Bob's Currency Focus 17:30 GMT

EUR/USD
The euro has broken above the year’s high Tuesday and now looks dangerously poised just below the lifetime high of 1.4966, for a possible challenge of the psychologically important 1.50 price handle. The dollar was damaged by a report from Citigroup, the largest bank in the US, that it was forced to write down $18.1 Billion in mortgage losses and reported a quarterly loss of $10 billion, the single biggest loss in the company’s near 200 year history. To compound the dollar’s problems, a separate report showed retail sales declined by 0.4% in December, following a downwardly revised 1.0% gain in November. Core producer prices in the US matched the forecast and rose 0.2% in December, keeping the annual core rate at 2.0%. The headline producer prices rate fell by a marginal 0.1% in December against an expected 0.2% rise. Producer prices are notoriously volatile though and markets will look to consumer prices Wednesday for a true gauge of where US inflation stands at the moment and what wriggle room the Fed has when it meets later this month. Economic data from the euro area Tuesday was also poor with Germany’s key Zew business sentiment index declining by more than expected to -41.6, over 72 points below the historical average. The Zew index for the euro economy also declined as did the current condition index for both the German and euro area economies. Markets are notoriously slow to respond to weak euro zone data and the Zew survey result had practically no market impact, with euro trading still dominated by hawkish comments from the ECB last Thursday. The dollar did manage to push the euro to as low as 1.4830 this morning, but couldn’t hold this price level and price has since reversed by over 80 pips. The dollar might be able to hold the euro back until Wednesday’s consumer price data release, a report which should determine what policy action to expect from the Fed when it meets later this month. I expect to see price fenced in between 1.4830 and 1.4950 between now and then and if you are entering a sell order, your stop should be tight above 1.4966 as any break above this price could trigger an aggressive move upwards. Strategy: short run trades should continue to sell down on failed rallies, once price remains entrenched below 1.4966. Immediate target prices are 1.4860, 1.4820 and 1.4770. If 1.4966 gives, shorts should await a peak in price before re-entering the market.

GBP
We called for a rebound in sterling yesterday and Tuesday we have seen it, even if the consumer price inflation figures came in close to the consensus. The annual inflation rate rose marginally to 2.1% in December from 2.0% in November, but they remain significantly more benign than current inflation rates in the euro area and the US. One must wonder if the Bank of England had something else on its mind last week when it chose to hold off on cutting rates again, but I expect more than one member of the MPC voted for a cut. We will need to wait until the minutes are released next week to find out for sure. Wednesday sees the release of the UK employment data and the key indicator will be the total earnings figure (including bonus). Earnings for the 3 months to the end of November is expected to come in at a 3.9% annual rate and sterling will be hoping for something above 4% to give it some added impetus and momentum. We have witnessed a retracement of sorts today on both cable and EUR/GBP, but sterling needs to hold onto most of these gains if it is to sustain its mini-recovery. Cable prices approaching are above 1.9750 will attract selling pressure, with key resistance seen at 1.9850. The euro gave up as much as 0.86 pence today against sterling before recovering somewhat to 0.7550. There remains far more value in EUR/GBP than on cable for those contemplating buying the pound as a correction should stretch back to 0.75 at least. I myself prefer to continue to sell cable on failed rallies to around 1.9750, as the medium-term outlook for sterling remains bearish. Strategy: Sell cable on prices close to or above 1.9750, with limit prices of 1.9550 and 1.95.

Yen
The yen has had another spectacular day Tuesday with broad-based losses across global stock markets triggering a major liquidation in riskier assets, in turn leading to major gains for lower yielding currencies. A bad night on Asian markets overnight was followed by major dip on Wall Street after US economic data raised fresh recession fears. The dollar collapsed back to as low as 106.62 at one point (lowest in two and a half years), before recovering modestly to 107. The euro also fell sharply against yen, collapsing to below 159, as the yen wipes the board with all the major currencies in a topsy-turvy trading session. I mistakenly believed yesterday that a rally in European and US stock would lead to a yen depreciation overnight and this just demonstrates the current level of unpredictability in trading the Japanese currency in the current market climate. I still think we will see a major retreat by the Japanese currency once some form of sustained stability is established on global stock markets. Asiain stock are likely to come under pressure again tonight, so the yen could in fact extend its gains by the time we reach the European session Wednesday. Strategy: Wait for risk aversion levels to weaken before shorting the yen against the euro. We need to have 3 successive positive sessions (Asia, Europe and US) on stock markets before being able to gauge that risk aversion is in decline.

