EUR/USD
Just over an hour to go to the Fed and the euro has run up to yet another new high in anticipation of a cut, which should see the euro sail over the 1.45 price mark. How high the pair can go will very much depend on what the Fed says in its accompanying statement. If the Fed hints at further monetary easing in the months ahead the euro may well reach 1.46. Any shift of bias to the inflation side could see the dollar bounce back after an initial push upwards. It is high risk stuff but one would prefer to be long right now than short. Many clever traders will stay out of it altogether until the dust has settled. Today’s report which showed US GDP grew at its fastest pace in quarter 3 since the first quarter of 2006 failed to inspire any dollar rally. The ADP employment report hinted at a possible upside surprise in this Friday’s nonfarm payroll report, as private sector jobs were reported to have risen by 105K in October, above economists’ predictions for a rise of just 60K. The euro was boosted this morning by the preliminary inflation indicator for October, which at 2.6%, is the highest inflation rate seen in the euro area for 25 months. This is sure to keep ECB hawks in the majority and raise the prospect of further tightening in the near future. The European Commission's key economic sentiment index for October,released today, revealed that business sentiment across the euro area weakened further in the past month. The index fell to 105.9, from 106.9 in September. Euro area unemployment dropped to 7.3% in September from 7.4% in August (originally reported at 6.9%, but how the measure is calculated was changed).
GBP
Sterling is the day’s star performer, gaining on both the dollar and the euro, while rising significantly on the yen cross. The currency was boosted by a survey from Nationwide which reported that house prices rose at their fastest pace in 4 months in October, signalling that reports of a major housing slump may be exaggerated. Cable has risen to 2.0780 this afternoon and so long as it stays above 2.0650, 2.10 now looks like a realistic target over the next week. The euro has dropped to 0.6958 against the pound and there is the potential for a brief return to 0.69, if the Fed cuts rates and it fuels a rally in stock markets and the carry trade through to the end of this week. Sterling is vulnerable if there is a rise in risk aversion, given the current rally has come on the back of a new wave of carry trades.
Yen
The yen came under attack today after the Bank of Japan shocked nobody and left its core interest rate unchanged at 0.5%. While not a surprise, the anticipation of a Fed rate cut this evening, is enticing more and more positions into the carry trade, with the Japanese currency being used as the funding currency. Housing starts in Japan crashed by 44% year on year in September, raising concerns about the domestic economy. The yen needs to hold the dollar below 115.50 today, otherwise the dollar could again take control of the pair's direction and we could see a return to 117 over the next week. The euro has risen significantly against the yen to over Y166.50 Wednesday and is now only 2% of fthe magical Y170 price barrier, which it looks set to breach over the next week, unless there is a significant rise in risk aversion levels. If the Fed fails to deliver a rate cut this evening, the yen will rebound strongly across the board, but particularly against sterling and the Aussie and Canadian dollars.
CAD
USD/CAD is currently trading along the 0.95 line, having dipped below it for the first time in 40 years a short while ago. The loonie rallied on the back of a GDP report for August which revealed the economy grew by 0.2% in the month, (in line with expectations) and rising oil prices. Oil has virtually regained all of Tuesday’s losses thanks to a weekly inventory report in the US which shows that crude inventories surprisingly dropped last week. The loonie was untroubled by comments from Canada’s Finance Minister Jim Flaherty, who suggested the loonie's current strength is down to speculative trading moreover underlying fundamentals. We will have to wait until the dust settles after this evening’s Fed rate announcement, to see whether Flaherty’s comments scare off some of the speculative longs in the market. The loonie looks set to record a further record high later today, possibly around 0.9450, but the time must be nigh for a very sharp correction and if Friday’s payroll report out of Canada disappoints, it could just trigger it. The Euro again offers good value at around 1.37 against the Canadian currency.
Bob T - Oct 31
Thứ Tư, 31 tháng 10, 2007
Thứ Ba, 30 tháng 10, 2007
Bob's Currency Focus - 13:00 GMT
EUR/USD
Likely to trade within a narrow range ahead of Wednesday's Fed rate announcement. There is the potential for some pullback today if risk aversion levels rise, or if speculation intensifies that the Fed could keep rates on hold. The euro though looks poised for a strike at 1.45 and we could wee see that happen Wednesday, if the Fed meet market expectations for a 25 basis point cut, or surprise with another 50 basis point cut. The Fed will have access to this week’s key economic data (PCE core inflation indicator and ISM manufacturing index, as well as October’s non-farm payrolls number) when it makes its decision, data which is not officially released until Thursday and Friday. Any sharp surprises in this key data, particularly the core inflation indicator or the payroll numbers, could potentially influence the Fed’s rate decision and the content of the statement it subsequently releases. $93 oil also cannot go unnoticed and the Fed will have to seriously consider that a rate cut tomorrow is likely to trigger $100 oil and pose a major inflation risk for the US economy. Runaway oil prices could be the one major obstacle to what would otherwise be a certain rate cut tomorrow, in my view. For Tuesday, the most likely scenario is a drift back towards 1.4350 with the euro rising back up to the highs of 1.4440 before tomorrow’s announcement.
GBP
Cable has managed to take out the high at 2.0651 Tuesday and if it breaks above 2.0675 later today, this will be very significant technically and could lead to significant upside potential in the next few days, if we get the expected US Fed rate cut. However with housing data on Monday again reporting on the soft side, sterling’s apparent revival has more to do with US dollar weakness and technical trading than with any new-found underlying fundamental strength. Sterling will be massively vulnerable if the Fed does not cut rates tomorrow and we will probably find ourselves back at 2.0250 before the end of the week. The pound’s technical move against the dollar has helped it appreciate against the euro and the single currency is down 50 points to 0.6770, having hit 0.7020 Sunday night. The pound can potentially push the euro lower but will struggle to gain much beyond 0.6950 in the short-term. Sterling is vulnerable on the Swiss and yen crosses at current price levels, if there is any rise in risk aversion levels.
Yen
The yen has just about held its own early Tuesday after two days of significant losses against most currencies, when we had a new wave of carry positions laid ahead of an expected US interest rate cut. The Japanese currency is likely to lose out more than the dollar in the event of a rate cut, as a rally in financial markets will lead to the yen being used as the principal funding currency. The Bank of Japan is expected to leave rates unchanged when it delivers its policy decision early Wednesday and unless Governor Fukui speaks in a hawkish tone, the yen will come under pressure, even before the Fed delivers its rate announcement later Wednesday. However, if the Fed does not cut rates Wednesday, stocks will tumble and the yen will be the principal beneficiary amongst the major currencies. For today, we may well see a sell-off ahead of the Bank of Japan announcement, if stock markets do rally later today, and the US dollar may rise to Y115.50, while the euro could reach Y166.
CAD
The loonie was up to its old tricks again Monday, hitting yet another high, this time a 37 year high. USD/CAD yesterday reached its lowest trading price (0.9516) since the Canadian dollar decoupled from the US dollar way back in 1970. When are we ever going to see a bottom in place and a correction higher? The loonie has essentially rallied 13 cents without any correction against the US dollar since the credit crisis shook financial markets in the middle of August. That is an unprecedented level of currency appreciation by any standards and if this is not giving David Dodge and his colleagues in the Bank of Canada some sleepless nights, then it should be. Crude oil revenue has made a paltry contribution to Canada’s economic growth in 2007 and higher oil prices are not a justification for a higher Canadian dollar. The fact is that the rapid rate of the Canadian dollar’s rise in value is at odds with the underlying fundamentals and Canada’s economy will soon pay a very high price for this major disconnect. Speculators continue to ruls and dictate the direction of Canada’s currency. With a Fed rate cut on Wednesday likely to fuel further US dollar weakness, the greenback could find itself trading below 95 CAD cents within the next 2 days. There is the potential for some kind of correction upwards later this week and into next week, once all the risk events are out of the way. Keep an eye on oil prices today because speculators are currently using this as the barometer for deciding where to price the loonie. The euro is a good buy at prices close to 1.37.
Bob T - Oct 30
Likely to trade within a narrow range ahead of Wednesday's Fed rate announcement. There is the potential for some pullback today if risk aversion levels rise, or if speculation intensifies that the Fed could keep rates on hold. The euro though looks poised for a strike at 1.45 and we could wee see that happen Wednesday, if the Fed meet market expectations for a 25 basis point cut, or surprise with another 50 basis point cut. The Fed will have access to this week’s key economic data (PCE core inflation indicator and ISM manufacturing index, as well as October’s non-farm payrolls number) when it makes its decision, data which is not officially released until Thursday and Friday. Any sharp surprises in this key data, particularly the core inflation indicator or the payroll numbers, could potentially influence the Fed’s rate decision and the content of the statement it subsequently releases. $93 oil also cannot go unnoticed and the Fed will have to seriously consider that a rate cut tomorrow is likely to trigger $100 oil and pose a major inflation risk for the US economy. Runaway oil prices could be the one major obstacle to what would otherwise be a certain rate cut tomorrow, in my view. For Tuesday, the most likely scenario is a drift back towards 1.4350 with the euro rising back up to the highs of 1.4440 before tomorrow’s announcement.
GBP
Cable has managed to take out the high at 2.0651 Tuesday and if it breaks above 2.0675 later today, this will be very significant technically and could lead to significant upside potential in the next few days, if we get the expected US Fed rate cut. However with housing data on Monday again reporting on the soft side, sterling’s apparent revival has more to do with US dollar weakness and technical trading than with any new-found underlying fundamental strength. Sterling will be massively vulnerable if the Fed does not cut rates tomorrow and we will probably find ourselves back at 2.0250 before the end of the week. The pound’s technical move against the dollar has helped it appreciate against the euro and the single currency is down 50 points to 0.6770, having hit 0.7020 Sunday night. The pound can potentially push the euro lower but will struggle to gain much beyond 0.6950 in the short-term. Sterling is vulnerable on the Swiss and yen crosses at current price levels, if there is any rise in risk aversion levels.
Yen
The yen has just about held its own early Tuesday after two days of significant losses against most currencies, when we had a new wave of carry positions laid ahead of an expected US interest rate cut. The Japanese currency is likely to lose out more than the dollar in the event of a rate cut, as a rally in financial markets will lead to the yen being used as the principal funding currency. The Bank of Japan is expected to leave rates unchanged when it delivers its policy decision early Wednesday and unless Governor Fukui speaks in a hawkish tone, the yen will come under pressure, even before the Fed delivers its rate announcement later Wednesday. However, if the Fed does not cut rates Wednesday, stocks will tumble and the yen will be the principal beneficiary amongst the major currencies. For today, we may well see a sell-off ahead of the Bank of Japan announcement, if stock markets do rally later today, and the US dollar may rise to Y115.50, while the euro could reach Y166.
CAD
The loonie was up to its old tricks again Monday, hitting yet another high, this time a 37 year high. USD/CAD yesterday reached its lowest trading price (0.9516) since the Canadian dollar decoupled from the US dollar way back in 1970. When are we ever going to see a bottom in place and a correction higher? The loonie has essentially rallied 13 cents without any correction against the US dollar since the credit crisis shook financial markets in the middle of August. That is an unprecedented level of currency appreciation by any standards and if this is not giving David Dodge and his colleagues in the Bank of Canada some sleepless nights, then it should be. Crude oil revenue has made a paltry contribution to Canada’s economic growth in 2007 and higher oil prices are not a justification for a higher Canadian dollar. The fact is that the rapid rate of the Canadian dollar’s rise in value is at odds with the underlying fundamentals and Canada’s economy will soon pay a very high price for this major disconnect. Speculators continue to ruls and dictate the direction of Canada’s currency. With a Fed rate cut on Wednesday likely to fuel further US dollar weakness, the greenback could find itself trading below 95 CAD cents within the next 2 days. There is the potential for some kind of correction upwards later this week and into next week, once all the risk events are out of the way. Keep an eye on oil prices today because speculators are currently using this as the barometer for deciding where to price the loonie. The euro is a good buy at prices close to 1.37.
Bob T - Oct 30
Chủ Nhật, 28 tháng 10, 2007
US Dollar faces Difficult Week - Oct 28
Over the past two months we have witnessed a remarkable decline in the US dollar, with the euro gaining 10 cents on the US currency in the 9 weeks following the brief period of US dollar respite during the credit crisis turmoil back in August. As frightening as this level of sharp depreciation is for the greenback against the euro, alarmingly the US currency has depreciated at an even sharper rate against the Canadian and Australian dollars over the same short time period. This past Friday, the US dollar index closed at its lowest ever level and the currency now faces into arguably its most important week of the year’s campaign while apparently in freefall at a time when oil is trading at $92 a barrel.
The Fed delivers its latest monetary policy statement next Wednesday and the smart money is on a 25 basis point rate cut. Some analysts are even predicting a cut of 50 basis points, so it now is a question not so much of ‘will they or won’t they’ but rather a case of ‘by how much.’ I have a sneaking feeling they will opt for a 50 basis point move, simply because the Fed’s key concern right now is the US housing sector and let’s face it, the key indicators we saw in the past 2 weeks on housing starts and home sales were even worse than the worst forecasts and with softer numbers in employment and retail sales, the Fed will probably want to be seen to be proactive to lower the risk of the economy going into recession. The Fed surprised when it moved aggressively with a 0.5% cut in September and with further deterioration evident in housing since then, the Fed may well decide to act in a similar aggressive vein this Wednesday. Inflation remains a very real threat in the US, especially with a battered dollar and oil prices going through the roof, but the US Administration and Fed has to date shown no real desire to publicly support the dollar, so in effect the US is indirectly supporting the dollar’s decline. A 50 basis points reduction on Wednesday may have unpredictable results for both stock markets and the US currency, as it may force a rethink on the part of investors as to the outlook for the US economy and the risks, which could lead to a rise in risk aversion levels, which might temporarily protect the US currency. A 25 basis points move on the other hand will be read as a gift to stock markets and investors will anticipate more of the same to come from the Fed and this will lead to a broader rally in global stocks and a continuation in the sell-off of the dollar.
The ironic thing about Wednesday’s Fed announcement is that it will come only hours after the Government look set to report US growth exceeded an annual rate of over 3% for the second successive quarter, in quarter 3. While the GDP number may look good on its own, it will be ignored by currency markets which will only be interested in what happens to interest rates later in the day. The market will need to quickly absorb the Fed’s policy statement because Thursday and Friday are packed with further key economic releases, including the ISM Manufacturing Index and Personal Income and Expenditure data Wednesday and the non-farm payrolls on Friday. A 25 basis cut Wednesday that is then followed by a weak ISM number and a soft PCE core inflation number Thursday and a weak employment figure on Friday could prove fatal for the beleaguered dollar and the currency will be set to hit further record lows.
It is difficult to be anyway optimistic for the dollar this week, particularly against the euro. The euro area report an advance estimate for October’s consumer price inflation next Wednesday and the forecast is for a significant up-tick in the reading from 2.1% last month to 2.3% for this month. If this is the outcome it is going to keep the ECB’s hawkish line firmly in the ascendancy and with the Fed set to further ease US interest rates later the same day, this is going to give traders a firm reason to propel the euro to even more extreme overbought levels.
The euro should be able to breeze past 1.45 this week and could go significantly higher, towards even 1.4650 before we see a new peak and a correction lower. Looking at the downside risks to the dollar associated with this week’s data, a dollar correction is only likely to happen if there is a major rise in risk aversion levels (coinciding with dramatic falls in global stock markets), or if there is strong verbal or direct market intervention by Central Banks.
Currencies most likely this week: Euro, Swiss franc, Aussie & New Zealand dollar.
Currencies most at risk: USD & Japanese yen.
Ted B - Oct 28
The Fed delivers its latest monetary policy statement next Wednesday and the smart money is on a 25 basis point rate cut. Some analysts are even predicting a cut of 50 basis points, so it now is a question not so much of ‘will they or won’t they’ but rather a case of ‘by how much.’ I have a sneaking feeling they will opt for a 50 basis point move, simply because the Fed’s key concern right now is the US housing sector and let’s face it, the key indicators we saw in the past 2 weeks on housing starts and home sales were even worse than the worst forecasts and with softer numbers in employment and retail sales, the Fed will probably want to be seen to be proactive to lower the risk of the economy going into recession. The Fed surprised when it moved aggressively with a 0.5% cut in September and with further deterioration evident in housing since then, the Fed may well decide to act in a similar aggressive vein this Wednesday. Inflation remains a very real threat in the US, especially with a battered dollar and oil prices going through the roof, but the US Administration and Fed has to date shown no real desire to publicly support the dollar, so in effect the US is indirectly supporting the dollar’s decline. A 50 basis points reduction on Wednesday may have unpredictable results for both stock markets and the US currency, as it may force a rethink on the part of investors as to the outlook for the US economy and the risks, which could lead to a rise in risk aversion levels, which might temporarily protect the US currency. A 25 basis points move on the other hand will be read as a gift to stock markets and investors will anticipate more of the same to come from the Fed and this will lead to a broader rally in global stocks and a continuation in the sell-off of the dollar.
The ironic thing about Wednesday’s Fed announcement is that it will come only hours after the Government look set to report US growth exceeded an annual rate of over 3% for the second successive quarter, in quarter 3. While the GDP number may look good on its own, it will be ignored by currency markets which will only be interested in what happens to interest rates later in the day. The market will need to quickly absorb the Fed’s policy statement because Thursday and Friday are packed with further key economic releases, including the ISM Manufacturing Index and Personal Income and Expenditure data Wednesday and the non-farm payrolls on Friday. A 25 basis cut Wednesday that is then followed by a weak ISM number and a soft PCE core inflation number Thursday and a weak employment figure on Friday could prove fatal for the beleaguered dollar and the currency will be set to hit further record lows.
It is difficult to be anyway optimistic for the dollar this week, particularly against the euro. The euro area report an advance estimate for October’s consumer price inflation next Wednesday and the forecast is for a significant up-tick in the reading from 2.1% last month to 2.3% for this month. If this is the outcome it is going to keep the ECB’s hawkish line firmly in the ascendancy and with the Fed set to further ease US interest rates later the same day, this is going to give traders a firm reason to propel the euro to even more extreme overbought levels.
The euro should be able to breeze past 1.45 this week and could go significantly higher, towards even 1.4650 before we see a new peak and a correction lower. Looking at the downside risks to the dollar associated with this week’s data, a dollar correction is only likely to happen if there is a major rise in risk aversion levels (coinciding with dramatic falls in global stock markets), or if there is strong verbal or direct market intervention by Central Banks.
Currencies most likely this week: Euro, Swiss franc, Aussie & New Zealand dollar.
Currencies most at risk: USD & Japanese yen.
Ted B - Oct 28
Thứ Sáu, 26 tháng 10, 2007
Bob's Currency Focus - 16:00 GMT
EUR/USD
Yet another high for the pair Friday, coming up just shy of 1.44, but trading in bullish fashion just below this level. 1.45 now looks like a certainty to be hit next week and markets may not even wait for the Fed on Wednesday, such is the negative sentiment surrounding the dollar. We are in major overbought territory and a major dollar correction is due, once the market is satisfied a significant top has been put in place. We are highly unlikely to see any correction though until after the Fed meeting next week. Any sell-offs in EUR/USD between now and next Wednesday is only likely to be down to bouts of profit-taking, unless there is some Central Bank intervention (unlikely) and this may offer a fresh opportunity to enter the market long. The US dollar is showing increased signs of being abandoned by major players and the sharp rise in gold and oil prices over the past 3 days are very worrying for the dollar and the US economy as a whole. For now the euro will probably keep the pressure on ahead of the Fed and dips below 1.43 are likely to attract strong buying interest. One needs to keep the radar on for any comments from Fed officials and ECB officials ahead of next week’s Fed meeting.
