Bernanke’s gift of a further 50 basis points to the markets Wednesday was soured by S&P’s report that some of the credit ratings of the major bond insurers might be downgraded. The Dow industrial average had been up 200 points after the Fed rate cut was announced, but it lost these gains to close modestly in negative territory. The FOMC statement yesterday was virtually the same as that released a week previously and with the emphasis again on downside risks to growth, it is probable the Fed Funds rate will drop to 2.5% by March and possibly go as low as 2% before the summer. Inflation concerns have been pushed to one side and the Fed is prepared to gamble on the logic inflation must ease in a slowing economic environment. There is of course no guarantee this will happen as evidenced by the quarter 4 GDP report, when growth slowed to a 0.6% annualised rate while at the same time core inflation rose to a 2.7% annualised rate. The US is officially in a period of stagflation and one which could worsen significantly yet - $100 oil was hit for the first time in January. Let’s be clear, given inflation is actually on the rise and well above an acceptable level and the fact the US has a negative savings rate, the Fed is wreckless because the committee is not looking at the longer-term picture. But should the economy narrowly avert a recession or if growth gathers pace later this year against a backdrop of falling inflation, Bernanke will be hailed a saviour and a hero. But even in the event of such a miraculous medium term outcome, the next generation of Americans will spend a further generation paying off the stockpile of national debt amassed thanks to the short-sightedness of Messrs. Greenspan and Bernanke.
EUR/USD
The pair has traded in very volatile fashion all of Thursday, bouncing between 1.48 and 1.49. As we saw Wednesday, the euro is again meeting selling pressure above 1.49, but each retreat thus far has coincided with a rise in risk aversion as global stock markets fell into the red. If we do see a sustained period of rallying in stocks, then the euro could benefit from this positive momentum and challenge the lifetime high at 1.4966 within the next 24 hours. The euro will never have a better chance to hit 1.50 and it got a boost today when the euro-zone flash estimate for consumer price inflation in January returned a 3.2% annualised rate, against the 3.1% in December. This is the highest rate on record and is sure to keep an already hawkish ECB on alert and rule out the possibility of a change in policy when the Monetary Policy Committee meets next week. Other data out of the euro area Thursday was mixed – economic and consumer sentiment fell rather sharply in January, while in Germany, the jobless and unemployment were much better than consensus. In the US, the jobless claims number for last week rose sharply, to the highest level in 29 months, stoking fears we may get a disappointing non-farm payroll number on Friday. Personal spending in December rose by the slowest pace since June, growing 0.2%. Personal income rose 0.5%. The core PCE inflation gauge was unchanged at 2.2% and the Chicago PMI came in lower than expected for January, but the PMI did register above 50 and at least signalled some expansion in the important Illinois industrial region. The dollar will struggle to push the euro below 1.48 today, unless there is a further spike in risk aversion. The euro itself needs to close above 1.4870 to set up a possible challenge of the lifetime high tomorrow. Friday is another high risk day with US non-farm payrolls at 13:30 GMT and the ISM Manufacturing Index at 15:00 GMT. The euro area Manufacturing PMI at 09:00 GMT is unlikely to have any market impact, unless it differs greatly to the estimate released earlier in the month. Oddly enough the euro may benefit most from positive US data, i.e. a consensus non-farm payroll number and a better than expected ISM PMI. A negative non-farm number or a decline in the ISM PMI will fuel concerns that the US is already in recession and a subsequent rise in risk aversion could send stocks tumbling and boost the dollar in the short-term. Strategy: buy euro on dips towards 1.4770, with upside price limits of 1.4840, 1.4870, 1.49, 1.4920, 1.4950 and 1.50. Short stops won’t work Friday because volatility will be high, owing to the high risk data due out in the US.
GBP
Sterling is largely unchanged Thursday and cable is consolidating in the 1.9850 to 1.9950 price region. Traders are reluctant to try and challenge the 2 dollar line ahead of Friday’s non-farm payroll data from the US. Sterling’s ability to once more sustain a period of trading above the 2 dollar line is probably dependent on whether the euro can break above 1.50 against the US currency. A failure by the euro to penetrate 1.50 could signal a low for the dollar for now and ultimately mean the only way for cable to go is down. Indeed with the Bank of England meeting on Thursday next likely to focus the minds of traders through the whole of next week, cable will probably return closer to 1.95 by then, unless there is a capitulation by the dollar tomorrow. Even if cable does rally to above 2 dollars, it is likely to meet resistance at 2.01 so there is certainly value in selling cable now at prices above 1.99, with the intention of holding the positions until next Thursday, when the Bank of England are likely to announce a rate cut. There will be calls for a 50 basis points cut next week with markets calling on the Bank of England to take their lead from the Fed and to be aggressive. I said last week we should avoid selling cable through the key events this week and until the current upside rally had peaked. We have now had 3 days where price has traded above 1.99 but sterling has failed to earn the necessary momentum to move higher. Of course a broader dollar collapse Friday could change all that, but cable could easily reverse sharply in the other direction, if the US data prints the other way. UK consumer confidence remained near record low levels this month with the Gfk index coming in at -13, against -14 in December. House prices fell 0.1% in January according to Nationwide, which is a somewhat better number than most of the other house prices indices we have seen this month. Against the euro, sterling could benefit if there is a sharp sell-off of the single currency against the greenback, but because of the a possible rate cut next week, it is not wise to buy the UK currency now. I remain bearish on the pound and see value in selling down cable on levels above 1.99. Strategy: Sell cable on prices above 1.9920, with price limits of 1.9840, 1.9770, 1.97, 1.9640 and 1.9550. If very much risk adverse, wait until the non-farm and ISM numbers print in the US on Friday.
Yen
The yen done remarkably well Thursday as the Fed’s latest declaration of policy easing failed to rally stock markets and thus the Japanese currency was spared a sell-off. If stocks do bounce back in the next few days, the yen will be forced into retreat, with the key barriers of Y108 against the dollar and Y160 against the euro up for grabs. The high-yielding Aussie and Kiwi dollars have been performing well and this demonstrates there is plenty of risk appetite in the marketplace, despite the ups and downs we have witnessed in the past 10 days. Friday is a major risk day with US employment and manufacturing data due for release and very poor prints will tend to favour the yen, as it will likely lead to an appreciation in low-yielding currencies. In economic data out of Japan Thursday, manufacturing expanded at the same pace in January as in December, but housing starts were down 20% on the year this month, highlighting major disconnects within the domestic economy. Traders should hold off buying or selling the yen until after Friday’s non-farm payroll report, although a strong stock market close on Wall Street Thursday and a follow-on in Asia overnight could send the yen backwards. Strategy: Wait until after Friday’s data and if the non-farm number is negative sell EUR/JPY if price is close to Y159, with limit prices of 157, 156.50 and 1.55.
CAD
The loonie reversed course and fell sharply Thursday, though it staged a comeback this afternoon, to trade a full half cent below its worst levels of the session. The failure to close below 0.9920 Wednesday, having gone as low as 0.9872, meant USD/CAD started today on the up. The greenback must close out today’s session well above the parity line if it is to have a chance of continuing the uptrend through to the weekend. The surprisingly high jobless number out of the US today frightened loonie supporters as a softening labour market in the US poses a major threat to the consumption of Canadian exports. For its part, Canada recorded a mere 0.1% growth in November, underscoring the economic slowdown is a North American phenomenon and not just a US one. The loonie is still trading 3 cents better than the price it was trading at early last week, so we could see a sizeable heave upwards in USD/CAD again Friday, especially if the US data is poor and recessionary-like, resulting in a rise in risk aversion and a drop in appetite for commodity currencies like the loonie. the Bank of Canada’s Jenkins did not say anything new in his address to the House of Commons Wednesday evening, but the line of questioning highlighted concerns about the widening spread in US and Canadian interest rates and this hurt the loonie late last night. I’m not inclined to buy USD/CAD until we are sure price is firmly established above the parity line, so we shall wait and see what tomorrow brings before resuming our buying trend. I am however still holding my long USD/CAD positional trades, with a S/L at 0.9750 and a limit price of 105.
Bob B - Jan 31
Thứ Năm, 31 tháng 1, 2008
Thứ Tư, 30 tháng 1, 2008
Bob's Currency Focus - 17:30 GMT
EUR/USD
The pair briefly moved above 1.48 this morning, but got pegged back following the US ADP employment report which suggested this week’s non-farm payroll number may print better than expected. The ADP report showed that as much as 130,000 new jobs were added by the private sector in January, significantly above the 40,000 forecast. The advance reading for quarter 4 GDP in the US was then released and with the economy seen as having only grown at an annualised paltry 0.6%, this raised expectations the Fed will not hold back this evening and will deliver a 0.5% rate cut. GDP for the whole of 2007, at 2.2%, was the lowest since 2002 and to make matters worse, core inflation in quarter 4 rose to an annualised 2.9%, which means the Fed has a very difficult balancing act to perform – how to stimulate growth while keeping inflation in check. The Fed has stated its intention to err on the side of growth and for this reason, expect the Fed to deliver a 0.5% rate cut today. Anything less will be taken as a disappointment, although the Fed may be privy to key data not due for official release until later this week and if the Fed falls short of expectations today and cuts by only 0.25%, it may be a signal that this data is going to print much better than expectations. The inflation concern is however a very real one and it will be a surprise if there is not some dissent from inflation hawks in the vote, especially from Governor Poole, if a 0.5% cut is today’s result. The dollar is sure to come under short-term selling pressure in the event of a 50 basis points cut, but today’s announcement could mark a watershed for the dollar going forward, because it could put the Fed ahead of the curve, while all other major Central Banks remain firmly behind the curve. EUR/USD could hit 1.49 today and if it manages to hold above this level, 1.50 could be hit either today or tomorrow. Looking beyond this week’s events risks will switch from the dollar to the euro and I cannot see much further appreciation in the single currency, so traders need to be alert to a sharp reversal. If the Fed does not cut rates at all today and issues a hawkish statement placing greater emphasis on inflation risks which is unlikely, expect EUR/USD to capitulate to 1.46 and below. Strategy: It is dangerous to enter the market to purely trade the Fed news, because major volatility after the announcement could take out most stop losses anywhere near the market price. The value trade may be to buy EUR/USD on dips towards 1.4750 before the announcement, with target prices of 1.4880, 1.4920 and 1.4950. The stop should be below yesterday’s low of 1.4738.
GBP
Cable rallied to above the 1.99 for the second consecutive day, stalling at 1.9948 before retreating back to 1.9860. Data out of the UK was not exactly encouraging with mortgage approvals for December falling more than expected and consumer credit narrowing significantly more than forecast. Cable is gaining only because of negative dollar sentiment ahead of the Fed decision this evening and there is still the potential for a spike to above the 2 dollar mark, if the Fed delivers a 0.5% cut, as anticipated. Sterling has come off against the euro Wednesday, the single currency rising modestly to 0.7435. We also learned today that Bank of England Governor Mervyn King has been reappointed for a second 5-year term, despite the harsh criticism directed at him for his sloppy handling of the Northern Bank crisis. The Bank of England meets again next week and the MPC is widely expected to cut rates by at least 25 basis points, having left rates on hold earlier this month. Sterling will start to come under pressure once the dust settles after the Fed’s monetary policy announcement. I am bearish on sterling but don’t see any value entering the market ahead of today’s major risk event. I prefer to see where cable goes between now and tomorrow before contemplating re-entering the market. Strategy: Hold fire until after markets settles following Fed rate announcement. We shall revisit tomorrow.
Yen
The Japanese currency has been targeted and sold off ahead of the US interest rate announcement, with carry traders expecting a 0.5% cut tonight which they believe will drive up demand for high-yielding currencies, like the Aussie dollar, Kiwi dollar and sterling. A 0.5% cut today is likely to force the yen to back-pedal for a couple of days and the dollar could rise to Y109, with the euro likely to jump back above Y160. However the rate cut is not the result of a good news story, very much the opposite in fact, so it is only a matter of time before risk aversion levels rise and the yen is back in vogue. Industrial Production in Japan rose 1.6% in December against expectations for a 2.0% rise, disappointing markets. There is increasing talk over the past week that Japan is also on the verge of a recession, with Goldman Sachs particularly negative in its assessment of the world’s second largest economy. The sombre outlook for both the US and Japan has thus far failed to dampen commodity prices, so the yen looks poised to continue its short-term retreat. Strategy: If long on EUR/JPY, set target limit to Y160. If the Fed comes up short of a 0.5% rate cut expect the yen to appreciate. Short yen positions should be exited before Friday, but be ready to exit in a hurry today (place stops in advance) if the Fed does not cut by 50 basis points.
CAD
The loonie steamroller show goes on unchecked and earlier today the Canadian currency pushed the greenback down to 0.9920, a 4-week low. The loonie has made gains against all the major currencies again today as the current bounce in the currency extends, despite fears of a US recession. The loonie is now set up to force the US dollar back to the 0.98 price level, if we get an aggressive cut from the Fed today. The currency has advanced 4% in a week and looks decidedly bullish, even if there is no economic data supporting the move. The current market perception that commodity prices can continue to rise indefinitely against a backdrop of recession in the world’s two largest economies and that the Canadian dollar can soar in this environment is a nonsensical one. Commodity prices are going to soon switch into reverse gear, which is a major negative for the medium term and long-term prospects of the loonie. For now, the loonie is on a high and I would not bet against the greenback being forced back below 0.9850 today and 0.9750 may even be tested before the week is out. The loonie has appreciated a further 0.4% against the euro Wednesday and the pair is now hovering below the 1.47 price level. Bank of Canada Deputy Governor Paul Jenkins is due to speak on the economic impact of a strong Canadian dollar in the House of Commons at 20:20 GMT. I remain bearish on the loonie but will sit out today’s key events. Strategy: Wait for market to settle after Fed rate announcement. We will review the situation on Thursday.
Bob B - Jan 30
The pair briefly moved above 1.48 this morning, but got pegged back following the US ADP employment report which suggested this week’s non-farm payroll number may print better than expected. The ADP report showed that as much as 130,000 new jobs were added by the private sector in January, significantly above the 40,000 forecast. The advance reading for quarter 4 GDP in the US was then released and with the economy seen as having only grown at an annualised paltry 0.6%, this raised expectations the Fed will not hold back this evening and will deliver a 0.5% rate cut. GDP for the whole of 2007, at 2.2%, was the lowest since 2002 and to make matters worse, core inflation in quarter 4 rose to an annualised 2.9%, which means the Fed has a very difficult balancing act to perform – how to stimulate growth while keeping inflation in check. The Fed has stated its intention to err on the side of growth and for this reason, expect the Fed to deliver a 0.5% rate cut today. Anything less will be taken as a disappointment, although the Fed may be privy to key data not due for official release until later this week and if the Fed falls short of expectations today and cuts by only 0.25%, it may be a signal that this data is going to print much better than expectations. The inflation concern is however a very real one and it will be a surprise if there is not some dissent from inflation hawks in the vote, especially from Governor Poole, if a 0.5% cut is today’s result. The dollar is sure to come under short-term selling pressure in the event of a 50 basis points cut, but today’s announcement could mark a watershed for the dollar going forward, because it could put the Fed ahead of the curve, while all other major Central Banks remain firmly behind the curve. EUR/USD could hit 1.49 today and if it manages to hold above this level, 1.50 could be hit either today or tomorrow. Looking beyond this week’s events risks will switch from the dollar to the euro and I cannot see much further appreciation in the single currency, so traders need to be alert to a sharp reversal. If the Fed does not cut rates at all today and issues a hawkish statement placing greater emphasis on inflation risks which is unlikely, expect EUR/USD to capitulate to 1.46 and below. Strategy: It is dangerous to enter the market to purely trade the Fed news, because major volatility after the announcement could take out most stop losses anywhere near the market price. The value trade may be to buy EUR/USD on dips towards 1.4750 before the announcement, with target prices of 1.4880, 1.4920 and 1.4950. The stop should be below yesterday’s low of 1.4738.
GBP
Cable rallied to above the 1.99 for the second consecutive day, stalling at 1.9948 before retreating back to 1.9860. Data out of the UK was not exactly encouraging with mortgage approvals for December falling more than expected and consumer credit narrowing significantly more than forecast. Cable is gaining only because of negative dollar sentiment ahead of the Fed decision this evening and there is still the potential for a spike to above the 2 dollar mark, if the Fed delivers a 0.5% cut, as anticipated. Sterling has come off against the euro Wednesday, the single currency rising modestly to 0.7435. We also learned today that Bank of England Governor Mervyn King has been reappointed for a second 5-year term, despite the harsh criticism directed at him for his sloppy handling of the Northern Bank crisis. The Bank of England meets again next week and the MPC is widely expected to cut rates by at least 25 basis points, having left rates on hold earlier this month. Sterling will start to come under pressure once the dust settles after the Fed’s monetary policy announcement. I am bearish on sterling but don’t see any value entering the market ahead of today’s major risk event. I prefer to see where cable goes between now and tomorrow before contemplating re-entering the market. Strategy: Hold fire until after markets settles following Fed rate announcement. We shall revisit tomorrow.
Yen
The Japanese currency has been targeted and sold off ahead of the US interest rate announcement, with carry traders expecting a 0.5% cut tonight which they believe will drive up demand for high-yielding currencies, like the Aussie dollar, Kiwi dollar and sterling. A 0.5% cut today is likely to force the yen to back-pedal for a couple of days and the dollar could rise to Y109, with the euro likely to jump back above Y160. However the rate cut is not the result of a good news story, very much the opposite in fact, so it is only a matter of time before risk aversion levels rise and the yen is back in vogue. Industrial Production in Japan rose 1.6% in December against expectations for a 2.0% rise, disappointing markets. There is increasing talk over the past week that Japan is also on the verge of a recession, with Goldman Sachs particularly negative in its assessment of the world’s second largest economy. The sombre outlook for both the US and Japan has thus far failed to dampen commodity prices, so the yen looks poised to continue its short-term retreat. Strategy: If long on EUR/JPY, set target limit to Y160. If the Fed comes up short of a 0.5% rate cut expect the yen to appreciate. Short yen positions should be exited before Friday, but be ready to exit in a hurry today (place stops in advance) if the Fed does not cut by 50 basis points.
CAD
The loonie steamroller show goes on unchecked and earlier today the Canadian currency pushed the greenback down to 0.9920, a 4-week low. The loonie has made gains against all the major currencies again today as the current bounce in the currency extends, despite fears of a US recession. The loonie is now set up to force the US dollar back to the 0.98 price level, if we get an aggressive cut from the Fed today. The currency has advanced 4% in a week and looks decidedly bullish, even if there is no economic data supporting the move. The current market perception that commodity prices can continue to rise indefinitely against a backdrop of recession in the world’s two largest economies and that the Canadian dollar can soar in this environment is a nonsensical one. Commodity prices are going to soon switch into reverse gear, which is a major negative for the medium term and long-term prospects of the loonie. For now, the loonie is on a high and I would not bet against the greenback being forced back below 0.9850 today and 0.9750 may even be tested before the week is out. The loonie has appreciated a further 0.4% against the euro Wednesday and the pair is now hovering below the 1.47 price level. Bank of Canada Deputy Governor Paul Jenkins is due to speak on the economic impact of a strong Canadian dollar in the House of Commons at 20:20 GMT. I remain bearish on the loonie but will sit out today’s key events. Strategy: Wait for market to settle after Fed rate announcement. We will review the situation on Thursday.
