bounce in cable to the 1.9650 price region before entering the market with a sell order. The euro offers no value against sterling at present. Strategy: Sell cable on rallies towards the 1.9650 price region with downside price targets of 1.9550, 1.95, 1.9450 and 1.9390.

JPY
The yen has retreated modestly Friday against both the greenback and the euro and it could yet move sharply lower if stocks rally sharply on Wall Street this evening. Risk tolerance levels have risen since the major spikes in risk aversion seen on the first 3 days of this week and the market tendency over the past 2 days has been to sell the yen, particularly against the high yielding currencies, on any lulls in market volatility. The next major data indicator that may severely influence markets is next Wednesday retail sales release in the US. If stock markets settle between now and then, there is the prospect of a push towards 110 on USD/JPY. If trading short on USD/JPY, your stop should be tight above Y108 because if this key level gives way, there will be an avalanche of bids in an attempt to take the pair significantly higher. Strategy: Preference is to remain short on USD/JPY while price holds below 108. If 108 gives way, stay out of market. Sell on rallies towards 107.80 with downside price targets of 107.20, 106.80, 106.50, 106.20. The pair remains range-bound between 106 and 108 and it is worth buying on prices close to 106.

CAD
The loonie has had another monumental day, thanks to a much better than expected employment report. Quick, cruel, incisive rallies are now a trademark of the Canadian dollar and it has become the most dangerous currency to short against prior to major domestic economic releases. In fact the loonie was setting up for a good employment number for a few days as it essentially had lost no ground to the US dollar since last Wednesday, while other major currencies floundered. It has rallied every moment there has been a lull in market volatility this week, a clear signal the currency remained bullish. The 46,400 jobs gained in January printed way higher than the 8,000 expected and the unemployment rate also fell to a 33 year low. While the news is very good, it is important to note employment is a lagging indicator and the risks to the outlook for the Canadian economy from a US recession are unchanged. What today’s report may do is to dissuade the Bank of Canada from cutting rates aggressively and for the moment it looks like a 25 basis points cut in March is what the Bank may give, rather than the 50 basis points which was previously expected. Friday’s appreciation in the loonie is overdone, with the currency already having gained 1.2% against the euro and 1.3% against the dollar today. Regular upbeat employment reports out of the euro area, the UK and Australia don’t ever generate anything like the sharp type of rally for those local currencies that we are constantly seeing for the loonie. Housing starts in January also printed much higher than expected Friday, 21% up on December’s figure. Warren Buffet’s claim yesterday that his company ‘owned the Canadian dollar’ and made several hundred million dollars from it is a worrying revelation and explains to some degree the startling level of appreciation seen in the loonie in recent times, a level of appreciation that cannot be explained by the underlying fundamentals. However I remain bearish on the loonie’s outlook in the medium term as it is ludicrous to believe the Canadian economy walks scot-free from a US recession. The loonie is the most over-valued currency of all 16 most actively traded currencies. The risks for the loonie over the next week though are probably again to the upside and there will be an attempt to take out 0.9920 on USD/CAD and revisit the 0.9870 low hit in the aftermath of the Fed’s 50 basis points cut last week. We could even see a retreat back to 0.9750. The loonie is also trading 5 cents higher than it was last week against the euro and that pair is massively oversold. The euro could however be ultimately pushed below 1.43, if the loonie makes further inroads against the greenback. Strategy: Wait in the short-run. If holding positional USD/CAD trades, the stop loss needs to be below 0.9750.

Have a good weekend!

Bob B - Feb 8

Bob's Currency Focus - 18:30 GMT

2008-02-07T18:38:00.000Z

EUR/USD
We have had an incredibly volatile session Thursday as stock markets in Europe plunge and the ECB moves to a more neutral stance, thus sending the euro into freefall. ECB President Jean Claude Trichet said council members neither argued for a rate cut, nor for a rate rise. This is a significant change from the last meeting, where some members were calling for a rate hike. The decision out of today was the same, but the shift in tone suggests the ECB may be positioning itself to cut rates at some future date. The euro has been trounced by every other major currency today with the exception of sterling, as the pound also went into reverse after th Bank of England cut rates in the UK and gave a downbeat assessment of the economy. Markets are in a confused state however because despite the plunge in stock markets, the high-yielding Aussie and New Zealand dollars have surged and the yen has depreciated against the US dollar. The dollar has forced the euro back to below 1.45, gaining almost 1% on the day. US economic data again disappointed with last week’s jobless claims number coming in higher than expected, while December’s pending home sales number fell 1.5%, against a forecast decline of 0.5%. German factory orders decreased 1.7% in December, but this was slightly better than forecast. The euro needs to recover quickly back towards 1.46, otherwise the dollar looks set to push the pair back to the 1.4310 low seen last December. The dollar’s advance this week is hardly deserved on the evidence of recessionary data out of the US, but with the yen remaining more or less static in value this week, the dollar has suddenly become the preferred ‘safe haven’ currency. The euro’s best chance of an impulsive rally later Thursday is if we see a recovery in US stocks on Wall Street. It is dangerous to enter the market today given current levels of volatility, but having declined by 500 pips since last Friday’s peak, the euro may offer some short-term value on Friday, once the current dollar rally bottoms out. Strategy: Wait!

GBP
The Bank of England cut rates by 25 basis points as expected, but, rather more surprisingly, the MPC issued a detailed statement, highlighting downside risks for both the domestic and global economies, as well as raising concerns about the medium-term outlook for inflation. Sterling originally gained a bounce after the announcement was made, as a rate cut had already been fully priced in, but then the pound collapsed as the Bank’s bleak assessment was taken rather indifferently by stock markets and accelerating a sell-off in European stocks. Earlier this morning a report out of the UK revealed manufacturing output declined 0.2% in December. Industrial Production also fell, by a more marginal 0.1%. The UK economy is clearly struggling at present and the Bank of England’s actions, although a help, may not be enough to avert a more serious economic downturn. Cable fell to below 1.94, down 2 cents on the day, while sterling is unchanged against the euro, the other major currency to be pummeled today. We have done pretty well from cable in the past week, since we initially recommended selling down from 1.9920. However, while still bearish on the currency, there is little value at present prices, so the best advice is to wait for a bounce in the pair to back over 1.96. Sterling should be able to push the euro back to 0.74 in the short-term, with the single currency coming under broader selling pressure. Strategy: Sell cable on rallies towards 1.9650 with price limits of 1.9540, 1.95, 1.9440 and 1.9395.

Yen
There has been a bizarre turn of events Thursday with the yen depreciating significantly against the US dollar, even when major European Stock markets were closing out their trading sessions down an average 2%. Traders have been loading carry trade positions all day on AUD/JPY and NZD/JPY, ever since the Bank of England announced a rate cut at 12:00GMT. Investors risk nerve has held thus far, helped in no small part by a modest bounce in US equities this afternoon. The Kiwi dollar is currently up 1.7% against the yen, with the Aussie dollar up 1.4%, while the greenback is up 1% against the Japanese currency on the day. The yen is virtually unchanged against the euro. The dollar does not offer any value against the yen on prices close to 108 while risk is a major issue, so this remains a good entry point for selling down. We have seen the pair spend the week sparring in the 106 to 108 price region and the two currencies should remain within this trading range until we see risk aversion levels cool somewhat. Strategy: Sell USD/JPY on prices near 107.80 with downside price limits of 106.80, 106.50 and 106.20. Place a stop loss above 108.10.

CAD
The loonie has made significant gains against the euro, pound and the yen, but it was forced to give up modest ground against the greenback. There was no domestic data out today and markets await Friday’s key employment report for January which is key to discovering whether the Canadian economy is managing stay afloat at a time when the US tinkers with recession. Today’s warning on growth risks out of Europe is not good news for the outlook of the loonie, a currency that is dependent on the wider economic growth story. In the past week we have seen the South African rand and the Norwegian Krone come under intense selling pressure, but thus far the other major commodity currencies of the loonie and the Aussie and Kiwi dollars have been spared the rod. All three of these currencies are likely to come under increasing threat in the near term, especially while volatility and risk aversion levels remain high. All three currencies are defying the underlying fundamentals which point to an at best ‘uncertain’ outlook for the global economy. The loonie today is trading 2% higher against the euro than it was this day last week. If Friday’s employment report prints another negative number, the loonie will be hammered and the greenback should rise back towards the 1.0350 by the middle of next week. However, a better than expected number and a steady unemployment rate could see the loonie push the greenback down sharply to test that critical 0.9920 support point. Strategy: wait for Friday’s employment report as this is the key to determining confidence for moving in one direction or the other. Hold onto those positional USD/CAD longs.

