Bob's Currency Focus - 16:00 GMT

EUR/USD
The euro on Monday gave back all of its gains from Friday following a poor run of data releases. The timeliness of this data could not be more significant, given the ECB is expected to a deliver a 0.25% rate hike when it deliberates next week. Germany’s monthly Ifo business survey, an important business sentiment measure for the euro area’s largest economy, fell more than expected in June, the index declining to 101.3 from 103.5, against a forecast decline to 102.5. A more damaging release came in the form of June’s preliminary PMI readings for the euro area’s manufacturing and services sectors, both of which recorded a contraction (<50) and the combined composite PMI index is now seen at 49.5, the lowest reading in 5 years. Some pressure may now be put on the ECB to suspend next week’s signalled rate hike, although the ECB is likely to stand firm against opposition and raise rates by 0.25%, if only to protect its credibility. Concerns are beginning to grow about the health of the euro zone economy and the next 10 days could prove to be a defining period for the single currency. If the Fed acts tough this week (policy statement due out on Wednesday), i.e. the FOMC points to future rate hikes, followed next week by a ‘stand pat’ ECB or an ECB which states the July rate hike is a ‘once off,’ then the euro could capitulate and we could be at 1.50 within the next 2 weeks. For now, the dollar must break below 1.5460 if it is to have any chance of giving euro supporters a bloody nose in the short-term. A break below 1.5460 should pave the way for a retreat to 1.5350 ahead of the Fed on Wednesday evening. Markets need to be on their guard for comments from members of the ECB Governing Council in the next few days, because any softening in tone ahead of next week’s key rate setting meeting will badly hurt the euro. Expect direction to gravitate more towards the lower end of 1.53 to 1.58 trading range over the coming days, with euro supporters needing a more dovish sounding Fed to boost the single currency. Between now and then, sell on any rallies back towards 1.56, with downside price targets of 1.5480, 1.5410 and 1.5360. A tough policy stance on inflation from the Fed could force the pair down to test the near 4-month low at 1.5287.

GBP/USD
Cable has proven itself to be the most lucrative of the major trading pairs over the past few months, with the pair essentially bobbing between 1.94 and 1.98 on an ongoing basis. The pound burst from its lows near 1.94 a week ago to almost hit 1.98 on Friday, thanks almost exclusively to a stunning set of retail sales figures for May, released last Thursday. As to whether one can believe the numbers is another thing, particularly when it coincides with a slowdown in money supply and a further deterioration in UK house prices. The market has gone off the idea of imminent rate cuts from the Bank of England, with some analysts even forecasting a rate hike in the near-term, and this is protecting the pound, for now. Sterling has given back almost 2 cents against the dollar on Monday as the US currency picked up gains across the board. UK data is on the light side this week, with Thursday’s Nationwide House prices likely to be the only real market moving release its side of the Atlantic. The pound’s fate over the course of the week will be determined by the markets reaction to US data and to the Fed’s statement on Wednesday next. US data has been soft of late and there is no reason to suspect anything different this week, particularly from Tuesday’s Consumer Confidence index and Wednesday’s Durable Orders numbers. Any sustained falloff in oil prices will prove to be negative for the pound as it could temporarily erode global inflation, fears which are preventing the Bank of England from cutting interest rates. Key support levels to watch are 1.9460, 1.94 and 1.9335. Anything that leads to a decline to below 1.9335 will mean a major rethink for the pair’s trading range. Barring a very tough Fed statement, cable should be contained within recent trading ranges, but the preferred trade is to sell down on any rallies above 1.9750. Target downside prices are 1.96, 1.9550, 1.9480 and 1.9410.