Bob B - Jan 30
Thứ Ba, 29 tháng 1, 2008
Bob's Currency Focus - 17:00 GMT
EUR/USD
The euro has come off a fraction today as the market seems reluctant to push it through the 1.48 price barrier, ahead of Wednesday’s GDP data and Fed rate announcements. Also, December’s Durable Orders in the US rose 5.2% on the month, well ahead of expectations for a 1.6% increase, lending some support to the dollar. US Consumer Confidence declined in January according to the latest survey from the Conference Board, but the number was marginally better than forecast and this too reinforces the argument that the US economy may not be in as bad a shape as many would have us believe. The Fed will be privy to Friday’s payroll numbers as they deliberate over the next 2 days and there is a distinct probability if the payroll number is reasonably positive, the Fed may only ease 25 basis points tomorrow. The euro is likely to push higher prior to the Fed announcement, in anticipation of a 50 basis points cut, and if it edges past 1.4825, it will be perfectly positioned to take out the lifetime high at 1.4966. Today is all about positioning ahead of Wednesday’s key events, but the euro does offer good interim value on any dips to 1.4660, given the downside risks to the dollar for the remainder of this week. There is also the chance of a major dollar backlash later in the week, particularly in the event of a 50 basis point rate cut and positive employment data, as positional investors could see it as an ideal time to back the greenback, because the longer play rate outlook for the dollar Vs the other leading currencies may have shifted dramatically in favour of the dollar. Strategy: short-term buy euro on dips towards 1.4660 with upside price limits of 1.4770, 1.4790, 1.4820, 1.4870, 1.4920 and 1.4950. Moves stops to tight positions just ahead of Fed rate announcement Wednesday, if not out of market before then.
GBP
Cable rallied to its highest level in almost 4 weeks, reaching 1.9928 this morning, before retreating to 1.9870. Although over-priced against the dollar, the pound is benefiting from increased risk appetite and a surge in demand for high-yield currencies in advance of the Fed’s policy statement. Cable could yet rise to 2.01 by late Wednesday or early Thursday, before another sharp leg to the downside commences. The pound managed to send the euro back to 0.7415 this morning, but was unable to hold all its gains and the single currency has appreciated back to 0.7430. The CBI Distributive trades survey for January printed better than expected, particularly the forward looking component, with UK retailers more optimistic on outlook for the next month. The UK data calendar is rather sparse this week and we have to wait until Friday’s CPI manufacturing index before we get any real market-moving data. Between now and then sterling’s direction will be determined by US data and market reaction to the Fed’s rate announcement. If there is indeed a euphoric rise for the pound, it will be short-lived because once this week’s data is out of the way in the US, the focus for sterling will shift to the Bank of England meeting next week, when UK interest rates are expected to be cut. Later this week we could have a glorious sell-down opportunity on cable, but EUR/GBP shorts should be seeking to exit the market by the end of this week, as that pair is likely to rally in favour of the euro next week. Strategy: Wait for Fed rate announcement Wednesday and don’t rush in to sell. If cable rallies to 2.01, sell down with limit prices of 1.9870, 1.9770 and 1.9660.
Yen
The yen is virtually unchanged Tuesday across the board, as traders are reluctant to become over-loaded on carry trades for fear the Fed disappoints markets Wednesday. If the Fed does not deliver a 0.5% cut, we could see a negative stock market reaction and downturn and a new bout of carry selling. Economic data out of Japan overnight printed quite positively with the unemployment rate unchanged at 3.8%, household spending surprisingly up by 2.2% in December and retail sales also increasing 0.2% last month, though this was a consequence of higher gasoline prices. We will probably see the yen retreat against the euro and the dollar in advance of tomorrow evening’s key announcement and it could turn into a rout for the Japanese currency if the Fed cuts by 0.5%, because risk tolerance is likely to rocket, temporarily at least, encouraging traders to use the yen to fund carry positions. It is not a good time to be long yen, but the currency will bounce back if 1) the Fed does not cut by 0.5% or 2) US employment data on Friday disappoints and stock prices go into retreat. I see potential for the euro to return to at least Y160 by tomorrow evening, before the next leg down. Strategy: Buy EUR/JPY on dips to between Y156 to Y157 with limit prices of Y158, Y159 and Y160. Have stop losses moved to a tight position prior to Fed, if not out of the market before then.
CAD
The loonie has defied the fundamentals and continued its rally Tuesday, breaking parity with the greenback, while most other currencies were moving sideways. The loonie has now appreciated 4% against the US dollar in the past week. It is a remarkable rally by any standards, but all the more remarkable given it comes immediately in the aftermath of a second successive rate cut from the Bank of Canada, with further rate cuts on the way, a 2-year low in core inflation, negative employment growth in December, a contracting industrial sector according to the latest business PMI and increasing concerns over the health of both the US and global economies which will limit demand for exports from Canada's export-dependent economy. Even today the country’s quarterly manufacturing survey reports pessimism amongst Canada’s production companies, with the expectations index for production this quarter falling to -14 from a flat reading in the last quarter. So why against this background of worrying data and events is the loonie suddenly soaring and outperforming every other major currency in the world? Perhaps we need to ask the managers of some of the sovereign wealth funds for their straetgies, or perhaps it is merely an impulsive rally in response to record high gold prices and elevated oil prices, or perahps a celebration of the fact the US is entering recession and Canada is not, yet. Leaving the thin holiday trading move for the currency aside, the fundamentals for Canada have shifted very significantly since the loonie last broke below parity and it is difficult to see how the current burst in support is a) justified and b) sustainable. It is probably the last hurrah before the pair finally sets off more firmly in the opposite direction. Technically the pair could fall as low as the 0.9756 price we saw in late December, before rebounding. Data this week holds plenty of downside risk for the US dollar, so it is not be a good idea to go long USD/CAD until the major events of the week are out of the way. If you are sitting on positional long USD/CAD trades, you will be left biting your nails for the whole of this week, but sit tight. Strategy: Hold off until after Fed. Do not go long on USD/CAD until current correction fizzles out. EUR/CAD looks to offer good value below 1.47, as the loonie’s rally aainst the euro was accentuated by the loonie’s drive to parity against the dollar. Caution is needed however, for while we may soon see a rapid return to 150 for EUR/CAD, the pair may first go lower this week.
Bob B - Jan 29
The euro has come off a fraction today as the market seems reluctant to push it through the 1.48 price barrier, ahead of Wednesday’s GDP data and Fed rate announcements. Also, December’s Durable Orders in the US rose 5.2% on the month, well ahead of expectations for a 1.6% increase, lending some support to the dollar. US Consumer Confidence declined in January according to the latest survey from the Conference Board, but the number was marginally better than forecast and this too reinforces the argument that the US economy may not be in as bad a shape as many would have us believe. The Fed will be privy to Friday’s payroll numbers as they deliberate over the next 2 days and there is a distinct probability if the payroll number is reasonably positive, the Fed may only ease 25 basis points tomorrow. The euro is likely to push higher prior to the Fed announcement, in anticipation of a 50 basis points cut, and if it edges past 1.4825, it will be perfectly positioned to take out the lifetime high at 1.4966. Today is all about positioning ahead of Wednesday’s key events, but the euro does offer good interim value on any dips to 1.4660, given the downside risks to the dollar for the remainder of this week. There is also the chance of a major dollar backlash later in the week, particularly in the event of a 50 basis point rate cut and positive employment data, as positional investors could see it as an ideal time to back the greenback, because the longer play rate outlook for the dollar Vs the other leading currencies may have shifted dramatically in favour of the dollar. Strategy: short-term buy euro on dips towards 1.4660 with upside price limits of 1.4770, 1.4790, 1.4820, 1.4870, 1.4920 and 1.4950. Moves stops to tight positions just ahead of Fed rate announcement Wednesday, if not out of market before then.
GBP
Cable rallied to its highest level in almost 4 weeks, reaching 1.9928 this morning, before retreating to 1.9870. Although over-priced against the dollar, the pound is benefiting from increased risk appetite and a surge in demand for high-yield currencies in advance of the Fed’s policy statement. Cable could yet rise to 2.01 by late Wednesday or early Thursday, before another sharp leg to the downside commences. The pound managed to send the euro back to 0.7415 this morning, but was unable to hold all its gains and the single currency has appreciated back to 0.7430. The CBI Distributive trades survey for January printed better than expected, particularly the forward looking component, with UK retailers more optimistic on outlook for the next month. The UK data calendar is rather sparse this week and we have to wait until Friday’s CPI manufacturing index before we get any real market-moving data. Between now and then sterling’s direction will be determined by US data and market reaction to the Fed’s rate announcement. If there is indeed a euphoric rise for the pound, it will be short-lived because once this week’s data is out of the way in the US, the focus for sterling will shift to the Bank of England meeting next week, when UK interest rates are expected to be cut. Later this week we could have a glorious sell-down opportunity on cable, but EUR/GBP shorts should be seeking to exit the market by the end of this week, as that pair is likely to rally in favour of the euro next week. Strategy: Wait for Fed rate announcement Wednesday and don’t rush in to sell. If cable rallies to 2.01, sell down with limit prices of 1.9870, 1.9770 and 1.9660.
Yen
The yen is virtually unchanged Tuesday across the board, as traders are reluctant to become over-loaded on carry trades for fear the Fed disappoints markets Wednesday. If the Fed does not deliver a 0.5% cut, we could see a negative stock market reaction and downturn and a new bout of carry selling. Economic data out of Japan overnight printed quite positively with the unemployment rate unchanged at 3.8%, household spending surprisingly up by 2.2% in December and retail sales also increasing 0.2% last month, though this was a consequence of higher gasoline prices. We will probably see the yen retreat against the euro and the dollar in advance of tomorrow evening’s key announcement and it could turn into a rout for the Japanese currency if the Fed cuts by 0.5%, because risk tolerance is likely to rocket, temporarily at least, encouraging traders to use the yen to fund carry positions. It is not a good time to be long yen, but the currency will bounce back if 1) the Fed does not cut by 0.5% or 2) US employment data on Friday disappoints and stock prices go into retreat. I see potential for the euro to return to at least Y160 by tomorrow evening, before the next leg down. Strategy: Buy EUR/JPY on dips to between Y156 to Y157 with limit prices of Y158, Y159 and Y160. Have stop losses moved to a tight position prior to Fed, if not out of the market before then.
CAD
The loonie has defied the fundamentals and continued its rally Tuesday, breaking parity with the greenback, while most other currencies were moving sideways. The loonie has now appreciated 4% against the US dollar in the past week. It is a remarkable rally by any standards, but all the more remarkable given it comes immediately in the aftermath of a second successive rate cut from the Bank of Canada, with further rate cuts on the way, a 2-year low in core inflation, negative employment growth in December, a contracting industrial sector according to the latest business PMI and increasing concerns over the health of both the US and global economies which will limit demand for exports from Canada's export-dependent economy. Even today the country’s quarterly manufacturing survey reports pessimism amongst Canada’s production companies, with the expectations index for production this quarter falling to -14 from a flat reading in the last quarter. So why against this background of worrying data and events is the loonie suddenly soaring and outperforming every other major currency in the world? Perhaps we need to ask the managers of some of the sovereign wealth funds for their straetgies, or perhaps it is merely an impulsive rally in response to record high gold prices and elevated oil prices, or perahps a celebration of the fact the US is entering recession and Canada is not, yet. Leaving the thin holiday trading move for the currency aside, the fundamentals for Canada have shifted very significantly since the loonie last broke below parity and it is difficult to see how the current burst in support is a) justified and b) sustainable. It is probably the last hurrah before the pair finally sets off more firmly in the opposite direction. Technically the pair could fall as low as the 0.9756 price we saw in late December, before rebounding. Data this week holds plenty of downside risk for the US dollar, so it is not be a good idea to go long USD/CAD until the major events of the week are out of the way. If you are sitting on positional long USD/CAD trades, you will be left biting your nails for the whole of this week, but sit tight. Strategy: Hold off until after Fed. Do not go long on USD/CAD until current correction fizzles out. EUR/CAD looks to offer good value below 1.47, as the loonie’s rally aainst the euro was accentuated by the loonie’s drive to parity against the dollar. Caution is needed however, for while we may soon see a rapid return to 150 for EUR/CAD, the pair may first go lower this week.
Bob B - Jan 29
Market Watch: Will the Fed deliver on Jan 30?
Futures markets are pricing in an 80% chance of a 50 basis points cut Wednesday, to follow the 75 basis points cut from last Tuesday, meaning if the Fed cedes to futures market expectations tomorrow, the Fed Funds rate will have declined by a massive 225 basis points, or 2.25%, in just 4 months. If this is the outcome, Bernanke and co. will be cheered by stock market investors and the Fed certainly can’t be accused of watching from behind the curve, although many inflation watchers are certain to accuse the Fed of bowing to Wall Street pressure and abandoning longer-run economic sustainability, in favour of short-run economic growth. What are the arguments for against the various options open to the Fed?
Why Cut the Fed Funds rate by 50 basis points?
a) Markets expect it and were the Fed not to deliver Wednesday it may cause renewed volatility and a sharp downturn in stock prices and subsequently the value of investment portfolios of US households.
b) A credit crunch remains and more is needed from the Fed to free up liquidity and get the banking system working normally. A 50 basis points cut will enable cheaper credit and encourage inter-bank lending to operate more freely.
c) Aggressive policy action, having cut the base lending rate by 1.25% in a week, is certain to stimulate growth activity, which may steer the economy clear of a sharp slowdown or recession.
d) The momentum generated by last week’s emergency cut and the Administration’s stimulus package will only be maintained if followed by this further ‘expected’ move, to help restore consumer confidence.
e) Getting monetary easing out of the way quickly will lead to a significant bounce in the dollar through the remainder of the year, when markets focus elsewhere and price in monetary easing in other economies. A recovery in the dollar will help raise foreign investment and reduce import inflation costs.
f) The housing sector in the US is in recession and the only way to stimulate any form of recovery is to cut the cost of borrowing, aggressively.
g) The Fed does not meet again until March and that will be too long to wait before further policy easing is required.
Why not cut the Fed funds rate by 50 basis points?
a) The Fed has already given more than what was originally expected in January, when the 75 basis points emergency cut was announced last week. Interest rate cuts take a long time to play out in terms of impact on the wider economy and there is no urgency to act again so soon.
b) Being too aggressive in such a short period of time will signal the Fed is panicking and it will undermine confidence rather than the contrary - in essence another aggressive rate cut will help fuel opinion that the economy is already in recession.
c) Inflation is on the rise and there are severe warning signs emanating from the current rally in gold and oil prices. The US is currently experiencing stagflation and aggressive rate cuts from the Fed now are certain to put the US economy into an even deeper period of stagflation, while the economic benefits from those cuts won’t be seen for at least 6-12 months. No Central Bank wants to be accused of being soft on inflation, but that is exactly where the Fed is at.
d) Economic data out of the US has not yet pointed to a recession and even allowing for major problems in the housing sector, the economy has coped reasonably well. Outside of quarter 4 (for which we have not yet seen the data), in 2007 the US economy grew stronger than that of all other major developed nations, including Japan and the euro area.
e) The extent to which the ‘rogue trader’ impacted global stock markets early last week may never be known, but the story will never go away and if this event, even in part, led to the US Federal Reserve cutting interest rates by the most in 25 years on Jan 22, the Fed’s credibility is in tatters. If the Fed keeps rates on hold this week, the committee can at least argue what they did was to bring their decision forward a week, to prevent a major stock market crash. A further cut this week however will add weight to claims that a single stock market irregularity led to 75 basis points indefinitely being shaved off the Fed Funds rate.
f) A decline in the Fed Funds rate to 3.0% will very much restrict the Fed from responding to any worsening crisis in the months to come, when further action may be needed from them. Using all its ammunition now will largely make the Fed redundant going forward, particularly if inflations risks do not disappear.
g) Aggressive Fed easing in the past led to the current fiasco we see with the subprime issue and the credit crunch in financial markets. If the Fed has learned from the past, it won’t repeat the same mistakes again, or will it?
h) The Fed stands accused in some quarters of giving too much preference to Wall Street over Main Street and it is the only Central Bank in the world that directly changed monetary policy to help out investors and stock markets that got into trouble recently. The Fed made a 360 degree turn in its message when it cut rates back in December and last September’s 50 basis points rate cut was a direct response to the then credit crisis which saw a downturn in stock prices. Last week’s 75 basis points cut was the most alarming, given Asian and European Central Banks did nothing, even though it was the stock markets in these jurisdictions which actually experienced the major sell-off. Further easing this week by the Fed will be seen as further evidence of a Central Bank responding to stock market demands.
i) The dollar. While not high on the Fed’s list of concerns to date, further monetary easing will only further erode confidence in the dollar, resulting in more depreciation in the currency and leading to a further rise in the cost of imports, particularly fuel and energy, which will only add to domestic inflation risks.
j) If the Fed wishes to be seen to be seen to be consistent in its commitment to policy easing and that last week’s move was not a once-off knee-jerk reaction, then a cut of 25 basis points should be more than enough on January 30, to keep its credibility intact.
Ted B - Jan 30
Why Cut the Fed Funds rate by 50 basis points?
a) Markets expect it and were the Fed not to deliver Wednesday it may cause renewed volatility and a sharp downturn in stock prices and subsequently the value of investment portfolios of US households.
b) A credit crunch remains and more is needed from the Fed to free up liquidity and get the banking system working normally. A 50 basis points cut will enable cheaper credit and encourage inter-bank lending to operate more freely.
c) Aggressive policy action, having cut the base lending rate by 1.25% in a week, is certain to stimulate growth activity, which may steer the economy clear of a sharp slowdown or recession.
d) The momentum generated by last week’s emergency cut and the Administration’s stimulus package will only be maintained if followed by this further ‘expected’ move, to help restore consumer confidence.
e) Getting monetary easing out of the way quickly will lead to a significant bounce in the dollar through the remainder of the year, when markets focus elsewhere and price in monetary easing in other economies. A recovery in the dollar will help raise foreign investment and reduce import inflation costs.
f) The housing sector in the US is in recession and the only way to stimulate any form of recovery is to cut the cost of borrowing, aggressively.
g) The Fed does not meet again until March and that will be too long to wait before further policy easing is required.