Bob B - Feb 7

Bob's Currency Focus - 18:00 GMT

2008-02-06T18:32:00.000Z

EUR/USD
It is more a case of as you were for this pair Wednesday with traders reluctant to push price too far in one direction or the other ahead of a key ECB rate setting meeting Thursday. The euro has managed to rally to 1.4670 from a low of 1.4592 during the European session, but has since fallen back to 1.4630, around where the pair closed last evening. US productivity slowed sharply in quarter 4 although it did print higher than expected while unit labour costs for the quarter came in lower than forecast, something which will dampen immediate inflation concerns and make it easier for the Fed to cut rates further. US stock markets have rallied this afternoon and we have seen a modest return in risk appetite. It will be difficult for markets to simply erase the memory of Wednesday’s ISM survey (reporting the first contraction in the services sector for 4 years), and any immediate rebound in stocks is likely to attract fresh selling pressure. The euro will bounce back on Thursday if the ECB retains its hawkish bias. The President of the ECB delivers the Central Bank’s policy statement at 13:30 GMT. The Bank is certain to keep rates on hold and we could see the single currency drift ahead of Jean Claude Trichet’s statement, with many euro long positions coming off the table for fear of some softening in tone from the ECB. I however will not be surprised if the ECB maintains its fim inflation bias, particularly given inflation rose to 3.2% in January. Remember most members of the council are confirmed hawks. If the ECB retains its tough stance, the euro could quickly take off and we could be back above 1.48 by Friday. If they do surprise and prepare markets for a possible future rate cut, the euro will undergo a significant sell-off. We need to wait for the actual outcome Thursday before entering the market but if we do get the same hawkish stance, the euro should be bought with upside price limits of 1.4660, 1.4720, 1.4760 and 1.4810.

GBP
Sterling held steady Wednesday as markets believed the currency sold off sufficiently ahead of the Bank of England rate announcement tomorrow. On the domestic data side, consumer confidence plunged further in January according to the latest Nationwide Survey while the British Retail Consortium reports shop prices rose marginally in January to an annualised 1.2% rate, against a 1.0% rate in December. Cable has traded around the 1.96 price level all day but there is a good chance of a dip to 1.95 before the MPC delivers its policy decision at 12:00 GMT Thursday. Markets now expect a 25 basis points cut, but if the Bank surprises and delivers an aggressive 50 basis points, sterling will fall sharply and cable could revisit the year’s low at 1.9337 later Thursday. If the Bank does not cut tomorrow, any bounce we may immediately see in sterling will prove to be short-lived, as markets will become more firmly entrenched in the opinion the Bank is well behind the curve. Rallies to 1.97 between now and tomorrow morning are worth selling down with limit prices of 1.9550 and 1.95 being realistic targets. After an initial spike downwards, expect sterling to bounce in the aftermath of a 25 basis points cut. The fate of sterling against the euro will very much depend on the ECB Thursday, moreover the Bank of England. A more dovish sounding ECB could see sterling appreciate sharply against the euro (if the bank of England delivers a 25 basis points cut), with the chance of a euro retreat to 0.7350 by Friday, whereas a hawkish ECB should see the single currency move back towards 0.7550. I remain bearish on sterling in the medium term, but the best short-term opportunities may have already passed. Strategy: Sell cable on any rallies towards 1.97 with limits prices of 1.9550 and 1.95. Aim to exit trade before the Bank of England announcement.

Yen
The yen has held most of its gains from Tuesday with carry traders reluctant to move to the Japanese unit as a funding currency following the volatile trading session witnessed Tuesday. In domestic news, Japan’s leading indicators rose to a reading of 40.0 in December, up from a lowly 18.2 in November, meaning that although economic outlook is seen in a more optimistic light than the previous month the pace of growth will remain stagnant (denoted by the index coming in below the 50.0 boom or bust line). The yen could sell off late tonight against the dollar and the euro if Wall Street rallies strongly to the close, but any losses incurred by the yen should be limited because of the broader negative sentiment that still abounds. The Aussie and New Zealand dollars have held most of their gains from last week against the yen despite the sharp dip in market sentiment this week, but another night of misery for stocks should trigger a significant bout of selling on AUD/JPY and NZD/JPY. Strategy: Sell USD/JPY on any rallies above 107.70 with target prices of 106.80, 106.50 and 106.20. Place a stop loss above 108.10. Do not trade EUR/JPY ahead of Thursday’s ECB meeting.

CAD
The loonie declined this morning but came back strongly this afternoon to be the best performer of all the major currencies on the day, gaining 0.4% against both the euro and the greenback and 0.6% against the yen. The modest bounce in equities was sufficient to drive the loonie up, although the currency was aided by a better than expected IVEY PMI survey for January which suggested business activity in Canada expanded following a month of contraction in December. The IVEY survey is renowned as a hopelessly inaccurate guide for gauging economic performance, but in the current climate all good news is worth taking and also it won’t have been lost on traders that the Canadian dollar fell by over 1% when news of a contraction in the IVEY index was reported last month. Building Permits in December rose 0.4% against a forecast decline of 0.5%, but this data had little market impact. The next key release for the loonie is this Friday’s employment report and the outcome may well determine the direction of USD/CAD for the remainder of the month. A further rise in risk aversion later today or tomorrow should see the loonie retreat and key resistance in the 1.0120 price range could come under threat. Otherwise we may see the loonie send the dollar back below parity and quickly descend upon that critical 0.9920 price level, where price has stalled 3 times in the past week. I am still bearish on the loonie but am not inclined to enter the market until the greenback firmly establishes itself back above the parity line. Anyone currently long on EUR/CAD in a short-term context should aim to exit their positions ahead of the ECB policy statement at 13:30 Thursday, as this is a high risk event, which could go the wrong way.

Bob B - Feb 6

Bob's Currency Focus - 17:00 GMT

2008-02-05T17:36:00.000Z

EUR/USD
The euro went sharply into reverse gear Tuesday when economic data for the 15-member nation currency area printed much weaker than expected. The services PMI for January fell to 50.6 from 53.1 in December while Retail Sales printed -2.0% on the year against a downwardly revised -1.2% in November. Pressure will now be on the ECB to soften their stance this Thursday and while the prospects of a rate cut are non-existent, markets will be looking to the ECB to balance growth risks with inflation concerns and leave open the opportunity of a rate cut some time later this year. Risk aversion rocketed this afternoon after an ISM report revealed that the US services sector contracted in January, the first contraction in the index since March 2003. The PMI nosedived to 44.6 from a revised reading of 54.4 for December. A reading under 50 signals contraction in the industry. Stock markets have plummeted Tuesday, particularly in Europe with some of the major indices down between 3% and 4%. The euro has fallen to as low as 1.4628 having opened at 1.4821 and it is on track to record one of its worst single day performances ever against the dollar. Volatility is high and whiplash like moves is making intraday trading very dangerous. There may now be an attempt to push the euro down towards 1.45 in the next few days but today’s dollar rally is overdone and a sizeable retracement is possible, particularly with many traders expecting the ECB to maintain its cautious stance this Thursday. It is not worth venturing into the market until we see some sort of order return. Strategy: Wait!

GBP
Cable fell Tuesday, the pound ceding ground to a broad dollar-based rally. The CIPS services PMI for January printed slightly higher than expected and led to important support for sterling against the euro and the single currency was pushed back to below 74.5 pence. Sterling will struggle to gain protracted support ahead of Thursday’s Bank of England meeting, and while sterling could decline to 1.95 at least, the pound should at least be able to fend off any major advance by the euro. The recommended trade is to sell cable on rallies back above 1.9750, although with stock markets in sharp decline today, sterling may find it difficult to launch a major recovery. Strategy: sell cable at prices above 1.9750 with limit prices of 1.9650, 1.96 and 1.9550.

YEN
Despite fear gripping stock markets today, the yen has been unable to make any major progress and is hovering around the Y107 price level against the dollar. The dollar did advance to 107.76 earlier this morning after the Reserve Bank of Australia’s rate hike announcement led to a bout of yen selling, to fund carry trades. There was no economic data out of Japan overnight and the currency’s movement for the remainder of this week will be determined by risk tolerance levels, influenced by the performance of global stock markets. We move into the Asian session tonight on the back of significant share price losses and it would be foolhardy to sell the yen against any currency just now. The dollar does not offer any value at prices close to 108 and I would again sell down on any rallies approaching this mark. Strategy: sell USD/JPY on prices between 107.60 and 107.90 with limit prices of 106.80, 106.50, 106.10 and 105.75. Place a Stop Loss just above 108.10.

CAD
The loonie has come off sharply today against the greenback but the Canadian currency has performed better than most other commodity currencies and it has in fact made further gains against the euro. There was no domestic data released in Canada and the loonie has moved with the risk flow, but the greenback has failed to hit the highs of 1.0085 that we saw last week and unless we have a close near to or above this level, we could again see a sharp reversal down towards 0.9920, something that has been a feature of the USD/CAD pairing over the past week. Oil prices have fallen by $1.50 Tuesday and gold is down sharply, but other base metal prices are only down marginally and this is helping to afford the loonie some element of protection. The loonie does have some key data releases in the next 3 days, starting with Wednesday’s IVEY PMI. If the IVEY PMI prints under 50 for the second consecutive month, it will put paid to the decoupling theory and hint that Canada may also have entered a recession, along with the US. Friday’s payroll data should give some further clues. Given that surprises in domestic data may print to the downside, particularly for the employment numbers, and the fact concerns over global growth are on the rise, it is dangerous to back the loonie this week. The fundamentals are stacking higher against the loonie this week and the currency’s impressive 2-week rally may be coming to an end. Strategy: Buy USD/CAD on dips towards 0.9920 with upside price targets of 1.0010, 1.0030, 1.0070, 1.0115 and 1.0170. Our target for our positional trades remains 1.05. If you are holding EUR/CAD long positions, exit at 1.48, given renewed risks for the euro.

