EUR/USD
The euro made an early rally on Wednesday but topped out at 1.5760 before falling sharply. The pair has gone as low as 1.5610 today and momentum has swung in favour of the dollar. The dollar has moved with oil prices this week, losing on Monday as prices advanced, gaining on Tuesday as oil prices plunged and moving up and down with the commodity today. A serious falloff in oil prices could trigger a significant dollar rally back to the 1.53 region at least, as the interest rate outlook for the US currency is not nearly as bad as is currently priced in. A decline in oil prices would lead to a softening in global inflation and make it easier for other Central Banks, like the ECB, to cut interest rates in order to offset against weakening growth. The euro area posted a trade deficit of over EUR15 million in March, much worse than forecast, and while one month’s data does not define a trend it does suggest the strong euro is beginning to have a very negative impact on the competitiveness of exports from the euro area. US durable orders declined by 0.5% in April, slightly less than the 0.7% forecast, but when one excludes transport items, orders increased by 2.5% on the month. This data further underlines that rocketing oil prices are having a damaging impact on the wider economy, with producers of large transport vehicles and cars suffering whereas producers of other large ticket items have seen demand for the goods rise. We are likely to see further volatility through this week and the dollar will struggle to retain a firm tone, unless commodity prices continue to decline. A push through 1.56 could see the pair fall to 1.5550 and a push through here would open the pair to a wider trading range of between 1.53 and 1.58. The euro offers no value on prices close to 1.58 and the best strategy for now is to sell on any rallies that come close to this price level.
GBP/USD
Sterling continues to live a charmed life as the currency benefits from a less chance of an immediate rate cut from the Bank of England because of the growing threat of inflation. This protection is likely to be short-lived however as the underlying fundamentals for the UK economy deteriorates and the current market is essentially masking the reality. Any sharp decline in the Gfk survey on consumer confidence Thursday could trigger a sterling sell-off. Cable offers little value on prices close to 1.9850 and this price region offers good value for shorts. Sterling is being protected in the short run as traders move from euros to pounds to balance a slight breakdown in confidence in the single currency. A rise in risk aversion would lead to a capitulation in carry trades and this is another risk to sterling over the coming days. Cable looks destined to continue to trade between 1.94 and 1.9950, with the potential for a sharp move downwards to the bottom of this range over the next week. Sterling will struggle to extend its gains against the euro beyond 0.7850 and there is the potential for a rapid return to 0.80 later in the week. Strategy: sell cable on prices approaching 1.9850 with target priced of 1.9750, 1.9710, 1.9650 and 1.96.
USD/JPY
The yen sold off aggressively early Wednesday although it has managed to claw back some its losses since. While equities may be on the decline, currency traders have shown renewed appetite for the carry trade and all the yen crosses are up today, including AUD/JPY, GBP/JPY and EUR/JPY. The Aussie dollar has pushed above Y100 and has managed to hold it all day, despite a retreat in commodity prices and a reversal for equities. There is significant complacency in evidence out there but it is dangerous to buy the yen when the market is in this mood. The only value for selling the yen remains on USD/JPY with any dips towards Y103 offering good bid value, with Y105.50 remaining the resistance point at the top of the current trading range. The euro offers no value against the yen on current prices and even if the EUR/JPY pair does advance to Y165, there is a very real danger of a dip to Y158 over the coming weeks.
USD/CAD
The loonie’s resilience shone through again Wednesday with the Canadian currency gaining against every major currency with the exception of the Aussie dollar. The greenback failed to extend its rally beyond 0.9950 and if the pair closes below 0.99 today, the immediate momentum will be back with the loonie. There was no economic data out of Canada today but traders need to be wary of this Friday’s GDP release because the figure is likely to be poor and it should arouse significant selling interest in the Canadian dollar if GDP comes in close to flat or negative. The Canadian economy is arguably slowing at a faster rate than that of the US and Friday’s GDP data could surprise many. If the loonie does push the greenback down to 0.9820 again, this is a good buying opportunity because with the level of risk stacked against the Canadian dollar, USD/CAD could rally sharply through parity and back to 1.02 in a couple of days. The euro also offers short-term value on prices below 1.5450 against the loonie.
Bob B - May 28
Thứ Tư, 28 tháng 5, 2008
Thứ Tư, 21 tháng 5, 2008
Market Watch: Will the oil bull cause its own downfall?
