Bob's Currency Focus

EUR/USD
The dollar has pushed the euro to below the 1.55 price handle on Tuesday and a convincing break below here could trigger a steeper decline in the days ahead, possibly setting up a near-term test of 1.5283. Central Banks take centre stage this week, the Fed kicking off proceedings with a rate announcement later today, while the ECB issue their latest monetary policy statement on Thursday. There is certain to be no change from the Fed and with instability in the financial sector still a primary concern, it is most unlikely Bernanke & Co. will shift from their neutral policy stance, despite reservations from a number of the Fed’s hawks in recent weeks. It is possible that at least 2 members might decide to vote for a rate hike today, but they are likely to be outgunned by the majority, although the hawks’ inflation concerns may have to be accommodated by way of a stronger worded statement. There are only 10 voting members in today’s FOMC vote. Prior to the Fed’s statement release at 19:15 GMT, we had the ISM services index which came in at 49.5, ahead of a forecast for 48.6. The reading is still below 50.0, so it indicates contraction in the non-manufacturing sector, so it offers little in the way of positives for the dollar. The past week has seen a waft of softer economic data out of the euro area and with a significant contraction in the manufacturing and services sectors, declining exports and a further depressed consumer, the euro zone looks to be pushing towards a recession. Oil prices have fallen below $119 this morning and with commodity prices in general falling sharply over the past month against a slowing global economy, the ECB decision to hike rates in July is starting to look like a possible mistake. However don’t expect a climb-down from the ECB just yet and indeed if just to maintain the Governing Council’s credibility, ECB President Jean Claude Trichet is unlikely to turn dovish on inflation, although he is likely to back away from any suggestions of possible future rate hikes. The markets may place the ECB in a more neutral position this week, regardless of what Trichet says and this could see the euro retreat even further, particularly if oil prices continue to fall as this would ease inflationary pressures in the euro area and give the ECB room to ease rates later in the year. A break below 1.5460 should see us drift to 1.5350 and ultimately see the April low of 1.5283 taken out. It is conceivable it could happen this week.

GBP
Sterling has come under sustained selling pressure in the past week as wave after wave of soft economic data has finally weighed on a pound which had taken on a Teflon ‘nothing-sticks’ trait over the past 2 months. The break below 1.9650 on cable yesterday could be significant and we may now see the dollar push the pound back towards the year’s low at 1.9337. The pair dropped to 1.9528 this morning before recovering towards 1.9570 and the next important line of support on the downside is at 1.9460. June’s Industrial Production (-0.2%) and Manufacturing output data (-0.5%) for the UK was much lower than expected, while a July services PMI reading of 47.4 (slightly higher than the 47.1 print last month) is hardly a cause for celebration as it signals further contraction in the dominant services sector. With the Manufacturing and Construction PMIs deeper into contraction last month, the UK economy looks to be accelerating towards recession. The current slide in commodity prices, if it is sustained, could hurt the pound badly as it is commodity price inflation which is preventing the Bank of England from cutting interest rates. The Bank meet this Thursday and while the Committee should cut rates immediately to help stimulate the UK economy, the MPC is certain to stand pat, as the Committee is dominated by short-sighted Central Banks hawks, incapable of looking beyond a current month’s consumer price inflation report. There is absolutely no reason to buy sterling at present other than against the euro if one believes the euro economy is in as equally a bad predicament as that of the UK, but even that is a risk, because the UK’s over-dependency on the housing and financial sectors means the UK economy is likely to decelerate at a much faster pace than that of the euro area. The pound should be sold on any failed upside rallies against the dollar and there is every chance of a sub 1.90 price on cable by the end of September.

