Bob's Currency Focus - 17:00 GMT

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

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

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