GBP
Sterling has fallen badly against the euro Friday as the single currency tries to establish itself above the 0.70 line. There was no data out of the UK Friday but with traders positioning themselves ahead of next week’s Fed meeting, the euro is in popular demand, while continued uncertainty surrounding the UK housing sector is dampening demand for the pound. The euro however is massively overbought at present and offers no value against sterling at present levels. Sterling has the potential to push the euro back to 0.6950 later next week, although further euro buying against the dollar and the yen ahead of the Fed may mean it is wise to stay out of it for the moment. Cable rallied to 2.0572 this morning but could not hold these levels and is currently languishing near Thursday’s close at 2.0518. Sterling clearly is not the currency of choice of the anti-dollar brigade right now and cable’s ability to rise to the 3-decade highs of 2.0650 next week very much depend on how the dollar performs across the broader spectrum. If there is a major market correction next week and traders exit their positions, sterling should gain against the euro, Australian and Canadian dollars, simply because there is a much smaller % of sterling long positions out there than there are long positions on the euro and the commodity currencies.
Yen
Japan experienced the seventh consecutive month of deflation in September according to a report released last night and with Industrial Production surprisingly in decline, there are still several question marks about the outlook for the Japanese economy and interest rates. It is highly unlikely the Bank of Japan will raise rates again this year. The yen has managed to hold its own against the US dollar and sterling today, but this is owing to weakness on their part, as opposed to any renewed strength in the yen. The Japanese currency may sell-off a little later today if US stock markets close on a high and we could see the dollar rise to 114.50. The picture for next week looks bleak for the yen, as a cut in US interest rates is likely to trigger a fresh wave of carry trades, with the yen being used as the preferred funding currency. There is huge complacency out there however and this is clearly evident in the steam-rolling advance of the high-yielding Aussie dollar over the past few days. Any serious glitch in global stock markets could send the carry trade running for cover and in this event the yen could make significant inroads, even later today. Keep an eye on the Dow’s performance this evening.
CAD
The loonie did it again Friday, hitting yet another 33 year low against the US dollar, when the pair slid to below 0.96 briefly, to touch 0.9588 this morning. Manufacturers in Canada are less optimistic about manufacturing conditions with a 3rd quarter survey showing the key business sentiment index slipped to +2 from +7 in quarter 2. Weekly earnings in August softened to an annualised 3.1% from 3.7% in July, something that will please the Bank of Canada. The loonie is trading softer this afternoon and the US dollar has strengthened to 0.9630 against the currency, while the euro is up to 1.3850, having been as low as 1.3750 earlier today. The loonie offers no value against the dollar at present rates but with an expected rate cut from the Fed and record high oil prices, the US currency will find it difficult to make much progress. The euro continues to be the currency to buy against the loonie, especially on any dips back to 1.3750, or even below 1.38.
Bob B - Oct 26
Yet another high for the pair Friday, coming up just shy of 1.44, but trading in bullish fashion just below this level. 1.45 now looks like a certainty to be hit next week and markets may not even wait for the Fed on Wednesday, such is the negative sentiment surrounding the dollar. We are in major overbought territory and a major dollar correction is due, once the market is satisfied a significant top has been put in place. We are highly unlikely to see any correction though until after the Fed meeting next week. Any sell-offs in EUR/USD between now and next Wednesday is only likely to be down to bouts of profit-taking, unless there is some Central Bank intervention (unlikely) and this may offer a fresh opportunity to enter the market long. The US dollar is showing increased signs of being abandoned by major players and the sharp rise in gold and oil prices over the past 3 days are very worrying for the dollar and the US economy as a whole. For now the euro will probably keep the pressure on ahead of the Fed and dips below 1.43 are likely to attract strong buying interest. One needs to keep the radar on for any comments from Fed officials and ECB officials ahead of next week’s Fed meeting.
GBP
Sterling has fallen badly against the euro Friday as the single currency tries to establish itself above the 0.70 line. There was no data out of the UK Friday but with traders positioning themselves ahead of next week’s Fed meeting, the euro is in popular demand, while continued uncertainty surrounding the UK housing sector is dampening demand for the pound. The euro however is massively overbought at present and offers no value against sterling at present levels. Sterling has the potential to push the euro back to 0.6950 later next week, although further euro buying against the dollar and the yen ahead of the Fed may mean it is wise to stay out of it for the moment. Cable rallied to 2.0572 this morning but could not hold these levels and is currently languishing near Thursday’s close at 2.0518. Sterling clearly is not the currency of choice of the anti-dollar brigade right now and cable’s ability to rise to the 3-decade highs of 2.0650 next week very much depend on how the dollar performs across the broader spectrum. If there is a major market correction next week and traders exit their positions, sterling should gain against the euro, Australian and Canadian dollars, simply because there is a much smaller % of sterling long positions out there than there are long positions on the euro and the commodity currencies.
Yen
Japan experienced the seventh consecutive month of deflation in September according to a report released last night and with Industrial Production surprisingly in decline, there are still several question marks about the outlook for the Japanese economy and interest rates. It is highly unlikely the Bank of Japan will raise rates again this year. The yen has managed to hold its own against the US dollar and sterling today, but this is owing to weakness on their part, as opposed to any renewed strength in the yen. The Japanese currency may sell-off a little later today if US stock markets close on a high and we could see the dollar rise to 114.50. The picture for next week looks bleak for the yen, as a cut in US interest rates is likely to trigger a fresh wave of carry trades, with the yen being used as the preferred funding currency. There is huge complacency out there however and this is clearly evident in the steam-rolling advance of the high-yielding Aussie dollar over the past few days. Any serious glitch in global stock markets could send the carry trade running for cover and in this event the yen could make significant inroads, even later today. Keep an eye on the Dow’s performance this evening.
CAD
The loonie did it again Friday, hitting yet another 33 year low against the US dollar, when the pair slid to below 0.96 briefly, to touch 0.9588 this morning. Manufacturers in Canada are less optimistic about manufacturing conditions with a 3rd quarter survey showing the key business sentiment index slipped to +2 from +7 in quarter 2. Weekly earnings in August softened to an annualised 3.1% from 3.7% in July, something that will please the Bank of Canada. The loonie is trading softer this afternoon and the US dollar has strengthened to 0.9630 against the currency, while the euro is up to 1.3850, having been as low as 1.3750 earlier today. The loonie offers no value against the dollar at present rates but with an expected rate cut from the Fed and record high oil prices, the US currency will find it difficult to make much progress. The euro continues to be the currency to buy against the loonie, especially on any dips back to 1.3750, or even below 1.38.
Bob B - Oct 26
Thứ Năm, 25 tháng 10, 2007
Market Watch: Canadian Dollar - October 2007
Is the high-flying loonie going to punish the Canadian Economy?
Six months ago I wrote an article warning the loonie (called this because of the bird on Canada’s one-dollar coin) was undervalued, oversold and due for a reversal in fortune. At the time the US dollar was worth 1.1850 against the Canadian dollar, with the euro valued at 1.56 Canadian. The Canadian economy was beginning to pick up following 6 months of lacklustre growth to the end of last year. Oil prices were rallying to over $60 having come off a low of $50 a barrel earlier in the year. Consumption was on the up, exports were growing steadily, employment was rising faster than forecast, business confidence was improving and there were some early signs that inflation was beginning to tick upwards. Against this backdrop of evidence it was a mystery why the currency was rejected, but that soon changed when economic report after report demanded the world take notice. Before we had time to blink the loonie had appreciated to 1.0850 against the US dollar by the end of May, at the time the Bank of Canada sat down to deliver their latest monetary policy assessment. When the Bank then signalled to markets that interest rates ‘may’ need to rise to keep inflation in check (interest rates were on hold for a year prior to this meeting), it helped catapult the loonie to new highs. Although the loonie was now up to a 1.04 to 1.07 price range against the US dollar, few experts believed it would ever reach parity with its US counterpart, with even fewer believing it could happen this year. At the beginning of 2007 most currency analysts and seasoned gurus predicted a price range for the pair of between 1.12 and 1.20 for the year. As of 12:00 EST on October 19, 2007, the US dollar was worth CAD0.9636. Hence the loonie has appreciated 18.84% since its low in February and in terms of the calendar year it has risen 17.34% against the US currency. This is a staggering level of currency appreciation in such a short time frame and while it may be celebrated by Canadians travelling abroad, it carries with it a very real set of economic challenges and dangers that could seriously derail Canada’s economy.
Firstly, let us look at the reasons why the Canadian dollar has appreciated in 2007:
1) Interest Rates: T
The principal driver for major currency movements is a shift in interest rate differentials. The Bank of Canada had largely been expected to keep interest rates unchanged at 4.25% this year, but in July the bank upped its lending rate by 25 basis points to 4.5%. The Bank has since moved to a neutral policy stance and rates are not expected to rise again for the foreseeable future. In the US the Fed, who were also expected to keep rates on hold throughout the year, actually cut rates by 50 basis points in September, to bring the key rate down to 4.75%. So currently, while interest rates are still higher in the US, the differential in rates between the two countries has narrowed by 0.75%. Markets have also priced in a further 25 basis point rate cut for the Fed before the end of the year, so in currency pricing terms the USD/CAD currency pair is trading on the assumption that by the end of this year both will have the same core interest rate of 4.5%. While this is the most important contributor to the loonie’s appreciation against the US dollar, it does not explain the level of appreciation we have had. Looking to the wider market, the interest rate differential between the euro area and the US this year has narrowed by 1.25% and during this time the euro has appreciated by 6.11% against the US dollar, compared to the 17.34% achieved by the loonie. Measuring currency appreciation purely on the movement in interest rate differentials, we might have expected the loonie to have appreciated by 4.9% against the US dollar (using the euro as the base denominator). But this is 12.44% less than the actual appreciation seen. We must also note that in terms of interest rate outlook, the European Central Bank is leaning to the upside on future rates, while the Bank of Canada is ‘tilting’ to the downside. Thus, if currencies are moving on interest rate differentials alone, the euro should be performing much better than the Canadian dollar. Yet the Canadian dollar is today worth 10.7% more than euro than it was back on January 1st. So is the real value of the loonie USD1.1087 and should the euro be worth CAD1.54 rather than the CAD1.38 we have today?
2) Oil Prices
It is a well established fact that the Canadian dollar often follows the movement of oil prices. The correlation is difficult to understand in the sense that while crude oil is an important export component, it only constituted 8% of total exports from Canada to the end of August 2007. An even more surprising stat is that in constant dollars, crude export revenues only rose 1.3% thus far in 2007, lagging the increase in total exports, which are running 1.8% higher than the same period in 2006. Oil prices have risen from a low of $50 in January to a high of $90 (Oct 19). The fluctuation in oil prices is volatile and what we can clearly ascertain is that Canadian oil companies have been unable to reap the full rewards because oil proceeds (denominated in US dollars) are converting into a smaller number of Canadian dollars than they used to. By the way this goes for all other US dollar-denominated commodities also, most of which have not experienced anything near the level of price inflation seen in oil. In terms of the increase in overall Canadian exports in 2007, crude is only responsible for 3.7% of the total increase. In the case of Canada, oil is only an 8% component of all exports and has contributed a mere 3.7% to the year over year gain in all exports in 2007. Therefore oil is something of a misnomer as far as the loonie is concerned and oil on its own should never be used for determining what the loonie exchange rate should look like. Will someone please notify those misinformed speculators?
3) GDP
Canadian GDP has been very robust in 2007, the economy coming off a rather lethargic performance in the second half of 2006, when it grew at annualised rates of 1.3% and 1.5% respectively in the final two quarters. Canada grew by an impressive annual rate of 3.9% in quarter one 2007 and a moderately slower 3.4% in quarter 2. This compares very favourably with annualised growth rates of 0.6% and 3.8% in the US for quarters one and two in 2007. While Canada’s GDP rates seem high this year they fall well short of the levels of growth regularly seen in Asia and many of those countries have their currencies pegged to the US dollar, so they have grown spectacularly with little or no currency appreciation - China has grown at annualised rates of over 11% in the first 3 quarters of this year and its currency has moved only marginally. A fairer comparison for Canada might be to look at the GDP rates for the euro area and the UK. The 13-nation euro area has grown at annualised rates of 3.2% and 2.5% in quarters 1 and 2 while the UK has grown at rates of 3.0% and 3.1%. While growth was more robust in Canada than in Europe, the Bank of Canada raised interest rates by just 25 basis points this year, as against 50 basis points by the ECB and 75 basis points by the Bank of England. We can however make the assumption that the strengthening loonie was instrumental in keeping inflation at levels that meant the Bank of Canada only had to raise rates once this year. We can deduct that Canada’s growth in 2007 is on average 29% greater than that in the euro area in the first half of this year. If we use growth as a means of determining currency value and use the euro as our base measure we see the euro has strengthened 6.11% against the US dollar so far in 2007 and if we factor in the growth differential for the Canadian economy, it means that using this calculation the loonie should have appreciated 7.88% against the US dollar (6.11% * 1.29). The loonie has in fact gained 17.34% in this time, so one could argue that 9.46% of the loonie’s appreciation in 2007 cannot be explained by underlying economic fundamentals, when we take growth as the factor behind currency appreciation. Therefore the loonie should be trading at USD1.0739 and not at the USD0.9650 price it is currently at.
The Predicament
All bull runs must come to an end some time, surely. The start of the current loonie bull trend can be traced back to January 2002, when the US dollar was worth CAD1.60. There is also a precedent for the sharpness in the loonie’s appreciation – back in 2003 the loonie rallied by 21% over the year before a 5% correction in the first 5 months of 2004. The economic circumstances were different back then as the Canadian dollar was still cheap in US dollar terms, meaning Canada was still competitive internationally and the US and global economies were expanding at an increasing rate. Today we have a slowing US economy and a global economy that has started to stutter, so it is now a seismic challenge for Canadian companies to be competitive internationally at an uncertain time when the US dollar is cheaper than the Canadian dollar. At the very least, Canadian companies will need time to adjust and for this to happen the currency has to stabilise soon, or Canada’s economy is destined for a hard landing.
How might the loonie bull be brought down?
1) Deterioration in Economic Data
It is only a matter of time before the sharp appreciation in the currency begins to weigh heavily on the domestic economy. The first signs of strain will be seen in Canada’s trade data, as cheaper imports and more expensive exports should take their toll on the country’s heretofore impressive trade surplus, in particular with the US. The decline in manufacturing shipments will intensify as US consumers shy away from buying ‘more expensive’ Canadian products and Canadian consumers themselves travel south of the border for cheaper American cars and other large durable goods. Employment will soften as Canadian companies lay off people because the company is unable to compete or because of reduced order intakes owing to a US slowdown. Corporate profits will tumble as companies that export their products and services see their revenues plummet because of the poor exchange rate. GDP numbers will decline as an export-dependent economy struggles with productivity and competition. Once disappointing data begins to regularly hit the newswires, speculators and investors alike will ditch the currency and the loonie will gradually depreciate. However, because of the significant time lag between the here and now and when economic reports become available, the drip feed may be too slow to prevent a sharp economic slowdown.
2) Bank of Canada intervention
If the Bank of Canada is seriously concerned today about the outlook of a 96 US cent economy over the next year, then they could cut interest rates which would lead to sell-off and result in a significant depreciation in the loonie. The Bank of Canada do not have sufficient foreign exchange funds to influence the loonie’s value through direct market intervention and in any event such an exercise would prove futile, as demonstrated by the failed intervention we witnessed this summer from the Reserve Bank of New Zealand. The Bank of Canada should at the very least up their concerned rhetoric in public, to signal a determination to face down currency speculators, who we can argue are responsible for more than half of the currency’s appreciation in 2007.
3) Financial Market Stresses
If we get a prolonged period of deterioration in global financial markets, traders and investors alike will be forced to reassess risk and outlook for the wider global economy. Speculators poured into the loonie this year upon the belief that the Canadian economy could withstand a US slowdown – the theory being Canada is a commodity rich country and a booming world economy demands more commodities and a commodity currency could only go up. When markets finally come to their senses and accept a downgrading of the global economic outlook, then commodity prices should drop, as should appetite for commodity currencies like the loonie. In this situation existing speculators will liquidate their Canadian dollar currency positions and the loonie will depreciate to a more realistic value level. How quickly it happens will depend on the trigger for the liquidation event, but it may not be orderly and the loonie could fall very sharply.
4) US Recession
If the US economy should find itself officially in recession (GDP contracts), then it is highly unlikely that Canada will get off scot-free because the ‘guilt by association’ syndrome is bound to stick. The loonie will come under persistent pressure, not just because our speculator friends run for the exits, but also because a recession scenario will create a new wave of Canadian dollar selling by funds and investors, who see the loonie in a completely different light.
Conclusion
It could be 6 months before I delve into such detail on this subject again and if I am to make a forecast now I guess my view is that the US dollar will very soon bottom out against the loonie and by April 2008 the greenback will have risen to be trading in a range of 1.07 to 1.11 once again. I also believe economic performance will suffer in Canada over the next half year with productivity failing to keep pace with the rising competitive challenge of a grossly inflated currency and the Bank of Canada will be forced to move, to cut interest rates by at least 50 basis points within the next 6 months.
Ted B'Struck - October 25, 2007
Six months ago I wrote an article warning the loonie (called this because of the bird on Canada’s one-dollar coin) was undervalued, oversold and due for a reversal in fortune. At the time the US dollar was worth 1.1850 against the Canadian dollar, with the euro valued at 1.56 Canadian. The Canadian economy was beginning to pick up following 6 months of lacklustre growth to the end of last year. Oil prices were rallying to over $60 having come off a low of $50 a barrel earlier in the year. Consumption was on the up, exports were growing steadily, employment was rising faster than forecast, business confidence was improving and there were some early signs that inflation was beginning to tick upwards. Against this backdrop of evidence it was a mystery why the currency was rejected, but that soon changed when economic report after report demanded the world take notice. Before we had time to blink the loonie had appreciated to 1.0850 against the US dollar by the end of May, at the time the Bank of Canada sat down to deliver their latest monetary policy assessment. When the Bank then signalled to markets that interest rates ‘may’ need to rise to keep inflation in check (interest rates were on hold for a year prior to this meeting), it helped catapult the loonie to new highs. Although the loonie was now up to a 1.04 to 1.07 price range against the US dollar, few experts believed it would ever reach parity with its US counterpart, with even fewer believing it could happen this year. At the beginning of 2007 most currency analysts and seasoned gurus predicted a price range for the pair of between 1.12 and 1.20 for the year. As of 12:00 EST on October 19, 2007, the US dollar was worth CAD0.9636. Hence the loonie has appreciated 18.84% since its low in February and in terms of the calendar year it has risen 17.34% against the US currency. This is a staggering level of currency appreciation in such a short time frame and while it may be celebrated by Canadians travelling abroad, it carries with it a very real set of economic challenges and dangers that could seriously derail Canada’s economy.
