Bob's Currency Focus - 23:50 GMT

EUR/USD
The dollar started Wednesday strongly and had pushed the euro back by a full cent before a spectacular reversal during the US session. The pair closed the day at 1.4720, virtually the same price at which it started early this morning. As global stocks declined in Asia and Europe, the dollar attracted safe haven funds and pushed the euro back to 1.4616, after economic data revealed US inflation rose by more than expected in January. The annualised core rate now stands at 2.5%, well above the Fed’s comfort zone. Oil prices rose to an incredible $101 a barrel this evening raising further inflation concerns. However the Fed minutes of the January 30/31 meeting, released today, portrayed a dovish Committee, one more concerned about sluggish growth than spiralling inflation. Indeed the minutes signalled further interest rate cuts are on the way. It is unlikely the Fed would have sounded so soft on price concerns were the Committee in possession of today’s inflation figures, or looking at $101 oil, but markets seized the minutes to force a dollar sell-off. The irony is Wednesday’s data will restrict the extent to which the Fed can cut rates and should prove dollar positive in the medium term. US Housing Starts and Building Permits for January, also released today, were in line with forecast and didn’t have a market impact. The euro offers little immediate value above 1.4750 and it will come under selling pressure on prices around this level. The euro’s counter-rally today was more of a knee-jerk reaction to the day’s events and I would not be surprised to see the single currency forced back to 1.46 again tomorrow, especially if risk aversion returns. Strategy: Sell EUR/USD on prices close to 1.4750 with limit prices of 1.4680, 1.4640, 1.4620, 1.4590 and 1.4550.

GBP
Sterling plunged again Wednesday, cable coming perilously close to the year’s nadir of 1.9337, hit in early January. Cable hit 1.9362 before it then recovered to 1.9420 by the close. The Bank of England minutes showed all 9 members of the MPC voted for a rate cut 2 weeks ago, but perennial dove Mr Blanchflower wanted a 50 basis point cut. The Bank did cut rates by 25 basis points at that February 7 meeting. The pound needs a strong retail sales figure Thursday to earn a much needed bounce. Although I remain bearish on the currency, I see little value in selling it down at current prices. A strong retail sales figure could trigger a cable rally up to 1.96, while it could help the pound push the euro back below the 75 pence mark. The BRC retail sales figure last week points to a possible upside surprise tomorrow, but if retail sales disappoint, then cable could flirt with the year’s low. Wait for a better price on cable before re-entering the market. Strategy: Sell cable on prices close to 1.9650 with limit prices of 1.95, 1.9430 and 1.9380.

JPY
A late surge on Wall Street was bad news for the yen, which retreated sharply as carry trades returned en masse late in the session. The euro hit a high of Y159.27 its highest level since Jan 30. The dollar returned to Y108.35, having traded as low as 107.48 in the morning. Complacency has crept into the market and the yen is vulnerable to a near term retreat to Y110 against the dollar and Y160 against the euro. Direction is going to be determined exclusively by risk aversion and Thursday’s Philly Fed Index in the US could prove to be the last major risk event of the week for USD/JPY. I see better value in the yen against the euro, particularly on prices close to Y160. Strategy Sell EUR/JPY on prices near Y160 with limit prices of Y158.50, Y157.50, Y156.80 and Y155.70.

CAD
The loonie had a very volatile day, being up, then down then up again at the finish. The greenback had rocketed to a one-month high of 1.0196 before $101 oil sparked a loonie rally that saw the pair close the day at 1.0125. USD/CAD has however turned bullish in the short-term and the pair is being bought on dips and it is difficult to see this trend change unless Friday’s Retail Sales figures for Canada print better than expected. The Bank of Canada will be cutting rates on March 4 and the only question now is by how much, 25 or 50 basis points. Loonie shorts will stack up in the run up to this meeting and a close above 1.02 this week will pave the way for a crack of the year’s high before the Central Bank meeting. The Leading indicators for January printed at +0.2%, above the 0.1% expected and against a flat reading in December. Also boosting the loonie today was a report which revealed a positive capital inflow into Canadian securities in December. 1.02 and 1.0250 look vulnerable to further upside pressure from USD/CAD bulls and dips close to 1.01 are likely to attract plenty of buying support. A strong rally on stock markets over the next 24 hours will be the loonie’s best form of defence Thursday. Strategy: Buy USD/CAD on dips to 1.01 with upside price targets of 1.0170, 1.0190, 1.0215 and 1.0245.