Why not cut the Fed funds rate by 50 basis points?
a) The Fed has already given more than what was originally expected in January, when the 75 basis points emergency cut was announced last week. Interest rate cuts take a long time to play out in terms of impact on the wider economy and there is no urgency to act again so soon.
b) Being too aggressive in such a short period of time will signal the Fed is panicking and it will undermine confidence rather than the contrary - in essence another aggressive rate cut will help fuel opinion that the economy is already in recession.
c) Inflation is on the rise and there are severe warning signs emanating from the current rally in gold and oil prices. The US is currently experiencing stagflation and aggressive rate cuts from the Fed now are certain to put the US economy into an even deeper period of stagflation, while the economic benefits from those cuts won’t be seen for at least 6-12 months. No Central Bank wants to be accused of being soft on inflation, but that is exactly where the Fed is at.
d) Economic data out of the US has not yet pointed to a recession and even allowing for major problems in the housing sector, the economy has coped reasonably well. Outside of quarter 4 (for which we have not yet seen the data), in 2007 the US economy grew stronger than that of all other major developed nations, including Japan and the euro area.
e) The extent to which the ‘rogue trader’ impacted global stock markets early last week may never be known, but the story will never go away and if this event, even in part, led to the US Federal Reserve cutting interest rates by the most in 25 years on Jan 22, the Fed’s credibility is in tatters. If the Fed keeps rates on hold this week, the committee can at least argue what they did was to bring their decision forward a week, to prevent a major stock market crash. A further cut this week however will add weight to claims that a single stock market irregularity led to 75 basis points indefinitely being shaved off the Fed Funds rate.
f) A decline in the Fed Funds rate to 3.0% will very much restrict the Fed from responding to any worsening crisis in the months to come, when further action may be needed from them. Using all its ammunition now will largely make the Fed redundant going forward, particularly if inflations risks do not disappear.
g) Aggressive Fed easing in the past led to the current fiasco we see with the subprime issue and the credit crunch in financial markets. If the Fed has learned from the past, it won’t repeat the same mistakes again, or will it?
h) The Fed stands accused in some quarters of giving too much preference to Wall Street over Main Street and it is the only Central Bank in the world that directly changed monetary policy to help out investors and stock markets that got into trouble recently. The Fed made a 360 degree turn in its message when it cut rates back in December and last September’s 50 basis points rate cut was a direct response to the then credit crisis which saw a downturn in stock prices. Last week’s 75 basis points cut was the most alarming, given Asian and European Central Banks did nothing, even though it was the stock markets in these jurisdictions which actually experienced the major sell-off. Further easing this week by the Fed will be seen as further evidence of a Central Bank responding to stock market demands.
i) The dollar. While not high on the Fed’s list of concerns to date, further monetary easing will only further erode confidence in the dollar, resulting in more depreciation in the currency and leading to a further rise in the cost of imports, particularly fuel and energy, which will only add to domestic inflation risks.
j) If the Fed wishes to be seen to be seen to be consistent in its commitment to policy easing and that last week’s move was not a once-off knee-jerk reaction, then a cut of 25 basis points should be more than enough on January 30, to keep its credibility intact.
Ted B - Jan 30
Thứ Hai, 28 tháng 1, 2008
Bob's Currency Focus - 17:30 GMT
It will be a tough week for the greenback with the currency likely to come under selling pressure early on as markets price in a further 50 basis points rate cut from the Fed on Wednesday next. There are other key data releases with quarter 4 GDP the same day as the Fed and on Friday there is January’s employment report and the ISM Manufacturing Index. Anything short of a 50 basis points cut from the Fed Wednesday will disappoint stock markets and probably lead to a bounce in the dollar, although probably a very temporary one. The Fed did not communicate much to markets last week when they cut by 75 basis points in their surprise emergency move and markets will be studying this week’s accompanying statement closely to extrapolate the Fed’s current thinking on the economy and also for clues as to likely future policy moves. If quarter 4 GDP earlier Wednesday prints higher than 2%, it will signal markets may have been too pessimistic in their outlook for the US economy and it could cast some doubts over how much the Fed will subsequently cut later the same day. Thursday’s inflation data (Core Personal Consumption index) will be of secondary importance this week unless the Fed had issued a fresh inflation warning in its policy statement. Friday’s payroll data will however be critical in shaping immediate confidence post-Fed and a negative jobs number will increase consensus that the US is already in recession and it may trigger a sharp rise in risk aversion which will temporarily benefit the dollar. A strong employment number will tend to undermine The ISM manufacturing index is also seen as a key recessionary indicator, particularly since the index contracted to a 47.5 reading last month. A further decline in the index this week will also raise fears over a recession and if it follows a negative non-farm payroll number, Friday could prove to be a very testing day for global financial markets, although the dollar might likely get a short-term lift.
EUR/USD
The euro rose sharply Monday, taking the pair back near the 1.48 line and the euro is currently lingering just below this key level. On the data front, M3 money supply in the euro area narrowed slightly in December while US new home sales slumped by a further 4.6% in December, recording the lowest annual rate for 12 years. Markets are anxiously waiting key events due out later in the week and the New Home Sales figure only caused a temporary blip before dollar selling pressure resumed. The euro may have its best chance of reaching the coveted 1.50 price level this week and much will depend on how global stock markets respond to the Fed’s rate announcement and the other key US data due for release this week. A positive response from stock markets is more likely to damage the dollar, such are the contradictions that currently dictate market direction. The dollar is going to struggle to make an impression before the Fed, and we could see the euro attempt to rise towards the 1.49 line before then. There is little value at current prices because if markets fears were to suddenly flare up, the euro could quickly decline by as much as 3 cents. The best option may be to buy only on dips back towards 1.4650 using a tight stop, or to wait for a sell opportunity when this week’s major risk events are done. Strategy: buy euro on dips to 1.4650 with upside price targets of 1.4750, 1.4790, 1.4820 and 1.4870. Place a tight S/L just below 1.4640.
GBP
Sterling has held its own again the dollar Monday but has badly struggled against the euro, giving up all of the hard-won gains from Friday. The pound was put under some pressure during the Asian session when a report in the Guardian quoted Bank of England voting member Blanchflower as saying that waiting to cut UK interest waits was akin to playing the fiddle while Rome was left to burn. Although Mr Blanchflower’s views are well known and he was the only member of the MPC to have voted for a cut at the January meeting, his illustration was strong enough to remind traders that the Bank of England’s next monetary policy meeting is only a week away, when a rate cut is much more likely. The euro has risen to 0.7450 against the pound and there may be a chance of a temporary return to 0.75, if the euro is elsewhere able to sustain its rise against the dollar. I remain bearish on sterling but still see some chance of cable moving to 2.01 in the short-term because of the risk calendar in the US over the next few days so prefer to wait before entering the market. It is dangerous to buy into the dollar before the Fed meeting. Strategy: Wait for cable to peak this week, possibly around 2.01, and then sell down with limit prices of 1.99, 1.9850, 1.9770 and 1.9650.
Yen
The yen failed to make much progress Monday despite a sharp sell-off in Asian stocks overnight, something which carried through into the European session, before a modest turnaround was seen early in the US trading session. Complacency has returned in mega-fashion with all the high yielding currencies and commodity currencies being bet on Monday, ahead of the Fed’s rate announcement Wednesday. The assumption is commodity prices and the carry trade will benefit from the Fed’s expected 50 basis points cut and many fund managers can’t wait until the actual event, so are piling on their positions now. Of course it is ridiculous in the sense that more and more evidence is emerging of a broader global slowdown, something which is likely to lead to a prolonged retreat in commodity prices, but as of now markets are looking no more than a few days ahead. The yen is unlikely to be a benefactor ahead of Wednesday and indeed not immediately after the Fed’s Statement is released, if the rate announcement is responded to positively by Wall Street. The Japanese currency may however bite back at the end of the week once reality begins to take foot once again and risk aversion levels rise once more. There is a significant set of data indicators out in Japan tonight, including house-holding spending, unemployment and retail sales numbers for December. With concerns over a possible Japanese recession growing more vocal, these data releases offer a timely test. The data is however unlikely to influence the currency markets, which will continue to be dominated by pre-Fed sentiment. The dollar is likely to remain in a 106.50 to 107.50 price range against the yen, while the euro has a chance to exceed the key Y160 price level during the course of this week, before the downtrend resumes. Strategy: Buy EUR/JPY on dips towards Y155 with price limits of Y156.50, Y157 and Y158.
CAD
The loonie declined for a short while this morning, the greenback rising to 1.0119 before the pair retreated somewhat sharply during the course of the day, with the loonie now testing levels once more around the 1.0030 price level. The Canadian currency has been the strongest supported currency since the middle of last week, despite a further Bank of Canada rate cut and further soft data in the shape of Friday’s consumer price index for December. The pair looks to be on another collision course around the parity line and with US dollar sentiment very low in anticipation of a further rate cut from the Fed Wednesday, I will be surprised if the pair does not break below the parity line by tomorrow. I remain medium to long-term bearish on the loonie, although the currency is now exploiting the greenback’s Fed vulnerability to stage a sizeable correction, which could see the pair go as low as 0.9850 or 0.9750, before the uptrend resumes. It is a twitchy time for those holding long positions on the pair, but if you are not over-exposed, I wouldn’t despair as the medium-term outlook for the loonie is not good (increased evidence of a global slowdown which will put commodity currencies under pressure, further bank of Canada rate cuts and further soft Canadian data), something which is being largely ignored by the big funds that have catapulted the loonie back into contention. The high yielding currencies and commodity currencies could all seriously come off the rails by the end of the week, once markets have to deal with the reality of a downturn once more and have to suspend calls for the Fed to again cut interest rates, for a few weeks at least. The euro has offered some good temporary value against the loonie on levels around 1.4750, with prices again rising towards 1.49, although traders need to be aware that a break below the parity line on USD/CAD would trigger a lift for the loonie on all the crosses. Strategy: Wait until after Fed on Wednesday for USD/CAD. Buy EUR/CAD on dips to 1.4750 with limit prices of 1.4850, 1.49 and 1.4960, but exit if loonie breaches parity against the greenback.
Bob B - Jan 28
EUR/USD
The euro rose sharply Monday, taking the pair back near the 1.48 line and the euro is currently lingering just below this key level. On the data front, M3 money supply in the euro area narrowed slightly in December while US new home sales slumped by a further 4.6% in December, recording the lowest annual rate for 12 years. Markets are anxiously waiting key events due out later in the week and the New Home Sales figure only caused a temporary blip before dollar selling pressure resumed. The euro may have its best chance of reaching the coveted 1.50 price level this week and much will depend on how global stock markets respond to the Fed’s rate announcement and the other key US data due for release this week. A positive response from stock markets is more likely to damage the dollar, such are the contradictions that currently dictate market direction. The dollar is going to struggle to make an impression before the Fed, and we could see the euro attempt to rise towards the 1.49 line before then. There is little value at current prices because if markets fears were to suddenly flare up, the euro could quickly decline by as much as 3 cents. The best option may be to buy only on dips back towards 1.4650 using a tight stop, or to wait for a sell opportunity when this week’s major risk events are done. Strategy: buy euro on dips to 1.4650 with upside price targets of 1.4750, 1.4790, 1.4820 and 1.4870. Place a tight S/L just below 1.4640.
GBP
Sterling has held its own again the dollar Monday but has badly struggled against the euro, giving up all of the hard-won gains from Friday. The pound was put under some pressure during the Asian session when a report in the Guardian quoted Bank of England voting member Blanchflower as saying that waiting to cut UK interest waits was akin to playing the fiddle while Rome was left to burn. Although Mr Blanchflower’s views are well known and he was the only member of the MPC to have voted for a cut at the January meeting, his illustration was strong enough to remind traders that the Bank of England’s next monetary policy meeting is only a week away, when a rate cut is much more likely. The euro has risen to 0.7450 against the pound and there may be a chance of a temporary return to 0.75, if the euro is elsewhere able to sustain its rise against the dollar. I remain bearish on sterling but still see some chance of cable moving to 2.01 in the short-term because of the risk calendar in the US over the next few days so prefer to wait before entering the market. It is dangerous to buy into the dollar before the Fed meeting. Strategy: Wait for cable to peak this week, possibly around 2.01, and then sell down with limit prices of 1.99, 1.9850, 1.9770 and 1.9650.
Yen
The yen failed to make much progress Monday despite a sharp sell-off in Asian stocks overnight, something which carried through into the European session, before a modest turnaround was seen early in the US trading session. Complacency has returned in mega-fashion with all the high yielding currencies and commodity currencies being bet on Monday, ahead of the Fed’s rate announcement Wednesday. The assumption is commodity prices and the carry trade will benefit from the Fed’s expected 50 basis points cut and many fund managers can’t wait until the actual event, so are piling on their positions now. Of course it is ridiculous in the sense that more and more evidence is emerging of a broader global slowdown, something which is likely to lead to a prolonged retreat in commodity prices, but as of now markets are looking no more than a few days ahead. The yen is unlikely to be a benefactor ahead of Wednesday and indeed not immediately after the Fed’s Statement is released, if the rate announcement is responded to positively by Wall Street. The Japanese currency may however bite back at the end of the week once reality begins to take foot once again and risk aversion levels rise once more. There is a significant set of data indicators out in Japan tonight, including house-holding spending, unemployment and retail sales numbers for December. With concerns over a possible Japanese recession growing more vocal, these data releases offer a timely test. The data is however unlikely to influence the currency markets, which will continue to be dominated by pre-Fed sentiment. The dollar is likely to remain in a 106.50 to 107.50 price range against the yen, while the euro has a chance to exceed the key Y160 price level during the course of this week, before the downtrend resumes. Strategy: Buy EUR/JPY on dips towards Y155 with price limits of Y156.50, Y157 and Y158.
CAD
The loonie declined for a short while this morning, the greenback rising to 1.0119 before the pair retreated somewhat sharply during the course of the day, with the loonie now testing levels once more around the 1.0030 price level. The Canadian currency has been the strongest supported currency since the middle of last week, despite a further Bank of Canada rate cut and further soft data in the shape of Friday’s consumer price index for December. The pair looks to be on another collision course around the parity line and with US dollar sentiment very low in anticipation of a further rate cut from the Fed Wednesday, I will be surprised if the pair does not break below the parity line by tomorrow. I remain medium to long-term bearish on the loonie, although the currency is now exploiting the greenback’s Fed vulnerability to stage a sizeable correction, which could see the pair go as low as 0.9850 or 0.9750, before the uptrend resumes. It is a twitchy time for those holding long positions on the pair, but if you are not over-exposed, I wouldn’t despair as the medium-term outlook for the loonie is not good (increased evidence of a global slowdown which will put commodity currencies under pressure, further bank of Canada rate cuts and further soft Canadian data), something which is being largely ignored by the big funds that have catapulted the loonie back into contention. The high yielding currencies and commodity currencies could all seriously come off the rails by the end of the week, once markets have to deal with the reality of a downturn once more and have to suspend calls for the Fed to again cut interest rates, for a few weeks at least. The euro has offered some good temporary value against the loonie on levels around 1.4750, with prices again rising towards 1.49, although traders need to be aware that a break below the parity line on USD/CAD would trigger a lift for the loonie on all the crosses. Strategy: Wait until after Fed on Wednesday for USD/CAD. Buy EUR/CAD on dips to 1.4750 with limit prices of 1.4850, 1.49 and 1.4960, but exit if loonie breaches parity against the greenback.
Bob B - Jan 28
Thứ Sáu, 25 tháng 1, 2008
Bob's Currency Focus - 16:00 GMT
EUR/USD
The euro came off a little Friday, following an unprecedented rally of over 3.5 cents on the previous two days. The pair has spent most of the day hovering close to the 1.47 line, the single currency in decline, having failed to breach resistance up at 1.4780. There has been little in the way of meaningful economic data Friday and traders are now positioning themselves ahead of next week’s Federal Reserve meeting on Wednesday. Legitimate questions about the wisdom and necessity behind this week’s emergency rate cut in the US remain unanswered and Ben Bernanke’s already fragile credibility is coming under increasing scrutiny. The panic sell-off Sunday night and Monday of $60 billion of stock indices futures by the French Bank Societé General (the employer of rogue trader Jerome Kerviel) is reported by much of the media today as having been a major contributory factor to Monday’s mayhem on global stock markets. Any hint of a link between this and Ben Bernanke’s decision the very next day, to suddenly cut US interest rates by the highest margin in history, is sure to be the stuff of legends and no doubt will be transformed into a blockbuster movie in the not too distant future. The US economy is either in recession or it is being talked into recession by the Fed and it will be most interesting to see what the FOMC have to say in their statement next Wednesday. Next week also sees the release of the latest US employment data and if this report prints positive, against the backdrop of a further rate cut next week, Mr Bernanke will stand accused of serving Wall Street’s immediate interests ahead of the longer-term interests and sustainability of the US economy.
Bernanke will be damned if he does and damned if he doesn’t next week and as financial markets are expecting a further 50 basis points cut, it will be a surprise if the Fed does not deliver. It may prove more beneficial in the longer run were rates to be kept on hold on Wednesday, because to cut rates to 3% now is going to leave the Fed with very little charge left in the battery to face the challenges in the months ahead. The euro will have its best chance of reaching the coveted 1.50 price handle next week, although there will possibly be reluctance to force the price through until traders see what the Fed decides. Strategy: buy euro on dips towards 1.46 with upside limit prices of 1.4720, 1.4770, 1.4820 and 1.49. We will look at the lie of the land again Monday.
GBP
Sterling has had its best week of the year by far, gaining 3 cents against the dollar and half a penny against the euro, while the sterling crosses on the yen and Swiss franc have also done very well. There was no data out of the UK Friday but the pound uses its current momentum to push the pair to the key 1.9850 price level. A strong close near to this price Friday could see sterling rally to the 2 dollar line next week, with the dollar likely to be lightly supported ahead of the Fed’s rate decision on Wednesday. There is scope for a possible move to 2.01, the high breached just before the New Year, but cable’s fortunes depend as much on risk aversion levels remaining contained as they do on a defensive dollar. I am still bearish on the UK currency and am reluctant to buy it at all and prefer to wait for the best time to sell. Once the attention shifts after the Fed next week, the focus will very much be put on sterling again and the currency is going to come under selling pressure, particularly if economic data remains soft and with the Bank of England most likely to cut rates at its February rate setting meeting. I prefer to stay away from cable until after the Fed rate announcement. The euro dropped to 0.7408 today and there is the potential for a fall to 0.7350, if stock markets remain robust up to next Wednesday and the appetite for high yielding currencies remains high. Strategy: Stay on sidelines until after Fed meeting, but if risk aversion levels do rise again stock markets decline sharply), sell down on prices from around 1.98 with limit prices of 1.97, 1.9660 and 1.9580. Trade with a stop loss just above 1.9850, because if that price gives, cable could quickly move to the 2 dollar line.
Yen
The Japanese currency has had an up and down day, losing heavily earlier in the session but rebounding as European stock stumbled to the close. Traders are now quick to offload the low-yielding yen which is hampered by the prospect of a further Fed rate cut next Wednesday, leading to carry traders exchanging the yen for higher yielding currencies like the pound, Australian and New Zealand dollars. The euro bounced back to Y159 early in the European session, an extraordinary turnaround given the pair had fallen to Y152 twice this week. They yen has found some support at the Y108 level against the dollar, but if this price gives way, either today or early next week, we could see Y110 reached by next Thursday, if the Fed does cut rates again on Jan 30th. We could also see a total capitulation of the Japanese currency next week, across the board, if stock markets remain stable and risk appetite intensifies. EUR/JPY is likely to reach Y160 by the middle of next week, but entering the market at the current price is not without risk, given the still fragile sentiment on global markets. There is however never a shortage of takers of risk when it comes to shedding the yen, when market conditions stabilises, so it is certainly worth buying the euro against the yen when prices move to extremes (close to Y152), as it is the dollar (when the dollar falls close to Y105). Strategy: Buy EUR/JPY on dips towards Y155 – Y156, with upside price targets of Y158, Y159 and Y160.