Firstly, let us look at the reasons why the Canadian dollar has appreciated in 2007:
1) Interest Rates: T
The principal driver for major currency movements is a shift in interest rate differentials. The Bank of Canada had largely been expected to keep interest rates unchanged at 4.25% this year, but in July the bank upped its lending rate by 25 basis points to 4.5%. The Bank has since moved to a neutral policy stance and rates are not expected to rise again for the foreseeable future. In the US the Fed, who were also expected to keep rates on hold throughout the year, actually cut rates by 50 basis points in September, to bring the key rate down to 4.75%. So currently, while interest rates are still higher in the US, the differential in rates between the two countries has narrowed by 0.75%. Markets have also priced in a further 25 basis point rate cut for the Fed before the end of the year, so in currency pricing terms the USD/CAD currency pair is trading on the assumption that by the end of this year both will have the same core interest rate of 4.5%. While this is the most important contributor to the loonie’s appreciation against the US dollar, it does not explain the level of appreciation we have had. Looking to the wider market, the interest rate differential between the euro area and the US this year has narrowed by 1.25% and during this time the euro has appreciated by 6.11% against the US dollar, compared to the 17.34% achieved by the loonie. Measuring currency appreciation purely on the movement in interest rate differentials, we might have expected the loonie to have appreciated by 4.9% against the US dollar (using the euro as the base denominator). But this is 12.44% less than the actual appreciation seen. We must also note that in terms of interest rate outlook, the European Central Bank is leaning to the upside on future rates, while the Bank of Canada is ‘tilting’ to the downside. Thus, if currencies are moving on interest rate differentials alone, the euro should be performing much better than the Canadian dollar. Yet the Canadian dollar is today worth 10.7% more than euro than it was back on January 1st. So is the real value of the loonie USD1.1087 and should the euro be worth CAD1.54 rather than the CAD1.38 we have today?
2) Oil Prices
It is a well established fact that the Canadian dollar often follows the movement of oil prices. The correlation is difficult to understand in the sense that while crude oil is an important export component, it only constituted 8% of total exports from Canada to the end of August 2007. An even more surprising stat is that in constant dollars, crude export revenues only rose 1.3% thus far in 2007, lagging the increase in total exports, which are running 1.8% higher than the same period in 2006. Oil prices have risen from a low of $50 in January to a high of $90 (Oct 19). The fluctuation in oil prices is volatile and what we can clearly ascertain is that Canadian oil companies have been unable to reap the full rewards because oil proceeds (denominated in US dollars) are converting into a smaller number of Canadian dollars than they used to. By the way this goes for all other US dollar-denominated commodities also, most of which have not experienced anything near the level of price inflation seen in oil. In terms of the increase in overall Canadian exports in 2007, crude is only responsible for 3.7% of the total increase. In the case of Canada, oil is only an 8% component of all exports and has contributed a mere 3.7% to the year over year gain in all exports in 2007. Therefore oil is something of a misnomer as far as the loonie is concerned and oil on its own should never be used for determining what the loonie exchange rate should look like. Will someone please notify those misinformed speculators?
3) GDP
Canadian GDP has been very robust in 2007, the economy coming off a rather lethargic performance in the second half of 2006, when it grew at annualised rates of 1.3% and 1.5% respectively in the final two quarters. Canada grew by an impressive annual rate of 3.9% in quarter one 2007 and a moderately slower 3.4% in quarter 2. This compares very favourably with annualised growth rates of 0.6% and 3.8% in the US for quarters one and two in 2007. While Canada’s GDP rates seem high this year they fall well short of the levels of growth regularly seen in Asia and many of those countries have their currencies pegged to the US dollar, so they have grown spectacularly with little or no currency appreciation - China has grown at annualised rates of over 11% in the first 3 quarters of this year and its currency has moved only marginally. A fairer comparison for Canada might be to look at the GDP rates for the euro area and the UK. The 13-nation euro area has grown at annualised rates of 3.2% and 2.5% in quarters 1 and 2 while the UK has grown at rates of 3.0% and 3.1%. While growth was more robust in Canada than in Europe, the Bank of Canada raised interest rates by just 25 basis points this year, as against 50 basis points by the ECB and 75 basis points by the Bank of England. We can however make the assumption that the strengthening loonie was instrumental in keeping inflation at levels that meant the Bank of Canada only had to raise rates once this year. We can deduct that Canada’s growth in 2007 is on average 29% greater than that in the euro area in the first half of this year. If we use growth as a means of determining currency value and use the euro as our base measure we see the euro has strengthened 6.11% against the US dollar so far in 2007 and if we factor in the growth differential for the Canadian economy, it means that using this calculation the loonie should have appreciated 7.88% against the US dollar (6.11% * 1.29). The loonie has in fact gained 17.34% in this time, so one could argue that 9.46% of the loonie’s appreciation in 2007 cannot be explained by underlying economic fundamentals, when we take growth as the factor behind currency appreciation. Therefore the loonie should be trading at USD1.0739 and not at the USD0.9650 price it is currently at.
The Predicament
All bull runs must come to an end some time, surely. The start of the current loonie bull trend can be traced back to January 2002, when the US dollar was worth CAD1.60. There is also a precedent for the sharpness in the loonie’s appreciation – back in 2003 the loonie rallied by 21% over the year before a 5% correction in the first 5 months of 2004. The economic circumstances were different back then as the Canadian dollar was still cheap in US dollar terms, meaning Canada was still competitive internationally and the US and global economies were expanding at an increasing rate. Today we have a slowing US economy and a global economy that has started to stutter, so it is now a seismic challenge for Canadian companies to be competitive internationally at an uncertain time when the US dollar is cheaper than the Canadian dollar. At the very least, Canadian companies will need time to adjust and for this to happen the currency has to stabilise soon, or Canada’s economy is destined for a hard landing.
How might the loonie bull be brought down?
1) Deterioration in Economic Data
It is only a matter of time before the sharp appreciation in the currency begins to weigh heavily on the domestic economy. The first signs of strain will be seen in Canada’s trade data, as cheaper imports and more expensive exports should take their toll on the country’s heretofore impressive trade surplus, in particular with the US. The decline in manufacturing shipments will intensify as US consumers shy away from buying ‘more expensive’ Canadian products and Canadian consumers themselves travel south of the border for cheaper American cars and other large durable goods. Employment will soften as Canadian companies lay off people because the company is unable to compete or because of reduced order intakes owing to a US slowdown. Corporate profits will tumble as companies that export their products and services see their revenues plummet because of the poor exchange rate. GDP numbers will decline as an export-dependent economy struggles with productivity and competition. Once disappointing data begins to regularly hit the newswires, speculators and investors alike will ditch the currency and the loonie will gradually depreciate. However, because of the significant time lag between the here and now and when economic reports become available, the drip feed may be too slow to prevent a sharp economic slowdown.
2) Bank of Canada intervention
If the Bank of Canada is seriously concerned today about the outlook of a 96 US cent economy over the next year, then they could cut interest rates which would lead to sell-off and result in a significant depreciation in the loonie. The Bank of Canada do not have sufficient foreign exchange funds to influence the loonie’s value through direct market intervention and in any event such an exercise would prove futile, as demonstrated by the failed intervention we witnessed this summer from the Reserve Bank of New Zealand. The Bank of Canada should at the very least up their concerned rhetoric in public, to signal a determination to face down currency speculators, who we can argue are responsible for more than half of the currency’s appreciation in 2007.
3) Financial Market Stresses
If we get a prolonged period of deterioration in global financial markets, traders and investors alike will be forced to reassess risk and outlook for the wider global economy. Speculators poured into the loonie this year upon the belief that the Canadian economy could withstand a US slowdown – the theory being Canada is a commodity rich country and a booming world economy demands more commodities and a commodity currency could only go up. When markets finally come to their senses and accept a downgrading of the global economic outlook, then commodity prices should drop, as should appetite for commodity currencies like the loonie. In this situation existing speculators will liquidate their Canadian dollar currency positions and the loonie will depreciate to a more realistic value level. How quickly it happens will depend on the trigger for the liquidation event, but it may not be orderly and the loonie could fall very sharply.
4) US Recession
If the US economy should find itself officially in recession (GDP contracts), then it is highly unlikely that Canada will get off scot-free because the ‘guilt by association’ syndrome is bound to stick. The loonie will come under persistent pressure, not just because our speculator friends run for the exits, but also because a recession scenario will create a new wave of Canadian dollar selling by funds and investors, who see the loonie in a completely different light.
Conclusion
It could be 6 months before I delve into such detail on this subject again and if I am to make a forecast now I guess my view is that the US dollar will very soon bottom out against the loonie and by April 2008 the greenback will have risen to be trading in a range of 1.07 to 1.11 once again. I also believe economic performance will suffer in Canada over the next half year with productivity failing to keep pace with the rising competitive challenge of a grossly inflated currency and the Bank of Canada will be forced to move, to cut interest rates by at least 50 basis points within the next 6 months.
Ted B'Struck - October 25, 2007
Bob's Currency Focus 12:00 GMT
EUR/USD
US Existing Home Sales in September came in 8% lower than in August, twice as bad as what economists were forecasting. We witnessed a very strange turnaround on the Dow Industrial Average when it came from being 200 points down (understandable given the clatter of bad news circulating – including Merrill Lynch’s report of a near $3 billion dollar loss in Quarter 3, owing to the subprime fiasco) to close in positive territory. The reason appears to be that traders now appear certain that Ben Bernanke will don his white knight suit again next Wednesday and deliver a further rate cut. It is somewhat disturbing when financial markets rally in the wake of bad news on the assumption Central Banks are going to bail them out, but ultimately the US Fed are to blame for creating this market mindset. No other Central Bank has followed suit with respect to the credit crisis fiasco. Germany’s Ifo business index, one of the most important indicators for the euro, held up fairly well in October, coming in at 103.9 in October, from 104.2 in September. This indicates that the euro’s strength is not yet seen as a major threat to the euro economy’s largest player. The dollar is going to have few friends for the next week, ahead of the Fed meeting, and 1.45 is now a realisable target for EUR/USD if the Fed cut interest rates on Wednesday. We should continue to buy the euro on dips and we could see an attempt to hit 1.4350 today. With almost everyone long on EUR/USD, there is the danger that some event like another sudden stock market blip or dovish comments from the ECB could trigger a wave of profit-taking and send EUR/USD plummeting lower, similar to what happened on Monday. But if caution is exercised and you don’t get too greedy, the direction to be on at the moment is up. 1.4240 appears to have formed as an interim support point and behind this there is further support at 1.42 and 1.4180. 1.4320 needs to give way for a crack at 1.4350 later today. If price stalls on the upside, expect a retreat to 1.4250. Keep an eye on US stock markets, because if they do fall sharply, the dollar may be offered some temporary respite.
GBP
Cable has been hovering in no-man’s land for the past few days and looks as though it is waiting for something to happen to give it some direction. This morning’s BBA data from the UK shows a dip in mortgage approvals from 61K in August to 52.7K in September. Ongoing concerns about the fate of the UK’s housing sector will probably prevent aggressive buying of sterling, but the sheer negativity of sentiment surrounding the US dollar might still allow cable push higher, particularly in bouts of broad dollar sell-offs. There is the potential for a rise to 2.0550 or maybe higher today and cable could potentially take out the 28 year high of 2.0651 in the next week, as few are going to want to buy the dollar with the prospect of a Fed rate cut looming. For today, cable should trade within a 2.0420 to 2.0550 price range, with the bias to the upside. The euro has risen to 0.6775 against the pound Thursday and the pair is likely to remain largely within the 0.6940 to 0.7010 price range. Sterling offers good value on levels close to 0.70.
Yen
The yen has weakened Thursday and increased interest in carry trades in the expectation of a US Fed rate cut will put the Japanese currency on the defensive. We could see the dollar return to Y115 later today if stocks rally, while the euro should be able to hit Y164. The underlying credit risks remain however and any rise in risk aversion levels will propel the yen sharply higher. In the build-up to next week’s Fed meeting the yen could come under further pressure as higher yielding currencies will tend to benefit more. We have consumer price inflation data released in Japan this evening and a further negative reading for the national index in September will weaken the yen and probably kill off any notion of a rate hike from the Bank of Japan this year. The country has been in deflationary mode for each of the past 6 months.
CAD
The loonie weakened somewhat Wednesday, retreating when stock markets went into decline, but the currency rebounded before the market close. In early Thursday trading, the loonie has appreciated to within a whisker of the 33 year high it hit against the US dollar on Tuesday. The USD/CAD pair is trading at 0.9634, just above the 0.9625 low. The Canadian currency has been buoyed by higher oil prices and the prospects of a further narrowing in US-Canada interest rate differentials as early as next week. It is difficult to see the loonie being able to appreciate much more against a background of a slowing US economy and significant competitive problems, but traders that support the loonie don’t seem to be phased by the concerns and if they can drive the US/CAD pair to below 0.9625, then there is no reason why we cant see a retreat to below 0.96, setting up a new record target of 0.95 for the coming week, when US dollar sentiment is likely to remain negative. If risk aversion levels rise and stock markets go into decline again, then the loonie will suffer and the US dollar could push back up towards 0.9750. The euro again offers good buy value on levels close to 1.3750 against the loonie.
Bob B - Oct 25
US Existing Home Sales in September came in 8% lower than in August, twice as bad as what economists were forecasting. We witnessed a very strange turnaround on the Dow Industrial Average when it came from being 200 points down (understandable given the clatter of bad news circulating – including Merrill Lynch’s report of a near $3 billion dollar loss in Quarter 3, owing to the subprime fiasco) to close in positive territory. The reason appears to be that traders now appear certain that Ben Bernanke will don his white knight suit again next Wednesday and deliver a further rate cut. It is somewhat disturbing when financial markets rally in the wake of bad news on the assumption Central Banks are going to bail them out, but ultimately the US Fed are to blame for creating this market mindset. No other Central Bank has followed suit with respect to the credit crisis fiasco. Germany’s Ifo business index, one of the most important indicators for the euro, held up fairly well in October, coming in at 103.9 in October, from 104.2 in September. This indicates that the euro’s strength is not yet seen as a major threat to the euro economy’s largest player. The dollar is going to have few friends for the next week, ahead of the Fed meeting, and 1.45 is now a realisable target for EUR/USD if the Fed cut interest rates on Wednesday. We should continue to buy the euro on dips and we could see an attempt to hit 1.4350 today. With almost everyone long on EUR/USD, there is the danger that some event like another sudden stock market blip or dovish comments from the ECB could trigger a wave of profit-taking and send EUR/USD plummeting lower, similar to what happened on Monday. But if caution is exercised and you don’t get too greedy, the direction to be on at the moment is up. 1.4240 appears to have formed as an interim support point and behind this there is further support at 1.42 and 1.4180. 1.4320 needs to give way for a crack at 1.4350 later today. If price stalls on the upside, expect a retreat to 1.4250. Keep an eye on US stock markets, because if they do fall sharply, the dollar may be offered some temporary respite.
GBP
Cable has been hovering in no-man’s land for the past few days and looks as though it is waiting for something to happen to give it some direction. This morning’s BBA data from the UK shows a dip in mortgage approvals from 61K in August to 52.7K in September. Ongoing concerns about the fate of the UK’s housing sector will probably prevent aggressive buying of sterling, but the sheer negativity of sentiment surrounding the US dollar might still allow cable push higher, particularly in bouts of broad dollar sell-offs. There is the potential for a rise to 2.0550 or maybe higher today and cable could potentially take out the 28 year high of 2.0651 in the next week, as few are going to want to buy the dollar with the prospect of a Fed rate cut looming. For today, cable should trade within a 2.0420 to 2.0550 price range, with the bias to the upside. The euro has risen to 0.6775 against the pound Thursday and the pair is likely to remain largely within the 0.6940 to 0.7010 price range. Sterling offers good value on levels close to 0.70.
Yen
The yen has weakened Thursday and increased interest in carry trades in the expectation of a US Fed rate cut will put the Japanese currency on the defensive. We could see the dollar return to Y115 later today if stocks rally, while the euro should be able to hit Y164. The underlying credit risks remain however and any rise in risk aversion levels will propel the yen sharply higher. In the build-up to next week’s Fed meeting the yen could come under further pressure as higher yielding currencies will tend to benefit more. We have consumer price inflation data released in Japan this evening and a further negative reading for the national index in September will weaken the yen and probably kill off any notion of a rate hike from the Bank of Japan this year. The country has been in deflationary mode for each of the past 6 months.
CAD
The loonie weakened somewhat Wednesday, retreating when stock markets went into decline, but the currency rebounded before the market close. In early Thursday trading, the loonie has appreciated to within a whisker of the 33 year high it hit against the US dollar on Tuesday. The USD/CAD pair is trading at 0.9634, just above the 0.9625 low. The Canadian currency has been buoyed by higher oil prices and the prospects of a further narrowing in US-Canada interest rate differentials as early as next week. It is difficult to see the loonie being able to appreciate much more against a background of a slowing US economy and significant competitive problems, but traders that support the loonie don’t seem to be phased by the concerns and if they can drive the US/CAD pair to below 0.9625, then there is no reason why we cant see a retreat to below 0.96, setting up a new record target of 0.95 for the coming week, when US dollar sentiment is likely to remain negative. If risk aversion levels rise and stock markets go into decline again, then the loonie will suffer and the US dollar could push back up towards 0.9750. The euro again offers good buy value on levels close to 1.3750 against the loonie.
Bob B - Oct 25
Thứ Tư, 24 tháng 10, 2007
Bob's Currency Focus - 12:00 GMT
EUR/USD
The euro has drifted to the downside Wednesday and as I write, it is at 1.4230 against the dollar, down from 1.4260 overnight (but it did go as low as 1.4190). This afternoon is going to be quite an unpredictable market with traders awaiting the latest instalment of the US housing sector horror show, when the existing homes sales data for September is released at 14:00GMT. Nobody is forecasting an optimistic outcome and the average consensus amongst economists is for the annual sales rate to have fallen to 5.3 million homes from the 5.5 million reported for August. US stock markets are expected to open lower today and the housing news, coming just 30 minutes after the open, if really bad, could spook investors and send stocks tumbling. Ironically, a subsequent rise in risk aversion and a rush to the exits could send the dollar higher and there is a chance for a fall in EUR/USD right back to Monday’s levels of 1.4125. Any decline might prove to be short-lived however as a deterioration in the housing slump is likely to increase the chances of a Fed rate cut next week and that is not good news for the dollar, facing into next Wednesday’s key meeting. All is not so rosy in the euro garden either though, as this morning’s preliminary PMI data point to a significant slowdown in the euro area’s manufacturing sector, with growth slowing to its lowest level since August 2005. The chances of any imminent ECB rate hikes are fading fast and this will curb aggressive buying of the single currency on levels close to 1.43. Overall the risks today are to the downside and a possible spike lower similar to what we saw on Monday. Looking to the events over the next week though and the underlying sentiment, it is difficult to see the dollar holding any gains it may make for long, so the wisest move right now may be to buy the euro on dips. If you are short in the market, you might stay in, but keep moving your stop down, because we may witness another serious bounce later.