Bob B - Feb 21

Bob's Currency Focus - 17:30 GMT

EUR/USD
US markets returned after the long weekend and whereas we have seen an initial burst of optimism on US equity markets, on currency markets the dollar has fallen sharply against the euro. The euro was boosted by remarks from the latest bulletin out of the Bank of France which seemed to criticise the Fed for being too aggressive in its monetary policy and suggests policy easing on the part of the ECB is some way off. No data to move markets Tuesday and we must wait for Wednesday’s US consumer prices and housing data releases to get some direction. Oil prices are back near $100 a barrel and gold is trading close to $930 an ounce, primarily because of a weakening dollar. Some of the high-yielding currencies have hit extremes today and traders should be on alert for a potential major sell-off of commodities and high-yielding currencies, given current inflated prices. Such a sell-off will benefit the dollar. The euro will run into immediate resistance above 1.4770 and the pair does not offer any bid value at current prices. Wednesday also sees the release of the preliminary PMI readings for the euro area’s manufacturing and services sectors. Any contraction in either reading (index <50) could trigger a sharp sell off of the single currency and we could see a quick return to 1.46. I’m inclined to sell the euro on prices around 1.4750 as it is difficult to see the euro making a run on 1.50 in the absence of Central Bank meetings or any change in the underlying fundamentals. Strategy: Sell EUR/USD on prices around 1.4750 with limit prices of 1.47, 1.4660, 1.4640, 1.46 and 1.4580. Place a stop loss above 1.4825.

GBP
Sterling has had another bad day Tuesday, even if it has held its own against the dollar. The story about Northern Rock and its nationalisation by the British Government has set a very negative tone for the pound, which has seen it capitulate by 2% against the euro over the past 36 hours. Sterling has failed to benefit from a renewed bout of interest in high-yielding currencies with traders choosing to opt for the Australian and New Zealand dollars, ahead of sterling. Although I retain my bearish stance with respect to sterling, I do believe the sell-off against the euro is overdone in the short term and can see the pound pushing the euro back towards the 0.7550 price mark in the coming days. We have to wait until Thursday and January’s retail sales figures before getting any genuine market-moving data for the UK currency. There is also no value in selling down cable at current prices and I prefer to see a bounce back to over 1.96 before re-entering cable shorts. Strategy: Wait and then sell down cable at prices around 1.9650 with downside price targets of 1.9550 and 1.95.

JPY
The yen has made moderate gains Tuesday against the dollar, while still trading close to the recent low at 159 against the euro. With markets closed in the US Monday, traders went on an equity buying spree and the resultant surge in risk tolerance brought with it a new wave of carry trades, with the low-yielding yen the major loser. There has been a determined effort to push global stock markets higher in the past week, so backing the yen in this climate is dangerous. However some of the yen carry trades are approaching critical milestone points (Y160 on EUR/JPY and 100 on AUD/JPY) and these levels may act to serve a warning to the market that the recent build-up in carry trades is too aggressive and is not sustainable. Given the weight of the build-up, a sudden shift in risk aversion would see the yen strengthen sharply, particularly against the euro and the Australian dollar. A disappointing set of economic releases in the US Wednesday, particularly with respect to housing, could trigger such a move. I do not see the euro offering value above Y160 in an era of economic uncertainty so there is value in selling down EUR/JPY on any rallies close to this level, even if it means the positions have to be held for more than a few days. Strategy: Sell EUR/JPY on prices close to Y160 with downside price targets of Y158, Y157.20, Y156.50 and Y155.50.