The US dollar has been hammered since late last week, falling to a 24-year low against the Aussie dollar, a 1-month low against the euro and a 2-month low against the Canadian dollar this week. Although US interest rates appear to be on hold for now, the recent rally in the greenback has hit a wall and the currency has reversed course, as rising inflation across the globe cuts off the prospect of rates cuts by the world's Central Banks. Indeed rate hikes across the globe are back on the agenda as oil prices have hit $130 a barrel. Oil prices are 100% higher than they were this month in 2007 and 160% higher than in January of last year. Oil prices are now a huge risk to the health of the global economy and the frenzy-like price spike underway poses a policy dilemma for Central Bankers, let alone governments. The Fed won’t be thanked by many for their contribution to the commodity price bubble, a bubble which took off in earnest when the Fed embarked upon its aggressive rate easing cycle last September. This policy track, primarily for the benefit of financial markets, was not reciprocated by the ECB or most other Central Banks. It is plain nonsense to suggest rocketing oil prices are merely the result of an economic supply and demand imbalance. Demand growth for oil has slowed since oil prices were trading at $50 a barrel in early 2007. The global economy was booming back then but global GDP is expected to slow to a paltry 1.8% in 2008, according to the latest IMF forecast. If oil demand was kept in check at $50 during boom times, why must it fetch $130 during the bad times, which have arrived only 16 months later? US inflation is running at 3.9% over the past 12 months, euro area inflation at 3.3% and oil price inflation at 100%.
Oil demand relative to the oil price is also distorted as governments of many of the emerging economies (from where the bulk of global growth in demand originates) shield the end consumer by subsidising all imported oil and gas. Were consumers in China to be burdened with the massive inflation seen in oil and gas prices, it is not possible the growth in Chinese demand for these commodities could be sustained at current prices. In a sense, the subsidising governments are doing global consumers a disservice by interfering with the normal supply and demand mechanics of a free market. But the governments of emerging economies are not alone in price tampering as some governments in the developed world traditionally load domestic taxes on oil and gas, while wealth creation funds (hedge funds), that have no interest in buying the actual physical product let alone helping the end consumer, are allowed to push the price around significantly, generating exaggerated price movements through applying loosely regulated risk leverage to their bets. And it is worth noting that hedge funds don’t tend to short commodities in a bull market. A glance at last week’s non-commercial trades on the New York Mercantile Exchange reveals there is approximately two long positions against every short position on Nymex for non-commercial traders and in terms of volume, there is 5 times as much funds invested in non-commercial Nymex positions than there is in the euro currency. Looking in more detail, up to last week, there were more speculative shorts than longs on the euro, thus traders were net short on the euro. This confirms that the often referenced correlation between EUR/USD and oil prices has disappeared for immediate term because the bullish run-up in oil failed to pause, after we saw a temporary stabilisation in the dollar.
So what are the options and how can economic reality be brought to bear on oil prices? There are a few considerations to ponder:
1) OPEC announces it is increasing production output before the scheduled September meeting. This has been tried and tested many times before and previous token gestures to increase output have been met by higher oil prices. How come? There is not a supply shortage and there is no logic in rising output if it widens the gap between supply and demand. Politicians who believe the route to lower oil prices is taking a trip to the Middle East to plead for some announcement of a marginal increase in output, need to be brought into an economics class for a reality lesson.
2) China announces it is lifting its oil and gas subsidies and recent price increases are passed onto the consumer. This would definitely work and the very threat of subsidies being lifted would force a mass sell-off of those speculative long positions on the futures and options markets. Were other emerging economies to follow suit, oil prices could tumble dramatically and crude could easily fall to below $80 a barrel by the end of the third quarter. Of course a well-coordinated campaign on the part of the emerging economies to lifting subsidies could be a major triumph for these governments, because a dramatic fall in oil prices would essentially mean the end consumer does not pay any more anyway while the governments save themselves a fortune on subsidy costs. The risk associated with this strategy is that if oil prices did not fall, the removal of the subsidies would see substantial additional costs loaded onto the consumer and it would seriously dampen the pace of growth in those emerging economies. In any case, even if the governments fail to act now, they will not be able to afford to subsidise oil at consistently escalating price levels indefinitely and the price burden will eventually be passed onto the consumer.