JPY
The yen has more held its own in recent days as a drop in commodity prices has led to a paring of carry trades. The US dollar has thus far failed to breach an important technical indicator at 108.50 and while this price level holds, the yen could potentially make more significant progress against the euro and the high yielding Australian and New Zealand dollars. While lower commodity prices can help raise risk tolerance levels and fuel a rally in stocks which is generally negative for the yen, a retreat in commodity prices brings closer the prospect of interest rate cuts, particularly in the euro area, UK and Australia and a narrowing of the rate differential outlook is a positive for the yen against most currencies, with the exception of the US dollar, where rates are likely to remain on hold. Tonight’s Fed rate announcement is a major risk event for the yen because if the Fed prove to be more hawkish and threaten a possible rate hike in the coming months, then this could be sufficient to see the dollar rise to 109. The reaction of stock markets will be important as an adverse reaction in equities would see risk aversion rise and this will offer some short-term protection to the Japanese currency. The value trade of all the yen crosses is on EUR/JPY, which still trades close to lifetime highs, despite a sharp deceleration in the performance of the euro area economy. This pair should be sold down on any advances to 169 and there is every chance the pair will slide back to Y165 in the very near term. If the Fed’s statement this evening is not dollar supportive, the greenback will find it difficult to break out to the upside of the recent trading range and USD/JPY could spend the next week trading largely within a narrow 106.80 to 108.50 price range.

CAD
The loonie’s resilience has finally been broken by the greenback and on Tuesday USD/CAD broke out above 103.70 for the first time this year. This signals the pair is now most definitely in an uptrend and we could witness a very quick move to 105, with 108 being possible by the end of the month. Today’s Fed rate announcement will be crucial however as the greenback needs a hawkish bias to gain greater momentum. If the Fed stands pat and keep a neutral policy stance, the fate of USD/CAD over the next month will most likely rest with commodity prices, primarily oil. This Friday’s employment report out of Canada will also be important for gauging possible direction of Canadian interest rates and another negative employment number would hurt the loonie. Look for consolidation in the 103.70 to 105 price region over the next 2 days and only a break below 103.70 would mean a possible trend reversal in favour of the loonie. A rebound in oil prices would offer the Canadian currency some much-needed protection. The loonie is oversold on many of the crosses, particularly against the euro and there is some scope here for a pullback to 1.60.

Bob B - Aug 5

Bob's Currency Focus

EUR/USD
After a waft of weak data the euro eventually succumbed to selling pressure this week, although it staged an impressive recovery from late Wednesday, coming off a low of 1.5522, to trade at a full cent above this level on Thursday morning. The single currency was buoyed to some degree by today’s inflation print for July, which at 4.1% is the highest rate on record, since the ECB came into existence. With the ECB’s target inflation rate at 2%, some market analysts still believe there is scope for further rate hikes from Trichet & co. There is greater evidence however that the euro economy is decelerating at an alarming pace and divergence issues between the euro’s major economic blocks is likely to become an increasing concern over the coming months. US data has mostly surprised to the upside over the course of the past week but the real test will come with Friday’s non-farm payroll number. Thursday’s GDP figure is unlikely to have any sustained impact, given its historical context and the fact the number will be distorted by the Government’s stimulus package which helped prop up consumer spending in May and June. The Initial claims number for last week will be monitored closely as an indicator of what Friday’s payroll number might look like. Oil prices rocketed by almost 5 dollars on Wednesday and if this triggers a new bout of oil buying, the dollar is going to struggle. There are so many factors at play in the market at present and plenty of uncertainty about the direction of the major economies and interest rates, while a worsening credit crisis still looms large in the background. In this environment it will be difficult for either the dollar or the euro to make huge progress without facing some headwinds. Upside surprises in GDP and the non-farm payrolls, together with falling oil prices, is what the dollar needs if it is going to end the week on a high. The biggest risk to the euro in a broader sense could come from any negative comments from ECB council members (admission that the growth slowdown is worse than ECB had anticipated) or destabilising comments from French or Italian government officials about the ECB or euro. The range should remain 1.55 to 1.5660 for now, with Friday’s non-farm number being the key scheduled event which could push the pair beyond the boundaries. There is definite value in selling down on any rallies close to 1.57.