CAD
The loonie has dropped below the lows recorded last Friday and the USD/CAD pair is currently trading near 1.0150. Bank of Canada’s Governor Carney failed to excite markets with his speech on globalisation Monday, with no clues emanating on how low the Bank of Canada may go on interest rates at its next policy meeting on March 4. On the other hand Tuesday’s economic data out of Canada indicates the Bank of Canada could possibly cut by 50 basis points in a fortnight’s time with inflation prices slowing again in January. The core inflation rate now stands at just 1.4% while the headline rate has slowed to 2.2% from 2.4% in December. Wholesale Sales came off by 2.9% in December against expectations for a 0.1% gain and this signals the Canadian economy ground to a halt in the final quarter of 2007. The loonie’s fall Tuesday has been cushioned by a rise in commodity prices but a poor set of domestic retail sales numbers later this week would put added pressure on the currency and set up the prospect of a near-term rise to 1.0250 for USD/CAD. The greenback has at least established itself back above parity and appears to have regained the advantage. Any dips to 1.0050 should attract strong buying interest. The loonie has probably been oversold against the euro and the AUD since Friday and it has the potential for a limited correction against these two currencies. Strategy: Buy USD/CAD on any dips to around 1.0050 with upside price targets of 1.0140, 1.0175, 1.0220 and 1.0250.

Bob B - Feb 19

Bob's Currency Focus - 17:30 GMT

EUR/USD
Ben Bernanke, in a prepared statement to the Senate Thursday, indicated economic outlook for the US economy has further deteriorated. The Fed stands ready to cut rates even further to boost faltering growth the Fed Chairman hinted, contending inflation will moderate through this year, although risks remain, as evidenced by the run-up in oil prices in late 2007. There is nothing new in Bernanke’s statement but it reaffirms market expectations for another 50 basis points rate cut in March. This has helped undermine the dollar. In fact the greenback has struggled all day against all majors, with the exception of the yen, and the euro rallied to 1.4640 just before December’s US trade data was released earlier in the day. The US trade deficit narrowed by more than expected while last week’s jobless number printed moderately better than expected. The revival for equities this week and the subsequent rise in risk tolerance put the dollar under pressure again, as traders revert to the old habit of using rate outlook to determine price direction. Quarter 4 GDP in the euro area halved to 0.4% from the 0.8% pace set in Quarter 3. The annualised growth rate came in at 2.3%, just above the forecast 2.2%. There are no market-moving data releases through Friday and the dollar will be guided by underlying sentiment and risk aversion levels. Sentiment appears to have turned against the US currency again with better than expected quarter 4 GDP reports from Japan and Europe reigniting the decoupling theory. If stock markets retain the upbeat momentum, the euro could force a challenge of resistance in the 1.4660 price region. A push through this level could see the euro trading back above 1.47 within the next 24 hours. It may take a sharp sell-off on Wall Street Thursday to see the pair reverse course and move back towards 1.4540. There may be some value in selling down on prices close to 1.4660, using a tight stop above this level, but right now momentum does favour the euro.

GBP
No domestic data was released in the UK Thursday and the pound has continued its ascent against the dollar, thanks to in no small part to Mervyn King’s intervention Wednesday, when the Bank of England Governor poured cold water on expectations for an aggressive policy from the Bank of England. Cable rose to 1.9730 this afternoon, up 4.5 cents from the level it sank to immediately after the Bank of England announced a 25 basis points cut in interest rates last Thursday. Regardless of what Mervyn King may say, it does not alter the implied weakness of recent data and the perception the Bank of England is well behind the curve. Mervyn King’s twinkle-toe approach is a striking contrast to the size 14 boot approach donned by Fed Chief Ben Bernanke. Considering headline inflation in the US is running 2% higher than that in the UK and both economies have uncertain futures in 2008, it is unlikely both approaches are correct. We shall find out who deserves the kudos in due course. Cable could push to 1.98 in the short term, if the dollar remains weak across the board, but the pound will attract decent selling pressure on prices above 1.9730. I am bearish on cable above this level, even if there is a chance the pair might go higher in trying to carve out a near-term peak. The pound may be able to temporarily force the euro back below 0.74 with the prospect of a move to 0.7350 next week. If risk concerns begin to haunt markets again, the pound will tend to lose out more than the euro, given the strength of recent gains. Strategy: Sell cable on prices above 1.9720 with target prices of 1.9660, 1.9620, 1.9580, 1.9550 and 1.9510.

