EUR/USD Outlook for week

EUR/USD open price Nov 25 - 1.4868. Last week +1.77 cents.

Bob
Friday produced some volatile market action when liquidity levels were low and the euro soared to 1.4966 before being pegged back during the European session. The very fact the market was able to move to such a high at all demonstrates there remains little resistance to the euro’s current ascendancy and Central Bank intervention appears to be some way off. The downward trend in US stock markets and softer economic data has futures markets now pricing in a 90% chance of a further Fed rate cut in December. With the ECB continuing their hawkish tone against an outlook of further US rate cutes, there appears little prospect of any near-term trend reversal in EUR/USD. Although the single currency retreated sharply Friday, it still rounded off the week with a 1.75 cent gain. The euro may be pushed up close to the 1.50 line again Monday or Tuesday and if it breaks through this key price level, it could rise rapidly to 1.51 or 1.52. There are a number of key economic releases over the course of this week, the most important being US new home sales, existing home sales, consumer confidence and personal income and expenditure. On the euro side, only a sharp pullback in November's German Ifo index might undermine the single currency, while a higher inflation figure for November (published next Friday) should keep hawkish rhetoric flying from ECB officials and boost the euro. There are several speeches from US Fed members and these will need to be monitored closely. Fed officials two weeks ago hinted at no further rate cut this year, but given the negative sentiment that has seen US stocks plunge in the plast week, any softening in tone from Fed addresses this week will be read as a probable December rate cut and severely damage the dollar. Upside targets this week are 1.4850, 1.4880, 1.4920, 1.4950, 1.4970, 1.50 and 1.51. Euro support is seen at 1.4780, 1.4750, 1.47, 1.4660, 1.4570 and 1.45.

Ted
Global stock markets had a turbulent time last week but recovered Thursday and Friday while the US was on holiday. Global stock prices now reflect broader concerns about the global economy, so this is no longer exclusively about a US slowdown and bank write-downs because of subprime mortgages. EUR/USD has failed to price in any of this new reality and last week we saw the euro almost reach 1.50 against the dollar, 16 cents up from its rate in the middle of August. There is a very significant dislocation in currency markets and the euro’s price is now greatly inflated. I have no doubt the market will now wish to take out 1.50 simply because price is so close to this level, but what happens thereafter will be very interesting. A 1.50 exchange rate with a less favourable outlook for the euro economy in 2008 is going to spark quite an element of acrimonious debate within the euro community, the charge likely to be led by French President Mr Sarkozy. The ECB will be under more pressure than ever on the currency issue when they meet in early December and they may be forced to soften their stance, particularly if financial markets continue to experience the same levels of stress as in the past fortnight. We could potentially be on the cusp of a turn in the euro and at the very minimum a significant downside correction is due. The dollar must hold the 1.50 price line for now and at least get some euro supporters to believe a top has been formed in the pair. This could trigger a sell-off and a decline to 1.45. US GDP may be revised upwards by as much as 1% this week, meaning despite all the doom and gloom, the US economy will have grown by twice the annual rate of the euro economy over Quarter 3. Maintain a close watch on ECB and Fed officials this week for clues as to the next policy moves by the respective Central Banks. Any upside surprise in October’s existing home sales data from the US may also boost the dollar. Downside price onjectives this week are 1.4785, 1.4740, 1.47, 1.4650, 1.4570 and 1.4510. Resistance comes in at 1.4870, 1.49, 1.4970 and 1.50. Bears need to hold the key resistance lines early in the week, if the downside is to prevail over the next 5 days.

Bob B and Ted B - Nov 25

Bob's Currency Focus - 16:00 GMT

EUR/USD
Traders took advantage of thin trading conditions early Friday morning to push the euro to 1.4966, just short of the psychologically important 1.50 price level. It is a case of history repeating itself as it was on this same week one year ago that the euro made a surprise attack to take out the 1.30 price level, while US traders were sitting down to their Thanksgiving dinner. I called it yesterday, warning there may be a sharp correction downwards upon a successful/failed attempt to breach 1.50, and the euro has now fallen back to trade just around the 1.48 price handle. Data from the euro area this morning was poor, pointing to a further slowdown in the euro economy and highlighting the that economic softness is not restricted solely to the US. French consumer spending fell sharply in October, while industrial activity across the wider euro area slowed in November, based on preliminary PMI readings released Friday. There were also strong comments from ECB President Jean Claude Trichet this morning, again emphasising brutal moves in currency markets were unwelcome. Many may interpret this to mean the ECB might intervene, if the euro continues to appreciate at the current pace. 1.50 being a step too far today's market, soft euro-zone data and fear of Central Bank intervention combine to trigger a bout of profit-taking and we will need to wait until Monday when markets return to normal, to establish whether immediate direction is in fact up or down. If the dollar can close Friday below 1.4780, there is a chance we could see a broader retreat earlier next week, certainly back to 1.4660. At current prices and in such a thin market it is not worth getting involved. The time to have been in the market was this morning, to sell down the euro when it reached its inflated peak. It must be noted the euro has closed strongly most Fridays of late, and if the single currency does hold support at 1.4780, it could rally nearer to 1.4850 before the close today. Strategy: Stay out until markets normalise on Monday.

