Bob's Currency Focus - 15:30 GMT

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

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

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