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

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