USD/JPY
The yen has failed to make inroads today and it has ceded Friday’s gains to the dollar. It has strengthened modestly against the euro, but only because the euro is coming off the back of some very weak economic data on Monday. With inflation the key influencing factor, yield outlook is the principal driver for currency markets right now and with no rate hikes in Japan probable this year, the low-yielding Japanese currency remains a favourite sell. This is clearly demonstrated by the fact the yen has fallen rather sharply against every other major currency in the past month, despite a significant unravelling in global stock indices. The currency is clearly undervalued, particularly against the euro, but it will struggle to make any headway against the majors in the short-term, unless we see a dramatic unwinding in the EUR/JPY cross. Any hint of an imminent rate hike from the Fed, when it deliberates this week, is likely to push the dollar higher against the yen and could open the way for a move to Y110, possibly even by the end of this week, particularly if US economic data is more robust than expected. The safest trade involving the yen probably remains a ‘bid’ on USD/JPY, when the pair dips towards Y107 or below. The yen’s exchange rate will continue to be dictated by interest rate expectations elsewhere, rather than by domestic economic data out of Japan.

USD/CAD
The loonie has essentially been stuck within a 101 to 102 trading range for the past week, with the dollar once again failing to make any real impact while momentum was on its side. The loonie is being protected by soaring oil prices and last Friday’s better than expected retail sales numbers from Canada reveals the economy has yet to capsize under the weight of a strong domestic currency. The loonie/greenback pair is lacking direction right now, though it has taken on more of a bearish tone in recent days. But the risks for USD/CAD probably lie to the upside this week, given the possibility of some hawkish rhetoric from the Fed, the risk of a retreat in oil prices and a light economic calendar in Canada. Weak economic data out of the US over the next few days could push the pair either way, as soft US economic data is not generally a positive for the loonie, because of the importance of the US economy to Canada’s huge exporting sector. There is evidence over the last week that petro traders are back on the loonie and the currency’s wider fate this week should be dictated by oil prices. 1.01 has held in recent days on USD/CAD and any price close to this level does offer a decent entry price for buyers, given the upside risks coming later in the week. Traders should be wary and use a short stop as a break below 1.01 could trigger a rapid return to the parity line. Longer run positional traders should just hold out on their long USD/CAD positions and wait for a return to 103.20 at the very least.

Bob B - Jun 23

Bob's Currency Focus

EUR/USD
The dollar rallied to its biggest 2 day gain over the euro since 2005, thanks to dollar defensive comments on Monday from Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke. Paulson stated the US Administration had not ruled out intervention in currency markets to help halt the dollar’s slide, while Fed Chairman Bernanke, speaking in Boston on Monday night, upped his hawkish tone on inflation, leading futures markets to price in higher US interest rates for later this year. US economic data has yet to point to any justification for a rise in interest rates and the timing of Bernanke’s comments may simply be an attempt to halt the surge in oil prices, by way of encouraging a stronger US dollar. Thus far markets have taken him at his word, but we saw a similar move on Tuesday of last week after Bernanke stated the Fed was ‘attentive’ to the dollar, only for the Chairman to be upstaged by ECB President Jean Claude Trichet on Thursday, who dropped a bombshell about an imminent rise in euro area interest rates. Markets will be looking ever closer at economic data for an indication of which way the market should lean and tomorrow’s retail sales out of the US will be an important barometer, but of more importance will be Friday’s consumer price inflation numbers. Oil prices too need to be watched closely and if commodity markets push the price of crude higher, it will undermine dollar confidence and potentially lead to another sudden sharp decline in the US currency, almost without warning. US crude inventory data released on Wednesday afternoon will have a significant impact for the direction of oil prices for the remainder of this week. Range trading between 1.54 and 1.5550 is likely in the lead up to Thursday’s US retail sales data and if economic data, particularly the CPI numbers on Friday, favours the US currency, we could witness a test of key support levels below 1.53 before the end of the week. If oil prices soar, traders need to be on guard for possible market intervention (vocal at first), if EUR/USD returns back above 1.58. Aggressive dollar selling is dangerous in this environment, particularly with a G8 summit this coming weekend.