CAD
The loonie advanced by 2% against the US dollar Thursday, on a day when there were no economic indicators released and following a report published by the Bank of Canada, which downgraded its growth outlook for 2008 to 1.8%, from the 2.5% forecast last October. While there was general greenback weakness Thursday, the loonie’s appreciation is difficult to understand because the currency also advanced by 1% against the euro and by more than this against most other leading currencies. Friday’s inflation data was softer than expected with the Bank of Canada’s core inflation rate falling to 1.5%, the lowest reading in 2 years and gives muscle to the Central bank to further cut interest rate in the months ahead. This would normally be damning for a currency and see it go into freefall, but not the loonie today. Having retreated for a 5 minute period, the currency was soon trading at the point at which it was at just before the print. There are some of those mysterious forces we have seen before resurfacing and driving the loonie in recent days and the currency has suddenly grown decidedly bullish. The loonie is now trading over 3 cents better against the greenback than where it was on Tuesday around the time of the Bank of Canada announcement. There is a determined push to drive the pair to below parity once again and with the dollar likely to be vulnerable next week with the Fed expected to cut rates once more, this will widen the rate differential even further in favour of the Canadian dollar and USD/CAD bears may be able to force price down towards the 0.9756 price level seen over the Christmas holiday period. Strategy: I remain bearish on the loonie but I’m holding off on going long until I see the current correction bottom out. EUR/CAD looks to offer value on prices close to 1.47, although there is danger right now because if the loonie breaks below the parity line against the US dollar, the euro could possible fall to 1.45 against the Canadian currency by the middle of next week. If you have long-held positional trades on USD/CAD, you will need to bring your stop loss to below 0.9750. Next week could be a rollercoaster but the event calendar looks to favour the loonie, although it should also bring to a conclusion the loonie’s current burst of strength.
Bob B - Jan 25
The euro came off a little Friday, following an unprecedented rally of over 3.5 cents on the previous two days. The pair has spent most of the day hovering close to the 1.47 line, the single currency in decline, having failed to breach resistance up at 1.4780. There has been little in the way of meaningful economic data Friday and traders are now positioning themselves ahead of next week’s Federal Reserve meeting on Wednesday. Legitimate questions about the wisdom and necessity behind this week’s emergency rate cut in the US remain unanswered and Ben Bernanke’s already fragile credibility is coming under increasing scrutiny. The panic sell-off Sunday night and Monday of $60 billion of stock indices futures by the French Bank Societé General (the employer of rogue trader Jerome Kerviel) is reported by much of the media today as having been a major contributory factor to Monday’s mayhem on global stock markets. Any hint of a link between this and Ben Bernanke’s decision the very next day, to suddenly cut US interest rates by the highest margin in history, is sure to be the stuff of legends and no doubt will be transformed into a blockbuster movie in the not too distant future. The US economy is either in recession or it is being talked into recession by the Fed and it will be most interesting to see what the FOMC have to say in their statement next Wednesday. Next week also sees the release of the latest US employment data and if this report prints positive, against the backdrop of a further rate cut next week, Mr Bernanke will stand accused of serving Wall Street’s immediate interests ahead of the longer-term interests and sustainability of the US economy.
Bernanke will be damned if he does and damned if he doesn’t next week and as financial markets are expecting a further 50 basis points cut, it will be a surprise if the Fed does not deliver. It may prove more beneficial in the longer run were rates to be kept on hold on Wednesday, because to cut rates to 3% now is going to leave the Fed with very little charge left in the battery to face the challenges in the months ahead. The euro will have its best chance of reaching the coveted 1.50 price handle next week, although there will possibly be reluctance to force the price through until traders see what the Fed decides. Strategy: buy euro on dips towards 1.46 with upside limit prices of 1.4720, 1.4770, 1.4820 and 1.49. We will look at the lie of the land again Monday.
GBP
Sterling has had its best week of the year by far, gaining 3 cents against the dollar and half a penny against the euro, while the sterling crosses on the yen and Swiss franc have also done very well. There was no data out of the UK Friday but the pound uses its current momentum to push the pair to the key 1.9850 price level. A strong close near to this price Friday could see sterling rally to the 2 dollar line next week, with the dollar likely to be lightly supported ahead of the Fed’s rate decision on Wednesday. There is scope for a possible move to 2.01, the high breached just before the New Year, but cable’s fortunes depend as much on risk aversion levels remaining contained as they do on a defensive dollar. I am still bearish on the UK currency and am reluctant to buy it at all and prefer to wait for the best time to sell. Once the attention shifts after the Fed next week, the focus will very much be put on sterling again and the currency is going to come under selling pressure, particularly if economic data remains soft and with the Bank of England most likely to cut rates at its February rate setting meeting. I prefer to stay away from cable until after the Fed rate announcement. The euro dropped to 0.7408 today and there is the potential for a fall to 0.7350, if stock markets remain robust up to next Wednesday and the appetite for high yielding currencies remains high. Strategy: Stay on sidelines until after Fed meeting, but if risk aversion levels do rise again stock markets decline sharply), sell down on prices from around 1.98 with limit prices of 1.97, 1.9660 and 1.9580. Trade with a stop loss just above 1.9850, because if that price gives, cable could quickly move to the 2 dollar line.
Yen
The Japanese currency has had an up and down day, losing heavily earlier in the session but rebounding as European stock stumbled to the close. Traders are now quick to offload the low-yielding yen which is hampered by the prospect of a further Fed rate cut next Wednesday, leading to carry traders exchanging the yen for higher yielding currencies like the pound, Australian and New Zealand dollars. The euro bounced back to Y159 early in the European session, an extraordinary turnaround given the pair had fallen to Y152 twice this week. They yen has found some support at the Y108 level against the dollar, but if this price gives way, either today or early next week, we could see Y110 reached by next Thursday, if the Fed does cut rates again on Jan 30th. We could also see a total capitulation of the Japanese currency next week, across the board, if stock markets remain stable and risk appetite intensifies. EUR/JPY is likely to reach Y160 by the middle of next week, but entering the market at the current price is not without risk, given the still fragile sentiment on global markets. There is however never a shortage of takers of risk when it comes to shedding the yen, when market conditions stabilises, so it is certainly worth buying the euro against the yen when prices move to extremes (close to Y152), as it is the dollar (when the dollar falls close to Y105). Strategy: Buy EUR/JPY on dips towards Y155 – Y156, with upside price targets of Y158, Y159 and Y160.
CAD
The loonie advanced by 2% against the US dollar Thursday, on a day when there were no economic indicators released and following a report published by the Bank of Canada, which downgraded its growth outlook for 2008 to 1.8%, from the 2.5% forecast last October. While there was general greenback weakness Thursday, the loonie’s appreciation is difficult to understand because the currency also advanced by 1% against the euro and by more than this against most other leading currencies. Friday’s inflation data was softer than expected with the Bank of Canada’s core inflation rate falling to 1.5%, the lowest reading in 2 years and gives muscle to the Central bank to further cut interest rate in the months ahead. This would normally be damning for a currency and see it go into freefall, but not the loonie today. Having retreated for a 5 minute period, the currency was soon trading at the point at which it was at just before the print. There are some of those mysterious forces we have seen before resurfacing and driving the loonie in recent days and the currency has suddenly grown decidedly bullish. The loonie is now trading over 3 cents better against the greenback than where it was on Tuesday around the time of the Bank of Canada announcement. There is a determined push to drive the pair to below parity once again and with the dollar likely to be vulnerable next week with the Fed expected to cut rates once more, this will widen the rate differential even further in favour of the Canadian dollar and USD/CAD bears may be able to force price down towards the 0.9756 price level seen over the Christmas holiday period. Strategy: I remain bearish on the loonie but I’m holding off on going long until I see the current correction bottom out. EUR/CAD looks to offer value on prices close to 1.47, although there is danger right now because if the loonie breaks below the parity line against the US dollar, the euro could possible fall to 1.45 against the Canadian currency by the middle of next week. If you have long-held positional trades on USD/CAD, you will need to bring your stop loss to below 0.9750. Next week could be a rollercoaster but the event calendar looks to favour the loonie, although it should also bring to a conclusion the loonie’s current burst of strength.
Bob B - Jan 25
Thứ Năm, 24 tháng 1, 2008
Bob's Currency Focus - 17:00 GMT
Risk tolerance levels have risen appreciably today with traders prepared to buy into the high yielding currencies en masse, although significantly the yen has held its value against the dollar. The dollar has pretty much collapsed against every other major currency however, with a rise in equities equalling a license to sell the dollar. We have witnessed an aggressive bout of dollar selling Thursday, with the US currency falling broadly across the board, particularly against the Canadian dollar which has been on the rampage for most of the day. Stock markets in Europe are higher by 4%-5% on average as buyers frantically try to get a piece of the action, following heavy losses earlier in the week. The US currency is now a significant target on yield grounds – offering a mere 3.5% yield and with the Fed acting in isolation to calm markets and expected to cut rates again next week by a further 50 basis points, the dollar is very vulnerable. The dollar’s best hope of defence is if risk aversion levels remain high and stock markets resume their decline. It is a sad situation when a country’s currency is only seen to be of value when global share prices nosedive, but that is the very real outcome of the Fed’s policy of acting so aggressively and acting alone. The ECB and the Fed are poles apart in their line of thinking, as confirmed by ECB council member Alex Weber today, who stated it was ‘wishful thinking’ to believe the ECB might contemplate cutting interest rates. Markets remain fragile however and a spark either way could trigger further volatile periods that could send currencies sharply in either direction. The commodity currencies are particularly susceptible to sharp moves, given they have already recouped all the losses incurred earlier this week.
EUR/USD
The euro has pushed back above 1.47 for the first time this week and having broken through resistance at 1.4720, seems poised to reach the 1.48 and set itself up for another challenge of the lifetime high, which is currently at 1.4966. Few people are going to wish to buy the dollar ahead of the Federal Reserve’s second rate announcement in a week next Wednesday, and the only downside risk for the euro is a capitulation on stock markets which leads to a flow of ‘safe haven’ funds back into the dollar. Germany’s important Ifo business sentiment index came in higher than expected in January and higher than the previous month’s reading, meaning increasing talks of a US recession and a soaring euro is certainly not yet denting business confidence in Europe’s largest economy. Us economic data out Thursday showed jobless claims fell to a 301K last week 20K better than forecast, while existing home sales declined further to a 4.89 million rate in December against a forecast of 4.95 million. There is no market-moving data out Friday and direction will be dictated by sentiment, which remains dollar negative, unless there is a sharp decline in equity prices. Strategy: Buy on dips towards 1.46, with upside price targets of 1.4720, 1.4750, 1.4815, 1.49 and 1.4930. Keep on eye on the Wall Street industrial averages and if there is a major decline, do not enter the market.
GBP
The pound has had a solid day, rising over 0.8% against the dollar and virtually unchanged against the euro. The only economic data out of the UK Thursday was the BBA mortgage approvals number for December, which fell to 42,100 from a downwardly revised 43,900 in November. This didn’t matter on a day when markets were driven by risk appetite for high yielding currencies, as global stock markets rebounded from their heavy losses earlier in the week. Sterling is also supported by a stronger than expected quarter 4 GDP number, released Wednesday, and a hawkish set of minutes from the Bank of England, where it emerged only one committee member voted for a rate cut in January, with the other 8 voting to stand pat. If stock markets do settle through the remainder of the week, sterling should be able to extend its rally against the dollar, ahead of next Wednesday’s Fed rate announcement. I remain bearish on cable but do not believe it worth the risk entering the market ahead of next week’s Fed meeting, at which time rate differentials are likely to widen again. We should see sterling rise to take on 1.9850, which is the key dollar resistance point below the 2 dollar line. If risk tolerance levels are sustained, sterling has the potential to push the euro back to the 0.74 pence line in the near-term. Strategy: remain on sidelines for now.
Yen
The Japanese currency has predictably retreated Thursday with risk aversion on the wane after stock markets surged over the past 24 hours. The yen has held its own again the greenback and the pair is currently trading at much the same price at which it closed Wednesday. Japan’s trade balance narrowed for a second straight month in December, hinting the sharp appreciation in the currency over recent months is having an adverse impact on the country’s exporters. The fortunes of the currency are totally dependent on market sentiment and risk aversion, but if the recovery staged over the past 24 hours persists to the start of next week, the yen will come under tremendous pressure on the carry trade side, with high yielding currencies having the most to benefit from a further rate cut from the Federal Reserve next week. The euro has soared to 157.70 against the yen, meaning a gain of over 500 points since Wednesday. There is no value in buying the yen in the build-up to the Fed meeting, given the underlying risks. There look to be some value in buying AUD/JPY on any dips to below Y92.50 as this pair might easily sail towards Y96 by the middle of next week.
CAD
The loonie has had a remarkable day, even by its standards. It has risen an extraordinary 1.4% against the greenback today and despite the Bank of Canada having cut rates on Tuesday and hinting at further rate cuts, the Canadian dollar is now trading almost 3 cents below the levels it had fallen to on Tuesday. I did state on Tuesday I had a fear the pair were destined for a correction back to 1.0180 or perhaps 1.0050. With risk tolerance levels at fever pitch only 24 hours after the world was apparently going to collapse, the omens do not augur well for the US currency in the build-up to next week’s Fed meeting. There are two events that can save the greenback from an imminent fall back below parity 1) stock markets slump tonight and tomorrow and the rise in risk aversion sends the loonie packing or 2) Friday’s consumer price data out of Canada is soft to the point of being worrying for the Bank of Canada and suggest a 50 basis points cut might be on the cards at February’s meeting. Once next week’s Fed is out of the way and prices have settled and stabilised we should see resumption to the uptrend. The Fed’s shock 75 basis points cut this week has really derailed us bulls to some extent, but we need to be patient, bide our time and wait for the right opportunity to re-enter the market. Those positional traders long on USD/CAD will just have to sit it out, but stops should be returned back below 0.9750, because bears are setting up for an attack on the parity line. Strategy: wait for further directional clarity. A soft core inflation number out of Canada Friday (< 1.5%) is a signal to buy, with a target back above 1.0180 and then 1.0220.
Bob B - Jan 24
EUR/USD
The euro has pushed back above 1.47 for the first time this week and having broken through resistance at 1.4720, seems poised to reach the 1.48 and set itself up for another challenge of the lifetime high, which is currently at 1.4966. Few people are going to wish to buy the dollar ahead of the Federal Reserve’s second rate announcement in a week next Wednesday, and the only downside risk for the euro is a capitulation on stock markets which leads to a flow of ‘safe haven’ funds back into the dollar. Germany’s important Ifo business sentiment index came in higher than expected in January and higher than the previous month’s reading, meaning increasing talks of a US recession and a soaring euro is certainly not yet denting business confidence in Europe’s largest economy. Us economic data out Thursday showed jobless claims fell to a 301K last week 20K better than forecast, while existing home sales declined further to a 4.89 million rate in December against a forecast of 4.95 million. There is no market-moving data out Friday and direction will be dictated by sentiment, which remains dollar negative, unless there is a sharp decline in equity prices. Strategy: Buy on dips towards 1.46, with upside price targets of 1.4720, 1.4750, 1.4815, 1.49 and 1.4930. Keep on eye on the Wall Street industrial averages and if there is a major decline, do not enter the market.
GBP
The pound has had a solid day, rising over 0.8% against the dollar and virtually unchanged against the euro. The only economic data out of the UK Thursday was the BBA mortgage approvals number for December, which fell to 42,100 from a downwardly revised 43,900 in November. This didn’t matter on a day when markets were driven by risk appetite for high yielding currencies, as global stock markets rebounded from their heavy losses earlier in the week. Sterling is also supported by a stronger than expected quarter 4 GDP number, released Wednesday, and a hawkish set of minutes from the Bank of England, where it emerged only one committee member voted for a rate cut in January, with the other 8 voting to stand pat. If stock markets do settle through the remainder of the week, sterling should be able to extend its rally against the dollar, ahead of next Wednesday’s Fed rate announcement. I remain bearish on cable but do not believe it worth the risk entering the market ahead of next week’s Fed meeting, at which time rate differentials are likely to widen again. We should see sterling rise to take on 1.9850, which is the key dollar resistance point below the 2 dollar line. If risk tolerance levels are sustained, sterling has the potential to push the euro back to the 0.74 pence line in the near-term. Strategy: remain on sidelines for now.
Yen
The Japanese currency has predictably retreated Thursday with risk aversion on the wane after stock markets surged over the past 24 hours. The yen has held its own again the greenback and the pair is currently trading at much the same price at which it closed Wednesday. Japan’s trade balance narrowed for a second straight month in December, hinting the sharp appreciation in the currency over recent months is having an adverse impact on the country’s exporters. The fortunes of the currency are totally dependent on market sentiment and risk aversion, but if the recovery staged over the past 24 hours persists to the start of next week, the yen will come under tremendous pressure on the carry trade side, with high yielding currencies having the most to benefit from a further rate cut from the Federal Reserve next week. The euro has soared to 157.70 against the yen, meaning a gain of over 500 points since Wednesday. There is no value in buying the yen in the build-up to the Fed meeting, given the underlying risks. There look to be some value in buying AUD/JPY on any dips to below Y92.50 as this pair might easily sail towards Y96 by the middle of next week.
CAD
The loonie has had a remarkable day, even by its standards. It has risen an extraordinary 1.4% against the greenback today and despite the Bank of Canada having cut rates on Tuesday and hinting at further rate cuts, the Canadian dollar is now trading almost 3 cents below the levels it had fallen to on Tuesday. I did state on Tuesday I had a fear the pair were destined for a correction back to 1.0180 or perhaps 1.0050. With risk tolerance levels at fever pitch only 24 hours after the world was apparently going to collapse, the omens do not augur well for the US currency in the build-up to next week’s Fed meeting. There are two events that can save the greenback from an imminent fall back below parity 1) stock markets slump tonight and tomorrow and the rise in risk aversion sends the loonie packing or 2) Friday’s consumer price data out of Canada is soft to the point of being worrying for the Bank of Canada and suggest a 50 basis points cut might be on the cards at February’s meeting. Once next week’s Fed is out of the way and prices have settled and stabilised we should see resumption to the uptrend. The Fed’s shock 75 basis points cut this week has really derailed us bulls to some extent, but we need to be patient, bide our time and wait for the right opportunity to re-enter the market. Those positional traders long on USD/CAD will just have to sit it out, but stops should be returned back below 0.9750, because bears are setting up for an attack on the parity line. Strategy: wait for further directional clarity. A soft core inflation number out of Canada Friday (< 1.5%) is a signal to buy, with a target back above 1.0180 and then 1.0220.