CAD
The loonie has done spectacularly well Tuesday, holding its own on a day when commodity currencies have generally been trounced, as risk tolerance levels dipped severely during the US session. The greenback’s failure Monday to break above 102.20 has given fresh hope to USD/CAD bears who hope the pair could still be destined to resume a downward trend. The loonie however faces a difficult next week, with no category A economic releases scheduled ahead of the Bank of Canada’s rate decision next Tuesday. With further weakness evident in the US economy and every major report out of Canada since the turn of the year disappointing to the downside, a rate cut looks assured next week. It is going to be increasingly difficult for the loonie to gain sustained support as the week progresses, unless there is a broader capitulation of the US dollar across all currencies. If one looks back to when the Bank of Canada last met in early December, one can see the loonie was trading at much the same price then as it is today. For this reason, we can argue that a rate cut is not fully reflected in the loonie’s current market price, chiefly against the US dollar. Oil prices and commodity prices in general have fallen pretty sharply today so it is difficult to know where the loonie’s support is exactly coming from, but it is likely to be temporary. Strategy: Buy USD/CAD on dips towards 1.0130 with limit target prices of 1.0190 and 1.0120. If we see a sustained break above 1.0222 limit prices should be moved to 1.0250 and 1.03. Those that remain long on USD/CAD and are in for the longer run should keep their S/L at 0.97 with a limit price of 1.05.


Bob B - Jan 15

Bob and Ted's EUR/USD Outlook for week

Bob
This is a big week for the dollar as it defends its lines against a bullish euro which is seeking to reach the monumental 1.50 price level against the US currency for the first time ever. There are a lot of key data releases on the calendar, with downside risks for the dollar stemming from Retails Sales figures on Tuesday and Housing data Thursday. However the most important indicator on the calendar is Wednesday’s consumer price inflation numbers for December, which will give an indication as to just how much scope the Fed actually has for cutting interest rates. A 50 basis point cut at the end of January is a given at this stage, with Fed funds futures even pricing in the unlikely prospect of a 75 basis point cut. Either way it is difficult to see how the euro will not appreciate further against the dollar in a scenario where US interest rates are going to go lower than those in the euro zone at the end of this month and go significantly lower in the months to come. It now appears certain US interest rates will fall to at least 3.5% (and possibly to 3.25%) by March, while euro zone rates will remain on hold at 4.0% (or rise to 4.25%, if the ECB is to be listened to). That is a swing of at least 75 basis points to the euro on rate differentials from the current position and with further downside risks evident for the US economy, I believe the euro should be able to establish a period of trading above the 1.50 price level through much of the first quarter of the year. The dollar has essentially nothing going for it against the euro and with calls this week from Saudi Arabia’s largest bank for a removal of that country’s dollar peg, this adds further immediate pressure on the embattled US currency. We should see plenty of volatility this week, particularly if the euro gets close to the lifetime high at 1.4966 and edges towards the 1.50 price line. A convincing break above 1.50 could blow away all resistance that lies above this key level and we could rapidly witness a move near to 1.52. Central Banks have not issued any concerns about the euro’s lofty price level, so the chance of any market intervention from this quarter is pretty remote. The key days for price action are Monday through Thursday and upside targets are 1.4870, 1.4910, 1.4950, 1.4980, 1.50 and 1.51. Support will come at 1.4820, 1.4770, 1.47 and 1.4630.