3) A strong US dollar rebound would slow oil price inflation. While crude may have outperformed all other commodities over the past 9 months, the rapid run up in commodity prices over this period is directly related to a plunging dollar. Many commodities, including oil and gold, act as a hedge against a falling dollar and were the dollar to bounce back significantly, the heat would be taken out of the bull market in oil. The question remains as to what might force a dollar recovery strong enough to deter the commodity bull. The funny thing is it will probably be the runaway bull itself which will ultimately lead to some marked appreciation in the dollar. Why so? Inflation is rising everywhere, not just in the US, at a time when broad-based demand is slowing, which poses something of an economic contradiction. The real reason for the spike in producer and consumer prices is that hyper-inflation has entered dollar-denominated commodities, including industrial metals and soft commodities, although the principal contributor to hyper-inflation is the run-up in oil prices. If the dollar continues to fall indefinitely and commodity prices rise at the same disproportionate rate as seen in the past year, the world economy is set for a major recession, characterised by hyper-inflation and rising interest rates. It was the Fed’s unilateral policy that led to this commodity bubble in the first place and it may be that only the Fed can reverse it. A sudden downturn for the euro area economy should help the Fed, albeit by proxy, as this would trigger dollar appreciation, but failing this, further rises in commodity prices on the back of a weakening dollar will mean inflation (headline and core) comes knocking hard and the Fed will eventually be forced to answer its own door.
Ted B - May 21
Oil demand relative to the oil price is also distorted as governments of many of the emerging economies (from where the bulk of global growth in demand originates) shield the end consumer by subsidising all imported oil and gas. Were consumers in China to be burdened with the massive inflation seen in oil and gas prices, it is not possible the growth in Chinese demand for these commodities could be sustained at current prices. In a sense, the subsidising governments are doing global consumers a disservice by interfering with the normal supply and demand mechanics of a free market. But the governments of emerging economies are not alone in price tampering as some governments in the developed world traditionally load domestic taxes on oil and gas, while wealth creation funds (hedge funds), that have no interest in buying the actual physical product let alone helping the end consumer, are allowed to push the price around significantly, generating exaggerated price movements through applying loosely regulated risk leverage to their bets. And it is worth noting that hedge funds don’t tend to short commodities in a bull market. A glance at last week’s non-commercial trades on the New York Mercantile Exchange reveals there is approximately two long positions against every short position on Nymex for non-commercial traders and in terms of volume, there is 5 times as much funds invested in non-commercial Nymex positions than there is in the euro currency. Looking in more detail, up to last week, there were more speculative shorts than longs on the euro, thus traders were net short on the euro. This confirms that the often referenced correlation between EUR/USD and oil prices has disappeared for immediate term because the bullish run-up in oil failed to pause, after we saw a temporary stabilisation in the dollar.
So what are the options and how can economic reality be brought to bear on oil prices? There are a few considerations to ponder:
1) OPEC announces it is increasing production output before the scheduled September meeting. This has been tried and tested many times before and previous token gestures to increase output have been met by higher oil prices. How come? There is not a supply shortage and there is no logic in rising output if it widens the gap between supply and demand. Politicians who believe the route to lower oil prices is taking a trip to the Middle East to plead for some announcement of a marginal increase in output, need to be brought into an economics class for a reality lesson.
2) China announces it is lifting its oil and gas subsidies and recent price increases are passed onto the consumer. This would definitely work and the very threat of subsidies being lifted would force a mass sell-off of those speculative long positions on the futures and options markets. Were other emerging economies to follow suit, oil prices could tumble dramatically and crude could easily fall to below $80 a barrel by the end of the third quarter. Of course a well-coordinated campaign on the part of the emerging economies to lifting subsidies could be a major triumph for these governments, because a dramatic fall in oil prices would essentially mean the end consumer does not pay any more anyway while the governments save themselves a fortune on subsidy costs. The risk associated with this strategy is that if oil prices did not fall, the removal of the subsidies would see substantial additional costs loaded onto the consumer and it would seriously dampen the pace of growth in those emerging economies. In any case, even if the governments fail to act now, they will not be able to afford to subsidise oil at consistently escalating price levels indefinitely and the price burden will eventually be passed onto the consumer.