GBP
Sterling jumped on the dollar-thrashing wagon early Friday, when only a fraction of the normal market was up and running, and cable reached an improbable price of 2.0766. The move was proven to be premature however and the pair crashed back to below 2.06 soon after the European market was up and running. UK Quarter 3 GDP was revised downwards to 0.7%, from the preliminary 0.8% reported last month, but what was more significant to markets today was the mortgage lending figures released by the British Bankers Association this morning. The report from the BBA showed the number of mortgage approvals fell to 44.1K in October, from 52.6K in September. The slowdown in the housing sector and ongoing credit stresses in financial markets mean the Bank of England will possibly move to cut interest rates when they meet in a fortnight’s time, rather than wait until the new year. Expect sterling to come under increasing pressure next week, once markets return to full capacity and traders have had time to digest the significance of this week’s events. Even factoring in the negatives, sterling may be able to pull the euro back to 0.7150 early next week, as the euro remains grossly overbought against the UK currency. Cable continues to offer a good sell down opportunity and I would again sell the pair on any price close to 2.07, with price targets of 2.06 and 2.0550. I would not be surprised to see cable drop to 2.0250 next week, given the increasing probability of a December rate cut and the fact a December rate cut by the Fed (by no means guaranteed to happen) is effectively fully priced into the dollar. Strategy: Sell cable on prices close to 2.07 for limit of 2.06 and 2.0550. Sell down sterling against the Aussie dollar while stock markets are rallying.

Yen
The Japanese currency surprised this morning, making significant inroads across the board, despite a recovery in global stocks Thursday and Friday and with markets being closed in Japan Friday for a holiday. This is the first day in quite some time when the yen has rallied while stock markets were on the up. It may be an indication of just how deep the current strain of market fear runs, as the Aussie and Kiwi dollars have remained primarily on the defensive, with the carry trade also away for the Thanksgiving break. A new 2.5 year low was printed this morning for USD/JPY at 107.56, and the pivotal 2005 low of 106.47 is now within reach and could be hit next week, if risk aversion levels remain high. The yen made an even more significant move against the euro today, the single currency dropping below Y160. There is the possibility of a correction back towards Y158 early next week, if the broader flight to safety across markets continues. We must however recognise the number of yen shorts in the marketplace has been falling significantly of late and the pace of the Japanese currency’s should now begin to slow. The yen will also be forced to retreat next week if expectations for a Fed rate cut in December grow and it restores stability to US financial markets. Strategy: Stay away from yen until markets normalise (Monday).

CAD
The loonie has been stuck in a 0.98 to 0.99 range for yet another day on Friday, although the advantage looks to be with the dollar as the USD/CAD pair is continuously being bought on dips. Parity is near upon us again and I expect it to be hit within the next week, although elevated oil and gold prices will arm the loonie with some short-term resistance. It seems unlikely the Bank of Canada will wait until the first quarter of 2008 before cutting interest rates, particularly given the benign inflation data released this week. The sharp fall in base metal prices will raise doubts about global economic growth and this too will tend to undermine the loonie. The loonie looks to me to be the most vulnerable of all the major currencies right now, given its proximity to and dependence upon a US economy entering a downturn. The euro remains overbought against the Canadian currency, but now is not the time to be buying the loonie against any currency in my view, given the underlying risks. USD/CAD potentially offers the best opportunity of all the major currency pairs at the moment. Strategy - Short-term is to buy USD/CAD on dips to below or around 0.98 with targets of 0.9880 and 0.9920. Positional: buy USD/CAD at best available price (preferably below or at least close to 0.98) with stop at 0.95 and price target of 1.05 (moving stop to above 1.0 when parity convincingly broken).