Ted
This is an important week for US data and one which could decide what the Fed does when it delivers its first policy announcement of the year at the end of January. Markets have fully priced in a 0.5% cut this month with up to a further 75 basis points in cuts expected in the coming months. The Fed probably won’t disappoint in January, especially following Mr Bernanke’s dovish statement last week, but looking further ahead, the futures markets may be overly ambitious in terms of the level of easing it is pricing in. There is very much an inflation problem in the US and while all the focus has been on downside risks to growth, if inflation ticks up over the next couple of months the Fed’s hands will be tied in terms of how much it can ease in the current cycle. In fact justifiable criticism can be directed at the Fed for playing a high risk strategy, where it has parked inflation concerns in an environment where oil prices have risen 50% and reached $100 a barrel, during the short 4 month period in which they have been easing interest rates. The Fed’s biggest mistake was to give the market 50 basis points last September, something that sparked a false rally in equities and commodities, bringing equities to unsustainable levels, but oil prices have remained elevated ever since. Were the economic slowdown we are now experiencing primarily contained to the US, the Fed’s current policy would fail spectacularly, because the dollar would depreciate even further against its major rivals, global energy costs could continue to rise and oil and import inflation would put major pressure on US consumption and force the US economy into a sustained period of stagflation. It is a very dangerous balancing act the Fed has to undertake. This week’s consumer price data on Wednesday is critical for the fate of interest rates and the dollar. Also important in terms of market sentiment will be the Retail Sales number on Tuesday. A poor retail sales result will heighten concerns about the economy, although regardless of what the number prints, it is not going to change how far the Fed can go at the end of the month and by consequence what the market has already priced in. We will begin to see a growing realisation in coming weeks of a wider global slowdown and not just a US one, and this should help the US dollar against the euro. This week will be a difficult one for the dollar, with soft data expected for some key performance indicators, but if commodity prices come under serious pressure we could see a shift back into US assets which will boost the currency. The more evidence of a global slowdown we get, the more dislocated ECB monetary policy will begin to look and the heretofore teflon euro will become vulnerable. The dollar must hold the 1.4966 level this week and if it does this against a backdrop of weak US data, it will prove that resistance at 1.50 is quite formidable. Holding the lines might spark a sharp reversal, with a break below 1.4630 opening the way for a ner-term move back to 1.45. Downside targets are 1.4830, 1.4780, 1.47, 1.4640 and 1.4590. Key resistance points are 1.4966 and 1.5010.

Bob and Ted

Bob's Currency Focus - 15:30 GMT

EUR/USD
The dollar plummeted overnight and in early European trading, with the euro moving to 1.4913, only half a cent shy of the all-time high set back in late November. Trading was light during the Asian session with markets in Japan closed for a holiday and the thin trading conditions were used as a vehicle to hammer the dollar, as a now common yet unfounded rumour of an inter-meeting rate cut from the Fed spread across global markets and instigated a fresh wave of negative sentiment against the greenback. To deliver an interest rate cut ahead of a meeting scheduled for just 2 weeks away would be an act of unprecedented madness by the Fed. Such a move would only serve to undermine the economy further - effectively being a confession from the FOMC that the economy was now in recession. Do not expect the Fed to act before the scheduled FOMC meeting later this month, although economic data this week, in particular Retail Sales on Tuesday and Housing Starts on Thursday, is unlikely to deliver any positive news. The euro is riding the crest of a wave, not a wave earned by stellar economic performance on the part of the euro zone, but rather a wave borne out of Central Bank rhetoric and general market acquiescence to an ECB policy mindset and outlook which is diverging more and more from the policy mindset and outlook adopted by the Fed. One of these Central Bank outlooks is very wrong of course, particularly in respect to the outlook on inflation, and we probably won’t need to go beyond this quarter before learning to which side the plaudits will come.

Having seen the euro rocket up to 1.49, markets will now want to push the pair past the lifetime high of 1.4966 and challenge the 1.50 price line. With momentum on its side, the euro will need to breach that level this week, otherwise the pair will swing the other way, perhaps sharply, as traders who are currently long on the pair, exit their positions, in a belief the euro may have peaked for now. On the economic data side, euro zone industrial production fell 0.5% in November, slightly better than the forecast decline of 0.8%, and thus the report had no market impact. There is no data due out in the US Monday, but Tuesday sees the release of December’s US retail sales numbers, while in Europe the monthly Zew business survey will be important for the euro. If the euro closes near to 1.49 today in New York, we could see an early push for the 1.4966 lifetime high on Tuesday, while any fast breach of the 1.50 handle is likely to trigger a wave of fresh protests from European politicians and possibly raise the faint prospect of some form of ECB market intervention. It is very dangerous to buy the euro at current price levels, particularly as the euro is also massively overbought against sterling and a sudden reversal in the fortunes of the single currency is a very real risk. Longer run players should be looking to the current price as a sell opportunity. Strategy: Short-term sell on failed rallies (where the euro fails to take out 1.4966) with targets of 1.47 and 1.4650.