JPY
The yen struggled early Thursday with the positive momentum seen in equity markets Wednesday spilling over into Asia overnight, prompting investors to pile on carry trades at the expense of the low-yielding Japanese currency. The currency has since battled back to just below 108 against the dollar when the Industrial Averages on Wall Street slipped into the red. The yen is moderately weaker against all other majors today and the euro is back trading above Y158. Quarter 4 GDP in Japan surprised everyone when printing at 0.9% against a forecast of 0.3% and the annualised rate came in at 3.7% against the forecast 1.7%. It’s something of a mystery how economists came to get the forecast so badly wrong but the Government played down the data’s significance this morning, focusing instead on growth concerns for 2008. Don’t be surprised to see the GDP numbers revised downwards next month. The GDP data did not boost the yen as the currency has of late become largely immune to domestic economic data and instead the currency went into reverse gear as traders used the unit to fund carry trades. The market has clearly turned against the yen for now but if we see another sustained period of equity sell-offs, the currency will quickly be back into vogue. For now, the tendency will be to sell the yen off rallies, and the market will want to push the dollar to Y110 in the near-term, probably also leading the euro to return to Y160. There is risk in selling the yen at current prices because of ongoing market volatility and it may be wiser to wait for dips towards Y106.50, if price does go there. Strategy: Wait!

CAD
No matter what way you look at this latest Trade Report it is deeply worrying and points to more aggressive action being required from the Government and the Bank of Canada, if the country is to have any chance of being competitive in a slowing global economy. The total value of Canada’s exports declined by 3.1% in December, but in pure volume terms exports actually fell by 6.5%. The only major sector to record a gain in exports was the energy sector and that was thanks entirely to price inflation. In pure volume terms natural gas and crude petroleum exports were flat. At $2.4 billion, December’s surplus is the lowest since November 1998, while the trade surplus for 2007 as a whole was the lowest since 1999. In constant dollar terms Canada’s exports to the US fell 1.3% in December over November, while exports to its major trade partner were down 10.8% from December 2006. The US accounts for 80% of all of Canada’s exports. Imports rose in December by 0.7% but because import prices rose 3.4%, import volumes actually fell by 2.7%. Today’s report indicates there is a significant disconnect between Canada’s recent employment report and production outlook. I have always maintained labour is a lagging indicator and what today’s report signals is that Canada could be facing major job losses in the months ahead, if the slowing trend for the country’s export volumes persists. Canada’s exports to economic blocks outside the US also fell significantly in December, so the US slowdown can’t be put forward as the reason for the decline. The Canadian dollar which rocketed by 17% in value in 2007 is the principal reason. The loonie refused however to lay down after today’s report as traders continued to prefer using rising commodity prices as the driver for the currency’s value. With oil back up at $94.50 a barrel, the loonie is attracted widespread support. Having briefly touched above parity, USD/CAD has then declined back to 0.9937 as the pair retained its bearish tone. The euro rose briefly to 1.46 against the loonie this morning but the single currency too was forced to retreat to 1.4550, even on foot of that very weak Trade Report. I prefer to steer clear of USD/CAD for now but do like the euro for value on prices below 1.45. Strategy: Buy EUR/CAD on prices around 1.45 with upside price limits of 1.4580, 1.46, 1.4630, 1.4670 and 1.47. If holding longer-term USD/CAD long positions, the stop loss should be held below 0.9750.

Bob B - Feb 14