GBP/USD
Sterling has shown remarkable resilience against the adversity of shocking economic data over the past month, data soft enough to have pared several percentage points off any other currency. GBP/USD is still trading at the higher end of its trading range over the past few months and the pound has essentially grown immune to weak domestic data. However, it is primarily negatives which are keeping the currency afloat, primarily a market belief the Bank of England will not step in to save the economy and it is believed if the Bank were to do anything it will raise interest rates rather than cut them, adding to the attraction of sterling’s high yield. Nationwide reported house prices fell 1.7% in July, for an 8.1% annual decline, the steepest drop ever in the series. The UK economy looks destined for a certain recession, if it is not in one already, and with the Bank of England uttering hawkish rhetoric, they are clearly signalling they have a very different view to the US Federal Reserve on inflation prospects, so things are going to get a hell of a lot worse in the UK economy over the coming months. Friday’s Manufacturing PMI will be important to gauge if last month’s appalling run of PMIs in the manufacturing, services and construction sectors was an unlucky once-off or the start of an accelerating deterioration in the wider economy. It is highly dangerous to buy sterling against the dollar with the economic predicament facing the UK, even if sterling does even manage to make some short-term gains. In the medium to longer term sterling looks destined for a return to at least the mid 1.80s and a sudden spike downwards in the currency cannot be ruled out, given the downside risks and the pound’s elevated value at present. The downside against the euro should be more limited in the short run as the euro area economy also slows quite sharply. The pound’s direction through to the end of the week will be determined by US economic data, but we should be looking at a return to 1.9650 over the next week. It could happen this week if US data prints stronger than expected and oil prices are subdued.

USD/JPY
The yen has come under modest selling pressure Thursday as risk tolerance levels rise thanks to two very positive days for global stocks. The Japanese currency has been protected to some degree thanks to sell-off in commodity currencies in recent days, which has seen a paring of carry trade positions, especially against the Australian and New Zealand dollars. There is still sizeable complacency in the market though and both the US dollar and the euro look to be overvalued against the yen, when taking into consideration the deterioration in economic conditions, particularly in the euro area. Friday’s non-farm payroll data out of the US will be a major test of risk tolerance and if the number prints much worse than expectations, the yen should be the biggest gainer on currency markets. There is significant selling of the US dollar above Y108.30, but if the US currency does manage to reach 109 by the end of the week it will mark a further step up in the pair’s trading range and we should see Y110 next week. However it is dangerous to sell the yen at current prices, given all the underlying risks, and there is definite medium term value in selling down the euro on any advances by the single currency towards Y170.

USD/CAD
The loonie has failed to penetrate 1.02 against the greenback since the pair sailed over this important price level several days ago. The US currency though has not managed to capitalise on its momentum and has failed miserably to reach 103. The key economic releases out of the US over the next few days will be critical and could be decisive for the future direction of the pair. The only release out of Canada is today’s monthly GDP number for May, but its significance is likely to be dwarfed by the quarterly GDP figure out of the US. Stronger than expected numbers out of the US today and tomorrow (non-farm payrolls) coupled with a further slide in commodity prices could potentially see the greenback rise to 103.77 (the year’s high) and place the pair firmly in a longer run uptrend, which could see the loonie cede 1.05 very quickly. There is some value in buying at present, with a stop tightly below 1.02. If data prints badly for the greenback, then expect 1.02 to give way very easily and the pair should quickly return to 1.0130.