GBP
Sterling has struggled Monday against its European counterparts and the yen, although cable remains little changed from Friday. Despite higher than expected output prices reported for UK producers in December, which raises inflationary concerns, a report from the Department of Local Government which said annual growth in UK house prices slowed to 9.5% in November from 11.3% in October, suggests a marked slowdown in the housing sector remains the major downside risk for the UK economy this year. The euro rose to above 76 pence for the first time ever this morning while sterling also fell to below 2.14 against the Swiss franc. EUR/GBP is massively overbought at present and with the euro having advanced by 10% since November, a major correction in the pair is overdue. I remain medium-term and long-term bearish on sterling but there is no value in selling the currency at current market prices. In fact sterling could get a significant temporary boost Tuesday if UK consumer prices surprise to the upside, thereby lending some justification perhaps to the Bank of England’s ‘in the end surprising’ decision to keep interest rates on hold last week. There is a further risk event for sterling before that however, when the latest RICS monthly survey on house prices is released just after midnight. This is a big week for UK data as after Tuesday’s CPI data, there is employment data Wednesday and Retail Sales numbers Friday and sterling’s immediate fate for the next 2 weeks will be decided by how all these numbers print. Strategy: sterling shorts should wait for a more attractive price on cable (above 1.9750). There is some value in short-term selling of EUR/GBP at prices above 0.76, with a retracement back to at least 0.75 likely in the short-run, unless UK data prints very negatively for the pound.

Yen
The yen rallied strong in early trading Monday as risk adverse traders reacted to Friday’s dismal close on Wall Street and others took advantage of an absence of Japanese exporters (Japan’s markets were closed overnight for a holiday), who may have sold the currency to keep its value down. The euro dropped to below Y160 briefly while the dollar spent most of the day trading below the Y108 price handle, going as low as 107.37 at one point. A broad rally across stocks in Europe Monday and in early trading in the US has seen the Japanese currency since retreat and direction for the remainder of the day will depend on how the Dow performs this evening. I maintain my view that EUR/JPY offers value in terms of buying (the only euro cross in which there is some value in buying the euro), particularly with stock markets due for a sustained rally, which could happen this week. Japanese markets return to the fray this evening and with no key economic data due for release, a follow-through upaide rally in Asian stocks tonight would force the yen lower. Strategy: Buy EUR/JPY at prices close to Y160 with limit targets of first Y162 and then Y163. Place a Stop below 159.80.

CAD
The loonie has had a year to forget thus far and is now trading at 1-month lows as it had given up all of the gains it made over the thin holiday trading period. Friday’s employment report was the last key release ahead of the Bank of Canada’s rate announcement next Tuesday and with this week’s data out of Canada all belonging to the second tier, the consensus for a rate cut next week should build as the week progresses and in this situation the loonie is going to struggle. It is only broad US dollar weakness Monday which has saved the loonie from depreciating further today, although the Canadian currency has plunged lower against a soaring euro. If the greenback makes a recovery across the broader basket of currencies expect USD/CAD to quickly challenge 102.22, which is now a critical price barrier in terms of where the pair goes next. The Bank of Canada released its quarterly business survey today and while capacity constraints remain a considerable issue, of more importance was the fact a growing number of company respondents expect inflation to soften further through 2008, an outlook which strengthens the Bank of Canada’s case for an immediate rate cut on January 22nd, possibly followed by one more cut this quarter. The greenback found support at 1.0150 this morning and this now serves as a viable entry point for USD/CAD longs. Strategy: Short-run, buy USD/CAD on dips towards 1.0150, with stop loss below 1.0130. Limit price targets are 102.20 and 102.50. Longer-term positions should remain long, with S/L at 0.97 and limit price of 1.05. S/L for these longs may be moved to parity, once 102.50 is convincingly broken to the upside.


Bob B