Bob B - Feb 5

Bob's Currency Focus 15:30 GMT

2008-02-04T15:54:00.000Z

EUR/USD
The pair is lacking direction Monday on a day when economic data is scarce and a sense of normality has returned to equity markets. The euro did race towards 1.4850 earlier this morning but was unable to stay there and has struggled to make an impression since, although the single currency is still modestly ahead on the day with the dollar broadly weaker against all currencies. Eurozone producer prices for December printed in line with expectations but with consumer prices last week rising to a 9 year-high at 3.2%, the ECB is unlikely to soften its stance when it meets this Thursday and the euro should remain well bid in the run-up to that meeting. The euro’s failure to break above 1.4966 Friday and its subsequent sharp retreat, following release of the first negative employment figure out of the US in 4 years, could indicate the euro has limited scope for further appreciation, but traders should be wary of selling the euro ahead of this week’s policy statement from the ECB. The ECB is on a different road to the Fed and if it chooses to deliver another strongly worded statement about inflation risks this week, the euro could benefit significantly. Over the next 24 hours the pair should remain within a 1.4770 to 1.4870 price range, unless there is a significant shift in risk aversion and stock markets decline sharply, something that would tend to benefit the dollar. Strategy: Buy euro on dips towards 1.4770 with upside price targets of 1.4830, 1.4850 and 1.4880.

GBP
Sterling rebounded Monday, recouping almost 50% of the losses it incurred last Friday against both the dollar and the euro. The currency will come under pressure though as the week unfolds with the Bank of England widely expected to cut interest rates by a quarter of a percentage point when the Monetary Policy Committee (MPC) makes its latest policy announcement this coming Thursday. Expansion in the construction sector slowed to its slowest pace in 2 years in January, further evidence of a deteriorating economy. The pound will be hurt of there is a sell off in global stocks and given the wider downside risks for the currency because of expectations of an interest rate cut, we could see the pound fall back to 1.95 by Thursday. Cable offers good sell-down value on levels approaching 1.9850 and traders should not be frightened to hold their short positions right up until after the Bank of England decision. There is an outside chance of a 50 basis points cut from the MPC, but I wouldn’t count on it because this particular Committee has been slow to act in a meaningful way. Strategy: Sell cable on prices between 1.9770 and 1.9850 with downside price targets of 1.9650, 1.9570 and 1.9510.

Yen
The yen has been forced to retreat for most of Monday with the appetite for carry trades on the increase, ahead of an expected rate hike from the Reserve Bank of Australia tonight. The Japanese currency has held remarkably firm against the dollar in the past week even though stock markets rallied by over 5%. This is because the yield spread between the two currencies narrowed to 2.5% following the Fed’s additional 50 basis points rate cut announced last Wednesday, making the dollar a less attractive bet for carry traders. This is a week mostly devoid of meaningful data both in Japan and the US and USD/JPY direction this week will track the performance of equities. Expect the pair to trade within a 106 to 108 price range for the week unless risk aversion levels rocket upwards. The euro has a chance to reach Y160 over the coming days, particularly if the ECB deliver a hawkish statement next Thursday. There is little value on the yen at current prices, given the risks of a sudden change in risk aversion, so traders are best advised to wait until prices move to the peripherals of existing trading bands. Strategy: Sell USD/JPY on advances towards 108 with limit prices of 107, 106.50 and 106.25.

CAD
The loonie rallied strongly Friday against all major currencies, particularly the euro, pound and the dollar. This happened despite a fall of nearly $3 in the price of oil and a recessionary employment number out of the US. One would normally expect a decline in US employment to hurt the loonie - it will have a detrimental effect on Canada’s exports. But the loonie is largely trading contrary to the underlying fundamentals thanks to speculative funds that continue to see most commodity currencies as sure bets. The greenback did launch an offensive Monday, rising back above parity, but the rally was all too brief and again lacked conviction and the loonie was quickly able above to recover. USD/CAD maintains a short-term bearish tone and I prefer to avoid the pair until we have a sustained break above the parity line. The key data for the loonie this week will be Wednesday’s IVEY PMI and Friday’s January Employment Report. The euro fell very sharply against the loonie last Friday and after a rally Monday which saw the pair rise 130 pips, the pair is down 100 pips from the highs to 1.4736. The euro does in my view offer value on prices below 1.47. Strategy: buy EUR/CAD on prices between 1.4650 and 1.47 with price limits of 1.4790, 1.4830 and 1.49. Use a stop loss. Hold tose positional USD/CAD longs with S/L below 0.9750.

Bob B - Feb 4

Bob's Currency Focus - 18:00 GMT

2008-02-01T18:06:00.000Z

It has been a volatile day of trading, the dollar fending off an attack on the lifetime high by the euro, sterling sinking without trace and commodity currencies rallying like the world was entering a new boom period. The US dollar’s failure to hold onto any gains for anything more than a fraction of an hour is a very worrying sign and the greenback is only advancing during bouts of high risk aversion (meaning rallies are effectively the result of a close-out of dollar short positions). This has been a most difficult week for the US currency with lots of high risk events, most of which printed poorly and undermined the currency. Friday’s data was mixed but offered little cheer with the Labor Departments monthly employment report revealing the economy lost 17,000 jobs in January, the first decline in employment for 4 years. There was better news when the ISM manufacturing index printed at 50.5, indicating expansion in the sector in January, following contraction in December. Ironically enough it was the ISM report which sent the dollar tumbling once again, as it helped lift stocks and risk tolerance, leading to a scramble to sell the greenback against the ‘risky currencies’ Aussie, Kiwi and Canadian dollars. Stocks had earlier opened on a high note, thanks to a timely news story reporting Microsoft had made a bid for Yahoo. The non-farm data however is a signal all is not well in the economy and this news will carry through as a hangover into next week, regardless of how the session ends today.

EUR/USD
The euro shot to 1.4945 immediately after the Labor Department reported contraction in the US jobs total in January. Resistance around the lifetime high held firm however and the euro came crashing down to briefly dip below 1.48, before recovering to 1.4840. The dollar struggled against most other currencies this afternoon so today’s reversal is a false move and is the result of profit-taking. As long as the euro remains above 1.48, the lifetime high at 1.4966 will remain within reach. The lifetime barrier needs to be breached soon if 1.50 is ever to be hit. Next week could be the single currency’s final chance, with the ECB scheduled for Thursday. If the ECB maintain their hawkish stance, then the euro could be pushed over the line. January’s manufacturing PMI for the euro area printed better than expected Friday, but the more important services PMI will be watched closely when it is released Tuesday. As long as the euro remains above 1.4770, there is value in keeping faith in the upside trend, but with a 3-peak top formation in place, caution is required. Strategy: buy euro on dips back towards 1.4770 with upside price limits of 1.4850, 1.4880, 1.4915, 1.4945 and 1.4980. If buying the euro at current levels, tight stops must be employed.

GBP
Cable took a pounding Friday, coming off a high of 1.9935 to sink back to 1.9650. Hopefully you took my advice yesterday and if you did, you should have done very well. The CIPS manufacturing index, reported at 50.6, fell to near 2.5 year low signalling a an accelerating slowdown in the UK economy. For next week’s Bank of England it is not now so much a case of will they cut rate, but by how much? The prospect of a 0.50% reduction is now very real, but we must remember this particular MPC is dominated by hawks and has been slow to act in the past. Sterling’s sell-off against the euro has been overdone, but it is a high risk strategy to buy the pound against anything ahead of next Thursday’s meeting. I retain my bearish bias on cable, but hope to see something of a bounce before entering the market again. Strategy: Sell cable on prices above 1.98 with limit prices of 1.9650, 1.96, 1.9540 and 1.9480.

Yen
The yen was spared most of the frantic price action we saw Friday with the Japanese currency largely unchanged against the dollar and up moderately against the euro on the session. Risk tolerance has held despite a negative employment report from the US and the yen has sold off against the high-yielders and commodity currencies. There was no domestic data overnight and the yen has simply moved with the markets’ reaction to US data. Yesterday we called for a sell down of the EUR/YEN, if price near 159 and if the non-farm number from the US was negative. You should probably exit this trade now, with price currently at 157.50, in case Wall Street rallies to the close this evening and you get caught by a market moving in the opposite direction. The dollar is going to struggle to get back to Y107 because those holding short dollar positions will not be in a rush to run to the exits just yet. We recommend staying away from trading the yen until we see how Asian markets respond on Sunday to today’s events.