GBP
With no data of major significance this week, sterling is profiting from the wider uncertainty surrounding the economies in the US and the euro area and this morning the pound broke below the 0.6950 price level against the euro, a barrier that had held firm for the past 2 weeks. With the euro coming off the back of some weak data and growing concerns about the heightened value of the currency, the pound could potentially hold the euro around the 0.6950 in the days ahead. The major barrier to any further sterling move is if a rise in risk aversion leads to a major sell-off of the higher-yielding currencies today and tomorrow, which would see the pound fall off more than the euro. Cable looks very lofty above 2.05 and offers good sell-down value on prices above this level, with the possibility of another dip to 2.0350 or lower, if volatility levels pick up later today. The current market volatility is making cable an ideal pair to trade in both directions, although the range band has widened in the past week to 2.0250 to 2.0550. Sterling is vulnerable on the yen and Swiss franc crosses at current prices if stock markets sell off.
Yen
Carry traders currently want to sell the yen (given the sharp ups and downs we are witnessing), but the ongoing uncertainty in global financial markets means the yen keeps rebounding and we could see the Japanese currency retaliate further today if stock markets retreat sharply. The US dollar hit the Y115 price mark Tuesday but couldn’t hold it overnight, as traders bought the yen when Asian stock markets closed weakly. The pair has now gone as low at 114.10 today and could test Monday’s low of 113.25, if US equity markets tumble later today, while the euro could return to Y160.50. On the other hand, if equity markets rally, the yen will again be sold off and the dollar should be able to rally right back to 115, while the euro could climb to 164 this evening from the current 162.50 price level. September’s trade balance in Japan came in higher than expected and signals the appreciation in the Japanese currency after the credit crunch crisis in August failed to dampen demand for the country’s exports. The Australian and Canadian crosses could move significantly lower today, if the carry trade does experience a major wobble.
CAD
The loonie hit yet another high against the US dollar Tuesday, this time a 33 year low, as the US currency sank to a mere US96.25 cents against its Northern cousin. Monday’s decline was quickly shaken off by the Canadian currency as yesterday it resumed its mantle as the world’s strongest currency this year. While the loonie is vulnerable to a major correction at some point, its speculative backers are still not prepared to abandon the currency, just yet. The aggressive nature of the loonies march Tuesday will have put the frighteners up many would-be Canadian shorts and with no further major economic data out this week, only another spike in risk aversion is likely to lead to any significant sell-off. At prices below US0.97, the loonie offers no real value and with risks of further market volatility this week, there is the potential for the US dollar to again rally to 0.98, even if the greenback is unable to sustain any gains for long. The euro continues to offer good value against the loonie at current prices, especially around the 1.3750 price level.
Bob B
The euro has drifted to the downside Wednesday and as I write, it is at 1.4230 against the dollar, down from 1.4260 overnight (but it did go as low as 1.4190). This afternoon is going to be quite an unpredictable market with traders awaiting the latest instalment of the US housing sector horror show, when the existing homes sales data for September is released at 14:00GMT. Nobody is forecasting an optimistic outcome and the average consensus amongst economists is for the annual sales rate to have fallen to 5.3 million homes from the 5.5 million reported for August. US stock markets are expected to open lower today and the housing news, coming just 30 minutes after the open, if really bad, could spook investors and send stocks tumbling. Ironically, a subsequent rise in risk aversion and a rush to the exits could send the dollar higher and there is a chance for a fall in EUR/USD right back to Monday’s levels of 1.4125. Any decline might prove to be short-lived however as a deterioration in the housing slump is likely to increase the chances of a Fed rate cut next week and that is not good news for the dollar, facing into next Wednesday’s key meeting. All is not so rosy in the euro garden either though, as this morning’s preliminary PMI data point to a significant slowdown in the euro area’s manufacturing sector, with growth slowing to its lowest level since August 2005. The chances of any imminent ECB rate hikes are fading fast and this will curb aggressive buying of the single currency on levels close to 1.43. Overall the risks today are to the downside and a possible spike lower similar to what we saw on Monday. Looking to the events over the next week though and the underlying sentiment, it is difficult to see the dollar holding any gains it may make for long, so the wisest move right now may be to buy the euro on dips. If you are short in the market, you might stay in, but keep moving your stop down, because we may witness another serious bounce later.
GBP
With no data of major significance this week, sterling is profiting from the wider uncertainty surrounding the economies in the US and the euro area and this morning the pound broke below the 0.6950 price level against the euro, a barrier that had held firm for the past 2 weeks. With the euro coming off the back of some weak data and growing concerns about the heightened value of the currency, the pound could potentially hold the euro around the 0.6950 in the days ahead. The major barrier to any further sterling move is if a rise in risk aversion leads to a major sell-off of the higher-yielding currencies today and tomorrow, which would see the pound fall off more than the euro. Cable looks very lofty above 2.05 and offers good sell-down value on prices above this level, with the possibility of another dip to 2.0350 or lower, if volatility levels pick up later today. The current market volatility is making cable an ideal pair to trade in both directions, although the range band has widened in the past week to 2.0250 to 2.0550. Sterling is vulnerable on the yen and Swiss franc crosses at current prices if stock markets sell off.
Yen
Carry traders currently want to sell the yen (given the sharp ups and downs we are witnessing), but the ongoing uncertainty in global financial markets means the yen keeps rebounding and we could see the Japanese currency retaliate further today if stock markets retreat sharply. The US dollar hit the Y115 price mark Tuesday but couldn’t hold it overnight, as traders bought the yen when Asian stock markets closed weakly. The pair has now gone as low at 114.10 today and could test Monday’s low of 113.25, if US equity markets tumble later today, while the euro could return to Y160.50. On the other hand, if equity markets rally, the yen will again be sold off and the dollar should be able to rally right back to 115, while the euro could climb to 164 this evening from the current 162.50 price level. September’s trade balance in Japan came in higher than expected and signals the appreciation in the Japanese currency after the credit crunch crisis in August failed to dampen demand for the country’s exports. The Australian and Canadian crosses could move significantly lower today, if the carry trade does experience a major wobble.
CAD
The loonie hit yet another high against the US dollar Tuesday, this time a 33 year low, as the US currency sank to a mere US96.25 cents against its Northern cousin. Monday’s decline was quickly shaken off by the Canadian currency as yesterday it resumed its mantle as the world’s strongest currency this year. While the loonie is vulnerable to a major correction at some point, its speculative backers are still not prepared to abandon the currency, just yet. The aggressive nature of the loonies march Tuesday will have put the frighteners up many would-be Canadian shorts and with no further major economic data out this week, only another spike in risk aversion is likely to lead to any significant sell-off. At prices below US0.97, the loonie offers no real value and with risks of further market volatility this week, there is the potential for the US dollar to again rally to 0.98, even if the greenback is unable to sustain any gains for long. The euro continues to offer good value against the loonie at current prices, especially around the 1.3750 price level.
Bob B
Thứ Ba, 23 tháng 10, 2007
Bob's Currency Focus - 15:00 GMT
EUR/USD
The dollar may have gained the most in one day for almost two and a half years against the euro Monday but true to it form it gave back most of those gains today and the euro is now trading at the same levels it was at last Friday. The only thing that is going to enable the dollar make progress at present is if we have a sustained period of instability in equity markets, whereby a heightened demand for US bonds and a repatriation of overseas funds back to the US would see the dollar appreciate against all currencies, except the yen. Stock markets have rebounded Tuesday (albeit prematurely, as the fundamental concerns that triggered last Friday’s move have not changed) and panic-stricken traders that ran for the exits Monday are back in droves to sell-off the greenback. While this presumptuous approach may work for today, there is quite a deal of complacency out there and I for one will be surprised if we do not see Monday’s uncertainty resurrect itself again later in the week. A further capitulation in stock markets is likely at any time and traders need to be on their guard. The euro has returned to 1.4250 Tuesday lunchtime and this in itself is a sizeable bounce from yesterday, so it may be expecting a bit much to hope for a higher close than that this evening. There remains a possibility that the pair could even retreat right back to 1.4180, if US stocks start to plummet. If stock markets do remain stable over the next few days, then I expect to see the euro to sail over 1.43 again Wednesday, when the US existing homes sales data is released (barring a major upside surprise in this data). Poor home sales figures this week may well copper-fasten a Fed rate cut for next week and with this prospect looming large the dollar will find few friends this week. The dollar’s only hope is for risk aversion levels to remain high, something that will temporarily protect it.
GBP
Sterling has had a great day Tuesday, hitting the 2.05 bar against the dollar, while sending the euro scurrying back to 0.6950. It has recently come off those levels but remains well bid. We have witnessed with sterling over the past few weeks that every major rally usually leads to major sell-off. I maintain my position that cable is a good sell at levels close to 2.05, while the sterling offers good value against the euro at any price close to 0.70. With no major economic data out this week (except October’s CBI data Tuesday, which while softer than expected, is not a major market-mover) sterling is likely to run with the flow. This makes it a great currency to trade, particularly cable, while it remains in the 2.0250 to 2.0550 price range. If there is a breakout in cable this week, it could come on the upside, if US housing data is weak enough to assume a Fed rate cut on October 31st. Risk aversion levels remain high and with the pound also being sold for M&A reasons, sell-offs on rallies in the currency should continue.
Yen
The yen returned to the familiar role of funding currency Tuesday and suffered major losses to the euro, sterling and Canadian dollar, while the dollar rose to Y115 this afternoon. The dollar in particular will find it difficult to make gains beyond 115.50 in the short-term, while the yen is certain to rally strongly, if market volatility rises. The euro has almost recouped all of its losses from Monday again the yen and could rise to 165 against the Japanese currency over the next few days. If equity markets fall sharply, the yen could carve out major gains against sterling and the Canadian dollar, as these crosses look heavily weighted with short-term bets.
CAD
The loonie is experiencing one of its best days ever Tuesday and has put the disappointment of a sharp reversal on Monday clearly behind it. Even before Tuesday’s Retail Sales data was released, the loonie had chalked up 1.5% on the US dollar, while having also hit new high for the year against the euro of 1.3714. One might be forgiven for believing it all appears a bit suspect in how the Canadian dollar appreciates significantly in the run-up to key major data releases – that subsequently prove to be greater than market expectations (Retail Sales were 0.7% Vs 0.6% expected), but this observation aside, the loonie remains the currency to buy on dips as it invariably rebounds strongly. USD/CAD hit 0.9625 this afternoon, its highest level since 1974 and on current prices the CAD offers no value against the US dollar. The euro does offer very good value against the loonie - currently on offer at 1.3750, considering the pair opened the day at 1.3868 and the euro is well bid today. Eventually the realisation that a US slowdown will hurt Canada’s exports will weigh on the loonie, but as of yet, the currency is showing no sign of weakness.
Bob B - Oct 23
The dollar may have gained the most in one day for almost two and a half years against the euro Monday but true to it form it gave back most of those gains today and the euro is now trading at the same levels it was at last Friday. The only thing that is going to enable the dollar make progress at present is if we have a sustained period of instability in equity markets, whereby a heightened demand for US bonds and a repatriation of overseas funds back to the US would see the dollar appreciate against all currencies, except the yen. Stock markets have rebounded Tuesday (albeit prematurely, as the fundamental concerns that triggered last Friday’s move have not changed) and panic-stricken traders that ran for the exits Monday are back in droves to sell-off the greenback. While this presumptuous approach may work for today, there is quite a deal of complacency out there and I for one will be surprised if we do not see Monday’s uncertainty resurrect itself again later in the week. A further capitulation in stock markets is likely at any time and traders need to be on their guard. The euro has returned to 1.4250 Tuesday lunchtime and this in itself is a sizeable bounce from yesterday, so it may be expecting a bit much to hope for a higher close than that this evening. There remains a possibility that the pair could even retreat right back to 1.4180, if US stocks start to plummet. If stock markets do remain stable over the next few days, then I expect to see the euro to sail over 1.43 again Wednesday, when the US existing homes sales data is released (barring a major upside surprise in this data). Poor home sales figures this week may well copper-fasten a Fed rate cut for next week and with this prospect looming large the dollar will find few friends this week. The dollar’s only hope is for risk aversion levels to remain high, something that will temporarily protect it.
GBP
Sterling has had a great day Tuesday, hitting the 2.05 bar against the dollar, while sending the euro scurrying back to 0.6950. It has recently come off those levels but remains well bid. We have witnessed with sterling over the past few weeks that every major rally usually leads to major sell-off. I maintain my position that cable is a good sell at levels close to 2.05, while the sterling offers good value against the euro at any price close to 0.70. With no major economic data out this week (except October’s CBI data Tuesday, which while softer than expected, is not a major market-mover) sterling is likely to run with the flow. This makes it a great currency to trade, particularly cable, while it remains in the 2.0250 to 2.0550 price range. If there is a breakout in cable this week, it could come on the upside, if US housing data is weak enough to assume a Fed rate cut on October 31st. Risk aversion levels remain high and with the pound also being sold for M&A reasons, sell-offs on rallies in the currency should continue.
Yen
The yen returned to the familiar role of funding currency Tuesday and suffered major losses to the euro, sterling and Canadian dollar, while the dollar rose to Y115 this afternoon. The dollar in particular will find it difficult to make gains beyond 115.50 in the short-term, while the yen is certain to rally strongly, if market volatility rises. The euro has almost recouped all of its losses from Monday again the yen and could rise to 165 against the Japanese currency over the next few days. If equity markets fall sharply, the yen could carve out major gains against sterling and the Canadian dollar, as these crosses look heavily weighted with short-term bets.
CAD
The loonie is experiencing one of its best days ever Tuesday and has put the disappointment of a sharp reversal on Monday clearly behind it. Even before Tuesday’s Retail Sales data was released, the loonie had chalked up 1.5% on the US dollar, while having also hit new high for the year against the euro of 1.3714. One might be forgiven for believing it all appears a bit suspect in how the Canadian dollar appreciates significantly in the run-up to key major data releases – that subsequently prove to be greater than market expectations (Retail Sales were 0.7% Vs 0.6% expected), but this observation aside, the loonie remains the currency to buy on dips as it invariably rebounds strongly. USD/CAD hit 0.9625 this afternoon, its highest level since 1974 and on current prices the CAD offers no value against the US dollar. The euro does offer very good value against the loonie - currently on offer at 1.3750, considering the pair opened the day at 1.3868 and the euro is well bid today. Eventually the realisation that a US slowdown will hurt Canada’s exports will weigh on the loonie, but as of yet, the currency is showing no sign of weakness.
Bob B - Oct 23
Thứ Hai, 22 tháng 10, 2007
Bob's Currency Focus - 15:30 GMT
EUR/USD
What a turnaround this morning. We saw the euro hit 1.4349 last night on the Asian session and then go as low as 1.4134 this morning, as the pair crashed when the European session got properly underway. The market is incredibly volatile at present and we have seen a significant rise in risk aversion levels, as demonstrated by major losses on stock markets Monday that in turn follows an average 2.6% loss on the major US stock indices last Friday. Major doubts persist about the outlook for the US economy and futures markets have now priced in 90% probability of a further rate cut from the Fed when they meet next week. While fundamentally this is not good news for the dollar, a flight to safety Monday triggered a major unwind of carry trades and a major scramble for US treasurys which saw the dollar catapulted higher across the board. As to whether or not this trend will continues very much depends on the performance of financial markets over the next day or two. Any rebound in equities is certain to spark a fresh wave of dollar selling which will see the euro bounce strongly. The G7 meeting at the weekend failed to generate any official response from officials of the world’s most developed nations on current US dollar weakness. It remains to be seen as to whether there were any behind-the-scenes discussions of possible market intervention to protect the dollar, but this morning’s euro reversal can probably be put down to profit-taking and a temporary movement into dollar-denominated bonds. There is no economic data today or tomorrow that is going to influence the market much, one way or the other. It is a highly dangerous market to trade at present, particularly when currencies are following the fortunes of stock markets. The euro offers good value on levels close to 1.4150 and if stock markets stabilise, then there is every chance of a return to 1.43 over the next few days. If stock markets fall sharply again Monday, then there is every chance that the dollar could send the euro tumbling towards 1.40 by tomorrow.
GBP
Cable went through the floor Monday, helped in a large way by a major liquidation of GBP/JPY carry positions. Having come off an impressive high of over 2.0550 Sunday night, the pound fell to as low as 2.0265 Monday. Cable has fallen victim to the same rise in risk aversion that has afflicted EUR/USD. Sterling has consistently been susceptible to sell-offs on any significant rallies it has mustered in the past two weeks and that trend is likely to continue. There is no economic data of note out of the UK currency this week, but the pound should in part be protected by last week’s strong GDP and employment data which has reduced the prospects for an imminent rate cut from the Bank of England. Cable could test recent lows in the 2.0240 and 2.0190 price regions before we see a meaningful bounce. Sterling again offers good value against the euro on prices close to 0.70, although there appears little scope for progress much below 0.6950 for EUR/GBP in the current market environment.
JPY
The yen powered its way forward Monday against all currencies as the G7’s official calls for an appreciation on the Chinese Yuan was seen as supportive of the Japanese economy. Friday’s collapse on Wall Street saw many traders lower their risk tolerance levels and a reduction in carry trades also helped propel the yen higher. The dollar fell as low as 113.23 overnight before recovering to 114 by the time the US session opened. The euro, which hit a high of over Y167 last week, plummeted to below Y161 this morning, before bouncing back to 161.50. If stock markets continue their sharp decline, we could see the USD/JPY challenge the lows hit back in August (below Y112), while the euro could potentially decline back as far Y155 over the course of this week. It is a high risk trading approach though because if stock markets recover Monday, the dollar could quickly advance to Y115, while the euro could return to 1.64 by tomorrow evening. The yen made big inroads on the other crosses Monday, against the pound, the Canadian dollar and the Swiss Franc.
CAD
The loonie fell off its pedestal Monday, losing more than 1 and a half cents from Friday’s high (USD/CAD low) against its US counterpart. It is possible that Friday’s low of 0.9633 is now a significant anchor and what we are seeing today could be the commencement of a more meaningful correction upwards for the USD/CAD pair. Bank of Canada Governor David Dodge stated Sunday that the rapid appreciation of the loonie in the past few weeks was not fundamentally based and with Finance Minister Jim Flaherty commenting at the weekend that Canada is carrying the burden of 33% of the US dollar’s weakness (the same as the entire euro area), it could be that Canada’s establishment figures are finally realising that the runaway currency has the potential to bring the entire Canadian economy to its feet, if the loonie is not brought down to earth some time soon. The US dollar has risen to 0.98 Monday and there is know resistance in the 0.9830 price region which could halt the greenback’s assault. We have seen too many failed rallies by the dollar over the course of the past 6 months to know that it would be premature as of now to even consider this a possible trend reversal. Rallies on the back of increased market volatility (when temporary funds find their way into US dollars) are not in themselves convincing. The US dollar needs to hold above 0.9750, if any further genuine progress is to be made. The euro remains the value trade against the loonie on the crosses, on any price close to 1.38.
