Bob's Currency Focus - 14:30 GMT

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

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

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