CAD
The loonie and the dollar are having a rare tussle for supremacy around the parity line and the loonie has certainly had the better of it in the past 3 days and the pair is now back below 0.9950. The is pair giving off a strong bearish tone, which is probably owing to the renewed appetite for the commodity currencies which has persisted since the Fed’s emergency rate cut last week. There are some key risk events for the loonie next week, most notably Friday’s employment report, but before that we will get the IVEY business PMI on Wednesday, which recorded a contraction a month ago. The loonie also battered the euro today, sending the single currency toppling from a high of 1.4940 to a low a short while ago of 1.4730. The loonie remains in my estimation the most over-valued currency by far but certain forces are determined to keep it elevated. If the pair closes below 0.9920 this evening, the loonie will attempt to test the 0.9870 low hit on Wednesday and if this gives, a return to 0.9760 looks to be on the cards. Although bearish on the loonie, I’m reluctant to buy the greenback against it until we have established a firm break back above the parity line. The euro certainly offers value on prices around 1.47 against the loonie, particularly leading into what should be another hawkish ECB statement next Thursday.

Have a great weekend!

Bob B

Bob's Currency Focus - 18:00 GMT

2008-01-31T18:29:00.000Z

Bernanke’s gift of a further 50 basis points to the markets Wednesday was soured by S&P’s report that some of the credit ratings of the major bond insurers might be downgraded. The Dow industrial average had been up 200 points after the Fed rate cut was announced, but it lost these gains to close modestly in negative territory. The FOMC statement yesterday was virtually the same as that released a week previously and with the emphasis again on downside risks to growth, it is probable the Fed Funds rate will drop to 2.5% by March and possibly go as low as 2% before the summer. Inflation concerns have been pushed to one side and the Fed is prepared to gamble on the logic inflation must ease in a slowing economic environment. There is of course no guarantee this will happen as evidenced by the quarter 4 GDP report, when growth slowed to a 0.6% annualised rate while at the same time core inflation rose to a 2.7% annualised rate. The US is officially in a period of stagflation and one which could worsen significantly yet - $100 oil was hit for the first time in January. Let’s be clear, given inflation is actually on the rise and well above an acceptable level and the fact the US has a negative savings rate, the Fed is wreckless because the committee is not looking at the longer-term picture. But should the economy narrowly avert a recession or if growth gathers pace later this year against a backdrop of falling inflation, Bernanke will be hailed a saviour and a hero. But even in the event of such a miraculous medium term outcome, the next generation of Americans will spend a further generation paying off the stockpile of national debt amassed thanks to the short-sightedness of Messrs. Greenspan and Bernanke.

EUR/USD
The pair has traded in very volatile fashion all of Thursday, bouncing between 1.48 and 1.49. As we saw Wednesday, the euro is again meeting selling pressure above 1.49, but each retreat thus far has coincided with a rise in risk aversion as global stock markets fell into the red. If we do see a sustained period of rallying in stocks, then the euro could benefit from this positive momentum and challenge the lifetime high at 1.4966 within the next 24 hours. The euro will never have a better chance to hit 1.50 and it got a boost today when the euro-zone flash estimate for consumer price inflation in January returned a 3.2% annualised rate, against the 3.1% in December. This is the highest rate on record and is sure to keep an already hawkish ECB on alert and rule out the possibility of a change in policy when the Monetary Policy Committee meets next week. Other data out of the euro area Thursday was mixed – economic and consumer sentiment fell rather sharply in January, while in Germany, the jobless and unemployment were much better than consensus. In the US, the jobless claims number for last week rose sharply, to the highest level in 29 months, stoking fears we may get a disappointing non-farm payroll number on Friday. Personal spending in December rose by the slowest pace since June, growing 0.2%. Personal income rose 0.5%. The core PCE inflation gauge was unchanged at 2.2% and the Chicago PMI came in lower than expected for January, but the PMI did register above 50 and at least signalled some expansion in the important Illinois industrial region. The dollar will struggle to push the euro below 1.48 today, unless there is a further spike in risk aversion. The euro itself needs to close above 1.4870 to set up a possible challenge of the lifetime high tomorrow. Friday is another high risk day with US non-farm payrolls at 13:30 GMT and the ISM Manufacturing Index at 15:00 GMT. The euro area Manufacturing PMI at 09:00 GMT is unlikely to have any market impact, unless it differs greatly to the estimate released earlier in the month. Oddly enough the euro may benefit most from positive US data, i.e. a consensus non-farm payroll number and a better than expected ISM PMI. A negative non-farm number or a decline in the ISM PMI will fuel concerns that the US is already in recession and a subsequent rise in risk aversion could send stocks tumbling and boost the dollar in the short-term. Strategy: buy euro on dips towards 1.4770, with upside price limits of 1.4840, 1.4870, 1.49, 1.4920, 1.4950 and 1.50. Short stops won’t work Friday because volatility will be high, owing to the high risk data due out in the US.

GBP
Sterling is largely unchanged Thursday and cable is consolidating in the 1.9850 to 1.9950 price region. Traders are reluctant to try and challenge the 2 dollar line ahead of Friday’s non-farm payroll data from the US. Sterling’s ability to once more sustain a period of trading above the 2 dollar line is probably dependent on whether the euro can break above 1.50 against the US currency. A failure by the euro to penetrate 1.50 could signal a low for the dollar for now and ultimately mean the only way for cable to go is down. Indeed with the Bank of England meeting on Thursday next likely to focus the minds of traders through the whole of next week, cable will probably return closer to 1.95 by then, unless there is a capitulation by the dollar tomorrow. Even if cable does rally to above 2 dollars, it is likely to meet resistance at 2.01 so there is certainly value in selling cable now at prices above 1.99, with the intention of holding the positions until next Thursday, when the Bank of England are likely to announce a rate cut. There will be calls for a 50 basis points cut next week with markets calling on the Bank of England to take their lead from the Fed and to be aggressive. I said last week we should avoid selling cable through the key events this week and until the current upside rally had peaked. We have now had 3 days where price has traded above 1.99 but sterling has failed to earn the necessary momentum to move higher. Of course a broader dollar collapse Friday could change all that, but cable could easily reverse sharply in the other direction, if the US data prints the other way. UK consumer confidence remained near record low levels this month with the Gfk index coming in at -13, against -14 in December. House prices fell 0.1% in January according to Nationwide, which is a somewhat better number than most of the other house prices indices we have seen this month. Against the euro, sterling could benefit if there is a sharp sell-off of the single currency against the greenback, but because of the a possible rate cut next week, it is not wise to buy the UK currency now. I remain bearish on the pound and see value in selling down cable on levels above 1.99. Strategy: Sell cable on prices above 1.9920, with price limits of 1.9840, 1.9770, 1.97, 1.9640 and 1.9550. If very much risk adverse, wait until the non-farm and ISM numbers print in the US on Friday.

Yen
The yen done remarkably well Thursday as the Fed’s latest declaration of policy easing failed to rally stock markets and thus the Japanese currency was spared a sell-off. If stocks do bounce back in the next few days, the yen will be forced into retreat, with the key barriers of Y108 against the dollar and Y160 against the euro up for grabs. The high-yielding Aussie and Kiwi dollars have been performing well and this demonstrates there is plenty of risk appetite in the marketplace, despite the ups and downs we have witnessed in the past 10 days. Friday is a major risk day with US employment and manufacturing data due for release and very poor prints will tend to favour the yen, as it will likely lead to an appreciation in low-yielding currencies. In economic data out of Japan Thursday, manufacturing expanded at the same pace in January as in December, but housing starts were down 20% on the year this month, highlighting major disconnects within the domestic economy. Traders should hold off buying or selling the yen until after Friday’s non-farm payroll report, although a strong stock market close on Wall Street Thursday and a follow-on in Asia overnight could send the yen backwards. Strategy: Wait until after Friday’s data and if the non-farm number is negative sell EUR/JPY if price is close to Y159, with limit prices of 157, 156.50 and 1.55.

CAD
The loonie reversed course and fell sharply Thursday, though it staged a comeback this afternoon, to trade a full half cent below its worst levels of the session. The failure to close below 0.9920 Wednesday, having gone as low as 0.9872, meant USD/CAD started today on the up. The greenback must close out today’s session well above the parity line if it is to have a chance of continuing the uptrend through to the weekend. The surprisingly high jobless number out of the US today frightened loonie supporters as a softening labour market in the US poses a major threat to the consumption of Canadian exports. For its part, Canada recorded a mere 0.1% growth in November, underscoring the economic slowdown is a North American phenomenon and not just a US one. The loonie is still trading 3 cents better than the price it was trading at early last week, so we could see a sizeable heave upwards in USD/CAD again Friday, especially if the US data is poor and recessionary-like, resulting in a rise in risk aversion and a drop in appetite for commodity currencies like the loonie. the Bank of Canada’s Jenkins did not say anything new in his address to the House of Commons Wednesday evening, but the line of questioning highlighted concerns about the widening spread in US and Canadian interest rates and this hurt the loonie late last night. I’m not inclined to buy USD/CAD until we are sure price is firmly established above the parity line, so we shall wait and see what tomorrow brings before resuming our buying trend. I am however still holding my long USD/CAD positional trades, with a S/L at 0.9750 and a limit price of 105.