3) A strong US dollar rebound would slow oil price inflation. While crude may have outperformed all other commodities over the past 9 months, the rapid run up in commodity prices over this period is directly related to a plunging dollar. Many commodities, including oil and gold, act as a hedge against a falling dollar and were the dollar to bounce back significantly, the heat would be taken out of the bull market in oil. The question remains as to what might force a dollar recovery strong enough to deter the commodity bull. The funny thing is it will probably be the runaway bull itself which will ultimately lead to some marked appreciation in the dollar. Why so? Inflation is rising everywhere, not just in the US, at a time when broad-based demand is slowing, which poses something of an economic contradiction. The real reason for the spike in producer and consumer prices is that hyper-inflation has entered dollar-denominated commodities, including industrial metals and soft commodities, although the principal contributor to hyper-inflation is the run-up in oil prices. If the dollar continues to fall indefinitely and commodity prices rise at the same disproportionate rate as seen in the past year, the world economy is set for a major recession, characterised by hyper-inflation and rising interest rates. It was the Fed’s unilateral policy that led to this commodity bubble in the first place and it may be that only the Fed can reverse it. A sudden downturn for the euro area economy should help the Fed, albeit by proxy, as this would trigger dollar appreciation, but failing this, further rises in commodity prices on the back of a weakening dollar will mean inflation (headline and core) comes knocking hard and the Fed will eventually be forced to answer its own door.
Ted B - May 21
Thứ Ba, 20 tháng 5, 2008
Bob's Currency Focus - 12:15 GMT
EUR/USD
The euro has hit a high for the month on Tuesday, reaching 1.5673, with the dollar retreating broadly across the board. Rocketing oil prices are having an adverse impact on the dollar over the past week and it will probably take a sustained reversal in energy prices to provoke a meaningful rally for the greenback. German producer prices came in twice as high as expected for April and with costs spiraling everywhere at present, the inflation threat is fast becoming the dominant market influence. Of course the trigger for the current rally in oil was the Fed’s monetary easing policy which began last September and while this policy has helped to ease the credit crisis, it has also resulted in a significant increase in the cost of living for everyone, thanks to the frenzy-like rally experienced in commodity prices. The impact on consumer discretionary spending should not be underestimated, even if equity markets have failed to notice the threat to date. Consumer and business sentiment indicators should be watched very closely over the coming weeks as these will give more of a current market insight than actual growth and output numbers. Germany’s important ZEW survey, released Tuesday, pointed to further decline in confidence on the part of investors in May. The result was a surprise as a marginal improvement was expected. This did not stop the euro rally and the single currency is currently trading at more than a cent up on the day. There is no chance of a rate cut from the ECB in the immediate future and with inflation further on the rise, it is a rate hike that is beginning to look the more likely. There is the possibility of a push to 1.5720 for EUR/USD, before a sharp pullback to below 1.55. The US calendar is relatively bare this week with Producer Prices today and Friday’s Existing Home Sales the highlights. There are more significant indicators out of the euro area this week – the German Ifo survey is released Wednesday and the preliminary readings for the May PMIs are out on Thursday. The euro is overvalued, even if dollar confidence is low and any downside surprises in the Ifo and PMI numbers could trigger major rallies to the downside for EUR/USD.
GBP/USD
Sterling has benefited handsomely from a dollar retreat and cable rose to 1.9665 earlier today, up almost 2 cents from last night’s close. There was no data out of the UK and sterling’s surprising rally is thanks to an influx of funds into the high yielding currencies and a fall in confidence for the dollar. The pound is unchanged against the euro, down against the franc and up against the yen. The fundamentals have not changed and the fact remains the UK economy is slowing and economic data is deteriorating, so sterling remains exposed to sharp sell-offs, on any meaningful rallies, particularly against the dollar. Attention tomorrow will switch to the Bank of England’s minutes from their May meeting, when they are released at 08:30 GMT and with inflation riding high, a hawkish set of minutes seems likely, possibly ruling out a rate cut in June. Inflation is an issue for all Central Banks at the moment, but the high inflation threat is likely to offer nothing more than temporary protection to sterling, given the eroding growth fundamentals in the UK. Cable should be sold down on any rallies close to 1.9770 and a return to 1.9400 is a high probability over the course of this week. There is little value in buying the euro against sterling at present prices, although a break above 80 pence could trigger a momentum-driven rise to 81 pence. Sterling is exposed on the yen and Swiss crosses, if stock markets extend their declines through to Wednesday.