What a turnaround this morning. We saw the euro hit 1.4349 last night on the Asian session and then go as low as 1.4134 this morning, as the pair crashed when the European session got properly underway. The market is incredibly volatile at present and we have seen a significant rise in risk aversion levels, as demonstrated by major losses on stock markets Monday that in turn follows an average 2.6% loss on the major US stock indices last Friday. Major doubts persist about the outlook for the US economy and futures markets have now priced in 90% probability of a further rate cut from the Fed when they meet next week. While fundamentally this is not good news for the dollar, a flight to safety Monday triggered a major unwind of carry trades and a major scramble for US treasurys which saw the dollar catapulted higher across the board. As to whether or not this trend will continues very much depends on the performance of financial markets over the next day or two. Any rebound in equities is certain to spark a fresh wave of dollar selling which will see the euro bounce strongly. The G7 meeting at the weekend failed to generate any official response from officials of the world’s most developed nations on current US dollar weakness. It remains to be seen as to whether there were any behind-the-scenes discussions of possible market intervention to protect the dollar, but this morning’s euro reversal can probably be put down to profit-taking and a temporary movement into dollar-denominated bonds. There is no economic data today or tomorrow that is going to influence the market much, one way or the other. It is a highly dangerous market to trade at present, particularly when currencies are following the fortunes of stock markets. The euro offers good value on levels close to 1.4150 and if stock markets stabilise, then there is every chance of a return to 1.43 over the next few days. If stock markets fall sharply again Monday, then there is every chance that the dollar could send the euro tumbling towards 1.40 by tomorrow.
GBP
Cable went through the floor Monday, helped in a large way by a major liquidation of GBP/JPY carry positions. Having come off an impressive high of over 2.0550 Sunday night, the pound fell to as low as 2.0265 Monday. Cable has fallen victim to the same rise in risk aversion that has afflicted EUR/USD. Sterling has consistently been susceptible to sell-offs on any significant rallies it has mustered in the past two weeks and that trend is likely to continue. There is no economic data of note out of the UK currency this week, but the pound should in part be protected by last week’s strong GDP and employment data which has reduced the prospects for an imminent rate cut from the Bank of England. Cable could test recent lows in the 2.0240 and 2.0190 price regions before we see a meaningful bounce. Sterling again offers good value against the euro on prices close to 0.70, although there appears little scope for progress much below 0.6950 for EUR/GBP in the current market environment.
JPY
The yen powered its way forward Monday against all currencies as the G7’s official calls for an appreciation on the Chinese Yuan was seen as supportive of the Japanese economy. Friday’s collapse on Wall Street saw many traders lower their risk tolerance levels and a reduction in carry trades also helped propel the yen higher. The dollar fell as low as 113.23 overnight before recovering to 114 by the time the US session opened. The euro, which hit a high of over Y167 last week, plummeted to below Y161 this morning, before bouncing back to 161.50. If stock markets continue their sharp decline, we could see the USD/JPY challenge the lows hit back in August (below Y112), while the euro could potentially decline back as far Y155 over the course of this week. It is a high risk trading approach though because if stock markets recover Monday, the dollar could quickly advance to Y115, while the euro could return to 1.64 by tomorrow evening. The yen made big inroads on the other crosses Monday, against the pound, the Canadian dollar and the Swiss Franc.
CAD
The loonie fell off its pedestal Monday, losing more than 1 and a half cents from Friday’s high (USD/CAD low) against its US counterpart. It is possible that Friday’s low of 0.9633 is now a significant anchor and what we are seeing today could be the commencement of a more meaningful correction upwards for the USD/CAD pair. Bank of Canada Governor David Dodge stated Sunday that the rapid appreciation of the loonie in the past few weeks was not fundamentally based and with Finance Minister Jim Flaherty commenting at the weekend that Canada is carrying the burden of 33% of the US dollar’s weakness (the same as the entire euro area), it could be that Canada’s establishment figures are finally realising that the runaway currency has the potential to bring the entire Canadian economy to its feet, if the loonie is not brought down to earth some time soon. The US dollar has risen to 0.98 Monday and there is know resistance in the 0.9830 price region which could halt the greenback’s assault. We have seen too many failed rallies by the dollar over the course of the past 6 months to know that it would be premature as of now to even consider this a possible trend reversal. Rallies on the back of increased market volatility (when temporary funds find their way into US dollars) are not in themselves convincing. The US dollar needs to hold above 0.9750, if any further genuine progress is to be made. The euro remains the value trade against the loonie on the crosses, on any price close to 1.38.
Thứ Sáu, 19 tháng 10, 2007
Bob's Currency Focus - 13:00 GMT
EUR/USD
The euro briefly went to 1.4320 overnight before returning to 1.4285 - the level it traded at for most of Thursday evening, after the initial surge. As long as price remains above the previous high of 1.4280, the pair will maintain its bullish tone. With no economic data out Friday, market sentiment and risk aversion will drive prices through to the week’s close. The G7 summit starts later Friday and while it is probable European Ministers will try to raise the question of the weak dollar behind closed doors, it seems highly improbably that the US will permit the release of an official communique that mentions the dollar’s exchange rate. The same goes for Japan and the yen, so any official statement on currencies will probably again focus on the Chinese yuan, given that China are not part of the G7. Markets effectively don’t expect the dollar to get a public airing and that is why there has been a bold move to push the euro higher over the past few days. Today could prove to be volatile as currency traders closely track equity markets and volatility levels. If we get another run of momentum on the euro, we could see the single currency try to reach 2.0350 this afternoon. Stops should be placed at the overnight low of 1.4260 and if this gives way, we could be set for a return to 1.4240 and possibly even 1.42 later today. With no data and a lot of volatility out there, the safest option might be to stay away for the rest of the day and close out positions for the weekend. Any verbal intervention on the euro or dollar could see markets open at significantly different prices come Sunday night.
GBP
Despite all the forecasts of gloom for the UK housing sector and the potential for a major slowdown in the economy, today it was reported that the UK grew at an annualised 3.3% rate in quarter 3, above the 3.1% in quarter 2. It is the fastest economic growth seen for 3 years. The quarter on quarter rate at 0.8% was higher than the 0.7% forecast. Sterling has rallied back up towards USD2.05 against the dollar, while pushing the euro back to GBP0.6970 from the GBP0.70 reached overnight. Cable will struggle to hold above 2.05 in short-term unless there is more dollar weakness across the board. Sterling is still attracting plenty of selling interest with many analysts expecting a slowdown in the economy over the final quarter and into early next year. If the dollar stages a recovery late Friday, then cable could fall back to 2.04. there is no value n buying sterling at current levels against the dollar (2.0490), but sterling offers good value against the euro on any euro rallies towards 0.70.
Yen
USD/JPY hit 114.83 this morning as risk averse traders exit their long positions ahead of the G7 meeting. That is the lowest the pair has reached in 3 weeks and if equity markets significantly under-perform Friday, then we could see the yen reach 114. The yen will probably revert back to its funding role next week and weaken, unless there is an official statement from the G7 meeting directed at the currency. The euro has rallied back up to 164.90 against the Japanese currency at lunch-time, having fallen to 164.20 this morning. Expect the yen to weaken further today if US stock markets rally to the upside. In this event, the dollar could strengthen to 116, while the euro could reach 165.50.
CAD
The loonie hit yet another 31 year high Friday against the US dollar, in the wake of higher than expected consumer price inflation data and oil prices hitting $90 a barrel. USD/CAD fell over 80 points to 0.9653 soon after the CPI data showed the headline inflation rate in September rose to a much higher than expected 2.5% while the core rate slowed to 2.0%, in line with expectations. The headline rate was distorted by a massive increase in gasoline prices over the month and with the core rate (which excludes volatile items like food and energy) in check, it is unlikely to shift the Bank of Canada from its current neutral stance, so the market move we have seen today is a knee-jerk reaction. The loonie is grossly overbought at present and when we do see a genuine shift away form the currency, it is likely to be a very sharp one (CAD longs stand at 85%). The currency offers no value at present levels, and in terms of value against the loonie, the euro again offers the best buy, with the EUR/CAD cross back presently back down to1.38 today.
Bob B - Oct 19
The euro briefly went to 1.4320 overnight before returning to 1.4285 - the level it traded at for most of Thursday evening, after the initial surge. As long as price remains above the previous high of 1.4280, the pair will maintain its bullish tone. With no economic data out Friday, market sentiment and risk aversion will drive prices through to the week’s close. The G7 summit starts later Friday and while it is probable European Ministers will try to raise the question of the weak dollar behind closed doors, it seems highly improbably that the US will permit the release of an official communique that mentions the dollar’s exchange rate. The same goes for Japan and the yen, so any official statement on currencies will probably again focus on the Chinese yuan, given that China are not part of the G7. Markets effectively don’t expect the dollar to get a public airing and that is why there has been a bold move to push the euro higher over the past few days. Today could prove to be volatile as currency traders closely track equity markets and volatility levels. If we get another run of momentum on the euro, we could see the single currency try to reach 2.0350 this afternoon. Stops should be placed at the overnight low of 1.4260 and if this gives way, we could be set for a return to 1.4240 and possibly even 1.42 later today. With no data and a lot of volatility out there, the safest option might be to stay away for the rest of the day and close out positions for the weekend. Any verbal intervention on the euro or dollar could see markets open at significantly different prices come Sunday night.
GBP
Despite all the forecasts of gloom for the UK housing sector and the potential for a major slowdown in the economy, today it was reported that the UK grew at an annualised 3.3% rate in quarter 3, above the 3.1% in quarter 2. It is the fastest economic growth seen for 3 years. The quarter on quarter rate at 0.8% was higher than the 0.7% forecast. Sterling has rallied back up towards USD2.05 against the dollar, while pushing the euro back to GBP0.6970 from the GBP0.70 reached overnight. Cable will struggle to hold above 2.05 in short-term unless there is more dollar weakness across the board. Sterling is still attracting plenty of selling interest with many analysts expecting a slowdown in the economy over the final quarter and into early next year. If the dollar stages a recovery late Friday, then cable could fall back to 2.04. there is no value n buying sterling at current levels against the dollar (2.0490), but sterling offers good value against the euro on any euro rallies towards 0.70.
Yen
USD/JPY hit 114.83 this morning as risk averse traders exit their long positions ahead of the G7 meeting. That is the lowest the pair has reached in 3 weeks and if equity markets significantly under-perform Friday, then we could see the yen reach 114. The yen will probably revert back to its funding role next week and weaken, unless there is an official statement from the G7 meeting directed at the currency. The euro has rallied back up to 164.90 against the Japanese currency at lunch-time, having fallen to 164.20 this morning. Expect the yen to weaken further today if US stock markets rally to the upside. In this event, the dollar could strengthen to 116, while the euro could reach 165.50.
CAD
The loonie hit yet another 31 year high Friday against the US dollar, in the wake of higher than expected consumer price inflation data and oil prices hitting $90 a barrel. USD/CAD fell over 80 points to 0.9653 soon after the CPI data showed the headline inflation rate in September rose to a much higher than expected 2.5% while the core rate slowed to 2.0%, in line with expectations. The headline rate was distorted by a massive increase in gasoline prices over the month and with the core rate (which excludes volatile items like food and energy) in check, it is unlikely to shift the Bank of Canada from its current neutral stance, so the market move we have seen today is a knee-jerk reaction. The loonie is grossly overbought at present and when we do see a genuine shift away form the currency, it is likely to be a very sharp one (CAD longs stand at 85%). The currency offers no value at present levels, and in terms of value against the loonie, the euro again offers the best buy, with the EUR/CAD cross back presently back down to1.38 today.
Bob B - Oct 19
Thứ Năm, 18 tháng 10, 2007
Bob's Currency Focus - 15:00 GMT
EUR/USD
Yesterday’s woeful report on US housing starts and building permits was far worse than expected and sent shockwaves through the markets and the yield on US treasurys nosedived. The dollar now finds itself under renewed pressure as markets begin to price in a further Fed rate cut at the end of October. The US dollar index has also sunk to its lowest print ever Thursday and all of this ahead of the G7 meeting which starts tomorrow and at which European officials are expected to voice concerns about the weakness of the US currency (albeit unofficially). Markets don’t appear to expect anything to materialise from the G7, because the dollar continues to be sold off in large volumes. The euro this morning took out the 1.4280 lifetime high and hit a new high of 1.4312. With dollar sentiment so negative, the dollar is going to continue to struggle, with its rallies being limited to sell-offs owing to profit-taking. What is really worrying for the US currency is its sharp decline against a broad-based appreciation of both the yen and the Swiss franc today, which suggests that for now the dollar has been abandoned as a ‘safe haven’ currency by risk averse traders. The euro appears to offer little value at current levels, but the market may try to push it to as far as 1.45 in the near future. So long as the euro remains above the previous high of 1.4280, there is the potential for the pair to climb to at least 1.4350 by tomorrow. If the euro stalls and profit-taking ensues, then a fall back below 1.4280 will open the way for a retreat back to 1.4240, with an outside chance of a sharp decline to 1.4180 over the next 24 hours.
GBP
Sterling got a lift from a strong set of retail sales figures for September, which printed at 0.6% on the month, much higher than forecast. Cable rallied to just over 2.05, thanks mostly to a further dollar decline. Having taken out the 2-month high at 2.0492, cable now has the potential to rise towards 2.06 and the 28 year high at 2.0660. The pound fell against the euro this morning, with the single currency hitting 0.6984. With prospects of an interest rate cut in the UK this year now receding, on the back of stronger data, the pound should be able to keep the euro below 0.70 in the short term and again any rallies to this price level offer sell opportunities for EUR/GBP, although any attempt to take out 0.6950 is likely to hit resistance. UK third quarter GDP is out Friday and all the indications are that the number will match the robust 0.7% seen in quarter 2, for another annual 3.1% growth rate. A strong GDP figure should boost sterling and could see cable establish itself above USD2.05. On the crosses, sterling should be able to gain against the Canadian dollar and the Aussie dollar, particularly while risk appetite for the carry trade is somewhat more constrained.
Yen
The yen has gained significantly over the past day, with the aversion to risk, nervousness over the forthcoming G7 meeting, lower interest rate expectations for the US and a repatriation of funds all contributing to a strengthening Japanese currency. The currency has gained 100 points against the dollar since the close in New York Wednesday and the pair reached 115.23 today and is seemingly on its way to going lower. If equity markets continue to tumble, there is scope for further appreciation, possibly to as low as 114 by Friday. Against the euro, the yen should be able to push the single currency back towards 164 ahead of the weekend. But any shift in risk tolerance levels will see the yen once again go into retreat, so traders need to keep a firm eye on what is happening on equity markets.
CAD
Despite the record oil prices, the loonie has clung to the dollar for most of Thursday and it has lost out to all other currencies. The US dollar’s broad retreat was triggered by data released Wednesday that shows that the US housing sector crisis is getting significantly worse, leading many to believe the US economy is headed for recession. While bad news for the US dollar, it is hardly good news for a Canadian economy that sends 80% of its exports to the US. The loonie could be the one currency to watch in the coming weeks, because with 85% of all open positions on the currency now long, if the fate of the Canadian economy is coupled with that of the US in the minds of investors, we could soon witness a major reversal in the USD/CAD currency pair. For now, the US dollar must hold the 0.97 line against the loonie, while a rally that sees the pair close above 0.9830 could signal a possible rethink on which direction the pair is going in the near future. Friday's consumer price inflation data from Canada is going to be crucial and a very soft set of figures should trigger a sell-off of some of the current CAD long positions. On the crosses, the CAD will probably remain under pressure against both the euro and the AUD.
Bob B - Oct 18
Yesterday’s woeful report on US housing starts and building permits was far worse than expected and sent shockwaves through the markets and the yield on US treasurys nosedived. The dollar now finds itself under renewed pressure as markets begin to price in a further Fed rate cut at the end of October. The US dollar index has also sunk to its lowest print ever Thursday and all of this ahead of the G7 meeting which starts tomorrow and at which European officials are expected to voice concerns about the weakness of the US currency (albeit unofficially). Markets don’t appear to expect anything to materialise from the G7, because the dollar continues to be sold off in large volumes. The euro this morning took out the 1.4280 lifetime high and hit a new high of 1.4312. With dollar sentiment so negative, the dollar is going to continue to struggle, with its rallies being limited to sell-offs owing to profit-taking. What is really worrying for the US currency is its sharp decline against a broad-based appreciation of both the yen and the Swiss franc today, which suggests that for now the dollar has been abandoned as a ‘safe haven’ currency by risk averse traders. The euro appears to offer little value at current levels, but the market may try to push it to as far as 1.45 in the near future. So long as the euro remains above the previous high of 1.4280, there is the potential for the pair to climb to at least 1.4350 by tomorrow. If the euro stalls and profit-taking ensues, then a fall back below 1.4280 will open the way for a retreat back to 1.4240, with an outside chance of a sharp decline to 1.4180 over the next 24 hours.
GBP
Sterling got a lift from a strong set of retail sales figures for September, which printed at 0.6% on the month, much higher than forecast. Cable rallied to just over 2.05, thanks mostly to a further dollar decline. Having taken out the 2-month high at 2.0492, cable now has the potential to rise towards 2.06 and the 28 year high at 2.0660. The pound fell against the euro this morning, with the single currency hitting 0.6984. With prospects of an interest rate cut in the UK this year now receding, on the back of stronger data, the pound should be able to keep the euro below 0.70 in the short term and again any rallies to this price level offer sell opportunities for EUR/GBP, although any attempt to take out 0.6950 is likely to hit resistance. UK third quarter GDP is out Friday and all the indications are that the number will match the robust 0.7% seen in quarter 2, for another annual 3.1% growth rate. A strong GDP figure should boost sterling and could see cable establish itself above USD2.05. On the crosses, sterling should be able to gain against the Canadian dollar and the Aussie dollar, particularly while risk appetite for the carry trade is somewhat more constrained.
Yen
The yen has gained significantly over the past day, with the aversion to risk, nervousness over the forthcoming G7 meeting, lower interest rate expectations for the US and a repatriation of funds all contributing to a strengthening Japanese currency. The currency has gained 100 points against the dollar since the close in New York Wednesday and the pair reached 115.23 today and is seemingly on its way to going lower. If equity markets continue to tumble, there is scope for further appreciation, possibly to as low as 114 by Friday. Against the euro, the yen should be able to push the single currency back towards 164 ahead of the weekend. But any shift in risk tolerance levels will see the yen once again go into retreat, so traders need to keep a firm eye on what is happening on equity markets.
CAD
Despite the record oil prices, the loonie has clung to the dollar for most of Thursday and it has lost out to all other currencies. The US dollar’s broad retreat was triggered by data released Wednesday that shows that the US housing sector crisis is getting significantly worse, leading many to believe the US economy is headed for recession. While bad news for the US dollar, it is hardly good news for a Canadian economy that sends 80% of its exports to the US. The loonie could be the one currency to watch in the coming weeks, because with 85% of all open positions on the currency now long, if the fate of the Canadian economy is coupled with that of the US in the minds of investors, we could soon witness a major reversal in the USD/CAD currency pair. For now, the US dollar must hold the 0.97 line against the loonie, while a rally that sees the pair close above 0.9830 could signal a possible rethink on which direction the pair is going in the near future. Friday's consumer price inflation data from Canada is going to be crucial and a very soft set of figures should trigger a sell-off of some of the current CAD long positions. On the crosses, the CAD will probably remain under pressure against both the euro and the AUD.