Bob B - Nov 23

Bob's Currency Focus - 17:00 GMT

EUR/USD
Little activity on the currency market today with US markets closed and markets elsewhere taking a breather. Volatility has been surprisingly low, considering the negative sentiment that carried over from Wall Street Wednesday and the extreme overbought levels of this pair. Equity markets have settled across Europe Thursday, although risk aversion levels have not disappeared, as evidenced by the reluctance of traders to re-enter the carry trade. Industrial orders in the euro area fell by a significant 1.6% in September with the annual rate slowing to 2.0% from 5.2% in August. Economists had forecast a 0.5% drop on the month and an annualised growth rate of 6.7%. The adjusted current account for the euro area also narrowed much more than expected in September, to €0.6B from €4.5B a month earlier. Currency markets remain immune to less than positive news from the euro area and today’s disappointing data had no market impact on the teflon euro. The single currency had rallied to a new lifetime high of 1.4872 overnight and with the pair currently in and around 1.4850 and not having dipped below 1.4820 all day, it will be a surprise if there is not a run on the 1.49 line (at least - remember what happened on this week last year?) before tomorrow. The main reason why the euro won’t reach 1.50 this week might be upside exhaustion, with far too many euro long positions in the market. Friday’s flash PMI data for the euro-zone could potentially put a fly in the ointment however, particularly if any of the indices report a contraction. The indices are due out at 09:00 GMT - see link to calendar at end of page. There is little value in buying the euro at current prices and I prefer to wait for a correction, before entering at a more attractive bid price, but I might sell once the euro has made a run (failed or otherwise) on the 1.50 price mark. Strategy: Sit and wait. But sell if there is a contracting PMI reported for the euro area Friday.

GBP
Cable has held up remarkably when one considers the chances of a December rate cut are increasing all the time. Sterling is being protected by dollar weakness and the general market preference currently being given to the major European currencies. Cable may rise higher if the euro makes a run on the 1.50 price level, but any significant rallies are likely to attract selling interest and in this regard sterling is very vulnerable. Total Business Investment in quarter 3 disappointed, coming in flat against the previous quarter and if Friday’s BBA mortgage lending figures report soft, sterling may come under more immediate pressure. The euro is clearly overbought against sterling, but it may not retreat until there is a broader euro sell-off which should come when the current rally against the US dollar stalls. Strategy: Sell any cable rallies close to 2.07, with targets of 2.06 and 2.0550. Sell down sterling against the Aussie dollar while risk aversion levels are falling.

JPY
The yen has held its own Thursday even though the Japanese Nikkei and European Stock markets rallied, so the move towards 106.50 will have to wait. The yen not being sold off thus far today has more to do with the lack of liquidity than anything else, so if Asian stocks rally tonight, the yen should retreat. There may be some reluctance on the part of carry traders to enter the fray after the thrashing they have taken in recent days and with trading conditions running thin we could witness lots of volatility across the yen carry trade pairs until Friday’s close. The dollar should be able to push the yen back above the Y109 mark tonight with the chance of a return to Y110 tomorrow, if risk aversions levels fall. The euro has been trading around the Y161 mark for most of the day, but it could return to Y162.50 over the next 24 hours. The Japanese currency is unlikely to be able to make much headway while US markets are closed, but traders thinking of selling the currency need to keep a close eye on stock markets and need to allow for increased volatility because of the thin trading conditions. Strategy: Stay away from yen until market conditions normalise (wait until next Monday).

CAD
The loonie has traded in a 0.9789 to 0.9880 range with the US dollar all day, which is a good performance considering the loonie is coming off the back of some very negative reports for the currency in the past 2 days. It now seems certain the Bank of Canada will be cutting rates soon, to try to avoid any serious deterioration in the economy and the first cut could come in December. This is very negative for the loonie and while the euro has made very significant gains in recent days, the loonie still looks well priced against the US dollar, when one looks at the level of bad news already priced into the US currency. There is no data between now and the end of the week and while elevated oil and gold prices are temporary offering some currency support, the broader weakness seen in base metal prices will tend to undermine the outlook for the Canadian economy and it is difficult to see how the loonie cannot weaken further from here. Strategy: Buy USD/CAD on dips below 0.98, with targets of 0.9880 and 0.9920. A longer run position is to buy USD/CAD and hold the position with a longer run target of 1.05+, against a stop at 0.95. I'm now a loonie bear :-) and bullish USD/CAD.

Bob B