Bob B - Jul 31

Bob's Currency Focus

EUR/USD
Euro zone data keeps disappointing and this morning’s German Ifo business survey reported the sharpest fall in business sentiment since 2001. Also, preliminary readings for the manufacturing and services sectors of the euro area see another month of contraction in July, with the slowdown accelerating. The Ifo business climate reading fell to 97.5 in July, down from 101.3 in June. The composite PMI for the euro area (measuring both manufacturing and services economic activity) is seen as falling to 47.8 in July, from 49.3 in June. French and Italian business sentiment also fell more than expected in July and all told, economic woes for the single currency zone are mounting. It is difficult to fathom that the ECB has just hiked rates against this background and only time will tell if that policy decision was a big mistake, especially if oil prices continue to ease. The dollar has made significant gains overt the past 2 days but it is essentially only back to the levels it was trading at prior to the breakout of the Fanny Mae/Freddy Mac crisis 2 weeks ago. The real test for the dollar will be if it can break below 1.5610 against the euro and hold below this level. If we can achieve that, it may be time to look for a possible retreat all the way back to 1.5283. The euro picked itself up impressively from a low of 1.5637 to reach 1.5697 in the hour following the Ifo Business survey release and after a brief stint above 1.57 after US existing home sales numbers disappointed the pair is back around 1.5670. Oil prices will continue to play an important role in the greenback’s fortunes. There is a sense that sentiment is beginning to shift against the euro and although weak US economic data will curtail dollar gains, traders need to be on their guard for any comments from ECB and Fed officials. Any softening in tone from ECB Council members will hurt the euro. If the dollar holds below 1.5720, it is worth selling down from close to 1.57, as the pair may have another run at that key 1.5610 price level either today or tomorrow. Any break below that should see us return to 1.55, possibly by Monday. Today is a very important day for direction, because the dollar has not managed a 3 day rally against the euro for 2 months.

GBP
Sterling has had a weird couple of days. On Wednesday it rose sharply against every other major currency, although its gains against the dollar were more modest, while today it has plunged after European currencies came under pressure early this morning and after it was announced monthly UK retail sales plunged by their heaviest amount since the series began. The Bank of England minutes on Wednesday reveal Tim Besley voted for a rate hike at the MPC meeting earlier this month. It is the first time a member has voted for a rate increase since July of last year. The hawkish bias to the minutes sent sterling rising rapidly as investors began to price in the possibility of a future rate hike from the Bank of England. In fact the minutes even stated that August would be a more appropriate time to increase rates, if a rate hike was warranted. One has to wonder if the MPC is seeing the same data as the rest of us. The dollar has finally managed to break below the 1.99 support point that held firm for 10 days and if it can push sterling below 1.98, then we should have a trend reversal and the pair could go considerably lower over the next week. 1.99 is a key price barrier and if the dollar does not hold it, the pound could make another run towards the 2 dollar mark and 2.01. Tomorrow’s GDP release in the UK is crucial and if it shows a contraction, which is unlikely, then sterling will sell off very sharply. If selling down, traders should place a stop around 1.9910. The pair is still being bought on dips and remains dangerous for bears, until 1.98 is broken. Sterling could find itself pegged back towards 79.50 against the euro by early next week.

JPY
The yen has been hammered this week by the dollar, the euro and the pound. The euro registered a new lifetime high on Monday at 169.95, while the dollar hit a 7 week high against the yen yesterday just below 108. The Japanese currency has stabilised somewhat today as falling stocks and a rate cut in New Zealand has temporarily stalled the carry trade. If the current stock rally comes to an abrupt end, then the yen could gain significantly against the US dollar, given the pair currently trades 4% above the worst levels from last week. However any resumption of the stock rally will continue to see the yen out of favour and the dollar could potentially try to rally all the way to 110 over the next week. There is no value on selling the yen against any currency at current prices, given the risk, while any euro moves towards Y170 offer very good medium term value for a sell down on what is the most over-stretched of the yen crosses.

CAD
There was no economic data out of Canada on Thursday and the currency continues to trade within a tight range against the greenback, moving between 1.00 and 1.0115. While headline inflation rose to over 3% in June, the core rate was contained at 1.5% and this affirms the view the Bank of Canada will keep rates on hold for the foreseeable future. Commodity prices have come off considerable in the past week, with oil prices shedding $20, yet the loonie has managed to hold its own across the board, indeed making gains against the euro and the yen, while holding tight against the US dollar. A sustained slump in commodity prices will eventually hurt the loonie against the US currency and it is difficult to see the pair not returning to 1.02 over the next week, unless there is some renewed scare in financial markets. The loonie has also been helped by a rise in risk appetite, but that too is under threat with the recent stock rally looking shaky by Thursday. The euro has fallen to 1.58 this morning, as I projected a few days ago and there is the potential for a decline to 1.56 for EUR/CAD over the next week, if the euro continues its decline against the US dollar.

Bob B - July 24