GBP/USD
Cable took something of a battering on Tuesday, sterling losing a full 2 cents, as the UK currency retreated against a broadly stronger dollar. UK data has remained soft and the medium to longer term outlook for sterling is bleak, especially against the dollar. Sterling has held its own against the euro this week, but this is due to the fact the euro was sold off more aggressively against the US currency than sterling, rather than any shift in fundamentals. In fact the fundamental outlook for sterling against the euro has worsened for the UK currency, since last week’s ECB announcement of a pending rate hike in the euro area. Today’s labour data out of the UK revealed the claimant count rose for the 4th consecutive month in May and the unemployment rate ticked up 0.1% to 5.3%. Of more immediate significance is the GDP number for the 3 months to the end of May from the NIESR think tank group, which reveals a sharp slowdown in growth in the UK economy over the past month - GDP slowed to 0.2% from the 0.4% reported in the 3 months to the end of April. Sterling’s only real form of protection right now is high commodity costs, something which is keeping UK inflation rates elevated and preventing the Bank of England from cutting interest rates. But any sharp falloff in commodity prices will probably see sterling fall sharply against the dollar, as markets start to raise bets on pending rate cuts in the UK. Cable offers good sell down value on any prices over 1.9750 against the dollar, with the prospect of a challenge of the year’s lows around 1.9330 over the next week, while there is every likelihood the euro will return to over 80 pence sterling, although this is a more dangerous trade, given the potential for growing weakness in the euro economy.

USD/JPY
Complacency has returned in major fashion as witnessed by a virtual collapse of the Japanese yen in recent weeks, at a time when equity markets have been slumping. Although Japan’s economy grew faster than any of the other G7 economies in the first quarter, the low-yielding yen has found itself out of favour as Central Banks notch up their hawkish rhetoric and threaten higher interest rates. The yen has fallen to a year’s low against the euro and to a 14-week low against the dollar with traders anxious to place bets on a widening of interest rate differentials on USD/JPY and EUR/JPY. A weakening yen is unlikely to deter Japanese authorities and it is most unlikely the Bank of Japan will follow the Fed and the ECB and threaten higher rates in the world’s second largest economy. The Bank of Japan deliberate on monetary policy this Thursday and while rates are certain to remain on hold, if the Bank’s Governor delivers a passive statement on the rate outlook, the yen will likely come under further selling pressure. However traders need to be very attentive to what is happening on equity markets and given the extent to which the yen has been sold off recently, there is every chance of a sharp correction higher if credit woes intensify. The G8 meeting this coming weekend could also destabilise currency markets, but it is certain the yen will not come in for any direct comment. If anything is said at the G8, it will probably be a call for a stronger dollar and this should push USD/JPY even higher in the short term. The yen is out of favour right now, but because of the danger of a reversal, it may be wise to avoid trading it. Buying on sharp dips on USD/JPY probably offers the best value trade currently, given the calls for a stronger dollar.

USD/CAD
The decision to stand pat on rates surprised markets, although the switch to a more hawkish line by many of the world’s central banks over the past week meant holding rates steady was a safer play for Bank of Canada on Tuesday. The loonie got a timely boost and prevented the dollar from rallying towards the year’s highs at 103.70, while the Canadian dollar also gained a tidy 2 cents against the euro. It is difficult to see the loonie extending its gains much further, particularly against the greenback, because the rate outlook has shifted in the US currency’s favour following Bernanke’s comments earlier in the week. Commodity currencies have taken on a softer tone this week, with the Aussie and New Zealand dollars in retreat and falling below key support levels, so the loonie’s reprieve could be short-lived. Oil prices will remain a dominant factor in influencing direction and elevated prices will offer important protection, although any collapse in the price of crude will encourage a sell-off in the loonie, given the weak economic fundamentals emanating from Canada in recent weeks. We should range trade between 1.0120 and 1.0320 for now, but the risks are for a breakout to the upside, given the broader and firmer tone earned by the greenback in recent days. The loonie should be able to trade below 1.60 against the euro, with the possibility of a pullback to 1.56 before the end of the week. The value trade is to buy USD/CAD on dips towards 1.0130, with target prices of 1.0210, 1.0240 and 1.03.

