Bob's Currency Focus - 15:00 GMT

As we close out a tumultuous week on financial markets, the dollar is lacking direction with traders as uncertain about the health of the wider global economy just as much as they are uncertain about what a US recession means for the country’s currency. The dramatic fall we have seen on Wall Street’s leading averages over the past 3 days is not a corrective downturn but more a true reflection of just where Corporate America currently sits not just in terms of economic performance / outlook but also how its value is seen in the eyes of investors. A disappointing economic report here and there is nothing when compared to the negative sentiment quarterly earnings reports published by Citigroup and Merrill Lynch have generated. Both banks made staggering losses of the order of $10 billion each - each the equivalent GDP of a small country. Citigroup alone had a write-down of over $18 Billion and with some analysts predicting the total write-down from the entire subprime debacle could top $300 Billion, it is clear there is plenty more bad news to come from the Financial Sector. Of course the subprime risk exposure spreads to banking institutions well beyond the shores of the US, so there are sure to be unpleasant surprises to come from other quarters of the globe. The wider global picture is now a very crucial issue for the fate of the dollar because if contagion from the US sours economic growth elsewhere and in particular if global stock markets remain under pressure (i.e. have entered a bear market), we could witness a major repatriation of funds back into dollar denominated assets and bonds and the dollar would appreciate significantly in the coming months against the European and commodity currencies, irrespective of what happens to interest rates.

EUR/USD
Today EUR/USD has been trading within the same range as Thursday, but again the euro has held the advantage for most of the day. US stock markets were expected to rally strongly Friday as a stimulus package from the Government is due to be unveiled by President Bush later today. A strong rally in stocks would tend to undermine the dollar as the rise in risk tolerance would trigger an outflow of funds that have streamed into the currency in recent days. The Friday session will probably be very volatile again and when looking at it in simple practical terms, it is difficult to understand why investors would want to buy into stocks today, a mere day after the shadow of a looming recession grew ever larger. There are no economic releases today to alter the recessionary outlook so the economic fundamental view of the world today should in essence be the same as it was yesterday. We could however see a strong surge in stocks initially, but there is a real danger of a late sell-off after the euphoria fades and grim reality returns. For that reason we could see the dollar struggle in the early part of the US session, but then rebound. Positioning for the weekend will important in the current climate, so after 17:00 GMT we should see higher than normal Friday activity in the currency markets. We may see the euro use the positive impetus generated from the US rescue package to try to take out 1.47 this afternoon but if Wall Street does not respond positively to the Bush stimulus plan, currency prices could return to where they were at this morning – EUR/USD 1.4620, while another sharp sell-off in stocks and rise in risk aversion could potentially trigger a dollar rally towards 1.4550. Strategy: Sell down on failed rallies from around the 1.4690 to 1.4720 price region. Limit target prices are 1.4635, 1.4610, 1.4590 and 1.4556.

GBP
Sterling came off 1.5 cents against the dollar as December’s retail sales out of the UK disappointed markets. The consensus was for a 0.2% gain during the holiday month following a 0.4% gain in November, but instead consumers kept their money in their pockets and sales declined by 0.4%. As well as raising greater concerns about the health of the UK economy, today’s report raises the prospects of an imminent interest rate cut from the Bank of England in February. Although inflation numbers this week printed higher than expected the change was marginal and UK consumer price inflation at 2.1% is relatively benign compared to the current inflation rates in the euro area and the US. The pound could come under stronger pressure later Friday if risk aversion levels rise and we could potentially see cable decline to the 1.9483 low seen earlier this month. A break below that level will shatter confidence and could ultimately lead to a decline all the way back to last year’s low just below 1.92 over the next week, particularly if global stocks continues to come under pressure, which will deter interest in high-yielding currencies like sterling. We maintain our bearish bias and prefer to sell cable on prices in the 1.97 to 1.98 price level. Today’s poor economic data has set sterling back against the euro with the pair revisiting 0.75. The UK currency has scope for further retracement against the single currency but will probably need a broader sell-off of the euro or renewed interest in higher-yielding currencies to help it. Strategy: Sell cable on prices above 1.97 with target prices of 1.9570 and 1.9540.

Yen
The yen has had a strong afternoon having been sold off aggressively this morning with investors betting a stimulus package announced by the US Administration Friday would lead to a strong rally on Wall Street, thereby reintroducing risk tolerance and putting the low-yielding currencies under pressure. The gamble proved to be misdirected however because as at 17:00 GMT the Dow leading stock average is down 0.51% having been up 1.5% 3 hours earlier. The dollar has declined to 106.88 against the yen from an earlier high of 107.59. The euro has fared worse, coming off a high of Y157.80 to currently trade at 156.35. Positional adjustment leading into the weekend will be important for the yen, particularly as Monday is a holiday in the US. As long as stock markets struggle, the yen will remain supported but a late rally on Wall Street will lead to the yen being ditched in favour of high yielding currencies. Trading around the yen is so erratic at present that it is dangerous to get involved, although any dollar prices around Y106 to Y106.50 look attractive bids, given the extent of recent yen gains, but entering the current market against the yen has significant risks. Strategy: remain on sidelines and await market stabilization, at which point buy EUR/JPY with target objective tba.