Bob B - Oct 18
Thứ Tư, 17 tháng 10, 2007
Bob's Currency Focus - 12:00 GMT
EUR/USD
We failed to see any real move upwards Tuesday and most of the price action was to the downside. 1.4150 was beached but not convincingly and immediate support for the euro is now found around 1.4140. US data yesterday was rather poor and with the international net capital flows coming in at a negative $163 billion in August, this should raise concerns within the US Treasury Department, as doubts amongst foreign investors intensify over the outlook for the US economy and by consequence dollar-denominated assets. August was the month when financial markets endured a major credit squeeze and this will have distorted the capital flow numbers and we will have to wait until next month to see if yesterday’s shock report was a one-off, or the beginning of a worrisome trend. Wednesday sees key inflation and housing data released and the best outcome for the dollar will be a bigger rise than expected in inflation and a better than expected set of housing figures. The core inflation rate is expected to remain unchanged at 2.1%. but should this rise to 2.3% or more, the Fed’s hands may be tied on interest rates later this month and it should give the dollar a much-needed lift. The housing data is expected to be poor – housing starts are forecast at a 1.285 million annual rate. If the number comes in sharply lower than this, then expect risk aversion levels to rise and currency markets to become more volatile. The euro’s prospects of hitting the lifetime high of 1.4280 this week are reducing with each day, as we get closer to the G7 meeting at the weekend. With European politicians expected to raise the issue of the strong euro Vs the dollar and the yen at the weekend (unofficially), many would-be euro supporters will remain on the sidelines for fear of some form of intervention, thus curtailing the scope of immediate euro gains. The dollar does therefore have the potential to break to the downside, if the US inflation data is robust and we could possibly see a retreat to 1.41, or below, later on. If stock markets fall again, it will tend to hamper the euro. On balance, I would rather sell down Wednesday on any price advances towards 1.4240, presuming 1.4242 stays intact. Even if the euro does rally, it will find it difficult to hold its gains, given the wider risks at play.
GBP
Good old David Blanchflower didn’t let the side down at October’s MPC meeting, when being the only member of the committee to vote for a rate cut. The solitary vote is significant in market terms because it means a rate cut is now at least in the mindset of committee members and a cut is likely to command a more heated debate at the next Bank of England meeting in November, particularly following yesterday’s soft inflation report and recent housing data that points to a slowdown in that sector. September's favourable employment report didn’t reveal any new inflation concerns on the wage front and will have little impact on interest rate policy. Cable has managed to hold above the 2.03 line again today but it looks good value for a sell-down on any advances close to 2.04, with the possibility of a return to 2.0250 within the next few days. The pound will continue to struggle to make much progress against the euro, but should be able to prevent any immediate moves by the single currency to retake the 0.70 price level. Sterling will come under pressure on the yen and swiss franc crosses, if risk aversion levels rise again later.
Yen
The yen has given back nearly all of yesterday’s gains this morning, as a bounce in European markets Wednesday has attracted a flood of carry trades. There is plenty of high risk data scheduled for release in the US though and any further sharp deterioration in US housing data could spark another sell-off in US equities and see the yen come back into favour. It is difficult to see the US dollar advancing beyond Y118 in the short-term, given the current level of negative sentiment, while any yen advances are likely to occur in bouts of sporadic attacks, similar to what we have seen in the past two days. A significant decline in stocks could see the yen push the dollar back below Y116, with the potential to spike lower towards Y115, if the trend continues into the tonight's session. The euro could rally back up to Y167 against the Japanese currency, if markets manage to stabilise.
CAD
The Bank of Canada issued a broadly neutral statement Tuesday, when voting to keep rates unchanged, as expected. They were not as vociferous in their language about the currency’s high value as they might have been and many market players who are currently long on the CAD may see this as a let-off. At the same time, the statement did see inflation risks as tilting to the downside and have at least left the door slightly ajar for a cut, should events point to any deterioration in the economy. While oil prices are generally supportive of the loonie, the fact that prices are rising on the back of a weak US dollar and a slowing US economy should cause some alarm and the loonie will struggle to penetrate the 0.97 31-year low in the short-term. If US inflation data proves to be soft and US housing data is in line with expectations, the loonie should be able to hold its own. High US inflation data coupled with a rise in risk aversion levels could see the US dollar advance to 0.9850, if only temporarily. The euro is again a good buy at levels close to 1.38. A sharp fall in oil prices might also be seen as a reason to sell the CAD.
Bob B - Oct 17
We failed to see any real move upwards Tuesday and most of the price action was to the downside. 1.4150 was beached but not convincingly and immediate support for the euro is now found around 1.4140. US data yesterday was rather poor and with the international net capital flows coming in at a negative $163 billion in August, this should raise concerns within the US Treasury Department, as doubts amongst foreign investors intensify over the outlook for the US economy and by consequence dollar-denominated assets. August was the month when financial markets endured a major credit squeeze and this will have distorted the capital flow numbers and we will have to wait until next month to see if yesterday’s shock report was a one-off, or the beginning of a worrisome trend. Wednesday sees key inflation and housing data released and the best outcome for the dollar will be a bigger rise than expected in inflation and a better than expected set of housing figures. The core inflation rate is expected to remain unchanged at 2.1%. but should this rise to 2.3% or more, the Fed’s hands may be tied on interest rates later this month and it should give the dollar a much-needed lift. The housing data is expected to be poor – housing starts are forecast at a 1.285 million annual rate. If the number comes in sharply lower than this, then expect risk aversion levels to rise and currency markets to become more volatile. The euro’s prospects of hitting the lifetime high of 1.4280 this week are reducing with each day, as we get closer to the G7 meeting at the weekend. With European politicians expected to raise the issue of the strong euro Vs the dollar and the yen at the weekend (unofficially), many would-be euro supporters will remain on the sidelines for fear of some form of intervention, thus curtailing the scope of immediate euro gains. The dollar does therefore have the potential to break to the downside, if the US inflation data is robust and we could possibly see a retreat to 1.41, or below, later on. If stock markets fall again, it will tend to hamper the euro. On balance, I would rather sell down Wednesday on any price advances towards 1.4240, presuming 1.4242 stays intact. Even if the euro does rally, it will find it difficult to hold its gains, given the wider risks at play.
GBP
Good old David Blanchflower didn’t let the side down at October’s MPC meeting, when being the only member of the committee to vote for a rate cut. The solitary vote is significant in market terms because it means a rate cut is now at least in the mindset of committee members and a cut is likely to command a more heated debate at the next Bank of England meeting in November, particularly following yesterday’s soft inflation report and recent housing data that points to a slowdown in that sector. September's favourable employment report didn’t reveal any new inflation concerns on the wage front and will have little impact on interest rate policy. Cable has managed to hold above the 2.03 line again today but it looks good value for a sell-down on any advances close to 2.04, with the possibility of a return to 2.0250 within the next few days. The pound will continue to struggle to make much progress against the euro, but should be able to prevent any immediate moves by the single currency to retake the 0.70 price level. Sterling will come under pressure on the yen and swiss franc crosses, if risk aversion levels rise again later.
Yen
The yen has given back nearly all of yesterday’s gains this morning, as a bounce in European markets Wednesday has attracted a flood of carry trades. There is plenty of high risk data scheduled for release in the US though and any further sharp deterioration in US housing data could spark another sell-off in US equities and see the yen come back into favour. It is difficult to see the US dollar advancing beyond Y118 in the short-term, given the current level of negative sentiment, while any yen advances are likely to occur in bouts of sporadic attacks, similar to what we have seen in the past two days. A significant decline in stocks could see the yen push the dollar back below Y116, with the potential to spike lower towards Y115, if the trend continues into the tonight's session. The euro could rally back up to Y167 against the Japanese currency, if markets manage to stabilise.
CAD
The Bank of Canada issued a broadly neutral statement Tuesday, when voting to keep rates unchanged, as expected. They were not as vociferous in their language about the currency’s high value as they might have been and many market players who are currently long on the CAD may see this as a let-off. At the same time, the statement did see inflation risks as tilting to the downside and have at least left the door slightly ajar for a cut, should events point to any deterioration in the economy. While oil prices are generally supportive of the loonie, the fact that prices are rising on the back of a weak US dollar and a slowing US economy should cause some alarm and the loonie will struggle to penetrate the 0.97 31-year low in the short-term. If US inflation data proves to be soft and US housing data is in line with expectations, the loonie should be able to hold its own. High US inflation data coupled with a rise in risk aversion levels could see the US dollar advance to 0.9850, if only temporarily. The euro is again a good buy at levels close to 1.38. A sharp fall in oil prices might also be seen as a reason to sell the CAD.
Bob B - Oct 17
Thứ Ba, 16 tháng 10, 2007
Bob's Currency Focus - 12:00 GMT
EUR/USD
Currency markets are on a volatile footing Tuesday after stock markets declined overnight and we witnessed a sharp sell-off in the carry trade this morning. This has made the euro more vulnerable, because it has appreciated significantly against the yen in recent weeks. The euro has dropped to 1.4150 against the dollar this morning, a level that has held since the middle of last week and with no key US economic releases Tuesday, direction today will be determined by risk tolerance levels. A further unwinding of carry trades will undermine the euro and the pair could retreat to 1.41, with the outside possibility of sharp return back close to 1.40, if fear intensifies. If equity markets settle, then the current market price should be taken as a buy opportunity and the euro could bounce back to 1.4240. Bernanke’s comments overnight during a speech in New York were not especially positive for the dollar and there is still a strong sense that the Fed will move to cut rates again, possibly at the end of this month. This will keep the US currency on the defensive in the short-term and any dollar rallies should prove to be temporary, so long as market conditions remain stable. October's ZEW business survey index for Germany was unchanged from September and this must be taken as a plus for the euro, given the concerns raging about higher energy costs and the high value of the euro. Euro inflation for September was confirmed at 2.1%, the first time the rate has exceeded the ECB’s guideline rate of 2.0% since August 2006. With the ECB likely to maintain their hawkish stance against this background, there is every opportunity for the euro to take out the lifetime high of 1.4280 this week. For today, I would be inclined to buy around 1.4150 to 1.4160 with a stop at 1.4125 and a target price of 1.4240.
GBP
Sterling bulls took a knock this morning when September’s consumer price inflation came in unchanged at a benign 1.8%. It is the third consecutive month that the CPI rate has come in below the Bank of England’s 2% target. With inflation under control the Bank are in a position to lower UK interest rates within the next two months, if a further deterioration is seen in the housing sector or if financial markets encounter another credit crunch. We will find out on Wednesday, when the Bank of England minutes from the October meeting are released, just how dovish or otherwise thinking is on the Monetary Policy Committee. Sterling is certain to come under selling pressure against the euro and the dollar, particularly after it has rallied. Cable again looks like a good sell-down opportunity on levels close to 2.04, while it is difficult to see EUR/GBP breaking significantly below 0.6950 in the short-term, and any price near this level offers an opportunity for a rally back up towards 0.70. Sterling could fall sharply against the yen today, if the carry trade comes under increased pressure.
Yen
The yen came through like a train this morning as market panic overnight sent the first layer of carry traders running for the exits. USD/JPY went as low as 116.43 this morning and has currently settled around 116.75. The euro also fell by more than Y1.5 since last evening’s close and it currently at 165.26. We may see further sharp appreciation by the Japanese currency is risk aversions remain high today and traders need to keep a close eye on the performance of US stock markets. If the Dow IA strikes triple digit losses again today, then we could see the dollar fall to at least Y116 and maybe 115.50. te euro could decline back as far as Y164 in the short-term. However, the yen is not a currency traders like to hold for long and if stock markets rebound, then the currency will depreciate sharply, possibly back as far as Monday’s levels of Y117.50 against the dollar and Y167 against the euro. The biggest gains from a major carry unwind should be made on the AUD/JPY and NZD/JPY pairs. The yen is a dangerous currency to be trading in current market conditions and the rewards/losses can be substantial.
CAD
This is D Day in many respects for the loonie. With the currency having appreciated by 8% since the last Bank of Canada meeting in September, all eyes today (14:00 GMT) will be on what the Bank has to say about the country’s runaway currency. A rate cut, though unlikely, cannot be ruled out, but at the very least I expect the Central Bank to issue a strongly worded statement in an attempt to rein in a currency that has gained a massive 20% against the US dollar in the past 6 months. A failure to do so will be taken as the Bank effectively turning a ‘blind eye’ and could propel the loonie to further rapid gains, particularly since it is now armed with accelerating oil prices. Today is a stern test of the Bank of Canada’s mettle. The loonie will face a major reversal if rates are cut, or if the Bank’s statement signals a shift to an easing policy. Such a shift could see the dollar return to parity against its Canadian counterpart in the coming days, even in the face of rising commodity prices. Anything less will be taken as the committee being passive towards the currency’s appreciation and we could quickly return to the low at 0.97 for USD/CAD, with the possibility of a slide to 0.95 in the coming days. EUR/CAD and AUD/CAD offer good buy prospects, particularly if markets settle today and the Bank of Canada are dovish on monetary policy.
Bob B - Oct 16
Currency markets are on a volatile footing Tuesday after stock markets declined overnight and we witnessed a sharp sell-off in the carry trade this morning. This has made the euro more vulnerable, because it has appreciated significantly against the yen in recent weeks. The euro has dropped to 1.4150 against the dollar this morning, a level that has held since the middle of last week and with no key US economic releases Tuesday, direction today will be determined by risk tolerance levels. A further unwinding of carry trades will undermine the euro and the pair could retreat to 1.41, with the outside possibility of sharp return back close to 1.40, if fear intensifies. If equity markets settle, then the current market price should be taken as a buy opportunity and the euro could bounce back to 1.4240. Bernanke’s comments overnight during a speech in New York were not especially positive for the dollar and there is still a strong sense that the Fed will move to cut rates again, possibly at the end of this month. This will keep the US currency on the defensive in the short-term and any dollar rallies should prove to be temporary, so long as market conditions remain stable. October's ZEW business survey index for Germany was unchanged from September and this must be taken as a plus for the euro, given the concerns raging about higher energy costs and the high value of the euro. Euro inflation for September was confirmed at 2.1%, the first time the rate has exceeded the ECB’s guideline rate of 2.0% since August 2006. With the ECB likely to maintain their hawkish stance against this background, there is every opportunity for the euro to take out the lifetime high of 1.4280 this week. For today, I would be inclined to buy around 1.4150 to 1.4160 with a stop at 1.4125 and a target price of 1.4240.
GBP
Sterling bulls took a knock this morning when September’s consumer price inflation came in unchanged at a benign 1.8%. It is the third consecutive month that the CPI rate has come in below the Bank of England’s 2% target. With inflation under control the Bank are in a position to lower UK interest rates within the next two months, if a further deterioration is seen in the housing sector or if financial markets encounter another credit crunch. We will find out on Wednesday, when the Bank of England minutes from the October meeting are released, just how dovish or otherwise thinking is on the Monetary Policy Committee. Sterling is certain to come under selling pressure against the euro and the dollar, particularly after it has rallied. Cable again looks like a good sell-down opportunity on levels close to 2.04, while it is difficult to see EUR/GBP breaking significantly below 0.6950 in the short-term, and any price near this level offers an opportunity for a rally back up towards 0.70. Sterling could fall sharply against the yen today, if the carry trade comes under increased pressure.
Yen
The yen came through like a train this morning as market panic overnight sent the first layer of carry traders running for the exits. USD/JPY went as low as 116.43 this morning and has currently settled around 116.75. The euro also fell by more than Y1.5 since last evening’s close and it currently at 165.26. We may see further sharp appreciation by the Japanese currency is risk aversions remain high today and traders need to keep a close eye on the performance of US stock markets. If the Dow IA strikes triple digit losses again today, then we could see the dollar fall to at least Y116 and maybe 115.50. te euro could decline back as far as Y164 in the short-term. However, the yen is not a currency traders like to hold for long and if stock markets rebound, then the currency will depreciate sharply, possibly back as far as Monday’s levels of Y117.50 against the dollar and Y167 against the euro. The biggest gains from a major carry unwind should be made on the AUD/JPY and NZD/JPY pairs. The yen is a dangerous currency to be trading in current market conditions and the rewards/losses can be substantial.
CAD
This is D Day in many respects for the loonie. With the currency having appreciated by 8% since the last Bank of Canada meeting in September, all eyes today (14:00 GMT) will be on what the Bank has to say about the country’s runaway currency. A rate cut, though unlikely, cannot be ruled out, but at the very least I expect the Central Bank to issue a strongly worded statement in an attempt to rein in a currency that has gained a massive 20% against the US dollar in the past 6 months. A failure to do so will be taken as the Bank effectively turning a ‘blind eye’ and could propel the loonie to further rapid gains, particularly since it is now armed with accelerating oil prices. Today is a stern test of the Bank of Canada’s mettle. The loonie will face a major reversal if rates are cut, or if the Bank’s statement signals a shift to an easing policy. Such a shift could see the dollar return to parity against its Canadian counterpart in the coming days, even in the face of rising commodity prices. Anything less will be taken as the committee being passive towards the currency’s appreciation and we could quickly return to the low at 0.97 for USD/CAD, with the possibility of a slide to 0.95 in the coming days. EUR/CAD and AUD/CAD offer good buy prospects, particularly if markets settle today and the Bank of Canada are dovish on monetary policy.
Bob B - Oct 16
Thứ Hai, 15 tháng 10, 2007
Bob's Currency Focus - 13:00 GMT
EUR/USD
The euro held support at 1.4150 Friday even though US economic data was stronger than expected. The dollar is simply unable to gain any momentum at present with the market effectively anticipating a further Fed rate cut later this month. We have key inflation and housing data out in the US this Wednesday and ahead of that there is a speech by Fed Chairman Ben Bernanke tonight. Bernanke is unlikely to give too much away in tonight’s speech ahead of a key policy meeting later this month, but if he does emphasis continued weakness in the housing sector and further downside growth risks to the wider economy, then the dollar will suffer. The euro is ideally positioned price-wise to take out the lifetime high at 1.4280, if Bernanke says the ‘wrong’ thing this evening. If he says nothing or talks up inflation risks, then there is plenty of scope for a pullback to 1.4160, or below. Failure by the dollar to take out 1.4150 will however leave the bulls firmly in control. Expect most of today’s price action to be between 1.4150 to 1.4250.
GBP
Sterling bounced back rather miraculously on Friday and made further inroads Monday on the back of broad dollar weakness and increased appetite for the carry trade. Sterling has been very volatile in the past week and has fluctuated sporadically against nearly all currencies with little clear directional pattern developing in the short-term. This is a major week for UK data, with consumer price inflation data Tuesday and the Bank of England minutes of the October meeting released Wednesday. Tuesday’s inflation data could determine whether or not the BoE have scope to cut interest rates when they meet in November, while the Bank of England minutes will inform us whether or not the MPC are inclined to move on interest rates at all. Cable should remain in a 2.03 to 2.0440 price range until Tuesday’s data, while the pound should attract support on any rallies to 0.70 against the euro.