Bob B - Jun 11

Woeful error of judgment questions credibility of the ECB

On June 5th last, Jean Claude Trichet shook the world’s financial markets when he made what now looks like being his bravest statement since becoming ECB President, when he boldly signalled to the world’s media the ECB may raise interest rates when they meet again in July. To be fair to Trichet his statement was merely echoing the sentiment of the ECB’s Governing Council which had just deliberated on monetary policy for the 15-nation euro economic block. Markets were taken completely by surprise by the remarks as most Central Bank analysts had expected the next move in ECB interest rates to be down, albeit much later in the year. While inflation is running at a 16-year high in the euro zone, the recent surge in consumer price inflation is not because of excess consumption or demand from a slowing economy and an increasing cash-strapped euro area population, but rather because of a spike in global oil and commodity prices. These commodities are priced in dollars and only a rebound in the US dollar or some major global demand destruction is going to curb commodity price inflation. As to how the ECB believed a direct threat to raise euro zone interest rates exactly at the time the US Dollar was attempting to steer a tentative path to recovery is a mystery, but the record jump in crude oil prices witnessed in the 31 hours following Mr Trichet’s bombshell, would suggest the ECB’s strategy has backfired rather spectacularly already. Oil prices jumped a staggering $16.50 during this 31-hour period, or 13.5%, with oil futures posting lifetime gains on both Thursday and Friday’s sessions. The euro jumped 4 cents against the dollar over the same period and rose to its highest level against the yen in a year and this on a week when eurozone economic data added to growing evidence of a sharpening downturn in the euro area economy.

Spain’s Prime Minister, this past weekend, was correct to question the wisdom of Mr Trichet’s remarks and he essentially blamed the ECB President for the spike in oil prices seen at the end of last week. The nature in which the ECB ignored and steamrolled comments made by Fed Chairman Ben Bernanke earlier in the week, about the benefits of a stronger US dollar, does not augur well for a coordinated effort by the World’s Central Banks to solve the global inflation problem, a problem which is fast becoming a crisis. The ECB’s glaring lack of insight begs one to question the relevance and comprehensiveness of the data models used by ECB staff in making projections used in advising the Governing Council in its decision making process. A rate rise now by the ECB means higher inflation for the euro area, given trends and the driving factors behind the recent rally in commodity prices and this should have been known in advance of last week’s ECB meeting. As evidenced last Thursday and Friday, monetary policy which translates into a weaker dollar in the current climate means a disproportionate increase in fuel and food commodity prices for everyone, including all euro zone citizens. Why did the ECB Governing Council ignore this in its deliberation? The second round inflation effects that so concern the ECB is certain to become a self-fulfilling prophecy, if first round inflation is merely being fuelled by calamitous ECB monetary policy. This policy could trigger a vicious cycle that sees the ECB having to hike again and ultimately not only send the euro economy into a damaging recession, but it could lead to a major divergence in performance of the constituent states of the euro area. A divergence in performance will lead to greater political sniping and undermine not just the ECB’s credibility, but its very independence.

The ECB may feel it will lose face if it now fails to follow through with a July rate hike, having quite clearly signalled its new-found ‘heightened alertness’ last week. However, in light of the rapid evidence we have seen of how commodity traders have shown their willingness to translate this ‘heightened alertness’ into ‘heightened price inflation’, it means if the ECB is to follow through with this ill-timed threat, it may well constitute the most serious ‘dearth of alertness’ ever displayed by an ECB Governing Council, one for which all euro area inhabitants could pay very dearly, for some considerable time to come. Many would ague they are already paying too much.

Ted B