Bob B - Jan 24
Thứ Tư, 23 tháng 1, 2008
Market Watch: Central Banks, Outlook and the Decoupling of Responsibility
The emergency cut in the Fed Funds rate by a record 75 basis points Tuesday may not have surprised Wall Street traders, but it is important to note the Federal Reserve is the only major Central Bank that has responded directly and actively to the recent credit crisis and the widespread demise in global stocks. The Bank of Canada did also cut rates Tuesday but this was expected by markets and that decision came out of a prescheduled monetary policy meeting. It is obvious the only reason the Fed acted when it did on Tuesday was to try to avert the type of carnage on Wall Street which had engulfed European and Asian stock markets over the previous 36 hours, when US markets were closed for a holiday. There was no new economic data available to the Fed since Mr Bernanke spoke on January 17, which begs the question as to why the Fed felt it had to act ahead of its regular policy meeting, scheduled for next week. The move Tuesday appears to have been a huge gamble and if it fails to prevent a major sell-off of stocks over the coming days, it will go down as one of the greatest ever blunders by a major Central Bank. The surprise action will have spooked many investors who believe such a drastic move would only be taken if the US economy was already in a recession or on the brink of a catastrophic market crash.
The pre-emptive action will not have gone down well with other Central Bankers who identify the Central Bank role as one of chief policymaker to protect an economy from the adverse effects of inflation/deflation. In the world of the ECB and Bank of England, economic growth stems from sound monetary policy decisions, which in turn are made in the pursuit of inflation control. It is true that the other Central Banks, primarily the ECB and the Bank of England do not share the experience of the Federal Reserve when it comes to averting economic disasters, but the key differential between the two views is that the Fed deems itself to have a dual mandate, one for stimulating economic growth and the other for curbing inflation, while the ECB and the Bank of England are focused exclusively on inflation control / price stability. The ECB in particular are polarised in their thinking and have not wavered in their hawkish stance despite the recent turmoil. The Bank of England for their part are a reactive force and have a history of acting slowly when it comes to making key monetary policy decisions. The UK economy is adjudged by many to be facing much the same economic challenges in 2008 as the US, yet the Bank of England has only eased 25 basis points in recent months against the 175 basis points from the Fed. This is an even more startling difference when one throws into the equation the fact that headline consumer price inflation in the UK in December was running at an annual rate of 2.1%, against a dangerously high 4.1% in the US. The UK also started the current easing cycle at a higher rate of interest than the Fed funds rate – 5.75% Vs 5.25% and with rates now at 5.50% Vs 3.5% respectively, the differential has grown from 0.50% to 2.0%. Clearly the Fed and the Bank of England have very differing views on inflation outlook for this year and while the Fed is prepared to gamble and be aggressive during a period of rising inflation, believing inflation will soften, the Bank of England is not. A major problem for the Fed is that if does acts alone, the aggressive shift in interest rate differentials will see the dollar’s demise extend, imported inflation rise and see the US fall into an a protracted period of stagflation (inflation exceeding growth), something that will terminally damage the economy.
Let us look at the major Central Banks and examine their current policy:
FOMC
Chief: Ben Bernanke
Current Interest Rate: 3.5%
Interest Rate in September 2007: 5.25%
Change since September 2007: -1.75%
Responsibility: ‘attainment of long-run price stability and sustainable economic growth.’
CPI Rate Dec 2007: Headline: 4.1%, Core: 2.4%.
GDP in latest quarter: 4.1% in Qtr 3 2007
Kudos for:
Only major Central Bank to actively respond to major credit crisis which unfolded last August and dropped its key interest rate to 4.75% in September. The Fed was alert to poor economic data out of the US in the final quarter of 2007 and cut rates by 25 basis points in both its October and December meetings. Prevented a stock market crash on Jan 22, bringing forward an interest rate decision by a week, when it announced a cut of 75 basis points in the Fed Funds rate, the largest single-day cut in history.
Marks against:
Accused by many of not having been proactive enough and should have cut interest rates much sooner to stave off the threat of a recession. Inflation is rising at a time when the Fed is easing rates aggressively and Bernanke stands accused of largely ignoring the growing inflation risk. The Fed delivered large rate cuts in September (50 basis points) and January (75 basis points) in response to major dips in stock market prices, as opposed to specific dips in economic data and many see the Fed as the custodian of Wall Street, moreover Main Street. Current Fed policy seen as an irresponsible attempt to force short-run economic growth at the expense of long-run sustainable economic growth which is the Fed’s actual remit. Current asset bubble and credit crisis is the Fed’s own baby in the sense it was born out of the last major set of aggressive interest rate cuts from the FOMC back in 2001, when rates fell to 1%, leading to cheap money and complacency on the part of lenders.
What to expect from Fed in 2008: Rates could now go as low as 2.50% by the March meeting and it will then be a wait and see policy from the Fed to see if the gamble pays off, although having pared off most of the interest rate already by then, the Fed will have little in reserve. Will be due most of the credit if US avoids a recession but will have a massive credibility issue hanging over it, if inflation continues to rise in the coming months and the economy moves into a prolonged slump.
ECB
Chief: Jean Claude Trichet
Current Interest Rate: 4.0%
Interest Rate in September 2007: 4.0%
Change since September 2007: 0%
Responsibility: Price stability and to support a "high level of employment" and "sustainable and non-inflationary growth".
CPI Rate Dec 2007: Headline: 3.1%, Core: 1.9%.
GDP in latest quarter: 2.7% in Qtr 3 2007
Kudos for:
Market always knows where the ECB stands on policy and the press conference after each monetary policy meeting is both direct and informative. The ECB sticks to its mandate and is thus far unwavering in pursuit of its policy objectives in the face of pressures from politicians and financial markets. Has kept inflation firmly anchored in the euro area (to the last quarter of 2007) and in the past two years has overseen a period of sustained economic growth for a diverse group of 13 (now 15) nations. It quickly poured funds into markets to shore up liquidity during the financial market crisis last August.
Marks against:
Does not see stimulation of economic growth as its responsibility and it is currently threatening to hike interest rates at a time when the euro economy is slowing. The ECB doesn’t take an official vote when deciding on monetary policy and markets don’t know the extent to which views vary on the monetary policy committee. The ECB has done little or nothing to alleviate the ‘crisis’ that has plagued financial markets since the turn of the year. The ECB helped to make money cheap (interest rates were just 2% up to December 2005) something that has led to the asset bubble which threatens current economic stability.
What to expect from ECB in 2008: Will most likely keep rates on hold for the first quarter but inflation may ease sharply if the global slowdown takes root, thus opening the way for a rate 0.25% cut during the second or third quarter. Likely to have underestimated the potential slowdown in euro growth and will stand accused of not having acted soon enough, although the ECB will claim their only remit was to control inflation.
Bank of England
Chief: Mervyn King
Current Interest Rate: 5.50%
Interest Rate in September 2007: 5.75%
Change since September 2007: -0.25%
Responsibility: 'Monetary stability meaning stable prices - low inflation - and confidence in the currency.'
CPI Rate Dec 2007: Headline: 2.1%, Core: 1.4%.
GDP in latest quarter: 3.1% in Qtr 3 2007
Kudos for:
Presided over a sustained period of remarkable growth in the UK economy. Managed to drive UK inflation down from a 3.1% headline rate this time last year to the Bank’s target 2.0% rate in the Autumn and has since managed to keep UK inflation anchored, when consumer prices were significantly on the rise elsewhere because of the spike in energy and food costs.
Marks against:
Generally reactive and very slow to adopt a policy change. The inflation problem in late 2006/2007 had much to do with the Bank’s original failure to act soon enough, when growth began to expand from early 2006. The Bank handled the whole Northern Bank fiasco (first run on a UK bank since the 1800s) abysmally and this episode greatly tarnished the Bank’s reputation and the reputation of its Governor. With a major credit crisis underway in the financial sector (one of the mainstays of the UK economy), growing evidence of slowing growth, falling retail sales and falling house prices, the Bank of England has since September cut its core interest rate by a measly 25 basis points and is not doing enough to prevent the UK economy from a sharp downturn. Consensus appears to be a difficult position to reach for the Bank of England Monetary Policy Committee, with many split and narrow votes and this has undermined the role and the influential ability of the Bank’s Governor.
What to expect from Bank of England in 2008: The Bank will probably cut by 25 basis points in February but it won’t be nearly enough and events could overtake them, forcing the Bank into an aggressive series of cuts thereafter which could see a further 100 basis points pared off by the summer. If the UK suffers a severe downturn or a recession later this year, the Bank of England will be put forward as the principal culprits, for having chased the hare after it has bolted.
Ted B - Jan 23
The pre-emptive action will not have gone down well with other Central Bankers who identify the Central Bank role as one of chief policymaker to protect an economy from the adverse effects of inflation/deflation. In the world of the ECB and Bank of England, economic growth stems from sound monetary policy decisions, which in turn are made in the pursuit of inflation control. It is true that the other Central Banks, primarily the ECB and the Bank of England do not share the experience of the Federal Reserve when it comes to averting economic disasters, but the key differential between the two views is that the Fed deems itself to have a dual mandate, one for stimulating economic growth and the other for curbing inflation, while the ECB and the Bank of England are focused exclusively on inflation control / price stability. The ECB in particular are polarised in their thinking and have not wavered in their hawkish stance despite the recent turmoil. The Bank of England for their part are a reactive force and have a history of acting slowly when it comes to making key monetary policy decisions. The UK economy is adjudged by many to be facing much the same economic challenges in 2008 as the US, yet the Bank of England has only eased 25 basis points in recent months against the 175 basis points from the Fed. This is an even more startling difference when one throws into the equation the fact that headline consumer price inflation in the UK in December was running at an annual rate of 2.1%, against a dangerously high 4.1% in the US. The UK also started the current easing cycle at a higher rate of interest than the Fed funds rate – 5.75% Vs 5.25% and with rates now at 5.50% Vs 3.5% respectively, the differential has grown from 0.50% to 2.0%. Clearly the Fed and the Bank of England have very differing views on inflation outlook for this year and while the Fed is prepared to gamble and be aggressive during a period of rising inflation, believing inflation will soften, the Bank of England is not. A major problem for the Fed is that if does acts alone, the aggressive shift in interest rate differentials will see the dollar’s demise extend, imported inflation rise and see the US fall into an a protracted period of stagflation (inflation exceeding growth), something that will terminally damage the economy.
Let us look at the major Central Banks and examine their current policy:
FOMC
Chief: Ben Bernanke
Current Interest Rate: 3.5%
Interest Rate in September 2007: 5.25%
Change since September 2007: -1.75%
Responsibility: ‘attainment of long-run price stability and sustainable economic growth.’
CPI Rate Dec 2007: Headline: 4.1%, Core: 2.4%.
GDP in latest quarter: 4.1% in Qtr 3 2007
Kudos for:
Only major Central Bank to actively respond to major credit crisis which unfolded last August and dropped its key interest rate to 4.75% in September. The Fed was alert to poor economic data out of the US in the final quarter of 2007 and cut rates by 25 basis points in both its October and December meetings. Prevented a stock market crash on Jan 22, bringing forward an interest rate decision by a week, when it announced a cut of 75 basis points in the Fed Funds rate, the largest single-day cut in history.
Marks against:
Accused by many of not having been proactive enough and should have cut interest rates much sooner to stave off the threat of a recession. Inflation is rising at a time when the Fed is easing rates aggressively and Bernanke stands accused of largely ignoring the growing inflation risk. The Fed delivered large rate cuts in September (50 basis points) and January (75 basis points) in response to major dips in stock market prices, as opposed to specific dips in economic data and many see the Fed as the custodian of Wall Street, moreover Main Street. Current Fed policy seen as an irresponsible attempt to force short-run economic growth at the expense of long-run sustainable economic growth which is the Fed’s actual remit. Current asset bubble and credit crisis is the Fed’s own baby in the sense it was born out of the last major set of aggressive interest rate cuts from the FOMC back in 2001, when rates fell to 1%, leading to cheap money and complacency on the part of lenders.
What to expect from Fed in 2008: Rates could now go as low as 2.50% by the March meeting and it will then be a wait and see policy from the Fed to see if the gamble pays off, although having pared off most of the interest rate already by then, the Fed will have little in reserve. Will be due most of the credit if US avoids a recession but will have a massive credibility issue hanging over it, if inflation continues to rise in the coming months and the economy moves into a prolonged slump.
ECB
Chief: Jean Claude Trichet
Current Interest Rate: 4.0%
Interest Rate in September 2007: 4.0%
Change since September 2007: 0%
Responsibility: Price stability and to support a "high level of employment" and "sustainable and non-inflationary growth".
CPI Rate Dec 2007: Headline: 3.1%, Core: 1.9%.
GDP in latest quarter: 2.7% in Qtr 3 2007
Kudos for:
Market always knows where the ECB stands on policy and the press conference after each monetary policy meeting is both direct and informative. The ECB sticks to its mandate and is thus far unwavering in pursuit of its policy objectives in the face of pressures from politicians and financial markets. Has kept inflation firmly anchored in the euro area (to the last quarter of 2007) and in the past two years has overseen a period of sustained economic growth for a diverse group of 13 (now 15) nations. It quickly poured funds into markets to shore up liquidity during the financial market crisis last August.
Marks against:
Does not see stimulation of economic growth as its responsibility and it is currently threatening to hike interest rates at a time when the euro economy is slowing. The ECB doesn’t take an official vote when deciding on monetary policy and markets don’t know the extent to which views vary on the monetary policy committee. The ECB has done little or nothing to alleviate the ‘crisis’ that has plagued financial markets since the turn of the year. The ECB helped to make money cheap (interest rates were just 2% up to December 2005) something that has led to the asset bubble which threatens current economic stability.
What to expect from ECB in 2008: Will most likely keep rates on hold for the first quarter but inflation may ease sharply if the global slowdown takes root, thus opening the way for a rate 0.25% cut during the second or third quarter. Likely to have underestimated the potential slowdown in euro growth and will stand accused of not having acted soon enough, although the ECB will claim their only remit was to control inflation.
Bank of England
Chief: Mervyn King
Current Interest Rate: 5.50%
Interest Rate in September 2007: 5.75%
Change since September 2007: -0.25%
Responsibility: 'Monetary stability meaning stable prices - low inflation - and confidence in the currency.'
CPI Rate Dec 2007: Headline: 2.1%, Core: 1.4%.
GDP in latest quarter: 3.1% in Qtr 3 2007
Kudos for:
Presided over a sustained period of remarkable growth in the UK economy. Managed to drive UK inflation down from a 3.1% headline rate this time last year to the Bank’s target 2.0% rate in the Autumn and has since managed to keep UK inflation anchored, when consumer prices were significantly on the rise elsewhere because of the spike in energy and food costs.
Marks against:
Generally reactive and very slow to adopt a policy change. The inflation problem in late 2006/2007 had much to do with the Bank’s original failure to act soon enough, when growth began to expand from early 2006. The Bank handled the whole Northern Bank fiasco (first run on a UK bank since the 1800s) abysmally and this episode greatly tarnished the Bank’s reputation and the reputation of its Governor. With a major credit crisis underway in the financial sector (one of the mainstays of the UK economy), growing evidence of slowing growth, falling retail sales and falling house prices, the Bank of England has since September cut its core interest rate by a measly 25 basis points and is not doing enough to prevent the UK economy from a sharp downturn. Consensus appears to be a difficult position to reach for the Bank of England Monetary Policy Committee, with many split and narrow votes and this has undermined the role and the influential ability of the Bank’s Governor.
What to expect from Bank of England in 2008: The Bank will probably cut by 25 basis points in February but it won’t be nearly enough and events could overtake them, forcing the Bank into an aggressive series of cuts thereafter which could see a further 100 basis points pared off by the summer. If the UK suffers a severe downturn or a recession later this year, the Bank of England will be put forward as the principal culprits, for having chased the hare after it has bolted.
Ted B - Jan 23
Thứ Ba, 22 tháng 1, 2008
Bob's Currency Focus - 17:00 GMT
The Fed ceded to pressure following a turbulent day on global markets Monday and cut the Fed Funds rate by 0.75% with immediate effect, bringing the core interest rate down to 3.5%. The is the largest single-day cut in interest rates in living memory and it may well determine the legacy for which Ben Bernanke will be remembered, even if he is now just 2 years into his tenure as Fed Chairman. Today’s announcement is a highly controversial move because it comes 1 week before the Fed was scheduled to meet in regular session to deliberate on monetary policy and an out-of-meeting cut may be adjudged to being no more than a knee-jerk reaction to the sell-off in global stocks witnessed yesterday and timed to prevent a sharp sell-off on US stocks Tuesday. If President Bush’s stimulus plan, unveiled last Friday, had gotten a positive reaction from markets, would the Fed have cut rates at all before their scheduled meeting next week? Only time will tell if the pre-emptive move in any way benefits the US consumer and the wider US economy as much as the Wall Street share prices, which should now be spared a drubbing today. If anyone was still uncertain whether the US economy is either in or on the verge of a recession, today’s Fed decision has removed any doubts. The dollar has plunged following the announcement and has lost over 2 cents to the euro, while the dollar is also down 2 cents against sterling and over one cent against the Canadian dollar. Rates were also reduced in Canada Tuesday, but by a much more modest 25 basis points.
EUR/USD
Having hit a low of 1.4368 earlier this morning as soon as the European session opened, the euro has since then surged to over 1.46, putting Monday’s collapse behind it. Trading is incredibly volatile but with stock markets recovering this afternoon thus far, risk aversion levels have dropped somewhat and led to a broad sell-off of the dollar. The dollar is now essentially a low-yielding currency with interest rates at 3.50%, i.e. rate differentials now favour the euro by 50 basis points, an important consideration when holding the currency pair. If there is a significant bounce in stocks today and into tomorrow, following the Fed rate announcement, we should see the euro rise against the dollar, possibly back up towards 1.48. Traders will be afraid to buy the dollar in the belief the Fed move today was largely detrimental to the currency and the immediate risks for the greenback lie to the downside. However, when the stock rally runs out of steam, focus will shift back onto question of a global economic slowdown, and this will tend to benefit the US currency, with safe haven funds likely to flow back into US-denominated assets. It is very dangerous to trade the market today given the level of volatility and uncertainty that abounds, especially as the euro has already gained over 2 cents against the dollar. It may come under some selling pressure if the pair approaches 1.4720, the point at which the pair stalled towards the end of last week, but momentum could possibly take the pair back towards 1.48 in the coming days. Strategy: Wait for markets to stabilise before entering. Buy on dips only if Wall Street closes strongly this evening with limit prices of 1.4680, 1.47 and 1.4720, 1.4770 and 1.4820.