Bob B - Jan 31

Bob's Currency Focus - 17:30 GMT

2008-01-30T17:52:00.000Z

EUR/USD
The pair briefly moved above 1.48 this morning, but got pegged back following the US ADP employment report which suggested this week’s non-farm payroll number may print better than expected. The ADP report showed that as much as 130,000 new jobs were added by the private sector in January, significantly above the 40,000 forecast. The advance reading for quarter 4 GDP in the US was then released and with the economy seen as having only grown at an annualised paltry 0.6%, this raised expectations the Fed will not hold back this evening and will deliver a 0.5% rate cut. GDP for the whole of 2007, at 2.2%, was the lowest since 2002 and to make matters worse, core inflation in quarter 4 rose to an annualised 2.9%, which means the Fed has a very difficult balancing act to perform – how to stimulate growth while keeping inflation in check. The Fed has stated its intention to err on the side of growth and for this reason, expect the Fed to deliver a 0.5% rate cut today. Anything less will be taken as a disappointment, although the Fed may be privy to key data not due for official release until later this week and if the Fed falls short of expectations today and cuts by only 0.25%, it may be a signal that this data is going to print much better than expectations. The inflation concern is however a very real one and it will be a surprise if there is not some dissent from inflation hawks in the vote, especially from Governor Poole, if a 0.5% cut is today’s result. The dollar is sure to come under short-term selling pressure in the event of a 50 basis points cut, but today’s announcement could mark a watershed for the dollar going forward, because it could put the Fed ahead of the curve, while all other major Central Banks remain firmly behind the curve. EUR/USD could hit 1.49 today and if it manages to hold above this level, 1.50 could be hit either today or tomorrow. Looking beyond this week’s events risks will switch from the dollar to the euro and I cannot see much further appreciation in the single currency, so traders need to be alert to a sharp reversal. If the Fed does not cut rates at all today and issues a hawkish statement placing greater emphasis on inflation risks which is unlikely, expect EUR/USD to capitulate to 1.46 and below. Strategy: It is dangerous to enter the market to purely trade the Fed news, because major volatility after the announcement could take out most stop losses anywhere near the market price. The value trade may be to buy EUR/USD on dips towards 1.4750 before the announcement, with target prices of 1.4880, 1.4920 and 1.4950. The stop should be below yesterday’s low of 1.4738.

GBP
Cable rallied to above the 1.99 for the second consecutive day, stalling at 1.9948 before retreating back to 1.9860. Data out of the UK was not exactly encouraging with mortgage approvals for December falling more than expected and consumer credit narrowing significantly more than forecast. Cable is gaining only because of negative dollar sentiment ahead of the Fed decision this evening and there is still the potential for a spike to above the 2 dollar mark, if the Fed delivers a 0.5% cut, as anticipated. Sterling has come off against the euro Wednesday, the single currency rising modestly to 0.7435. We also learned today that Bank of England Governor Mervyn King has been reappointed for a second 5-year term, despite the harsh criticism directed at him for his sloppy handling of the Northern Bank crisis. The Bank of England meets again next week and the MPC is widely expected to cut rates by at least 25 basis points, having left rates on hold earlier this month. Sterling will start to come under pressure once the dust settles after the Fed’s monetary policy announcement. I am bearish on sterling but don’t see any value entering the market ahead of today’s major risk event. I prefer to see where cable goes between now and tomorrow before contemplating re-entering the market. Strategy: Hold fire until after markets settles following Fed rate announcement. We shall revisit tomorrow.

Yen
The Japanese currency has been targeted and sold off ahead of the US interest rate announcement, with carry traders expecting a 0.5% cut tonight which they believe will drive up demand for high-yielding currencies, like the Aussie dollar, Kiwi dollar and sterling. A 0.5% cut today is likely to force the yen to back-pedal for a couple of days and the dollar could rise to Y109, with the euro likely to jump back above Y160. However the rate cut is not the result of a good news story, very much the opposite in fact, so it is only a matter of time before risk aversion levels rise and the yen is back in vogue. Industrial Production in Japan rose 1.6% in December against expectations for a 2.0% rise, disappointing markets. There is increasing talk over the past week that Japan is also on the verge of a recession, with Goldman Sachs particularly negative in its assessment of the world’s second largest economy. The sombre outlook for both the US and Japan has thus far failed to dampen commodity prices, so the yen looks poised to continue its short-term retreat. Strategy: If long on EUR/JPY, set target limit to Y160. If the Fed comes up short of a 0.5% rate cut expect the yen to appreciate. Short yen positions should be exited before Friday, but be ready to exit in a hurry today (place stops in advance) if the Fed does not cut by 50 basis points.

CAD
The loonie steamroller show goes on unchecked and earlier today the Canadian currency pushed the greenback down to 0.9920, a 4-week low. The loonie has made gains against all the major currencies again today as the current bounce in the currency extends, despite fears of a US recession. The loonie is now set up to force the US dollar back to the 0.98 price level, if we get an aggressive cut from the Fed today. The currency has advanced 4% in a week and looks decidedly bullish, even if there is no economic data supporting the move. The current market perception that commodity prices can continue to rise indefinitely against a backdrop of recession in the world’s two largest economies and that the Canadian dollar can soar in this environment is a nonsensical one. Commodity prices are going to soon switch into reverse gear, which is a major negative for the medium term and long-term prospects of the loonie. For now, the loonie is on a high and I would not bet against the greenback being forced back below 0.9850 today and 0.9750 may even be tested before the week is out. The loonie has appreciated a further 0.4% against the euro Wednesday and the pair is now hovering below the 1.47 price level. Bank of Canada Deputy Governor Paul Jenkins is due to speak on the economic impact of a strong Canadian dollar in the House of Commons at 20:20 GMT. I remain bearish on the loonie but will sit out today’s key events. Strategy: Wait for market to settle after Fed rate announcement. We will review the situation on Thursday.

Bob B - Jan 30

Bob's Currency Focus - 17:00 GMT

2008-01-29T17:23:00.001Z

EUR/USD
The euro has come off a fraction today as the market seems reluctant to push it through the 1.48 price barrier, ahead of Wednesday’s GDP data and Fed rate announcements. Also, December’s Durable Orders in the US rose 5.2% on the month, well ahead of expectations for a 1.6% increase, lending some support to the dollar. US Consumer Confidence declined in January according to the latest survey from the Conference Board, but the number was marginally better than forecast and this too reinforces the argument that the US economy may not be in as bad a shape as many would have us believe. The Fed will be privy to Friday’s payroll numbers as they deliberate over the next 2 days and there is a distinct probability if the payroll number is reasonably positive, the Fed may only ease 25 basis points tomorrow. The euro is likely to push higher prior to the Fed announcement, in anticipation of a 50 basis points cut, and if it edges past 1.4825, it will be perfectly positioned to take out the lifetime high at 1.4966. Today is all about positioning ahead of Wednesday’s key events, but the euro does offer good interim value on any dips to 1.4660, given the downside risks to the dollar for the remainder of this week. There is also the chance of a major dollar backlash later in the week, particularly in the event of a 50 basis point rate cut and positive employment data, as positional investors could see it as an ideal time to back the greenback, because the longer play rate outlook for the dollar Vs the other leading currencies may have shifted dramatically in favour of the dollar. Strategy: short-term buy euro on dips towards 1.4660 with upside price limits of 1.4770, 1.4790, 1.4820, 1.4870, 1.4920 and 1.4950. Moves stops to tight positions just ahead of Fed rate announcement Wednesday, if not out of market before then.

GBP
Cable rallied to its highest level in almost 4 weeks, reaching 1.9928 this morning, before retreating to 1.9870. Although over-priced against the dollar, the pound is benefiting from increased risk appetite and a surge in demand for high-yield currencies in advance of the Fed’s policy statement. Cable could yet rise to 2.01 by late Wednesday or early Thursday, before another sharp leg to the downside commences. The pound managed to send the euro back to 0.7415 this morning, but was unable to hold all its gains and the single currency has appreciated back to 0.7430. The CBI Distributive trades survey for January printed better than expected, particularly the forward looking component, with UK retailers more optimistic on outlook for the next month. The UK data calendar is rather sparse this week and we have to wait until Friday’s CPI manufacturing index before we get any real market-moving data. Between now and then sterling’s direction will be determined by US data and market reaction to the Fed’s rate announcement. If there is indeed a euphoric rise for the pound, it will be short-lived because once this week’s data is out of the way in the US, the focus for sterling will shift to the Bank of England meeting next week, when UK interest rates are expected to be cut. Later this week we could have a glorious sell-down opportunity on cable, but EUR/GBP shorts should be seeking to exit the market by the end of this week, as that pair is likely to rally in favour of the euro next week. Strategy: Wait for Fed rate announcement Wednesday and don’t rush in to sell. If cable rallies to 2.01, sell down with limit prices of 1.9870, 1.9770 and 1.9660.