CAD
The loonie has settled Friday and managed to hold its own, but is coming under increasing pressure close to the 1.03 price mark. A close above that level Friday would put the loonie in a vulnerable position facing into next Tuesday’s Bank of Canada meeting. November’s retail sales numbers are released just 30 minutes before the Bank’s interest rate announcement Tuesday but are so close to the main event, they will prove largely meaningless. I expect the Bank of Canada to cut rates by 25 basis points, bringing the key interest rate for Canada to 4.0% and also to signal a possible further rate cut when the Monetary Policy Committee meets again in March. This will not be good news for the loonie and if commodity prices also decline next week, it will remove an important area of support and we could witness a spike to 1.05 in USD/CAD by the end of next week. Today’s report on manufacturing shipments which recorded a 1.1% rise in November looked impressive on the headline number but was rather less impressive when one delves into the detail of the report – the rise was thanks to the massive lift in petroleum and commodity prices during November. On the actual volume of shipments, there was no change between November and October. We will probably see a move to 103.50 ahead of Tuesday’s meeting, unless there is a broader sell-off of the greenback on Monday, when US markets are closed. USD/CAD remains the most lucrative of the major pairs to buy on dips and I remain a staunch bull on the pair. Strategy: Buy USD/CAD on dips towards 1.0220 with upside price targets of 1.03 and 1.0350. Positional longs following the trend should wait for initial price target of 1.05, with stop loss just below the parity line. We will review the positional outlook after the Bank of Canada rate announcement.

Have a good weekend!

Bob B - Jan 18

Bob's Currency Focus - 17:30 GMT

EUR/USD
The euro dipped to just below 1.46 early this morning only to return to 1.4680 by the US session and the single currency has had the edge in what has been another volatile trading session. A bounce in Asian equities overnight saw a dip in risk aversion levels Thursday which benefited the euro moreover the dollar, although US equities currently trade lower following a generally poor set of data releases, a frightening report from Merrill Lynch that it recorded a loss of just short of $10 Billion in the fourth quarter and a speech from Fed Chairman Ben Bernanke to the House of Representatives that highlighted further downside risks to growth projections for 2008 and nothing new on monetary policy. The housing report for today was a shocker, with Housing Starts falling by over 14% in December, against a 5% forecast drop and 2007 was the worst year for the housing construction sector in 16 years. The Philadelphia Fed Manufacturing Index plummeted to -20.9 in January, signalling the US manufacturing sector may have contracted much further this month, with manufacturing now joining housing as a depressed sector in the economy. US Jobless Claims was the only fragment of good news to emerge, with the initials claims rate falling by 21K in the latest week and hinting employment is holding up reasonably well thus far in January. The only piece of news out of the euro area was November’s trade surplus it narrowed to €2.6 Billion from a €5.2 Billion surplus in the same month in 2006. The dollar is lacking direction today as high levels of risk aversion is tending to support it while US economic data remains damning, particularly against the euro, with the ECB the only major Central Bank continuing to threaten rate hikes. Speeches from ECB officials need to be monitored closely over the coming days, because following comments from ECB member Mersch Wednesday when he talked up the downside risks to growth, there is a growing sense the ECB may be out of touch with reality in terms of its monetary policy stance. Expect trading to remain erratic and the risk in my view lies to the downside for EUR/USD with many major players reluctant to buy the single currency in current market conditions, given the large volume of euro long positions already in the market. There are no major data releases over the next 24 hours but equities need to be monitored closely to measure risk tolerance levels. Strategy: Sell EUR/USD on failed rallies towards 1.4770 and 1.4820. Trading will remain erratic into Friday and short stops will be taken out easily.

GBP
Sterling got a further bounce today, cable rising to as high as 1.9794 before retreating back towards 1.9725 at the time of print, yet sterling is still up a cent against the US currency, while appreciating 0.35% against the euro. The pound may struggle to hold onto those gains, particularly against the dollar, if Wall Street closes sharply lower as high yielding currencies will come under pressure overnight. There was no economic data out of the UK Thursday but Friday’s sees the release of December’s key retail sales number and if the figures disappoint, it will increase calls for interest rate cuts form the Bank of England and the pound will falter. The BRC retail sales index for the same month pointed to a sluggish consumer over the holiday period and lacklustre sales, so a downside surprise in the data Friday is distinctly possible. There remains scope for a further retracement in EUR/GBP to below 0.74. We maintain our bearish bias on cable however as the preferred trading approach. Strategy: Sell GBP/USD at prices around 1.98 with downside price targets of 1.9660, 1.96 and 1.9540.