GBP
Sterling has generally had a good day, although it lost out marginally to the euro. It has gained 2 cents against the dollar and also made a significant impression against the yen and the Swiss franc. Cable is back trading at 1.96 having gone as low as 1.9333 this morning. Sterling’s gain is purely down to the Fed surprise rate cut with high yielding currencies benefiting from a resumption of the carry trade and a broader dollar sell-off. The event of Monday however cannot be forgotten and the underlying fundamentals that caused such market stresses have not changed, so cable will slide again if risk aversion levels rise. Wednesday is a high risk day for sterling with both the minutes from the Bank of England’s January meeting and the first print of the quarter 4 GDP numbers due for release. Quarter 4 GDP is forecast at 0.5% and anything lower will be negative for the currency while if the minutes of the January 10 monetary policy meeting reveal that 3 or 4 members of the committee voted for a rate cut, then this too will hurt sterling as it would most likely rubberstamp a cut for the February meeting. Cable is going to be unpredictable following the Fed rate cut today, but futures markets had already priced in a 75 basis points cut for next week, so the upside for sterling should be limited to around 1.97 for now. There will also be pressure for the Bank of England to be more aggressive in its easing policy and this too will tend to limit support. Strategy: Sell cable on failed rallies to around the 1.97 price level, with target limit prices of 1.9570, 1.9540, 1.9480, 1.9440 and 1.94.
JPY
The yen retreated sharply following the Fed’s rate announcement Tuesday, with traders anxious to load on carry trades, in anticipation of a lift in stocks and risk tolerance levels and using the low-yielding yen as the funding currency. The currency had made exaggerated gains in the past week and was always going to come under attack once risk appetite returned to the market. The Bank of Japan had earlier announced that Japanese interest rates were to remain on hold at 0.5% and Governor Fukui indicated the Bank was also not in any rush to change the base rate. With rates in Japan remaining significantly lower than elsewhere the decision has little market impact. The medium term to longer term outlook however for USD/JPY would appear to be limited on the upside as rate differentials between the two currencies have now been slashed by 1.75% in the past 4 months and are likely to be narrowed even more in the coming months. The yen has given back all of the gains it had made against the euro since last Friday, while it also fell sharply against the pound and the New Zealand dollar. If stocks rebound in Asia tonight and continue their recovery into Europe and the US Wednesday, the yen will remain under pressure, but the reversal should prove to be temporary as the underlying fundamentals that led to the US recession fears and the sharp sell-off on global financial markets have not been changed by today’s Fed rate cut. There is some value in buying EUR/JPY with the prospect of a retracement back to Y160 over this week. The dollar will struggle against the broader currency basket but should be able to retrace modestly against the yen, back towards 108 over the next 2 days. Stock market performance again needs to be monitored closely because any further sharp dip in share prices will lead to a very fast bounce in the yen. Strategy: Buy EUR/JPY on dips towards Y154 with upside price targets of Y156.50, Y1.57.30, Y157.80, Y158.20 and Y158.50.
CAD
The Fed’s emergency rate cut has stalled the bull run on USD/CAD and there is no doubt the pair was poised to hit 1.05 Tuesday, if Bernanke had not stepped in to try to avert carnage happening to US stocks. How it will play out over the coming days is dependent on how global stocks perform but with futures markets betting on a further rate cut from the Fed next week, when it meets in an official session, the probability favours stocks getting some kind of reasonable bounce in the coming days. If they don’t, then Bernanke will have misjudged the situation and failed spectacularly. A bounce in stocks will tend to favour the Canadian dollar, although the medium term and longer run outlook is for the resumption to the upside for USD/CAD. The Bank of Canada itself cut its interest rate by 25 basis points today to 4.0% but it has lowered its growth outlook and strongly signalled further rate cuts are on the cards in the near term. Contagion from a US recession will hit Canada’s economy more than any other country and with commodity prices likely to come under pressure in the face of a wider global economic slowdown, a number of negatives are beginning to stack up for the loonie. Retail Sales out of Canada increased at a much higher than expected 0.7% in December, but when the effect of the huge increase in gasoline prices that month is removed, sales only rose by 0.2% from November. We may see a bold attempt at a retracement on USD/CAD back to 1.0180, 1.0120 and even 1.0050 before the uptrend takes off again. This Friday sees the release of the consumer price index for December in Canada and a soft set of figures will set the loonie back. The greenback’s best chance of a quick resumption of the uptrend is if US stock’s stumble badly before the close today. Strategy: Buy USD/CAD on dips towards 1.0180 and 1.0120, with upside price targets of 1.0220, 1.0250, 1.03 and 1.0350. A sustained break above 1.0370 should then pave the way for a momentum-led move to 1.05. If you are long using a positional trade, hold the position and maintain target of Y105 and a stop loss below parity line. USD/CAD is likely to remain volatile over the coming days and tight stop losses will be taken out easily.
Wednesday will feature an article by Ted B on the actions of the various Central Banks to the current economic uncertainty.
Bob B
EUR/USD
Having hit a low of 1.4368 earlier this morning as soon as the European session opened, the euro has since then surged to over 1.46, putting Monday’s collapse behind it. Trading is incredibly volatile but with stock markets recovering this afternoon thus far, risk aversion levels have dropped somewhat and led to a broad sell-off of the dollar. The dollar is now essentially a low-yielding currency with interest rates at 3.50%, i.e. rate differentials now favour the euro by 50 basis points, an important consideration when holding the currency pair. If there is a significant bounce in stocks today and into tomorrow, following the Fed rate announcement, we should see the euro rise against the dollar, possibly back up towards 1.48. Traders will be afraid to buy the dollar in the belief the Fed move today was largely detrimental to the currency and the immediate risks for the greenback lie to the downside. However, when the stock rally runs out of steam, focus will shift back onto question of a global economic slowdown, and this will tend to benefit the US currency, with safe haven funds likely to flow back into US-denominated assets. It is very dangerous to trade the market today given the level of volatility and uncertainty that abounds, especially as the euro has already gained over 2 cents against the dollar. It may come under some selling pressure if the pair approaches 1.4720, the point at which the pair stalled towards the end of last week, but momentum could possibly take the pair back towards 1.48 in the coming days. Strategy: Wait for markets to stabilise before entering. Buy on dips only if Wall Street closes strongly this evening with limit prices of 1.4680, 1.47 and 1.4720, 1.4770 and 1.4820.
GBP
Sterling has generally had a good day, although it lost out marginally to the euro. It has gained 2 cents against the dollar and also made a significant impression against the yen and the Swiss franc. Cable is back trading at 1.96 having gone as low as 1.9333 this morning. Sterling’s gain is purely down to the Fed surprise rate cut with high yielding currencies benefiting from a resumption of the carry trade and a broader dollar sell-off. The event of Monday however cannot be forgotten and the underlying fundamentals that caused such market stresses have not changed, so cable will slide again if risk aversion levels rise. Wednesday is a high risk day for sterling with both the minutes from the Bank of England’s January meeting and the first print of the quarter 4 GDP numbers due for release. Quarter 4 GDP is forecast at 0.5% and anything lower will be negative for the currency while if the minutes of the January 10 monetary policy meeting reveal that 3 or 4 members of the committee voted for a rate cut, then this too will hurt sterling as it would most likely rubberstamp a cut for the February meeting. Cable is going to be unpredictable following the Fed rate cut today, but futures markets had already priced in a 75 basis points cut for next week, so the upside for sterling should be limited to around 1.97 for now. There will also be pressure for the Bank of England to be more aggressive in its easing policy and this too will tend to limit support. Strategy: Sell cable on failed rallies to around the 1.97 price level, with target limit prices of 1.9570, 1.9540, 1.9480, 1.9440 and 1.94.
JPY
The yen retreated sharply following the Fed’s rate announcement Tuesday, with traders anxious to load on carry trades, in anticipation of a lift in stocks and risk tolerance levels and using the low-yielding yen as the funding currency. The currency had made exaggerated gains in the past week and was always going to come under attack once risk appetite returned to the market. The Bank of Japan had earlier announced that Japanese interest rates were to remain on hold at 0.5% and Governor Fukui indicated the Bank was also not in any rush to change the base rate. With rates in Japan remaining significantly lower than elsewhere the decision has little market impact. The medium term to longer term outlook however for USD/JPY would appear to be limited on the upside as rate differentials between the two currencies have now been slashed by 1.75% in the past 4 months and are likely to be narrowed even more in the coming months. The yen has given back all of the gains it had made against the euro since last Friday, while it also fell sharply against the pound and the New Zealand dollar. If stocks rebound in Asia tonight and continue their recovery into Europe and the US Wednesday, the yen will remain under pressure, but the reversal should prove to be temporary as the underlying fundamentals that led to the US recession fears and the sharp sell-off on global financial markets have not been changed by today’s Fed rate cut. There is some value in buying EUR/JPY with the prospect of a retracement back to Y160 over this week. The dollar will struggle against the broader currency basket but should be able to retrace modestly against the yen, back towards 108 over the next 2 days. Stock market performance again needs to be monitored closely because any further sharp dip in share prices will lead to a very fast bounce in the yen. Strategy: Buy EUR/JPY on dips towards Y154 with upside price targets of Y156.50, Y1.57.30, Y157.80, Y158.20 and Y158.50.
CAD
The Fed’s emergency rate cut has stalled the bull run on USD/CAD and there is no doubt the pair was poised to hit 1.05 Tuesday, if Bernanke had not stepped in to try to avert carnage happening to US stocks. How it will play out over the coming days is dependent on how global stocks perform but with futures markets betting on a further rate cut from the Fed next week, when it meets in an official session, the probability favours stocks getting some kind of reasonable bounce in the coming days. If they don’t, then Bernanke will have misjudged the situation and failed spectacularly. A bounce in stocks will tend to favour the Canadian dollar, although the medium term and longer run outlook is for the resumption to the upside for USD/CAD. The Bank of Canada itself cut its interest rate by 25 basis points today to 4.0% but it has lowered its growth outlook and strongly signalled further rate cuts are on the cards in the near term. Contagion from a US recession will hit Canada’s economy more than any other country and with commodity prices likely to come under pressure in the face of a wider global economic slowdown, a number of negatives are beginning to stack up for the loonie. Retail Sales out of Canada increased at a much higher than expected 0.7% in December, but when the effect of the huge increase in gasoline prices that month is removed, sales only rose by 0.2% from November. We may see a bold attempt at a retracement on USD/CAD back to 1.0180, 1.0120 and even 1.0050 before the uptrend takes off again. This Friday sees the release of the consumer price index for December in Canada and a soft set of figures will set the loonie back. The greenback’s best chance of a quick resumption of the uptrend is if US stock’s stumble badly before the close today. Strategy: Buy USD/CAD on dips towards 1.0180 and 1.0120, with upside price targets of 1.0220, 1.0250, 1.03 and 1.0350. A sustained break above 1.0370 should then pave the way for a momentum-led move to 1.05. If you are long using a positional trade, hold the position and maintain target of Y105 and a stop loss below parity line. USD/CAD is likely to remain volatile over the coming days and tight stop losses will be taken out easily.
Wednesday will feature an article by Ted B on the actions of the various Central Banks to the current economic uncertainty.
Bob B
Thứ Hai, 21 tháng 1, 2008
Bob's Currency Focus - 15:00 GMT
EUR/USD
Asian stock markets plunged overnight and European stocks have followed suit Monday with most of the major European averages down between 3.5% and 6% on the day. The major rise in risk aversion has seen the dollar become a major beneficiary (after the yen) with a major repatriation of funds back into dollar denominated assets, as concerns rise over the global economy’s ability to withstand a major US slowdown or recession. President Bush’s stimulus plan revealed last Friday has not impressed markets which regard the rescue effort as being too little too late. We’re moving into rather uncharted risk territory as equities officially enter a bear market, but growing doubts about the Asian and European economy’s ability to withstand a US recession is certain to benefit the greenback, as long as the current sentiment persists. Markets have already priced in at least a 50 basis points cut by the Fed next week, but traders need to be alert for any comments or announcements from Central Banks in the coming days because officials may attempt to allay fears and calm markets. The euro may potentially fall sharply against the dollar in the coming days if this fear overrides the anticipation of aggressive Fed easing and forces traders to the exits prematurely, most of whom are long EUR/USD. We may well see the euro drop to the low of 1.4318 seen in December and it may even decline all the way back to 1.38 over the next week if markets do not stabilise. Economic data, which is sparse this week, will play a minor role in the coming days, when risk aversion levels are certain to dominate market direction. Given the increased levels in volatility, currency trading will prove very erratic and dangerous. The increased risk will see EUR/USD go lower, possibly much lower, in the coming days. Expect a retreat to 1.4330, below which key support levels are likely to be severely tested. The euro will need to hold this level if it is to have any chance of gaining momentum as we move closer to the Fed’s key rate announcement on January 30. Strategy: sell EUR/USD on failed rallies, with limit prices of 1.4450, 1.4410, 1.4330 and 1.4210. Key upside resistance is now at 1.4590 and stops should be placed just above this level.
GBP
Sterling has had a mixed day, falling 0.5% against the dollar but rising significantly against the other high yielding currencies and rising modestly against the euro. House prices declined again in January (-0.8%) according to the latest survey from the UK Company Rightmove. In other data, the Bank of England reports money suppy widened to a 12.3% annual rate in December, from 11.7% in November. Markets were expecting a narrowing to 11.5%. UK public sector net borrowing narrowed to £7.8 billion in December, while the public finances widened to £17 billion, both figures coming in higher than expectations. Sterling now awaits Wednesday’s first estimate of quarter 4 GDP and the release of the Bank of England’s monetary policy minutes. Sentiment abour the state of the UK economy is likely to worsen the longer the current equity market turmoil continues and will put added strain on sterling. I retain my bearish bias on cable, but would hope for a bounce from the current rate before selling down again. Cable broke below support at 1.9480 Monday morning but has managed to stay above 1.9450 since then. Any rally back above 1.96 should offer a reasonable entry price, but traders need to be cautious in case of comments from Fed officials over the coming days that might have the impact of derailing the dollar. If you are already short on cable, you may want to stay in the market, because the risks have shifted more to the downside. Sterling could yet get back to below 0.74 against the euro, particularly if the sell-off in EUR/USD accelerates. Strategy: Sell cable on failed rallies to around 1.9650, with downside target prices of 1.9540, 1.9480 and 1.9370.
Yen
The yen has had a tremendous day Monday, wiping out all before it and hitting a fresh 2.5 year low against the dollar. The Japanese currency has also sent the euro back to Y153, gaining almost 3Y on the day. A dramatic rise in risk aversion triggered by pummelling stocks has forced the liquidation of risky investments and an increased flow of funds back to Japan, which has fuelled the yen’s rally. Stiff support is expected for the US currency at levels close to Y105 and progress from here may prove difficult. There is also the risk of possible intervention by Japanese officials, likely to be restricted to verbal warnings at this point, as concerns grow about the adverse impact a sharply stronger yen has on Japanese exporters and the wider Japanese economy. With markets in the US closed today, the prevailing negative sentiment is likely to carry through to Tuesday at least and the yen is likely to remain strong. Give the risk of a sharp reversal, there is little value in buying the yen at current prices and traders may be better advised to await some market stabilisation before executing any yen trades. With the Fed due to deliver a rate cut next week, markets will be hoping for a bounce in the lead-up to that decision, particularly if the current sharp sell-off on equities exhausts itself. Strategy: Await market stabilisation (one full day of recovery in equities) and rise in risk tolerance and then buy EUR/JPY. Sit on sidelines for now.
CAD
Although the loonie has fallen against the dollar and the yen, the currency has had, oddly enough, a relatively strong day on the currency markets, rising against almost every other currency, gaining 0.5% against the euro and over 1.5% against the Australian dollar. It is the only one of the commodity currencies that has not suffered a sharp sell-off and this may be more to do with a steady flow of funds into Canadian dollars for the expiration of the February oil contract than any form of renewed faith in the Canadian currency. The loonie is also getting some protection from the fact US markets are closed today which will significantly reduced the volume of trades on USD/CAD. But the next 24 hours hold massive risk for the loonie, with the Bank of Canada expected to deliver a rate cut Tuesday while risk aversion rises amidst concerns over the outlook for the global economy and plunging commodity prices. USD/CAD could potentially rise to 105 tomorrow, particularly if the Bank of Canada is decidedly dovish in the tone of its statement. Retail Sales for November are out 30 minutes before the Bank of Canada rate decision but their significance will be squeezed to the margins as the market will be fully focused on the Bank’s pending policy statement. Strategy: Buy USD/CAD on any dips below to between 1.0250 and 1.03 with target prices of 1.0350, 1.04, 1.0450 and 1.05. Positional players should hold their USD/CAD long positions and await the initial 1.05 price objective. Maintain a stop loss just below the parity line. Trading will be very volatile Tuesday and intraday traders need to be cautious and be alert for any unplanned announcements from the Fed,
Bob B
Asian stock markets plunged overnight and European stocks have followed suit Monday with most of the major European averages down between 3.5% and 6% on the day. The major rise in risk aversion has seen the dollar become a major beneficiary (after the yen) with a major repatriation of funds back into dollar denominated assets, as concerns rise over the global economy’s ability to withstand a major US slowdown or recession. President Bush’s stimulus plan revealed last Friday has not impressed markets which regard the rescue effort as being too little too late. We’re moving into rather uncharted risk territory as equities officially enter a bear market, but growing doubts about the Asian and European economy’s ability to withstand a US recession is certain to benefit the greenback, as long as the current sentiment persists. Markets have already priced in at least a 50 basis points cut by the Fed next week, but traders need to be alert for any comments or announcements from Central Banks in the coming days because officials may attempt to allay fears and calm markets. The euro may potentially fall sharply against the dollar in the coming days if this fear overrides the anticipation of aggressive Fed easing and forces traders to the exits prematurely, most of whom are long EUR/USD. We may well see the euro drop to the low of 1.4318 seen in December and it may even decline all the way back to 1.38 over the next week if markets do not stabilise. Economic data, which is sparse this week, will play a minor role in the coming days, when risk aversion levels are certain to dominate market direction. Given the increased levels in volatility, currency trading will prove very erratic and dangerous. The increased risk will see EUR/USD go lower, possibly much lower, in the coming days. Expect a retreat to 1.4330, below which key support levels are likely to be severely tested. The euro will need to hold this level if it is to have any chance of gaining momentum as we move closer to the Fed’s key rate announcement on January 30. Strategy: sell EUR/USD on failed rallies, with limit prices of 1.4450, 1.4410, 1.4330 and 1.4210. Key upside resistance is now at 1.4590 and stops should be placed just above this level.
GBP
Sterling has had a mixed day, falling 0.5% against the dollar but rising significantly against the other high yielding currencies and rising modestly against the euro. House prices declined again in January (-0.8%) according to the latest survey from the UK Company Rightmove. In other data, the Bank of England reports money suppy widened to a 12.3% annual rate in December, from 11.7% in November. Markets were expecting a narrowing to 11.5%. UK public sector net borrowing narrowed to £7.8 billion in December, while the public finances widened to £17 billion, both figures coming in higher than expectations. Sterling now awaits Wednesday’s first estimate of quarter 4 GDP and the release of the Bank of England’s monetary policy minutes. Sentiment abour the state of the UK economy is likely to worsen the longer the current equity market turmoil continues and will put added strain on sterling. I retain my bearish bias on cable, but would hope for a bounce from the current rate before selling down again. Cable broke below support at 1.9480 Monday morning but has managed to stay above 1.9450 since then. Any rally back above 1.96 should offer a reasonable entry price, but traders need to be cautious in case of comments from Fed officials over the coming days that might have the impact of derailing the dollar. If you are already short on cable, you may want to stay in the market, because the risks have shifted more to the downside. Sterling could yet get back to below 0.74 against the euro, particularly if the sell-off in EUR/USD accelerates. Strategy: Sell cable on failed rallies to around 1.9650, with downside target prices of 1.9540, 1.9480 and 1.9370.