Yen
The yen is virtually unchanged Tuesday across the board, as traders are reluctant to become over-loaded on carry trades for fear the Fed disappoints markets Wednesday. If the Fed does not deliver a 0.5% cut, we could see a negative stock market reaction and downturn and a new bout of carry selling. Economic data out of Japan overnight printed quite positively with the unemployment rate unchanged at 3.8%, household spending surprisingly up by 2.2% in December and retail sales also increasing 0.2% last month, though this was a consequence of higher gasoline prices. We will probably see the yen retreat against the euro and the dollar in advance of tomorrow evening’s key announcement and it could turn into a rout for the Japanese currency if the Fed cuts by 0.5%, because risk tolerance is likely to rocket, temporarily at least, encouraging traders to use the yen to fund carry positions. It is not a good time to be long yen, but the currency will bounce back if 1) the Fed does not cut by 0.5% or 2) US employment data on Friday disappoints and stock prices go into retreat. I see potential for the euro to return to at least Y160 by tomorrow evening, before the next leg down. Strategy: Buy EUR/JPY on dips to between Y156 to Y157 with limit prices of Y158, Y159 and Y160. Have stop losses moved to a tight position prior to Fed, if not out of the market before then.

CAD
The loonie has defied the fundamentals and continued its rally Tuesday, breaking parity with the greenback, while most other currencies were moving sideways. The loonie has now appreciated 4% against the US dollar in the past week. It is a remarkable rally by any standards, but all the more remarkable given it comes immediately in the aftermath of a second successive rate cut from the Bank of Canada, with further rate cuts on the way, a 2-year low in core inflation, negative employment growth in December, a contracting industrial sector according to the latest business PMI and increasing concerns over the health of both the US and global economies which will limit demand for exports from Canada's export-dependent economy. Even today the country’s quarterly manufacturing survey reports pessimism amongst Canada’s production companies, with the expectations index for production this quarter falling to -14 from a flat reading in the last quarter. So why against this background of worrying data and events is the loonie suddenly soaring and outperforming every other major currency in the world? Perhaps we need to ask the managers of some of the sovereign wealth funds for their straetgies, or perhaps it is merely an impulsive rally in response to record high gold prices and elevated oil prices, or perahps a celebration of the fact the US is entering recession and Canada is not, yet. Leaving the thin holiday trading move for the currency aside, the fundamentals for Canada have shifted very significantly since the loonie last broke below parity and it is difficult to see how the current burst in support is a) justified and b) sustainable. It is probably the last hurrah before the pair finally sets off more firmly in the opposite direction. Technically the pair could fall as low as the 0.9756 price we saw in late December, before rebounding. Data this week holds plenty of downside risk for the US dollar, so it is not be a good idea to go long USD/CAD until the major events of the week are out of the way. If you are sitting on positional long USD/CAD trades, you will be left biting your nails for the whole of this week, but sit tight. Strategy: Hold off until after Fed. Do not go long on USD/CAD until current correction fizzles out. EUR/CAD looks to offer good value below 1.47, as the loonie’s rally aainst the euro was accentuated by the loonie’s drive to parity against the dollar. Caution is needed however, for while we may soon see a rapid return to 150 for EUR/CAD, the pair may first go lower this week.

Bob B - Jan 29

Market Watch: Will the Fed deliver on Jan 30?

2008-01-29T14:06:00.000Z

Futures markets are pricing in an 80% chance of a 50 basis points cut Wednesday, to follow the 75 basis points cut from last Tuesday, meaning if the Fed cedes to futures market expectations tomorrow, the Fed Funds rate will have declined by a massive 225 basis points, or 2.25%, in just 4 months. If this is the outcome, Bernanke and co. will be cheered by stock market investors and the Fed certainly can’t be accused of watching from behind the curve, although many inflation watchers are certain to accuse the Fed of bowing to Wall Street pressure and abandoning longer-run economic sustainability, in favour of short-run economic growth. What are the arguments for against the various options open to the Fed?

Why Cut the Fed Funds rate by 50 basis points?

a) Markets expect it and were the Fed not to deliver Wednesday it may cause renewed volatility and a sharp downturn in stock prices and subsequently the value of investment portfolios of US households.

b) A credit crunch remains and more is needed from the Fed to free up liquidity and get the banking system working normally. A 50 basis points cut will enable cheaper credit and encourage inter-bank lending to operate more freely.

c) Aggressive policy action, having cut the base lending rate by 1.25% in a week, is certain to stimulate growth activity, which may steer the economy clear of a sharp slowdown or recession.

d) The momentum generated by last week’s emergency cut and the Administration’s stimulus package will only be maintained if followed by this further ‘expected’ move, to help restore consumer confidence.

e) Getting monetary easing out of the way quickly will lead to a significant bounce in the dollar through the remainder of the year, when markets focus elsewhere and price in monetary easing in other economies. A recovery in the dollar will help raise foreign investment and reduce import inflation costs.

f) The housing sector in the US is in recession and the only way to stimulate any form of recovery is to cut the cost of borrowing, aggressively.

g) The Fed does not meet again until March and that will be too long to wait before further policy easing is required.

Why not cut the Fed funds rate by 50 basis points?

a) The Fed has already given more than what was originally expected in January, when the 75 basis points emergency cut was announced last week. Interest rate cuts take a long time to play out in terms of impact on the wider economy and there is no urgency to act again so soon.

b) Being too aggressive in such a short period of time will signal the Fed is panicking and it will undermine confidence rather than the contrary - in essence another aggressive rate cut will help fuel opinion that the economy is already in recession.

c) Inflation is on the rise and there are severe warning signs emanating from the current rally in gold and oil prices. The US is currently experiencing stagflation and aggressive rate cuts from the Fed now are certain to put the US economy into an even deeper period of stagflation, while the economic benefits from those cuts won’t be seen for at least 6-12 months. No Central Bank wants to be accused of being soft on inflation, but that is exactly where the Fed is at.

d) Economic data out of the US has not yet pointed to a recession and even allowing for major problems in the housing sector, the economy has coped reasonably well. Outside of quarter 4 (for which we have not yet seen the data), in 2007 the US economy grew stronger than that of all other major developed nations, including Japan and the euro area.

e) The extent to which the ‘rogue trader’ impacted global stock markets early last week may never be known, but the story will never go away and if this event, even in part, led to the US Federal Reserve cutting interest rates by the most in 25 years on Jan 22, the Fed’s credibility is in tatters. If the Fed keeps rates on hold this week, the committee can at least argue what they did was to bring their decision forward a week, to prevent a major stock market crash. A further cut this week however will add weight to claims that a single stock market irregularity led to 75 basis points indefinitely being shaved off the Fed Funds rate.

f) A decline in the Fed Funds rate to 3.0% will very much restrict the Fed from responding to any worsening crisis in the months to come, when further action may be needed from them. Using all its ammunition now will largely make the Fed redundant going forward, particularly if inflations risks do not disappear.

g) Aggressive Fed easing in the past led to the current fiasco we see with the subprime issue and the credit crunch in financial markets. If the Fed has learned from the past, it won’t repeat the same mistakes again, or will it?

h) The Fed stands accused in some quarters of giving too much preference to Wall Street over Main Street and it is the only Central Bank in the world that directly changed monetary policy to help out investors and stock markets that got into trouble recently. The Fed made a 360 degree turn in its message when it cut rates back in December and last September’s 50 basis points rate cut was a direct response to the then credit crisis which saw a downturn in stock prices. Last week’s 75 basis points cut was the most alarming, given Asian and European Central Banks did nothing, even though it was the stock markets in these jurisdictions which actually experienced the major sell-off. Further easing this week by the Fed will be seen as further evidence of a Central Bank responding to stock market demands.

i) The dollar. While not high on the Fed’s list of concerns to date, further monetary easing will only further erode confidence in the dollar, resulting in more depreciation in the currency and leading to a further rise in the cost of imports, particularly fuel and energy, which will only add to domestic inflation risks.

j) If the Fed wishes to be seen to be seen to be consistent in its commitment to policy easing and that last week’s move was not a once-off knee-jerk reaction, then a cut of 25 basis points should be more than enough on January 30, to keep its credibility intact.

Ted B - Jan 30

Bob's Currency Focus - 17:30 GMT

2008-01-28T18:00:00.000Z

It will be a tough week for the greenback with the currency likely to come under selling pressure early on as markets price in a further 50 basis points rate cut from the Fed on Wednesday next. There are other key data releases with quarter 4 GDP the same day as the Fed and on Friday there is January’s employment report and the ISM Manufacturing Index. Anything short of a 50 basis points cut from the Fed Wednesday will disappoint stock markets and probably lead to a bounce in the dollar, although probably a very temporary one. The Fed did not communicate much to markets last week when they cut by 75 basis points in their surprise emergency move and markets will be studying this week’s accompanying statement closely to extrapolate the Fed’s current thinking on the economy and also for clues as to likely future policy moves. If quarter 4 GDP earlier Wednesday prints higher than 2%, it will signal markets may have been too pessimistic in their outlook for the US economy and it could cast some doubts over how much the Fed will subsequently cut later the same day. Thursday’s inflation data (Core Personal Consumption index) will be of secondary importance this week unless the Fed had issued a fresh inflation warning in its policy statement. Friday’s payroll data will however be critical in shaping immediate confidence post-Fed and a negative jobs number will increase consensus that the US is already in recession and it may trigger a sharp rise in risk aversion which will temporarily benefit the dollar. A strong employment number will tend to undermine The ISM manufacturing index is also seen as a key recessionary indicator, particularly since the index contracted to a 47.5 reading last month. A further decline in the index this week will also raise fears over a recession and if it follows a negative non-farm payroll number, Friday could prove to be a very testing day for global financial markets, although the dollar might likely get a short-term lift.