Yen
The yen has had another up and down day and is largely unchanged against both the dollar and the euro on the day. Traders want to sell it, knowing it is overbought over the past week, but its movement is closely matching the movement in global stocks Thursday which have been pulling in both directions, but mostly to the downside since around 15:00GMT, when a disastrous manufacturing report and a speech on economic outlook from the Fed Chairman sent traders running for cover. The dollar went as low as Y106.50 at one point this morning but since then it has primarily traded between 107 and 107.50. The euro is virtually unchanged against the yen, managing to reach 157.86 during the afternoon, but then declining back to Y157. Stock markets have not stabilised and trading involving the yen remains choppy and erratic and is best avoided until we get a clearer directional signal. There remains a risk that EUR/JPY could dip to below Y155 and the dollar back to Y106, if Wall Street hobbles to the close and the negative sentiment follows through on the Asian session tonight. There is no data scheduled for release over the next 24 hours which can turn things around and Friday could prove to be another difficult day. Strategy: Wait for global stock markets to settle (Recovery across 3 consecutive sessions – i.e 24 hours period), then buy EUR/JPY. Stay on sideline for now.

CAD
The greenback rose to 1.03 Thursday for the first time since last September, to hit an important mark on the pair’s recovery. Trading however has been very choppy yet again, with the US currency unable to hold its gains for long, although it is being bought each time on dips to around 1.02. Data out Thursday revealed foreign investors withdrew C$4.84 Billion dollars out of the Canadian economy in November, on top of the record C$23 Billion withdrawn in October. Oil prices have declined by 50 cents thus far today, removing an important support element for the loonie. The loonie only succumbed to the greenback after Fed Chairman Bernanke’s speech to the House of Representatives today was published, which revealed the US economy may be in worse shape than previously thought. A major US slowdown or recession is bad for Canadian exports and to be more competitive in such an environment, the Canadian economy would be helped by a weaker currency. Price direction all this week has been driven by risk tolerance levels and the Bank of Canada meeting next week has largely been off the radar for many preoccupied traders. Given the Bank are likely to cut Canada’s key interest rate by 25 basis points at this meeting, there remains considerable downside potential for the loonie between now next Tuesday. Attempts by the loonie to return the US dollar to 1.02 will meet strong bid orders and it will not be a surprise if the greenback establishes itself above 1.03 going into the weekend. The loonie strengthened significantly against the euro this morning, only to give back 2 cents as the day progressed when it came under increasing pressure. Friday’s sees the releases of November’s manufacturing shipments report but it is unlikely to have any great impact. Strategy: Buy USD/CAD on dips to or below 1.02, with limit prices of 1.0270, 1.03, 1.0350 and 1.04. Those long on USD/CAD should hold their positions and maintain the target price of 1.05. The stop loss can now be moved from 0.97 to just below parity, given resistance at 1.0250 has now given way.

Bob B

Bob's Currency Focus - 17:30 GMT

EUR/USD
What a volatile day for currency traders and particularly for those trading the euro/dollar pairing, which took a hammering. There is no single reason we can put our finger on for the dramatic sell-off we have witnessed, which has seen EUR/USD fall from a high of 1.4860 early this morning, to a low of 1.4593 in the past hour. The euro in fact started coming under pressure against sterling and the yen late last night and when EUR/JPY established itself below Y160 and the yen continued to rally aggressively across the board this morning, the euro, with the largest ratio of long to short open contracts of all the majors, suddenly looked vulnerable. Panic selling has set in and with the euro having broken below key support at 1.4630, we could see the pair attempt to retrace all the way back to the 1.4318 low we saw in early December. Ongoing instability on the world’s stock markets will play on the nerves of those traders currently holding euro long positions and the longer this plays out the more risk evident to the downside for the euro and there may be a growing acceptance that 1.50 is not going to be achieved in these market conditions. Today’s US inflation data was worse than expected, much worse when one takes into the equation the fact retail sales declined in December and consumer confidence was running at record lows. The annual core inflation rate has risen to 2.4% while the headline inflation rate closed out 2007 at 4.1%, a 17 year high. Those analysts who have been calling for a 75 basis points rate cut from the Fed need to think again, while Fed committee members themselves need to be extremely careful in terms of what they promise markets and what they subsequently are able to deliver. Bernanke is playing a very dangerous game in telling markets the Fed is prepared to cut rates aggressively, thereby allowing markets to price in aggressive cuts and then demand even more from the Fed before the FOMC has even met, and before the Fed itself has had time to examine the current level of inflation risk. Outside of the inflation data other economic prints Wednesday proved positive for the dollar, with the Treasury International Net Capital Inflows for November rising to a handsome $150 billion, while Industrial production for December was reported flat, slightly better than the marginal 0.1% decline which was forecast. Also, US crude inventories last week rose for the first time in 2 months, a surprise reading which helped to shave $2 off the price of a barrel of oil this afternoon, supporting the dollar. In the euro zone, consumer price inflation for December was confirmed at 3.1%, the same as the preliminary forecast earlier in the month, so this had no market impact.