Yen
The yen has had a tremendous day Monday, wiping out all before it and hitting a fresh 2.5 year low against the dollar. The Japanese currency has also sent the euro back to Y153, gaining almost 3Y on the day. A dramatic rise in risk aversion triggered by pummelling stocks has forced the liquidation of risky investments and an increased flow of funds back to Japan, which has fuelled the yen’s rally. Stiff support is expected for the US currency at levels close to Y105 and progress from here may prove difficult. There is also the risk of possible intervention by Japanese officials, likely to be restricted to verbal warnings at this point, as concerns grow about the adverse impact a sharply stronger yen has on Japanese exporters and the wider Japanese economy. With markets in the US closed today, the prevailing negative sentiment is likely to carry through to Tuesday at least and the yen is likely to remain strong. Give the risk of a sharp reversal, there is little value in buying the yen at current prices and traders may be better advised to await some market stabilisation before executing any yen trades. With the Fed due to deliver a rate cut next week, markets will be hoping for a bounce in the lead-up to that decision, particularly if the current sharp sell-off on equities exhausts itself. Strategy: Await market stabilisation (one full day of recovery in equities) and rise in risk tolerance and then buy EUR/JPY. Sit on sidelines for now.
CAD
Although the loonie has fallen against the dollar and the yen, the currency has had, oddly enough, a relatively strong day on the currency markets, rising against almost every other currency, gaining 0.5% against the euro and over 1.5% against the Australian dollar. It is the only one of the commodity currencies that has not suffered a sharp sell-off and this may be more to do with a steady flow of funds into Canadian dollars for the expiration of the February oil contract than any form of renewed faith in the Canadian currency. The loonie is also getting some protection from the fact US markets are closed today which will significantly reduced the volume of trades on USD/CAD. But the next 24 hours hold massive risk for the loonie, with the Bank of Canada expected to deliver a rate cut Tuesday while risk aversion rises amidst concerns over the outlook for the global economy and plunging commodity prices. USD/CAD could potentially rise to 105 tomorrow, particularly if the Bank of Canada is decidedly dovish in the tone of its statement. Retail Sales for November are out 30 minutes before the Bank of Canada rate decision but their significance will be squeezed to the margins as the market will be fully focused on the Bank’s pending policy statement. Strategy: Buy USD/CAD on any dips below to between 1.0250 and 1.03 with target prices of 1.0350, 1.04, 1.0450 and 1.05. Positional players should hold their USD/CAD long positions and await the initial 1.05 price objective. Maintain a stop loss just below the parity line. Trading will be very volatile Tuesday and intraday traders need to be cautious and be alert for any unplanned announcements from the Fed,
Bob B
Thứ Sáu, 18 tháng 1, 2008
Bob's Currency Focus - 15:00 GMT
As we close out a tumultuous week on financial markets, the dollar is lacking direction with traders as uncertain about the health of the wider global economy just as much as they are uncertain about what a US recession means for the country’s currency. The dramatic fall we have seen on Wall Street’s leading averages over the past 3 days is not a corrective downturn but more a true reflection of just where Corporate America currently sits not just in terms of economic performance / outlook but also how its value is seen in the eyes of investors. A disappointing economic report here and there is nothing when compared to the negative sentiment quarterly earnings reports published by Citigroup and Merrill Lynch have generated. Both banks made staggering losses of the order of $10 billion each - each the equivalent GDP of a small country. Citigroup alone had a write-down of over $18 Billion and with some analysts predicting the total write-down from the entire subprime debacle could top $300 Billion, it is clear there is plenty more bad news to come from the Financial Sector. Of course the subprime risk exposure spreads to banking institutions well beyond the shores of the US, so there are sure to be unpleasant surprises to come from other quarters of the globe. The wider global picture is now a very crucial issue for the fate of the dollar because if contagion from the US sours economic growth elsewhere and in particular if global stock markets remain under pressure (i.e. have entered a bear market), we could witness a major repatriation of funds back into dollar denominated assets and bonds and the dollar would appreciate significantly in the coming months against the European and commodity currencies, irrespective of what happens to interest rates.
EUR/USD
Today EUR/USD has been trading within the same range as Thursday, but again the euro has held the advantage for most of the day. US stock markets were expected to rally strongly Friday as a stimulus package from the Government is due to be unveiled by President Bush later today. A strong rally in stocks would tend to undermine the dollar as the rise in risk tolerance would trigger an outflow of funds that have streamed into the currency in recent days. The Friday session will probably be very volatile again and when looking at it in simple practical terms, it is difficult to understand why investors would want to buy into stocks today, a mere day after the shadow of a looming recession grew ever larger. There are no economic releases today to alter the recessionary outlook so the economic fundamental view of the world today should in essence be the same as it was yesterday. We could however see a strong surge in stocks initially, but there is a real danger of a late sell-off after the euphoria fades and grim reality returns. For that reason we could see the dollar struggle in the early part of the US session, but then rebound. Positioning for the weekend will important in the current climate, so after 17:00 GMT we should see higher than normal Friday activity in the currency markets. We may see the euro use the positive impetus generated from the US rescue package to try to take out 1.47 this afternoon but if Wall Street does not respond positively to the Bush stimulus plan, currency prices could return to where they were at this morning – EUR/USD 1.4620, while another sharp sell-off in stocks and rise in risk aversion could potentially trigger a dollar rally towards 1.4550. Strategy: Sell down on failed rallies from around the 1.4690 to 1.4720 price region. Limit target prices are 1.4635, 1.4610, 1.4590 and 1.4556.
GBP
Sterling came off 1.5 cents against the dollar as December’s retail sales out of the UK disappointed markets. The consensus was for a 0.2% gain during the holiday month following a 0.4% gain in November, but instead consumers kept their money in their pockets and sales declined by 0.4%. As well as raising greater concerns about the health of the UK economy, today’s report raises the prospects of an imminent interest rate cut from the Bank of England in February. Although inflation numbers this week printed higher than expected the change was marginal and UK consumer price inflation at 2.1% is relatively benign compared to the current inflation rates in the euro area and the US. The pound could come under stronger pressure later Friday if risk aversion levels rise and we could potentially see cable decline to the 1.9483 low seen earlier this month. A break below that level will shatter confidence and could ultimately lead to a decline all the way back to last year’s low just below 1.92 over the next week, particularly if global stocks continues to come under pressure, which will deter interest in high-yielding currencies like sterling. We maintain our bearish bias and prefer to sell cable on prices in the 1.97 to 1.98 price level. Today’s poor economic data has set sterling back against the euro with the pair revisiting 0.75. The UK currency has scope for further retracement against the single currency but will probably need a broader sell-off of the euro or renewed interest in higher-yielding currencies to help it. Strategy: Sell cable on prices above 1.97 with target prices of 1.9570 and 1.9540.
Yen
The yen has had a strong afternoon having been sold off aggressively this morning with investors betting a stimulus package announced by the US Administration Friday would lead to a strong rally on Wall Street, thereby reintroducing risk tolerance and putting the low-yielding currencies under pressure. The gamble proved to be misdirected however because as at 17:00 GMT the Dow leading stock average is down 0.51% having been up 1.5% 3 hours earlier. The dollar has declined to 106.88 against the yen from an earlier high of 107.59. The euro has fared worse, coming off a high of Y157.80 to currently trade at 156.35. Positional adjustment leading into the weekend will be important for the yen, particularly as Monday is a holiday in the US. As long as stock markets struggle, the yen will remain supported but a late rally on Wall Street will lead to the yen being ditched in favour of high yielding currencies. Trading around the yen is so erratic at present that it is dangerous to get involved, although any dollar prices around Y106 to Y106.50 look attractive bids, given the extent of recent yen gains, but entering the current market against the yen has significant risks. Strategy: remain on sidelines and await market stabilization, at which point buy EUR/JPY with target objective tba.
CAD
The loonie has settled Friday and managed to hold its own, but is coming under increasing pressure close to the 1.03 price mark. A close above that level Friday would put the loonie in a vulnerable position facing into next Tuesday’s Bank of Canada meeting. November’s retail sales numbers are released just 30 minutes before the Bank’s interest rate announcement Tuesday but are so close to the main event, they will prove largely meaningless. I expect the Bank of Canada to cut rates by 25 basis points, bringing the key interest rate for Canada to 4.0% and also to signal a possible further rate cut when the Monetary Policy Committee meets again in March. This will not be good news for the loonie and if commodity prices also decline next week, it will remove an important area of support and we could witness a spike to 1.05 in USD/CAD by the end of next week. Today’s report on manufacturing shipments which recorded a 1.1% rise in November looked impressive on the headline number but was rather less impressive when one delves into the detail of the report – the rise was thanks to the massive lift in petroleum and commodity prices during November. On the actual volume of shipments, there was no change between November and October. We will probably see a move to 103.50 ahead of Tuesday’s meeting, unless there is a broader sell-off of the greenback on Monday, when US markets are closed. USD/CAD remains the most lucrative of the major pairs to buy on dips and I remain a staunch bull on the pair. Strategy: Buy USD/CAD on dips towards 1.0220 with upside price targets of 1.03 and 1.0350. Positional longs following the trend should wait for initial price target of 1.05, with stop loss just below the parity line. We will review the positional outlook after the Bank of Canada rate announcement.
Have a good weekend!
Bob B - Jan 18
EUR/USD
Today EUR/USD has been trading within the same range as Thursday, but again the euro has held the advantage for most of the day. US stock markets were expected to rally strongly Friday as a stimulus package from the Government is due to be unveiled by President Bush later today. A strong rally in stocks would tend to undermine the dollar as the rise in risk tolerance would trigger an outflow of funds that have streamed into the currency in recent days. The Friday session will probably be very volatile again and when looking at it in simple practical terms, it is difficult to understand why investors would want to buy into stocks today, a mere day after the shadow of a looming recession grew ever larger. There are no economic releases today to alter the recessionary outlook so the economic fundamental view of the world today should in essence be the same as it was yesterday. We could however see a strong surge in stocks initially, but there is a real danger of a late sell-off after the euphoria fades and grim reality returns. For that reason we could see the dollar struggle in the early part of the US session, but then rebound. Positioning for the weekend will important in the current climate, so after 17:00 GMT we should see higher than normal Friday activity in the currency markets. We may see the euro use the positive impetus generated from the US rescue package to try to take out 1.47 this afternoon but if Wall Street does not respond positively to the Bush stimulus plan, currency prices could return to where they were at this morning – EUR/USD 1.4620, while another sharp sell-off in stocks and rise in risk aversion could potentially trigger a dollar rally towards 1.4550. Strategy: Sell down on failed rallies from around the 1.4690 to 1.4720 price region. Limit target prices are 1.4635, 1.4610, 1.4590 and 1.4556.
GBP
Sterling came off 1.5 cents against the dollar as December’s retail sales out of the UK disappointed markets. The consensus was for a 0.2% gain during the holiday month following a 0.4% gain in November, but instead consumers kept their money in their pockets and sales declined by 0.4%. As well as raising greater concerns about the health of the UK economy, today’s report raises the prospects of an imminent interest rate cut from the Bank of England in February. Although inflation numbers this week printed higher than expected the change was marginal and UK consumer price inflation at 2.1% is relatively benign compared to the current inflation rates in the euro area and the US. The pound could come under stronger pressure later Friday if risk aversion levels rise and we could potentially see cable decline to the 1.9483 low seen earlier this month. A break below that level will shatter confidence and could ultimately lead to a decline all the way back to last year’s low just below 1.92 over the next week, particularly if global stocks continues to come under pressure, which will deter interest in high-yielding currencies like sterling. We maintain our bearish bias and prefer to sell cable on prices in the 1.97 to 1.98 price level. Today’s poor economic data has set sterling back against the euro with the pair revisiting 0.75. The UK currency has scope for further retracement against the single currency but will probably need a broader sell-off of the euro or renewed interest in higher-yielding currencies to help it. Strategy: Sell cable on prices above 1.97 with target prices of 1.9570 and 1.9540.
Yen
The yen has had a strong afternoon having been sold off aggressively this morning with investors betting a stimulus package announced by the US Administration Friday would lead to a strong rally on Wall Street, thereby reintroducing risk tolerance and putting the low-yielding currencies under pressure. The gamble proved to be misdirected however because as at 17:00 GMT the Dow leading stock average is down 0.51% having been up 1.5% 3 hours earlier. The dollar has declined to 106.88 against the yen from an earlier high of 107.59. The euro has fared worse, coming off a high of Y157.80 to currently trade at 156.35. Positional adjustment leading into the weekend will be important for the yen, particularly as Monday is a holiday in the US. As long as stock markets struggle, the yen will remain supported but a late rally on Wall Street will lead to the yen being ditched in favour of high yielding currencies. Trading around the yen is so erratic at present that it is dangerous to get involved, although any dollar prices around Y106 to Y106.50 look attractive bids, given the extent of recent yen gains, but entering the current market against the yen has significant risks. Strategy: remain on sidelines and await market stabilization, at which point buy EUR/JPY with target objective tba.
CAD
The loonie has settled Friday and managed to hold its own, but is coming under increasing pressure close to the 1.03 price mark. A close above that level Friday would put the loonie in a vulnerable position facing into next Tuesday’s Bank of Canada meeting. November’s retail sales numbers are released just 30 minutes before the Bank’s interest rate announcement Tuesday but are so close to the main event, they will prove largely meaningless. I expect the Bank of Canada to cut rates by 25 basis points, bringing the key interest rate for Canada to 4.0% and also to signal a possible further rate cut when the Monetary Policy Committee meets again in March. This will not be good news for the loonie and if commodity prices also decline next week, it will remove an important area of support and we could witness a spike to 1.05 in USD/CAD by the end of next week. Today’s report on manufacturing shipments which recorded a 1.1% rise in November looked impressive on the headline number but was rather less impressive when one delves into the detail of the report – the rise was thanks to the massive lift in petroleum and commodity prices during November. On the actual volume of shipments, there was no change between November and October. We will probably see a move to 103.50 ahead of Tuesday’s meeting, unless there is a broader sell-off of the greenback on Monday, when US markets are closed. USD/CAD remains the most lucrative of the major pairs to buy on dips and I remain a staunch bull on the pair. Strategy: Buy USD/CAD on dips towards 1.0220 with upside price targets of 1.03 and 1.0350. Positional longs following the trend should wait for initial price target of 1.05, with stop loss just below the parity line. We will review the positional outlook after the Bank of Canada rate announcement.
Have a good weekend!
Bob B - Jan 18
Thứ Năm, 17 tháng 1, 2008
Bob's Currency Focus - 17:30 GMT
EUR/USD
The euro dipped to just below 1.46 early this morning only to return to 1.4680 by the US session and the single currency has had the edge in what has been another volatile trading session. A bounce in Asian equities overnight saw a dip in risk aversion levels Thursday which benefited the euro moreover the dollar, although US equities currently trade lower following a generally poor set of data releases, a frightening report from Merrill Lynch that it recorded a loss of just short of $10 Billion in the fourth quarter and a speech from Fed Chairman Ben Bernanke to the House of Representatives that highlighted further downside risks to growth projections for 2008 and nothing new on monetary policy. The housing report for today was a shocker, with Housing Starts falling by over 14% in December, against a 5% forecast drop and 2007 was the worst year for the housing construction sector in 16 years. The Philadelphia Fed Manufacturing Index plummeted to -20.9 in January, signalling the US manufacturing sector may have contracted much further this month, with manufacturing now joining housing as a depressed sector in the economy. US Jobless Claims was the only fragment of good news to emerge, with the initials claims rate falling by 21K in the latest week and hinting employment is holding up reasonably well thus far in January. The only piece of news out of the euro area was November’s trade surplus it narrowed to €2.6 Billion from a €5.2 Billion surplus in the same month in 2006. The dollar is lacking direction today as high levels of risk aversion is tending to support it while US economic data remains damning, particularly against the euro, with the ECB the only major Central Bank continuing to threaten rate hikes. Speeches from ECB officials need to be monitored closely over the coming days, because following comments from ECB member Mersch Wednesday when he talked up the downside risks to growth, there is a growing sense the ECB may be out of touch with reality in terms of its monetary policy stance. Expect trading to remain erratic and the risk in my view lies to the downside for EUR/USD with many major players reluctant to buy the single currency in current market conditions, given the large volume of euro long positions already in the market. There are no major data releases over the next 24 hours but equities need to be monitored closely to measure risk tolerance levels. Strategy: Sell EUR/USD on failed rallies towards 1.4770 and 1.4820. Trading will remain erratic into Friday and short stops will be taken out easily.
GBP
Sterling got a further bounce today, cable rising to as high as 1.9794 before retreating back towards 1.9725 at the time of print, yet sterling is still up a cent against the US currency, while appreciating 0.35% against the euro. The pound may struggle to hold onto those gains, particularly against the dollar, if Wall Street closes sharply lower as high yielding currencies will come under pressure overnight. There was no economic data out of the UK Thursday but Friday’s sees the release of December’s key retail sales number and if the figures disappoint, it will increase calls for interest rate cuts form the Bank of England and the pound will falter. The BRC retail sales index for the same month pointed to a sluggish consumer over the holiday period and lacklustre sales, so a downside surprise in the data Friday is distinctly possible. There remains scope for a further retracement in EUR/GBP to below 0.74. We maintain our bearish bias on cable however as the preferred trading approach. Strategy: Sell GBP/USD at prices around 1.98 with downside price targets of 1.9660, 1.96 and 1.9540.
Yen
The yen has had another up and down day and is largely unchanged against both the dollar and the euro on the day. Traders want to sell it, knowing it is overbought over the past week, but its movement is closely matching the movement in global stocks Thursday which have been pulling in both directions, but mostly to the downside since around 15:00GMT, when a disastrous manufacturing report and a speech on economic outlook from the Fed Chairman sent traders running for cover. The dollar went as low as Y106.50 at one point this morning but since then it has primarily traded between 107 and 107.50. The euro is virtually unchanged against the yen, managing to reach 157.86 during the afternoon, but then declining back to Y157. Stock markets have not stabilised and trading involving the yen remains choppy and erratic and is best avoided until we get a clearer directional signal. There remains a risk that EUR/JPY could dip to below Y155 and the dollar back to Y106, if Wall Street hobbles to the close and the negative sentiment follows through on the Asian session tonight. There is no data scheduled for release over the next 24 hours which can turn things around and Friday could prove to be another difficult day. Strategy: Wait for global stock markets to settle (Recovery across 3 consecutive sessions – i.e 24 hours period), then buy EUR/JPY. Stay on sideline for now.