EUR/USD
The euro rose sharply Monday, taking the pair back near the 1.48 line and the euro is currently lingering just below this key level. On the data front, M3 money supply in the euro area narrowed slightly in December while US new home sales slumped by a further 4.6% in December, recording the lowest annual rate for 12 years. Markets are anxiously waiting key events due out later in the week and the New Home Sales figure only caused a temporary blip before dollar selling pressure resumed. The euro may have its best chance of reaching the coveted 1.50 price level this week and much will depend on how global stock markets respond to the Fed’s rate announcement and the other key US data due for release this week. A positive response from stock markets is more likely to damage the dollar, such are the contradictions that currently dictate market direction. The dollar is going to struggle to make an impression before the Fed, and we could see the euro attempt to rise towards the 1.49 line before then. There is little value at current prices because if markets fears were to suddenly flare up, the euro could quickly decline by as much as 3 cents. The best option may be to buy only on dips back towards 1.4650 using a tight stop, or to wait for a sell opportunity when this week’s major risk events are done. Strategy: buy euro on dips to 1.4650 with upside price targets of 1.4750, 1.4790, 1.4820 and 1.4870. Place a tight S/L just below 1.4640.

GBP
Sterling has held its own again the dollar Monday but has badly struggled against the euro, giving up all of the hard-won gains from Friday. The pound was put under some pressure during the Asian session when a report in the Guardian quoted Bank of England voting member Blanchflower as saying that waiting to cut UK interest waits was akin to playing the fiddle while Rome was left to burn. Although Mr Blanchflower’s views are well known and he was the only member of the MPC to have voted for a cut at the January meeting, his illustration was strong enough to remind traders that the Bank of England’s next monetary policy meeting is only a week away, when a rate cut is much more likely. The euro has risen to 0.7450 against the pound and there may be a chance of a temporary return to 0.75, if the euro is elsewhere able to sustain its rise against the dollar. I remain bearish on sterling but still see some chance of cable moving to 2.01 in the short-term because of the risk calendar in the US over the next few days so prefer to wait before entering the market. It is dangerous to buy into the dollar before the Fed meeting. Strategy: Wait for cable to peak this week, possibly around 2.01, and then sell down with limit prices of 1.99, 1.9850, 1.9770 and 1.9650.

Yen
The yen failed to make much progress Monday despite a sharp sell-off in Asian stocks overnight, something which carried through into the European session, before a modest turnaround was seen early in the US trading session. Complacency has returned in mega-fashion with all the high yielding currencies and commodity currencies being bet on Monday, ahead of the Fed’s rate announcement Wednesday. The assumption is commodity prices and the carry trade will benefit from the Fed’s expected 50 basis points cut and many fund managers can’t wait until the actual event, so are piling on their positions now. Of course it is ridiculous in the sense that more and more evidence is emerging of a broader global slowdown, something which is likely to lead to a prolonged retreat in commodity prices, but as of now markets are looking no more than a few days ahead. The yen is unlikely to be a benefactor ahead of Wednesday and indeed not immediately after the Fed’s Statement is released, if the rate announcement is responded to positively by Wall Street. The Japanese currency may however bite back at the end of the week once reality begins to take foot once again and risk aversion levels rise once more. There is a significant set of data indicators out in Japan tonight, including house-holding spending, unemployment and retail sales numbers for December. With concerns over a possible Japanese recession growing more vocal, these data releases offer a timely test. The data is however unlikely to influence the currency markets, which will continue to be dominated by pre-Fed sentiment. The dollar is likely to remain in a 106.50 to 107.50 price range against the yen, while the euro has a chance to exceed the key Y160 price level during the course of this week, before the downtrend resumes. Strategy: Buy EUR/JPY on dips towards Y155 with price limits of Y156.50, Y157 and Y158.

CAD
The loonie declined for a short while this morning, the greenback rising to 1.0119 before the pair retreated somewhat sharply during the course of the day, with the loonie now testing levels once more around the 1.0030 price level. The Canadian currency has been the strongest supported currency since the middle of last week, despite a further Bank of Canada rate cut and further soft data in the shape of Friday’s consumer price index for December. The pair looks to be on another collision course around the parity line and with US dollar sentiment very low in anticipation of a further rate cut from the Fed Wednesday, I will be surprised if the pair does not break below the parity line by tomorrow. I remain medium to long-term bearish on the loonie, although the currency is now exploiting the greenback’s Fed vulnerability to stage a sizeable correction, which could see the pair go as low as 0.9850 or 0.9750, before the uptrend resumes. It is a twitchy time for those holding long positions on the pair, but if you are not over-exposed, I wouldn’t despair as the medium-term outlook for the loonie is not good (increased evidence of a global slowdown which will put commodity currencies under pressure, further bank of Canada rate cuts and further soft Canadian data), something which is being largely ignored by the big funds that have catapulted the loonie back into contention. The high yielding currencies and commodity currencies could all seriously come off the rails by the end of the week, once markets have to deal with the reality of a downturn once more and have to suspend calls for the Fed to again cut interest rates, for a few weeks at least. The euro has offered some good temporary value against the loonie on levels around 1.4750, with prices again rising towards 1.49, although traders need to be aware that a break below the parity line on USD/CAD would trigger a lift for the loonie on all the crosses. Strategy: Wait until after Fed on Wednesday for USD/CAD. Buy EUR/CAD on dips to 1.4750 with limit prices of 1.4850, 1.49 and 1.4960, but exit if loonie breaches parity against the greenback.

Bob B - Jan 28

Bob's Currency Focus - 16:00 GMT

2008-01-25T16:21:00.000Z

EUR/USD
The euro came off a little Friday, following an unprecedented rally of over 3.5 cents on the previous two days. The pair has spent most of the day hovering close to the 1.47 line, the single currency in decline, having failed to breach resistance up at 1.4780. There has been little in the way of meaningful economic data Friday and traders are now positioning themselves ahead of next week’s Federal Reserve meeting on Wednesday. Legitimate questions about the wisdom and necessity behind this week’s emergency rate cut in the US remain unanswered and Ben Bernanke’s already fragile credibility is coming under increasing scrutiny. The panic sell-off Sunday night and Monday of $60 billion of stock indices futures by the French Bank Societé General (the employer of rogue trader Jerome Kerviel) is reported by much of the media today as having been a major contributory factor to Monday’s mayhem on global stock markets. Any hint of a link between this and Ben Bernanke’s decision the very next day, to suddenly cut US interest rates by the highest margin in history, is sure to be the stuff of legends and no doubt will be transformed into a blockbuster movie in the not too distant future. The US economy is either in recession or it is being talked into recession by the Fed and it will be most interesting to see what the FOMC have to say in their statement next Wednesday. Next week also sees the release of the latest US employment data and if this report prints positive, against the backdrop of a further rate cut next week, Mr Bernanke will stand accused of serving Wall Street’s immediate interests ahead of the longer-term interests and sustainability of the US economy.

Bernanke will be damned if he does and damned if he doesn’t next week and as financial markets are expecting a further 50 basis points cut, it will be a surprise if the Fed does not deliver. It may prove more beneficial in the longer run were rates to be kept on hold on Wednesday, because to cut rates to 3% now is going to leave the Fed with very little charge left in the battery to face the challenges in the months ahead. The euro will have its best chance of reaching the coveted 1.50 price handle next week, although there will possibly be reluctance to force the price through until traders see what the Fed decides. Strategy: buy euro on dips towards 1.46 with upside limit prices of 1.4720, 1.4770, 1.4820 and 1.49. We will look at the lie of the land again Monday.

GBP
Sterling has had its best week of the year by far, gaining 3 cents against the dollar and half a penny against the euro, while the sterling crosses on the yen and Swiss franc have also done very well. There was no data out of the UK Friday but the pound uses its current momentum to push the pair to the key 1.9850 price level. A strong close near to this price Friday could see sterling rally to the 2 dollar line next week, with the dollar likely to be lightly supported ahead of the Fed’s rate decision on Wednesday. There is scope for a possible move to 2.01, the high breached just before the New Year, but cable’s fortunes depend as much on risk aversion levels remaining contained as they do on a defensive dollar. I am still bearish on the UK currency and am reluctant to buy it at all and prefer to wait for the best time to sell. Once the attention shifts after the Fed next week, the focus will very much be put on sterling again and the currency is going to come under selling pressure, particularly if economic data remains soft and with the Bank of England most likely to cut rates at its February rate setting meeting. I prefer to stay away from cable until after the Fed rate announcement. The euro dropped to 0.7408 today and there is the potential for a fall to 0.7350, if stock markets remain robust up to next Wednesday and the appetite for high yielding currencies remains high. Strategy: Stay on sidelines until after Fed meeting, but if risk aversion levels do rise again stock markets decline sharply), sell down on prices from around 1.98 with limit prices of 1.97, 1.9660 and 1.9580. Trade with a stop loss just above 1.9850, because if that price gives, cable could quickly move to the 2 dollar line.