If the pair closes tonight below 1.4630, the pair will move into Thursday in very bearish mood. Traders need to remember however that we are not in normal trading conditions and sudden events in the current climate can move prices dramatically, in either direction. Strategy: Sell on break below 1.4590 with limit price of 1.4460, ahead of further limit target of 1.4340. Otherwise wait for upside rally before selling down on prices close to or just below 1.4770. We could be in for a further volatile trading session Thursday and housing data out of the US at 13:30 GMT will need to be watched closely.

GBP
Sterling made significant inroads on EUR/GBP Wednesday, sending the euro back below 0.7450 after the pair had hit 0.7610 at one point on Tuesday. UK wage earnings rose 4.0% on the year in the 3 months to the end of December and while above the 3.9% forecast, the figure is probably not strong enough to dissuade the Bank of England from cutting rates when it meets in February. The data from the UK thus far this week has come in better than expected for sterling, which explains why the currency has stabilised against the dollar and has now appreciated against the euro. EUR/GBP has the potential to retrace back as far as 0.7350 and the best chance of this happening quickly is if the euro continues to sell-off against the US dollar. I remain a sterling bear and am restricting my trades to GBP/USD at what look like attractive entry prices. We have not quite reached 1.9750 in recent days but have come close to 1.9730, which is also an attractive entry level. Strategy: Sell cable at prices above 1.9720 with limit target prices of 1.9580 and 1.9540.

Yen
The yen broke through all technical barriers Wednesday as it rushed to a near 3-year high against the dollar and sent the euro back as low as Y156.50. All the doom and gloom that is sending stock markets running for cover is good news for the low-yielding yen, a currency which thrives on bad economic news and recession fears. Tuesday’s nosedive on Wall Street was followed by a similar downward spiralling move on Asian stocks overnight and by early in the European session the dollar was briefly trading just below Y106. The dollar has since rebounded to Y107, but the pair broke below resistance at 106.50 and the next major milestone for the pair is Y105. If risk aversion levels stay elevated and stocks continue to struggle, Y105 is possible within the next couple of days. The speed of the yens appreciation since the turn of the year will frighten Japanese exporters and markets need to be alert for any comments on the currency from Japanese officials. Y105 now looks to be a critical level, but the yen will come under immediate selling pressure at current prices each time there is the semblance of a positive rally on global stock markets. The euro’s dip today has seen EUR/JPY retreat to below Y157. If there is not a rapid recovery for this pair, the euro could potentially fall to as low as Y155 tomorrow. Strategy: Await stabilisation of stock markets and reduction in risk aversion levels and then buy EUR/JPY. We will watch this pair closely over the coming days.

CAD
We finally saw the greenback break through key resistance barriers at 1.0222 and 1.0248 early Wednesday but the loonie has traded in very volatile fashion all day and appears to be gaining strong support from somewhere, which has seen USD/CAD trade in whiplash-like fashion all day, between 1.0152 and 1.0286. Many bears do not seem prepared to give up the gauntlet without a fight, but bulls use these erratic trading conditions to their benefit, by exiting with profits and re-entering when the price dips. There is no major data out of Canada before next Tuesday’s Bank of Canada rate announcement and as we get closer to that day, the number of sellers of USD/CAD should begin to thin with a rate cit and a dovish policy statement on the day almost a certainty. Commodity prices have come off quite sharply in the past two days but the loonie has largely managed to hold its own, but with pressure likely to intensify on the commodity currencies against increasing concerns of a global economic slowdown, the loonie should weaken. A bounce on Wall Street tonight could send the loonie higher, but from tomorrow focus will being to shift onto the Bank of Canada’s meeting next Tuesday and I expect support for the Canadian currency hard to come by. I keep the bullish bias on USD/CAD and recommend buying dips towards 1.0150, but now moving the upside target prices to 1.0250, followed by 1.0280 and 1.03. We won’t yet move the S/L from 0.97 on the longer-term long positions, but maintain the current target price of 1.05.


Bob B - 16th Jan 2008