CAD
The greenback rose to 1.03 Thursday for the first time since last September, to hit an important mark on the pair’s recovery. Trading however has been very choppy yet again, with the US currency unable to hold its gains for long, although it is being bought each time on dips to around 1.02. Data out Thursday revealed foreign investors withdrew C$4.84 Billion dollars out of the Canadian economy in November, on top of the record C$23 Billion withdrawn in October. Oil prices have declined by 50 cents thus far today, removing an important support element for the loonie. The loonie only succumbed to the greenback after Fed Chairman Bernanke’s speech to the House of Representatives today was published, which revealed the US economy may be in worse shape than previously thought. A major US slowdown or recession is bad for Canadian exports and to be more competitive in such an environment, the Canadian economy would be helped by a weaker currency. Price direction all this week has been driven by risk tolerance levels and the Bank of Canada meeting next week has largely been off the radar for many preoccupied traders. Given the Bank are likely to cut Canada’s key interest rate by 25 basis points at this meeting, there remains considerable downside potential for the loonie between now next Tuesday. Attempts by the loonie to return the US dollar to 1.02 will meet strong bid orders and it will not be a surprise if the greenback establishes itself above 1.03 going into the weekend. The loonie strengthened significantly against the euro this morning, only to give back 2 cents as the day progressed when it came under increasing pressure. Friday’s sees the releases of November’s manufacturing shipments report but it is unlikely to have any great impact. Strategy: Buy USD/CAD on dips to or below 1.02, with limit prices of 1.0270, 1.03, 1.0350 and 1.04. Those long on USD/CAD should hold their positions and maintain the target price of 1.05. The stop loss can now be moved from 0.97 to just below parity, given resistance at 1.0250 has now given way.
Bob B
The euro dipped to just below 1.46 early this morning only to return to 1.4680 by the US session and the single currency has had the edge in what has been another volatile trading session. A bounce in Asian equities overnight saw a dip in risk aversion levels Thursday which benefited the euro moreover the dollar, although US equities currently trade lower following a generally poor set of data releases, a frightening report from Merrill Lynch that it recorded a loss of just short of $10 Billion in the fourth quarter and a speech from Fed Chairman Ben Bernanke to the House of Representatives that highlighted further downside risks to growth projections for 2008 and nothing new on monetary policy. The housing report for today was a shocker, with Housing Starts falling by over 14% in December, against a 5% forecast drop and 2007 was the worst year for the housing construction sector in 16 years. The Philadelphia Fed Manufacturing Index plummeted to -20.9 in January, signalling the US manufacturing sector may have contracted much further this month, with manufacturing now joining housing as a depressed sector in the economy. US Jobless Claims was the only fragment of good news to emerge, with the initials claims rate falling by 21K in the latest week and hinting employment is holding up reasonably well thus far in January. The only piece of news out of the euro area was November’s trade surplus it narrowed to €2.6 Billion from a €5.2 Billion surplus in the same month in 2006. The dollar is lacking direction today as high levels of risk aversion is tending to support it while US economic data remains damning, particularly against the euro, with the ECB the only major Central Bank continuing to threaten rate hikes. Speeches from ECB officials need to be monitored closely over the coming days, because following comments from ECB member Mersch Wednesday when he talked up the downside risks to growth, there is a growing sense the ECB may be out of touch with reality in terms of its monetary policy stance. Expect trading to remain erratic and the risk in my view lies to the downside for EUR/USD with many major players reluctant to buy the single currency in current market conditions, given the large volume of euro long positions already in the market. There are no major data releases over the next 24 hours but equities need to be monitored closely to measure risk tolerance levels. Strategy: Sell EUR/USD on failed rallies towards 1.4770 and 1.4820. Trading will remain erratic into Friday and short stops will be taken out easily.
GBP
Sterling got a further bounce today, cable rising to as high as 1.9794 before retreating back towards 1.9725 at the time of print, yet sterling is still up a cent against the US currency, while appreciating 0.35% against the euro. The pound may struggle to hold onto those gains, particularly against the dollar, if Wall Street closes sharply lower as high yielding currencies will come under pressure overnight. There was no economic data out of the UK Thursday but Friday’s sees the release of December’s key retail sales number and if the figures disappoint, it will increase calls for interest rate cuts form the Bank of England and the pound will falter. The BRC retail sales index for the same month pointed to a sluggish consumer over the holiday period and lacklustre sales, so a downside surprise in the data Friday is distinctly possible. There remains scope for a further retracement in EUR/GBP to below 0.74. We maintain our bearish bias on cable however as the preferred trading approach. Strategy: Sell GBP/USD at prices around 1.98 with downside price targets of 1.9660, 1.96 and 1.9540.
Yen
The yen has had another up and down day and is largely unchanged against both the dollar and the euro on the day. Traders want to sell it, knowing it is overbought over the past week, but its movement is closely matching the movement in global stocks Thursday which have been pulling in both directions, but mostly to the downside since around 15:00GMT, when a disastrous manufacturing report and a speech on economic outlook from the Fed Chairman sent traders running for cover. The dollar went as low as Y106.50 at one point this morning but since then it has primarily traded between 107 and 107.50. The euro is virtually unchanged against the yen, managing to reach 157.86 during the afternoon, but then declining back to Y157. Stock markets have not stabilised and trading involving the yen remains choppy and erratic and is best avoided until we get a clearer directional signal. There remains a risk that EUR/JPY could dip to below Y155 and the dollar back to Y106, if Wall Street hobbles to the close and the negative sentiment follows through on the Asian session tonight. There is no data scheduled for release over the next 24 hours which can turn things around and Friday could prove to be another difficult day. Strategy: Wait for global stock markets to settle (Recovery across 3 consecutive sessions – i.e 24 hours period), then buy EUR/JPY. Stay on sideline for now.
CAD
The greenback rose to 1.03 Thursday for the first time since last September, to hit an important mark on the pair’s recovery. Trading however has been very choppy yet again, with the US currency unable to hold its gains for long, although it is being bought each time on dips to around 1.02. Data out Thursday revealed foreign investors withdrew C$4.84 Billion dollars out of the Canadian economy in November, on top of the record C$23 Billion withdrawn in October. Oil prices have declined by 50 cents thus far today, removing an important support element for the loonie. The loonie only succumbed to the greenback after Fed Chairman Bernanke’s speech to the House of Representatives today was published, which revealed the US economy may be in worse shape than previously thought. A major US slowdown or recession is bad for Canadian exports and to be more competitive in such an environment, the Canadian economy would be helped by a weaker currency. Price direction all this week has been driven by risk tolerance levels and the Bank of Canada meeting next week has largely been off the radar for many preoccupied traders. Given the Bank are likely to cut Canada’s key interest rate by 25 basis points at this meeting, there remains considerable downside potential for the loonie between now next Tuesday. Attempts by the loonie to return the US dollar to 1.02 will meet strong bid orders and it will not be a surprise if the greenback establishes itself above 1.03 going into the weekend. The loonie strengthened significantly against the euro this morning, only to give back 2 cents as the day progressed when it came under increasing pressure. Friday’s sees the releases of November’s manufacturing shipments report but it is unlikely to have any great impact. Strategy: Buy USD/CAD on dips to or below 1.02, with limit prices of 1.0270, 1.03, 1.0350 and 1.04. Those long on USD/CAD should hold their positions and maintain the target price of 1.05. The stop loss can now be moved from 0.97 to just below parity, given resistance at 1.0250 has now given way.
Bob B
Thứ Tư, 16 tháng 1, 2008
Bob's Currency Focus - 17:30 GMT
EUR/USD
What a volatile day for currency traders and particularly for those trading the euro/dollar pairing, which took a hammering. There is no single reason we can put our finger on for the dramatic sell-off we have witnessed, which has seen EUR/USD fall from a high of 1.4860 early this morning, to a low of 1.4593 in the past hour. The euro in fact started coming under pressure against sterling and the yen late last night and when EUR/JPY established itself below Y160 and the yen continued to rally aggressively across the board this morning, the euro, with the largest ratio of long to short open contracts of all the majors, suddenly looked vulnerable. Panic selling has set in and with the euro having broken below key support at 1.4630, we could see the pair attempt to retrace all the way back to the 1.4318 low we saw in early December. Ongoing instability on the world’s stock markets will play on the nerves of those traders currently holding euro long positions and the longer this plays out the more risk evident to the downside for the euro and there may be a growing acceptance that 1.50 is not going to be achieved in these market conditions. Today’s US inflation data was worse than expected, much worse when one takes into the equation the fact retail sales declined in December and consumer confidence was running at record lows. The annual core inflation rate has risen to 2.4% while the headline inflation rate closed out 2007 at 4.1%, a 17 year high. Those analysts who have been calling for a 75 basis points rate cut from the Fed need to think again, while Fed committee members themselves need to be extremely careful in terms of what they promise markets and what they subsequently are able to deliver. Bernanke is playing a very dangerous game in telling markets the Fed is prepared to cut rates aggressively, thereby allowing markets to price in aggressive cuts and then demand even more from the Fed before the FOMC has even met, and before the Fed itself has had time to examine the current level of inflation risk. Outside of the inflation data other economic prints Wednesday proved positive for the dollar, with the Treasury International Net Capital Inflows for November rising to a handsome $150 billion, while Industrial production for December was reported flat, slightly better than the marginal 0.1% decline which was forecast. Also, US crude inventories last week rose for the first time in 2 months, a surprise reading which helped to shave $2 off the price of a barrel of oil this afternoon, supporting the dollar. In the euro zone, consumer price inflation for December was confirmed at 3.1%, the same as the preliminary forecast earlier in the month, so this had no market impact.
If the pair closes tonight below 1.4630, the pair will move into Thursday in very bearish mood. Traders need to remember however that we are not in normal trading conditions and sudden events in the current climate can move prices dramatically, in either direction. Strategy: Sell on break below 1.4590 with limit price of 1.4460, ahead of further limit target of 1.4340. Otherwise wait for upside rally before selling down on prices close to or just below 1.4770. We could be in for a further volatile trading session Thursday and housing data out of the US at 13:30 GMT will need to be watched closely.
GBP
Sterling made significant inroads on EUR/GBP Wednesday, sending the euro back below 0.7450 after the pair had hit 0.7610 at one point on Tuesday. UK wage earnings rose 4.0% on the year in the 3 months to the end of December and while above the 3.9% forecast, the figure is probably not strong enough to dissuade the Bank of England from cutting rates when it meets in February. The data from the UK thus far this week has come in better than expected for sterling, which explains why the currency has stabilised against the dollar and has now appreciated against the euro. EUR/GBP has the potential to retrace back as far as 0.7350 and the best chance of this happening quickly is if the euro continues to sell-off against the US dollar. I remain a sterling bear and am restricting my trades to GBP/USD at what look like attractive entry prices. We have not quite reached 1.9750 in recent days but have come close to 1.9730, which is also an attractive entry level. Strategy: Sell cable at prices above 1.9720 with limit target prices of 1.9580 and 1.9540.
Yen
The yen broke through all technical barriers Wednesday as it rushed to a near 3-year high against the dollar and sent the euro back as low as Y156.50. All the doom and gloom that is sending stock markets running for cover is good news for the low-yielding yen, a currency which thrives on bad economic news and recession fears. Tuesday’s nosedive on Wall Street was followed by a similar downward spiralling move on Asian stocks overnight and by early in the European session the dollar was briefly trading just below Y106. The dollar has since rebounded to Y107, but the pair broke below resistance at 106.50 and the next major milestone for the pair is Y105. If risk aversion levels stay elevated and stocks continue to struggle, Y105 is possible within the next couple of days. The speed of the yens appreciation since the turn of the year will frighten Japanese exporters and markets need to be alert for any comments on the currency from Japanese officials. Y105 now looks to be a critical level, but the yen will come under immediate selling pressure at current prices each time there is the semblance of a positive rally on global stock markets. The euro’s dip today has seen EUR/JPY retreat to below Y157. If there is not a rapid recovery for this pair, the euro could potentially fall to as low as Y155 tomorrow. Strategy: Await stabilisation of stock markets and reduction in risk aversion levels and then buy EUR/JPY. We will watch this pair closely over the coming days.
CAD
We finally saw the greenback break through key resistance barriers at 1.0222 and 1.0248 early Wednesday but the loonie has traded in very volatile fashion all day and appears to be gaining strong support from somewhere, which has seen USD/CAD trade in whiplash-like fashion all day, between 1.0152 and 1.0286. Many bears do not seem prepared to give up the gauntlet without a fight, but bulls use these erratic trading conditions to their benefit, by exiting with profits and re-entering when the price dips. There is no major data out of Canada before next Tuesday’s Bank of Canada rate announcement and as we get closer to that day, the number of sellers of USD/CAD should begin to thin with a rate cit and a dovish policy statement on the day almost a certainty. Commodity prices have come off quite sharply in the past two days but the loonie has largely managed to hold its own, but with pressure likely to intensify on the commodity currencies against increasing concerns of a global economic slowdown, the loonie should weaken. A bounce on Wall Street tonight could send the loonie higher, but from tomorrow focus will being to shift onto the Bank of Canada’s meeting next Tuesday and I expect support for the Canadian currency hard to come by. I keep the bullish bias on USD/CAD and recommend buying dips towards 1.0150, but now moving the upside target prices to 1.0250, followed by 1.0280 and 1.03. We won’t yet move the S/L from 0.97 on the longer-term long positions, but maintain the current target price of 1.05.
Bob B - 16th Jan 2008
What a volatile day for currency traders and particularly for those trading the euro/dollar pairing, which took a hammering. There is no single reason we can put our finger on for the dramatic sell-off we have witnessed, which has seen EUR/USD fall from a high of 1.4860 early this morning, to a low of 1.4593 in the past hour. The euro in fact started coming under pressure against sterling and the yen late last night and when EUR/JPY established itself below Y160 and the yen continued to rally aggressively across the board this morning, the euro, with the largest ratio of long to short open contracts of all the majors, suddenly looked vulnerable. Panic selling has set in and with the euro having broken below key support at 1.4630, we could see the pair attempt to retrace all the way back to the 1.4318 low we saw in early December. Ongoing instability on the world’s stock markets will play on the nerves of those traders currently holding euro long positions and the longer this plays out the more risk evident to the downside for the euro and there may be a growing acceptance that 1.50 is not going to be achieved in these market conditions. Today’s US inflation data was worse than expected, much worse when one takes into the equation the fact retail sales declined in December and consumer confidence was running at record lows. The annual core inflation rate has risen to 2.4% while the headline inflation rate closed out 2007 at 4.1%, a 17 year high. Those analysts who have been calling for a 75 basis points rate cut from the Fed need to think again, while Fed committee members themselves need to be extremely careful in terms of what they promise markets and what they subsequently are able to deliver. Bernanke is playing a very dangerous game in telling markets the Fed is prepared to cut rates aggressively, thereby allowing markets to price in aggressive cuts and then demand even more from the Fed before the FOMC has even met, and before the Fed itself has had time to examine the current level of inflation risk. Outside of the inflation data other economic prints Wednesday proved positive for the dollar, with the Treasury International Net Capital Inflows for November rising to a handsome $150 billion, while Industrial production for December was reported flat, slightly better than the marginal 0.1% decline which was forecast. Also, US crude inventories last week rose for the first time in 2 months, a surprise reading which helped to shave $2 off the price of a barrel of oil this afternoon, supporting the dollar. In the euro zone, consumer price inflation for December was confirmed at 3.1%, the same as the preliminary forecast earlier in the month, so this had no market impact.
If the pair closes tonight below 1.4630, the pair will move into Thursday in very bearish mood. Traders need to remember however that we are not in normal trading conditions and sudden events in the current climate can move prices dramatically, in either direction. Strategy: Sell on break below 1.4590 with limit price of 1.4460, ahead of further limit target of 1.4340. Otherwise wait for upside rally before selling down on prices close to or just below 1.4770. We could be in for a further volatile trading session Thursday and housing data out of the US at 13:30 GMT will need to be watched closely.
GBP
Sterling made significant inroads on EUR/GBP Wednesday, sending the euro back below 0.7450 after the pair had hit 0.7610 at one point on Tuesday. UK wage earnings rose 4.0% on the year in the 3 months to the end of December and while above the 3.9% forecast, the figure is probably not strong enough to dissuade the Bank of England from cutting rates when it meets in February. The data from the UK thus far this week has come in better than expected for sterling, which explains why the currency has stabilised against the dollar and has now appreciated against the euro. EUR/GBP has the potential to retrace back as far as 0.7350 and the best chance of this happening quickly is if the euro continues to sell-off against the US dollar. I remain a sterling bear and am restricting my trades to GBP/USD at what look like attractive entry prices. We have not quite reached 1.9750 in recent days but have come close to 1.9730, which is also an attractive entry level. Strategy: Sell cable at prices above 1.9720 with limit target prices of 1.9580 and 1.9540.
Yen
The yen broke through all technical barriers Wednesday as it rushed to a near 3-year high against the dollar and sent the euro back as low as Y156.50. All the doom and gloom that is sending stock markets running for cover is good news for the low-yielding yen, a currency which thrives on bad economic news and recession fears. Tuesday’s nosedive on Wall Street was followed by a similar downward spiralling move on Asian stocks overnight and by early in the European session the dollar was briefly trading just below Y106. The dollar has since rebounded to Y107, but the pair broke below resistance at 106.50 and the next major milestone for the pair is Y105. If risk aversion levels stay elevated and stocks continue to struggle, Y105 is possible within the next couple of days. The speed of the yens appreciation since the turn of the year will frighten Japanese exporters and markets need to be alert for any comments on the currency from Japanese officials. Y105 now looks to be a critical level, but the yen will come under immediate selling pressure at current prices each time there is the semblance of a positive rally on global stock markets. The euro’s dip today has seen EUR/JPY retreat to below Y157. If there is not a rapid recovery for this pair, the euro could potentially fall to as low as Y155 tomorrow. Strategy: Await stabilisation of stock markets and reduction in risk aversion levels and then buy EUR/JPY. We will watch this pair closely over the coming days.
CAD
We finally saw the greenback break through key resistance barriers at 1.0222 and 1.0248 early Wednesday but the loonie has traded in very volatile fashion all day and appears to be gaining strong support from somewhere, which has seen USD/CAD trade in whiplash-like fashion all day, between 1.0152 and 1.0286. Many bears do not seem prepared to give up the gauntlet without a fight, but bulls use these erratic trading conditions to their benefit, by exiting with profits and re-entering when the price dips. There is no major data out of Canada before next Tuesday’s Bank of Canada rate announcement and as we get closer to that day, the number of sellers of USD/CAD should begin to thin with a rate cit and a dovish policy statement on the day almost a certainty. Commodity prices have come off quite sharply in the past two days but the loonie has largely managed to hold its own, but with pressure likely to intensify on the commodity currencies against increasing concerns of a global economic slowdown, the loonie should weaken. A bounce on Wall Street tonight could send the loonie higher, but from tomorrow focus will being to shift onto the Bank of Canada’s meeting next Tuesday and I expect support for the Canadian currency hard to come by. I keep the bullish bias on USD/CAD and recommend buying dips towards 1.0150, but now moving the upside target prices to 1.0250, followed by 1.0280 and 1.03. We won’t yet move the S/L from 0.97 on the longer-term long positions, but maintain the current target price of 1.05.
Bob B - 16th Jan 2008
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