Yen
The only currency doing worse than the US dollar right now is the yen, which continues to be the target of risk-hungry carry traders. This situation is unlikely to change unless there is a distinct rise in risk aversion levels. The dollar should be able to rise to 118 against the yen in the short-term, although it could prove difficult to hold significantly above this level ahead of the weekend’s G7 meeting, when weakness of both the dollar and the yen may be raised as an issue. The euro rose to above 1.6750 against the yen Monday morning and now seems on course to challenge the lifetime high at 1.6894 this week. There appears little reason why this level won’t be taken out and if the yen cedes the 118 price line to the dollar, then expect the euro to hit the all-time high against the Japanese currency in the coming days.
Cad
The loonie hit yet another 31 year high against the greenback Friday (and Monday), when the dollar slipped to 0.9705 against its North American rival. Canada’s leading indicator rose 0.4% in September and vehicle sales rebounded to jump 2.8% in August. Record oil prices are helping to curtail the extent of any US dollar rally and the key question now for the pair is how low can it go, or how low will it be allowed to go? The Bank of Canada meet Tuesday and they find themselves in a serious dilemma. While the country’s underlying fundamentals appear to be sound, many of the economic reports released of late do not reflect the impact of the loonies surge through September and October, during which time it appreciated by almost 8 cents. There has to be concerns within the Bank of Canada about the serious implications for the competitiveness of Canada’s economy moving forward and they may well use the opportunity this Tuesday to signal their intentions on how to manage the impact of the loonie’s strength. It is not beyond the bounds of possibility that they could even cut rates tomorrow, or signal to the market that the next rate move is likely to be down. Tomorrow is a major risk event for the loonie and it could retreat back to at least 0.98 ahead of the Bank of Canada statement at 13:00GMT Tuesday. The euro looks at present to offer good value at levels close to 1.38 against the loonie.
Bob B - Oct 15
The euro held support at 1.4150 Friday even though US economic data was stronger than expected. The dollar is simply unable to gain any momentum at present with the market effectively anticipating a further Fed rate cut later this month. We have key inflation and housing data out in the US this Wednesday and ahead of that there is a speech by Fed Chairman Ben Bernanke tonight. Bernanke is unlikely to give too much away in tonight’s speech ahead of a key policy meeting later this month, but if he does emphasis continued weakness in the housing sector and further downside growth risks to the wider economy, then the dollar will suffer. The euro is ideally positioned price-wise to take out the lifetime high at 1.4280, if Bernanke says the ‘wrong’ thing this evening. If he says nothing or talks up inflation risks, then there is plenty of scope for a pullback to 1.4160, or below. Failure by the dollar to take out 1.4150 will however leave the bulls firmly in control. Expect most of today’s price action to be between 1.4150 to 1.4250.
GBP
Sterling bounced back rather miraculously on Friday and made further inroads Monday on the back of broad dollar weakness and increased appetite for the carry trade. Sterling has been very volatile in the past week and has fluctuated sporadically against nearly all currencies with little clear directional pattern developing in the short-term. This is a major week for UK data, with consumer price inflation data Tuesday and the Bank of England minutes of the October meeting released Wednesday. Tuesday’s inflation data could determine whether or not the BoE have scope to cut interest rates when they meet in November, while the Bank of England minutes will inform us whether or not the MPC are inclined to move on interest rates at all. Cable should remain in a 2.03 to 2.0440 price range until Tuesday’s data, while the pound should attract support on any rallies to 0.70 against the euro.
Yen
The only currency doing worse than the US dollar right now is the yen, which continues to be the target of risk-hungry carry traders. This situation is unlikely to change unless there is a distinct rise in risk aversion levels. The dollar should be able to rise to 118 against the yen in the short-term, although it could prove difficult to hold significantly above this level ahead of the weekend’s G7 meeting, when weakness of both the dollar and the yen may be raised as an issue. The euro rose to above 1.6750 against the yen Monday morning and now seems on course to challenge the lifetime high at 1.6894 this week. There appears little reason why this level won’t be taken out and if the yen cedes the 118 price line to the dollar, then expect the euro to hit the all-time high against the Japanese currency in the coming days.
Cad
The loonie hit yet another 31 year high against the greenback Friday (and Monday), when the dollar slipped to 0.9705 against its North American rival. Canada’s leading indicator rose 0.4% in September and vehicle sales rebounded to jump 2.8% in August. Record oil prices are helping to curtail the extent of any US dollar rally and the key question now for the pair is how low can it go, or how low will it be allowed to go? The Bank of Canada meet Tuesday and they find themselves in a serious dilemma. While the country’s underlying fundamentals appear to be sound, many of the economic reports released of late do not reflect the impact of the loonies surge through September and October, during which time it appreciated by almost 8 cents. There has to be concerns within the Bank of Canada about the serious implications for the competitiveness of Canada’s economy moving forward and they may well use the opportunity this Tuesday to signal their intentions on how to manage the impact of the loonie’s strength. It is not beyond the bounds of possibility that they could even cut rates tomorrow, or signal to the market that the next rate move is likely to be down. Tomorrow is a major risk event for the loonie and it could retreat back to at least 0.98 ahead of the Bank of Canada statement at 13:00GMT Tuesday. The euro looks at present to offer good value at levels close to 1.38 against the loonie.
Bob B - Oct 15
Thứ Sáu, 12 tháng 10, 2007
Bob's Currency Focus
USD
The dollar declined against most currencies Thursday, although it did manage to recoup some of its losses towards the close and gained against sterling and the yen. Despite a better than expected reduction in the country’s trade deficit and a decline in jobless numbers, traders are generally shying away from the currency as traders begin to expect a further Fed rate cut at the end of this month. Every dollar rally we are seeing is fleeting and the market is using each opportunity as a means of selling the greenback at a cut-down price. There is huge complacency out there at the moment but with the prospect of further rate cuts in the US while on hold elsewhere, nobody wants to stay on the dollar for long. Anything short of a very positive retail sales number today is unlikely to offer even short-term dollar support. Volatility in equity markets has increased and if we see a significant decline today in stocks, it may offer the dollar some protection, albeit temporary. A poor retail sales number coupled with a bounce in equities should see the dollar lose out to the euro, the AUD, CAD and NZD, although it could rise to 118 against the yen. A very positive retail sales number >0.5% should help pare back rate cut prospects and boost the dollar across the board. Against the euro, the dollar needs to break below 141.50 and 1.4130, if it to make any meaningful progress. There is also the potential for a move to 201.90 against sterling later today.
EUR
The euro was boosted early Friday by a positive set of Industrial Production numbers for the euro area in August, which came in much higher than expectations. Comments about inflation made by ECB German member Alex Weber Thursday caused some consternation in wider markets, but helped in part to give the euro a lift to 1.4240 against the dollar. Weber suggested that the ECB may have to continue to raise interest rates, even if economic growth were to continue to slow, to keep price inflation risks under control. The euro rose sharply to 0.70 against sterling yesterday and is currently trading near that price level. We may see a push back up towards 1.4250 today against the dollar, because the pair is still not overbought on the daily chart, while progress against the yen will very much depend on risk tolerance levels, which declined somewhat Thursday, after a drop in stock prices. The euro also rose to a fresh lifetime high against the Swiss franc Thursday, going over 1.68 for the first time and the pair currently trade close to that price level. An interim move to 1.6850 is possible, particularly if equity markets trade positively. There could be greater market volatility Friday and a broad fluctuation in prices, similar to what we saw on Thursday, is likely.
GBP
Sterling has struggled ever since the RICS house price index was published Thursday and cable today tested price levels just below 2.0250, having been above 2.04 early yesterday. Sentiment remains negative towards the currency and although it is gaining some protection from increased interest in carry currencies, it will probably continue to be sold off on any significant rallies, particularly against the US dollar. Although prospects of a Bank of England rate cut before the end of the year appear to be rising, markets will have to wait until next week’s consumer price inflation data before firming expectations. Sterling looks oversold against the euro and any advances towards 0.7020 should attract some selling pressure, with the potential for a near term move back towards 0.6970. If cable comes under pressure, then we could see a retreat back as far as 2.0195, but if the dollar comes under pressure because of US data, then sterling could rise back to 2.0350.
Yen
The increased appetite for the carry trade had the yen on a major defensive over the past 24 hours, although a sudden decline in risk tolerance helped the Japanese currency stabilise overnight. The yen is still vulnerable though and a retreat to 118 against the US currency Friday looks possible, if the US currency gets boosted by domestic economic data. If high yielding currencies come under threat later Friday, then the yen will profit, particularly against the AUD, NZD and sterling. Consumer sentiment rose in Japan for the first time in 5 months in September, but the data had no market impact as the yen’s price movements are currently dictated by risk tolerance levels.
CAD
The loonie hit a fresh 31 year high against the USD Thursday, the pair clocking below 0.9730. The dollar rallied to 0.9797 early Friday but the pair again came under selling pressure and is currently trading around 0.9750. August’s trade surplus in Canada came in higher than expected, although when one looks at the detail of the report it is not as positive as it appears on the surface. Exports fell by 1.8%, while imports fell 3.8%, indicating an easing in domestic consumption. With oil prices riding close to $83, the loonie will continue to be supported strongly and any rallies in the USD are likely to attract fresh selling pressure. There is no data from Canada Friday, but there is likely to be some positioning over the next few days ahead of Tuesday’s Bank of Canada meeting, so expect an increase in volatility between now and then. With few players short on CAD right now, we may see an exit of a number of long positions before Tuesday, which should give the USD the chance to correct back to at least 0.9830 before then.
Bob B - Oct 12
The dollar declined against most currencies Thursday, although it did manage to recoup some of its losses towards the close and gained against sterling and the yen. Despite a better than expected reduction in the country’s trade deficit and a decline in jobless numbers, traders are generally shying away from the currency as traders begin to expect a further Fed rate cut at the end of this month. Every dollar rally we are seeing is fleeting and the market is using each opportunity as a means of selling the greenback at a cut-down price. There is huge complacency out there at the moment but with the prospect of further rate cuts in the US while on hold elsewhere, nobody wants to stay on the dollar for long. Anything short of a very positive retail sales number today is unlikely to offer even short-term dollar support. Volatility in equity markets has increased and if we see a significant decline today in stocks, it may offer the dollar some protection, albeit temporary. A poor retail sales number coupled with a bounce in equities should see the dollar lose out to the euro, the AUD, CAD and NZD, although it could rise to 118 against the yen. A very positive retail sales number >0.5% should help pare back rate cut prospects and boost the dollar across the board. Against the euro, the dollar needs to break below 141.50 and 1.4130, if it to make any meaningful progress. There is also the potential for a move to 201.90 against sterling later today.
EUR
The euro was boosted early Friday by a positive set of Industrial Production numbers for the euro area in August, which came in much higher than expectations. Comments about inflation made by ECB German member Alex Weber Thursday caused some consternation in wider markets, but helped in part to give the euro a lift to 1.4240 against the dollar. Weber suggested that the ECB may have to continue to raise interest rates, even if economic growth were to continue to slow, to keep price inflation risks under control. The euro rose sharply to 0.70 against sterling yesterday and is currently trading near that price level. We may see a push back up towards 1.4250 today against the dollar, because the pair is still not overbought on the daily chart, while progress against the yen will very much depend on risk tolerance levels, which declined somewhat Thursday, after a drop in stock prices. The euro also rose to a fresh lifetime high against the Swiss franc Thursday, going over 1.68 for the first time and the pair currently trade close to that price level. An interim move to 1.6850 is possible, particularly if equity markets trade positively. There could be greater market volatility Friday and a broad fluctuation in prices, similar to what we saw on Thursday, is likely.
GBP
Sterling has struggled ever since the RICS house price index was published Thursday and cable today tested price levels just below 2.0250, having been above 2.04 early yesterday. Sentiment remains negative towards the currency and although it is gaining some protection from increased interest in carry currencies, it will probably continue to be sold off on any significant rallies, particularly against the US dollar. Although prospects of a Bank of England rate cut before the end of the year appear to be rising, markets will have to wait until next week’s consumer price inflation data before firming expectations. Sterling looks oversold against the euro and any advances towards 0.7020 should attract some selling pressure, with the potential for a near term move back towards 0.6970. If cable comes under pressure, then we could see a retreat back as far as 2.0195, but if the dollar comes under pressure because of US data, then sterling could rise back to 2.0350.
Yen
The increased appetite for the carry trade had the yen on a major defensive over the past 24 hours, although a sudden decline in risk tolerance helped the Japanese currency stabilise overnight. The yen is still vulnerable though and a retreat to 118 against the US currency Friday looks possible, if the US currency gets boosted by domestic economic data. If high yielding currencies come under threat later Friday, then the yen will profit, particularly against the AUD, NZD and sterling. Consumer sentiment rose in Japan for the first time in 5 months in September, but the data had no market impact as the yen’s price movements are currently dictated by risk tolerance levels.
CAD
The loonie hit a fresh 31 year high against the USD Thursday, the pair clocking below 0.9730. The dollar rallied to 0.9797 early Friday but the pair again came under selling pressure and is currently trading around 0.9750. August’s trade surplus in Canada came in higher than expected, although when one looks at the detail of the report it is not as positive as it appears on the surface. Exports fell by 1.8%, while imports fell 3.8%, indicating an easing in domestic consumption. With oil prices riding close to $83, the loonie will continue to be supported strongly and any rallies in the USD are likely to attract fresh selling pressure. There is no data from Canada Friday, but there is likely to be some positioning over the next few days ahead of Tuesday’s Bank of Canada meeting, so expect an increase in volatility between now and then. With few players short on CAD right now, we may see an exit of a number of long positions before Tuesday, which should give the USD the chance to correct back to at least 0.9830 before then.
Bob B - Oct 12
Thứ Năm, 11 tháng 10, 2007
Market Watch: US Exports its Deficit
Is this deliberate policy?
The US dollar has spent much of the past 6 months hitting record lows against most of the world’s leading currencies, including the pound, the euro and nearly all of the major commodity currencies: the Australian dollar, the Canadian dollar and the Norwegian Krone. The US currency has fallen 20% against the Canadian dollar (the US constitutes 80% of Canada’s exports) since March, 15% against the Australian dollar since August and 7% against the euro in the past 7 weeks. Although the dollar is the weakest of the major currencies in the world this year, US politicians have grown more vocal about the weak Chinese currency (primarily a fixed rate currency allowed to trade within a narrow band with the US dollar) and have been pushing legislative bills to penalise China for its apparent currency manipulation. Yet, is the US guilty of a similar offence and is it allowing its currency slide into the abyss, deliberately. With the US dollar index at an all-time low, many would argue the currency has already reached the abyss, yet having the worst current account deficit per capita of any leading economy, does the US Administration really want a stronger dollar?
Why might the Administration want a weaker currency?
1. With the economy slowing, a weak currency makes US exports cheaper and thus helps to stimulate activity and growth in the country’s export sector.
2. Imports become more expensive and thus US products are more competitive on the home market, again helping to stimulate domestic growth.
3. A weaker currency leads to a narrowing of the country’s trade deficit, thus improving the country’s current account and international debt liability.
4. Attracting greater foreign investment (it is now cheaper for investors to buy dollar denominated assets).
5. Encouraging greater numbers of tourists and thus greater consumption of US goods.
6. The value of the country’s own foreign currency and gold reserves increases and the net liability of previously issued debt in relative terms is reduced.
The dangers of a weaker currency ?
1. Imported Inflation. Essential imports like energy are rising in price not just on increased global demand, but also because of a weaker dollar (all major commodities are denominated in dollar). This means the US will be paying more than other countries for oil, gas etc. and the inflationary impact of higher prices will be greater in the US than anywhere else.
2. Dumping of dollar denominated assets. If investors believe the dollar is going to depreciate more and more in the longer run, they will be tempted to offload their assets sooner rather than later. The sharper the dollar decline, the more acute the investor panic and this could lead to a major dump of dollar denominated assets and by consequence higher US inflation.
3. No takers for US debt. If the yield on US bills is less than the dollar’s level of depreciation, then the attractiveness of holding US debt is diminished. Indeed, in such a scenario the only nations for whom it makes sense to continue to buy dollar-denominated asset paper would be those countries that have a currency that is aligned to the US dollar, like China and the oil-exporting nations of the Middle East. Continued dollar depreciation could force the oil-rich countries of the Middle East to break their alignment to the dollar, so as to preserve the value of their oil revenues.
4. China. Arguably the one country that benefits more than the US from a weaker dollar is China. With its currency directly aligned to the dollar, the conversion of its revenues from exports to the US into the local reminbi currency is primarily the same, regardless of the value of the US dollar. As well as this, a weaker US dollar, means a weaker reminbi relative to other world currencies and makes Chinese exports to other parts of the world all the more competitive. Also, if China continues to be the major holder of US debt, more and more control of the US economy and economic destiny will be given to the Chinese.
5. Stature. The US likes its mantle as the world’s dominant economy and owning the world’s premier currency. The dollar may become secondary in importance to the euro, or the reminbi, if it loses its credibility and role as a ‘haven’ currency and this could greatly weaken the economic influence of the US in the world.
6. A Dollar crash. Though unlikely, it is conceivable that the US dollar could become such a liability that nobody wants to hold it and a wave of panic selling / speculative overdrive could lead to a capitulation of the currency, like that seen for some Eastern currencies during the Asian financial crisis. A collapse of the dollar would plunge the world economy into crisis, but the world’s central banks and governments are unlikely to allow that to happen, not while it remains the predominant currency anyhow.
So is a weak dollar US government policy?
It is very difficult to prove but what we do know is that the current Administration has paid only lip service to the decline of its currency, so this indicates they’re untroubled. The Fed’s decision to cut rates aggressively and thus add liquidity to a domestic economy already heavily indebted, demonstrates the Fed does not expect today's US consumer to pay for the country’s massive deficit, at least not in the foreseeable future. Short-term economic gain is better than long-term pain for future generations of Americans – could this be the Fed’s thinking, or is it a case of weakening the currency to shift the US deficit problem to other parts of the world. Either way, it’s a massive gamble and somebody, somewhere will be left holding the tab.
Ted B - Oct 11
The US dollar has spent much of the past 6 months hitting record lows against most of the world’s leading currencies, including the pound, the euro and nearly all of the major commodity currencies: the Australian dollar, the Canadian dollar and the Norwegian Krone. The US currency has fallen 20% against the Canadian dollar (the US constitutes 80% of Canada’s exports) since March, 15% against the Australian dollar since August and 7% against the euro in the past 7 weeks. Although the dollar is the weakest of the major currencies in the world this year, US politicians have grown more vocal about the weak Chinese currency (primarily a fixed rate currency allowed to trade within a narrow band with the US dollar) and have been pushing legislative bills to penalise China for its apparent currency manipulation. Yet, is the US guilty of a similar offence and is it allowing its currency slide into the abyss, deliberately. With the US dollar index at an all-time low, many would argue the currency has already reached the abyss, yet having the worst current account deficit per capita of any leading economy, does the US Administration really want a stronger dollar?
Why might the Administration want a weaker currency?
1. With the economy slowing, a weak currency makes US exports cheaper and thus helps to stimulate activity and growth in the country’s export sector.
2. Imports become more expensive and thus US products are more competitive on the home market, again helping to stimulate domestic growth.
3. A weaker currency leads to a narrowing of the country’s trade deficit, thus improving the country’s current account and international debt liability.