Yen
The Japanese currency has had an up and down day, losing heavily earlier in the session but rebounding as European stock stumbled to the close. Traders are now quick to offload the low-yielding yen which is hampered by the prospect of a further Fed rate cut next Wednesday, leading to carry traders exchanging the yen for higher yielding currencies like the pound, Australian and New Zealand dollars. The euro bounced back to Y159 early in the European session, an extraordinary turnaround given the pair had fallen to Y152 twice this week. They yen has found some support at the Y108 level against the dollar, but if this price gives way, either today or early next week, we could see Y110 reached by next Thursday, if the Fed does cut rates again on Jan 30th. We could also see a total capitulation of the Japanese currency next week, across the board, if stock markets remain stable and risk appetite intensifies. EUR/JPY is likely to reach Y160 by the middle of next week, but entering the market at the current price is not without risk, given the still fragile sentiment on global markets. There is however never a shortage of takers of risk when it comes to shedding the yen, when market conditions stabilises, so it is certainly worth buying the euro against the yen when prices move to extremes (close to Y152), as it is the dollar (when the dollar falls close to Y105). Strategy: Buy EUR/JPY on dips towards Y155 – Y156, with upside price targets of Y158, Y159 and Y160.

CAD
The loonie advanced by 2% against the US dollar Thursday, on a day when there were no economic indicators released and following a report published by the Bank of Canada, which downgraded its growth outlook for 2008 to 1.8%, from the 2.5% forecast last October. While there was general greenback weakness Thursday, the loonie’s appreciation is difficult to understand because the currency also advanced by 1% against the euro and by more than this against most other leading currencies. Friday’s inflation data was softer than expected with the Bank of Canada’s core inflation rate falling to 1.5%, the lowest reading in 2 years and gives muscle to the Central bank to further cut interest rate in the months ahead. This would normally be damning for a currency and see it go into freefall, but not the loonie today. Having retreated for a 5 minute period, the currency was soon trading at the point at which it was at just before the print. There are some of those mysterious forces we have seen before resurfacing and driving the loonie in recent days and the currency has suddenly grown decidedly bullish. The loonie is now trading over 3 cents better against the greenback than where it was on Tuesday around the time of the Bank of Canada announcement. There is a determined push to drive the pair to below parity once again and with the dollar likely to be vulnerable next week with the Fed expected to cut rates once more, this will widen the rate differential even further in favour of the Canadian dollar and USD/CAD bears may be able to force price down towards the 0.9756 price level seen over the Christmas holiday period. Strategy: I remain bearish on the loonie but I’m holding off on going long until I see the current correction bottom out. EUR/CAD looks to offer value on prices close to 1.47, although there is danger right now because if the loonie breaks below the parity line against the US dollar, the euro could possible fall to 1.45 against the Canadian currency by the middle of next week. If you have long-held positional trades on USD/CAD, you will need to bring your stop loss to below 0.9750. Next week could be a rollercoaster but the event calendar looks to favour the loonie, although it should also bring to a conclusion the loonie’s current burst of strength.

Bob B - Jan 25

Bob's Currency Focus - 17:00 GMT

2008-01-24T17:25:00.000Z

Risk tolerance levels have risen appreciably today with traders prepared to buy into the high yielding currencies en masse, although significantly the yen has held its value against the dollar. The dollar has pretty much collapsed against every other major currency however, with a rise in equities equalling a license to sell the dollar. We have witnessed an aggressive bout of dollar selling Thursday, with the US currency falling broadly across the board, particularly against the Canadian dollar which has been on the rampage for most of the day. Stock markets in Europe are higher by 4%-5% on average as buyers frantically try to get a piece of the action, following heavy losses earlier in the week. The US currency is now a significant target on yield grounds – offering a mere 3.5% yield and with the Fed acting in isolation to calm markets and expected to cut rates again next week by a further 50 basis points, the dollar is very vulnerable. The dollar’s best hope of defence is if risk aversion levels remain high and stock markets resume their decline. It is a sad situation when a country’s currency is only seen to be of value when global share prices nosedive, but that is the very real outcome of the Fed’s policy of acting so aggressively and acting alone. The ECB and the Fed are poles apart in their line of thinking, as confirmed by ECB council member Alex Weber today, who stated it was ‘wishful thinking’ to believe the ECB might contemplate cutting interest rates. Markets remain fragile however and a spark either way could trigger further volatile periods that could send currencies sharply in either direction. The commodity currencies are particularly susceptible to sharp moves, given they have already recouped all the losses incurred earlier this week.

EUR/USD
The euro has pushed back above 1.47 for the first time this week and having broken through resistance at 1.4720, seems poised to reach the 1.48 and set itself up for another challenge of the lifetime high, which is currently at 1.4966. Few people are going to wish to buy the dollar ahead of the Federal Reserve’s second rate announcement in a week next Wednesday, and the only downside risk for the euro is a capitulation on stock markets which leads to a flow of ‘safe haven’ funds back into the dollar. Germany’s important Ifo business sentiment index came in higher than expected in January and higher than the previous month’s reading, meaning increasing talks of a US recession and a soaring euro is certainly not yet denting business confidence in Europe’s largest economy. Us economic data out Thursday showed jobless claims fell to a 301K last week 20K better than forecast, while existing home sales declined further to a 4.89 million rate in December against a forecast of 4.95 million. There is no market-moving data out Friday and direction will be dictated by sentiment, which remains dollar negative, unless there is a sharp decline in equity prices. Strategy: Buy on dips towards 1.46, with upside price targets of 1.4720, 1.4750, 1.4815, 1.49 and 1.4930. Keep on eye on the Wall Street industrial averages and if there is a major decline, do not enter the market.

GBP
The pound has had a solid day, rising over 0.8% against the dollar and virtually unchanged against the euro. The only economic data out of the UK Thursday was the BBA mortgage approvals number for December, which fell to 42,100 from a downwardly revised 43,900 in November. This didn’t matter on a day when markets were driven by risk appetite for high yielding currencies, as global stock markets rebounded from their heavy losses earlier in the week. Sterling is also supported by a stronger than expected quarter 4 GDP number, released Wednesday, and a hawkish set of minutes from the Bank of England, where it emerged only one committee member voted for a rate cut in January, with the other 8 voting to stand pat. If stock markets do settle through the remainder of the week, sterling should be able to extend its rally against the dollar, ahead of next Wednesday’s Fed rate announcement. I remain bearish on cable but do not believe it worth the risk entering the market ahead of next week’s Fed meeting, at which time rate differentials are likely to widen again. We should see sterling rise to take on 1.9850, which is the key dollar resistance point below the 2 dollar line. If risk tolerance levels are sustained, sterling has the potential to push the euro back to the 0.74 pence line in the near-term. Strategy: remain on sidelines for now.

Yen
The Japanese currency has predictably retreated Thursday with risk aversion on the wane after stock markets surged over the past 24 hours. The yen has held its own again the greenback and the pair is currently trading at much the same price at which it closed Wednesday. Japan’s trade balance narrowed for a second straight month in December, hinting the sharp appreciation in the currency over recent months is having an adverse impact on the country’s exporters. The fortunes of the currency are totally dependent on market sentiment and risk aversion, but if the recovery staged over the past 24 hours persists to the start of next week, the yen will come under tremendous pressure on the carry trade side, with high yielding currencies having the most to benefit from a further rate cut from the Federal Reserve next week. The euro has soared to 157.70 against the yen, meaning a gain of over 500 points since Wednesday. There is no value in buying the yen in the build-up to the Fed meeting, given the underlying risks. There look to be some value in buying AUD/JPY on any dips to below Y92.50 as this pair might easily sail towards Y96 by the middle of next week.

CAD
The loonie has had a remarkable day, even by its standards. It has risen an extraordinary 1.4% against the greenback today and despite the Bank of Canada having cut rates on Tuesday and hinting at further rate cuts, the Canadian dollar is now trading almost 3 cents below the levels it had fallen to on Tuesday. I did state on Tuesday I had a fear the pair were destined for a correction back to 1.0180 or perhaps 1.0050. With risk tolerance levels at fever pitch only 24 hours after the world was apparently going to collapse, the omens do not augur well for the US currency in the build-up to next week’s Fed meeting. There are two events that can save the greenback from an imminent fall back below parity 1) stock markets slump tonight and tomorrow and the rise in risk aversion sends the loonie packing or 2) Friday’s consumer price data out of Canada is soft to the point of being worrying for the Bank of Canada and suggest a 50 basis points cut might be on the cards at February’s meeting. Once next week’s Fed is out of the way and prices have settled and stabilised we should see resumption to the uptrend. The Fed’s shock 75 basis points cut this week has really derailed us bulls to some extent, but we need to be patient, bide our time and wait for the right opportunity to re-enter the market. Those positional traders long on USD/CAD will just have to sit it out, but stops should be returned back below 0.9750, because bears are setting up for an attack on the parity line. Strategy: wait for further directional clarity. A soft core inflation number out of Canada Friday (< 1.5%) is a signal to buy, with a target back above 1.0180 and then 1.0220.

Bob B - Jan 24