4. Attracting greater foreign investment (it is now cheaper for investors to buy dollar denominated assets).
5. Encouraging greater numbers of tourists and thus greater consumption of US goods.
6. The value of the country’s own foreign currency and gold reserves increases and the net liability of previously issued debt in relative terms is reduced.
The dangers of a weaker currency ?
1. Imported Inflation. Essential imports like energy are rising in price not just on increased global demand, but also because of a weaker dollar (all major commodities are denominated in dollar). This means the US will be paying more than other countries for oil, gas etc. and the inflationary impact of higher prices will be greater in the US than anywhere else.
2. Dumping of dollar denominated assets. If investors believe the dollar is going to depreciate more and more in the longer run, they will be tempted to offload their assets sooner rather than later. The sharper the dollar decline, the more acute the investor panic and this could lead to a major dump of dollar denominated assets and by consequence higher US inflation.
3. No takers for US debt. If the yield on US bills is less than the dollar’s level of depreciation, then the attractiveness of holding US debt is diminished. Indeed, in such a scenario the only nations for whom it makes sense to continue to buy dollar-denominated asset paper would be those countries that have a currency that is aligned to the US dollar, like China and the oil-exporting nations of the Middle East. Continued dollar depreciation could force the oil-rich countries of the Middle East to break their alignment to the dollar, so as to preserve the value of their oil revenues.
4. China. Arguably the one country that benefits more than the US from a weaker dollar is China. With its currency directly aligned to the dollar, the conversion of its revenues from exports to the US into the local reminbi currency is primarily the same, regardless of the value of the US dollar. As well as this, a weaker US dollar, means a weaker reminbi relative to other world currencies and makes Chinese exports to other parts of the world all the more competitive. Also, if China continues to be the major holder of US debt, more and more control of the US economy and economic destiny will be given to the Chinese.
5. Stature. The US likes its mantle as the world’s dominant economy and owning the world’s premier currency. The dollar may become secondary in importance to the euro, or the reminbi, if it loses its credibility and role as a ‘haven’ currency and this could greatly weaken the economic influence of the US in the world.
6. A Dollar crash. Though unlikely, it is conceivable that the US dollar could become such a liability that nobody wants to hold it and a wave of panic selling / speculative overdrive could lead to a capitulation of the currency, like that seen for some Eastern currencies during the Asian financial crisis. A collapse of the dollar would plunge the world economy into crisis, but the world’s central banks and governments are unlikely to allow that to happen, not while it remains the predominant currency anyhow.
So is a weak dollar US government policy?
It is very difficult to prove but what we do know is that the current Administration has paid only lip service to the decline of its currency, so this indicates they’re untroubled. The Fed’s decision to cut rates aggressively and thus add liquidity to a domestic economy already heavily indebted, demonstrates the Fed does not expect today's US consumer to pay for the country’s massive deficit, at least not in the foreseeable future. Short-term economic gain is better than long-term pain for future generations of Americans – could this be the Fed’s thinking, or is it a case of weakening the currency to shift the US deficit problem to other parts of the world. Either way, it’s a massive gamble and somebody, somewhere will be left holding the tab.
Ted B - Oct 11
Bob's Currency Focus - 12:00 GMT
USD
The dollar plummeted in early European trading, with the US dollar index collapsing to below 78 again, near its all-time low. New-found negative sentiment has clung to the currency since the release of the Fed minutes Tuesday, with many analysts now expecting the Fed to again cut rates at the end of this month. Last Friday’s apparent upbeat employment report is now but a distant memory. The euro rose to above 1.42 against the dollar yet again and within striking distance of the lifetime high, while the Canadian dollar and Australian dollars hit fresh 30 year and 24 year highs respectively against the beleaguered greenback Thursday morning. The dollar has managed to rise to 117.40 against the yen, which weakened across the board as the Bank of Japan kept interest rates on hold for the fourth consecutive meeting. The dollar has also held its own against the pound which is trading weaker this morning. Some of the positioning against the US dollar looks to be ambitious in the short-term, particularly with the euro, and the dollar does have a chance to reclaim some of its losses later today, particularly if we see a strong trade balance number. The currency has been struggling to hold onto any gains for long, so if you are going to back the dollar, the advice is not to sit on your positions for too long if you can help it. There is the potential for a rise to 118 against the yen and a move to 2.03 against sterling, while 1.41 against the euro is favoured ahead ahead of a fall of the lifetime high, which sits at 1.4280.
EURO
The European Commission this morning lowered its GDP forecast for quarter 3 to between 0.3% and 0.7% from 0.3% to 0.8%, while Eurostat confirmed quarter 2 GDP at a lowly 0.3%, in line with the original estimates. While the euro economy does not appear to be firing on all cylinders, it is still attracting a lot of support, being the only viable major currency alternative to an out-of-favour US dollar. With a new wave of negative dollar sentiment sweeping markets, the euro is in with a great chance of rising to above the lifetime high of 1.4280 within the next week. A weak US retail sales number Friday could provide the impetus traders need to push towards that milestone, while a period of consolidation is likely today with the currency having risen from a low of 1.4014 on Tuesday to 1.4217 this morning. A drift back to 1.4150 looks more likely in the short-term, before the next leg up. The euro rose significantly against the pound this morning, hitting a high of over 0.6970 and has the potential to reach 0.70 in the short-term, while the single currency has gained over 100 pips against the yen Thursday and at 1.6687, it is now within sight of the all-time highs near 1.70. With the carry trade back in vogue, there appears little to stop the euro reaching a new record against the yen, unless we encounter a prolonged bout of market instability, or have Central Bank intervention.
GBP
The pound came under pressure Thursday as the RICS house price survey for September reported the greatest fall in house prices in over 2 years. Despite the bad news, against the majors the pound only lost against the euro, while holding its own against the US dollar and gaining 100 pips against the yen. It remains vulnerable though as concerns about the economy’s housing sector grow, although greater interest in the higher yielding currencies will afford it some protection in the short-term. We could see the euro rise to 0.70, while a decline to below 2.03 against the dollar is possible later today. There is no further economic data out of the UK this week and the currency’s immediate fate will very much depend on US data.
Yen
As expected the Bank of Japan kept rates on hold Thursday and with Governor Fukui’s press statement lacking in clarity and seemingly riddled with contradictions, the smart money is on the Bank of Japan remaining on hold until the end of the year. The yen, not surprisingly, ceded further ground against all currencies this morning, particularly against the euro, with EUR/JPY having reached 1.67. The yen is currently at 117.50 against the dollar and could fall to below 118 later today, especially if US stock markets rally. The Japanese currency has also fallen dramatically against the commodity currencies today and with intensified interest in the carry trade as risk tolerance levels remain high, the yen looks under threat to the end of the week. The only chance of respite for the yen is if stock markets reverse rends and risk aversion levels rise.
CAD
The loonie struck yet another 30 year high today against the US dollar, with the US currency dropping to 0.9746 earlier Thursday. Rising oil prices have helped to underpin the Canadian currency, which thus far has shown no inclination to correct, following its recent rapid rise. Today’s Trade Balance number will be important to test the competitiveness of Canadian exporters, faced with a strengthening domestic currency. The figure is from August, so will not capture the most recent sharp appreciation in the currency, which occurred during September. A sharp narrowing of the trade surplus, particularly with the US would hurt the loonie and should send it into retreat. The CAD does not offer any value against the US dollar at current levels and there is the potential for a correction to 0.9830, or even higher if the trade data is bad. A much wider than expected trade surplus on the other hand could help the loonie push the dollar back to 0.97. The best cross to range trade right now remains AUD/CAD.
Bob B - Oct 11
The dollar plummeted in early European trading, with the US dollar index collapsing to below 78 again, near its all-time low. New-found negative sentiment has clung to the currency since the release of the Fed minutes Tuesday, with many analysts now expecting the Fed to again cut rates at the end of this month. Last Friday’s apparent upbeat employment report is now but a distant memory. The euro rose to above 1.42 against the dollar yet again and within striking distance of the lifetime high, while the Canadian dollar and Australian dollars hit fresh 30 year and 24 year highs respectively against the beleaguered greenback Thursday morning. The dollar has managed to rise to 117.40 against the yen, which weakened across the board as the Bank of Japan kept interest rates on hold for the fourth consecutive meeting. The dollar has also held its own against the pound which is trading weaker this morning. Some of the positioning against the US dollar looks to be ambitious in the short-term, particularly with the euro, and the dollar does have a chance to reclaim some of its losses later today, particularly if we see a strong trade balance number. The currency has been struggling to hold onto any gains for long, so if you are going to back the dollar, the advice is not to sit on your positions for too long if you can help it. There is the potential for a rise to 118 against the yen and a move to 2.03 against sterling, while 1.41 against the euro is favoured ahead ahead of a fall of the lifetime high, which sits at 1.4280.
EURO
The European Commission this morning lowered its GDP forecast for quarter 3 to between 0.3% and 0.7% from 0.3% to 0.8%, while Eurostat confirmed quarter 2 GDP at a lowly 0.3%, in line with the original estimates. While the euro economy does not appear to be firing on all cylinders, it is still attracting a lot of support, being the only viable major currency alternative to an out-of-favour US dollar. With a new wave of negative dollar sentiment sweeping markets, the euro is in with a great chance of rising to above the lifetime high of 1.4280 within the next week. A weak US retail sales number Friday could provide the impetus traders need to push towards that milestone, while a period of consolidation is likely today with the currency having risen from a low of 1.4014 on Tuesday to 1.4217 this morning. A drift back to 1.4150 looks more likely in the short-term, before the next leg up. The euro rose significantly against the pound this morning, hitting a high of over 0.6970 and has the potential to reach 0.70 in the short-term, while the single currency has gained over 100 pips against the yen Thursday and at 1.6687, it is now within sight of the all-time highs near 1.70. With the carry trade back in vogue, there appears little to stop the euro reaching a new record against the yen, unless we encounter a prolonged bout of market instability, or have Central Bank intervention.
GBP
The pound came under pressure Thursday as the RICS house price survey for September reported the greatest fall in house prices in over 2 years. Despite the bad news, against the majors the pound only lost against the euro, while holding its own against the US dollar and gaining 100 pips against the yen. It remains vulnerable though as concerns about the economy’s housing sector grow, although greater interest in the higher yielding currencies will afford it some protection in the short-term. We could see the euro rise to 0.70, while a decline to below 2.03 against the dollar is possible later today. There is no further economic data out of the UK this week and the currency’s immediate fate will very much depend on US data.
Yen
As expected the Bank of Japan kept rates on hold Thursday and with Governor Fukui’s press statement lacking in clarity and seemingly riddled with contradictions, the smart money is on the Bank of Japan remaining on hold until the end of the year. The yen, not surprisingly, ceded further ground against all currencies this morning, particularly against the euro, with EUR/JPY having reached 1.67. The yen is currently at 117.50 against the dollar and could fall to below 118 later today, especially if US stock markets rally. The Japanese currency has also fallen dramatically against the commodity currencies today and with intensified interest in the carry trade as risk tolerance levels remain high, the yen looks under threat to the end of the week. The only chance of respite for the yen is if stock markets reverse rends and risk aversion levels rise.
CAD
The loonie struck yet another 30 year high today against the US dollar, with the US currency dropping to 0.9746 earlier Thursday. Rising oil prices have helped to underpin the Canadian currency, which thus far has shown no inclination to correct, following its recent rapid rise. Today’s Trade Balance number will be important to test the competitiveness of Canadian exporters, faced with a strengthening domestic currency. The figure is from August, so will not capture the most recent sharp appreciation in the currency, which occurred during September. A sharp narrowing of the trade surplus, particularly with the US would hurt the loonie and should send it into retreat. The CAD does not offer any value against the US dollar at current levels and there is the potential for a correction to 0.9830, or even higher if the trade data is bad. A much wider than expected trade surplus on the other hand could help the loonie push the dollar back to 0.97. The best cross to range trade right now remains AUD/CAD.
Bob B - Oct 11
Thứ Tư, 10 tháng 10, 2007
Bob's Currency Focus - 12:00GMT
EUR/USD
The Fed minutes were rather disappointing from a dollar perspective as they did not indicate that the September rate cut was a once-off and also the 50 basis point cut was unanimous and an argument was not even put forward for the smaller 25 basis point move the market was expecting. While acknowledging that the August employment report would probably be revised, the Fed was really in the dark as to growth outlook and predicted the housing sector crisis would get worse, before it got better. The minutes have fuelled expectations for a further cut in October and the market’s interpretation of such was demonstrated by both the Dow and the S&P 500 closing at record highs Tuesday. The immediate prospects of a major dollar correction look to be on hold and EUR/USD may now range trade in the 1.40 to 1.42 band, until there is some major shift in expectations. With little on the data side for Wednesday, we may initially see a euro attempt to take out 1.4160, which if it gives way could see an attempt to reach 1.42. The euro has its own issues at present though and any move towards 1.42 is likely to attract increased selling pressure. The dollar needs to recover quickly to below 1.41, or negative sentiment against the currency will intensify.
GBP
Sterling rallied very strongly late Tuesday/early Wednesday and cable went from a low of 2.0256 Tuesday to reach 2.0478 this morning. Cable looks to be living a charmed life at levels close to 2.05, particularly since the UK government yesterday downgraded its growth forecast for 2008 to between 2 and 2.5%. However comments from Mervyn King on Tuesday helped play down expectations for a near-term interest rate cut, which helped boost the pound. If cable can hold above 2.04 today, it may have a chance to try and challenge the key resistance point at 2.0490 over the next day or so, but cable does look over-priced given the underlying risks and I will be surprised if it does not return back towards 2.03 by Thursday. Sterling failed to penetrate the 0.69 level again against the euro, but it still looks to offer decent value on levels close to 0.6950. Sterling broke above the 2.40 price level against the yen for the first time since the recent bout of market volatility started in early August and we could see a further spike in GBP/JPY if the Bank of Japan gives a dovish assessment after their latest policy meeting early Thursday.
Yen
The Japanese currency has been on the defensive for the past 24 hours as markets virtually eliminate the prospects for an interest rate rise from the Central Bank Thursday. The Bank could surprise and add 25 basis points tomorrow, particularly given the current favourable price levels for the currency, but it is unlikely to do so. The currency is likely to face a bout of fresh selling, if rates remain unchanged, and we should see 118 being struck against the dollar and further weakness against the other major currencies over the next 24 hours. This weakness could prove to be short-lived, given current levels of complacency, particularly if we see any rise in risk aversion on global financial markets in the coming days. It is not a currency to buy however based on current sentiment.
CAD
The loonie, as is its form over the past 6 months, blew away any notion of a recovery in USD/CAD Tuesday, as the currency pushed the US dollar right back below the 0.98 price line from the 0.9895 price the dollar had reached earlier yesterday. The loonie was underpinned by recovering oil prices which jumped by over $1.20 a barrel Tuesday. While the loonie does look grossly over-priced, it is unlikely to encounter any major selling pressure unless we see a sharp decline in commodity prices and/or strong intervention by the Bank of Canada. The market has more or less dismissed any chance of a rate cut from the Bank of Canada next week, particularly after the strong employment report that was published last Friday. The euro slipped to a 16 month low of 1.3810 against the Canadian currency Tuesday, while sterling slipped below CAD2.00. The euro looks to offer good value at levels close to 1.38 against the currency. The loonie is up an incredible 23.5% against the yen since March and with the pair fast approaching 1.20, the pair is being set up for a very sharp tumble, when risk aversion returns to currency markets. For the moment expect an attempt to take out 1.20 on the CAD/JPY cross, particularly while the yen remains exposed to the carry trade.
Bob B - October 10
The Fed minutes were rather disappointing from a dollar perspective as they did not indicate that the September rate cut was a once-off and also the 50 basis point cut was unanimous and an argument was not even put forward for the smaller 25 basis point move the market was expecting. While acknowledging that the August employment report would probably be revised, the Fed was really in the dark as to growth outlook and predicted the housing sector crisis would get worse, before it got better. The minutes have fuelled expectations for a further cut in October and the market’s interpretation of such was demonstrated by both the Dow and the S&P 500 closing at record highs Tuesday. The immediate prospects of a major dollar correction look to be on hold and EUR/USD may now range trade in the 1.40 to 1.42 band, until there is some major shift in expectations. With little on the data side for Wednesday, we may initially see a euro attempt to take out 1.4160, which if it gives way could see an attempt to reach 1.42. The euro has its own issues at present though and any move towards 1.42 is likely to attract increased selling pressure. The dollar needs to recover quickly to below 1.41, or negative sentiment against the currency will intensify.
GBP
Sterling rallied very strongly late Tuesday/early Wednesday and cable went from a low of 2.0256 Tuesday to reach 2.0478 this morning. Cable looks to be living a charmed life at levels close to 2.05, particularly since the UK government yesterday downgraded its growth forecast for 2008 to between 2 and 2.5%. However comments from Mervyn King on Tuesday helped play down expectations for a near-term interest rate cut, which helped boost the pound. If cable can hold above 2.04 today, it may have a chance to try and challenge the key resistance point at 2.0490 over the next day or so, but cable does look over-priced given the underlying risks and I will be surprised if it does not return back towards 2.03 by Thursday. Sterling failed to penetrate the 0.69 level again against the euro, but it still looks to offer decent value on levels close to 0.6950. Sterling broke above the 2.40 price level against the yen for the first time since the recent bout of market volatility started in early August and we could see a further spike in GBP/JPY if the Bank of Japan gives a dovish assessment after their latest policy meeting early Thursday.
Yen
The Japanese currency has been on the defensive for the past 24 hours as markets virtually eliminate the prospects for an interest rate rise from the Central Bank Thursday. The Bank could surprise and add 25 basis points tomorrow, particularly given the current favourable price levels for the currency, but it is unlikely to do so. The currency is likely to face a bout of fresh selling, if rates remain unchanged, and we should see 118 being struck against the dollar and further weakness against the other major currencies over the next 24 hours. This weakness could prove to be short-lived, given current levels of complacency, particularly if we see any rise in risk aversion on global financial markets in the coming days. It is not a currency to buy however based on current sentiment.
CAD
The loonie, as is its form over the past 6 months, blew away any notion of a recovery in USD/CAD Tuesday, as the currency pushed the US dollar right back below the 0.98 price line from the 0.9895 price the dollar had reached earlier yesterday. The loonie was underpinned by recovering oil prices which jumped by over $1.20 a barrel Tuesday. While the loonie does look grossly over-priced, it is unlikely to encounter any major selling pressure unless we see a sharp decline in commodity prices and/or strong intervention by the Bank of Canada. The market has more or less dismissed any chance of a rate cut from the Bank of Canada next week, particularly after the strong employment report that was published last Friday. The euro slipped to a 16 month low of 1.3810 against the Canadian currency Tuesday, while sterling slipped below CAD2.00. The euro looks to offer good value at levels close to 1.38 against the currency. The loonie is up an incredible 23.5% against the yen since March and with the pair fast approaching 1.20, the pair is being set up for a very sharp tumble, when risk aversion returns to currency markets. For the moment expect an attempt to take out 1.20 on the CAD/JPY cross, particularly while the yen remains exposed to the carry trade.
Bob B - October 10
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