JPY
The yen has made modest gains against the dollar Tuesday, but has lost against every other major currency as the Bank of Japan stands pat on interest rates. The Central Bank also today warned of the downside risks to the economy, thereby ruling out the prospect of a near-term rate hike and fuelling a new wave of carry trades. The Aussie dollar has risen to Y100 today despite a sharp decline in equities in both Asia and Europe, while the euro has risen to Y163. While risk appetite remains high the yen is going to struggle to make any headway and it will be prone to immediate sell-offs on any significant rallies. The dollar is currently hemmed into a 103 to 105.50 price range, but the smart money is buying the pair on dips. The euro is over-extended against the yen and while there is a chance of a rally to Y165, there is the risk of a return to Y158, especially if the decline in stocks continues as a theme this week. AUD/JPY should be watched closely as this is the standard bearer for the carry trade and a rally that extends to above Y100 could spark a further wave of carry buying, particularly for the high-yielders.
CAD
The loonie has been on a remarkable rally over the past week, gaining substantially against every other major currency, with the exception of the Aussie dollar. On Tuesday USD/CAD hit a low of 0.9874 and is currently trading just above this price level. Economic data has proven to be of only secondary importance to commodity prices when determining price direction for the loonie and the Canadian currency is the benefactor behind a major speculative drive in the past week. There are some important data releases out this week, with consumer price inflation and retail sales numbers out on Wednesday and Thursday respectively. Even a poor set of data numbers may not derail the loonie as it has shown itself to be pretty much immune to adverse economic data throughout this year. Any prick in the commodity bubble would be much more damaging for the loonie’s immediate fortunes and a reversal in oil prices could signal a sharp retreat in the Canadian currency. A dip below 0.9850 is possible today but a sharp return back above the parity line for USD/CAD is most probably in the coming days. The euro looks to offer good value against the loonie on any dips to or below 1.54, with a probable return to 1.56 later in the week.
Bob B - May 20
The euro has hit a high for the month on Tuesday, reaching 1.5673, with the dollar retreating broadly across the board. Rocketing oil prices are having an adverse impact on the dollar over the past week and it will probably take a sustained reversal in energy prices to provoke a meaningful rally for the greenback. German producer prices came in twice as high as expected for April and with costs spiraling everywhere at present, the inflation threat is fast becoming the dominant market influence. Of course the trigger for the current rally in oil was the Fed’s monetary easing policy which began last September and while this policy has helped to ease the credit crisis, it has also resulted in a significant increase in the cost of living for everyone, thanks to the frenzy-like rally experienced in commodity prices. The impact on consumer discretionary spending should not be underestimated, even if equity markets have failed to notice the threat to date. Consumer and business sentiment indicators should be watched very closely over the coming weeks as these will give more of a current market insight than actual growth and output numbers. Germany’s important ZEW survey, released Tuesday, pointed to further decline in confidence on the part of investors in May. The result was a surprise as a marginal improvement was expected. This did not stop the euro rally and the single currency is currently trading at more than a cent up on the day. There is no chance of a rate cut from the ECB in the immediate future and with inflation further on the rise, it is a rate hike that is beginning to look the more likely. There is the possibility of a push to 1.5720 for EUR/USD, before a sharp pullback to below 1.55. The US calendar is relatively bare this week with Producer Prices today and Friday’s Existing Home Sales the highlights. There are more significant indicators out of the euro area this week – the German Ifo survey is released Wednesday and the preliminary readings for the May PMIs are out on Thursday. The euro is overvalued, even if dollar confidence is low and any downside surprises in the Ifo and PMI numbers could trigger major rallies to the downside for EUR/USD.
GBP/USD
Sterling has benefited handsomely from a dollar retreat and cable rose to 1.9665 earlier today, up almost 2 cents from last night’s close. There was no data out of the UK and sterling’s surprising rally is thanks to an influx of funds into the high yielding currencies and a fall in confidence for the dollar. The pound is unchanged against the euro, down against the franc and up against the yen. The fundamentals have not changed and the fact remains the UK economy is slowing and economic data is deteriorating, so sterling remains exposed to sharp sell-offs, on any meaningful rallies, particularly against the dollar. Attention tomorrow will switch to the Bank of England’s minutes from their May meeting, when they are released at 08:30 GMT and with inflation riding high, a hawkish set of minutes seems likely, possibly ruling out a rate cut in June. Inflation is an issue for all Central Banks at the moment, but the high inflation threat is likely to offer nothing more than temporary protection to sterling, given the eroding growth fundamentals in the UK. Cable should be sold down on any rallies close to 1.9770 and a return to 1.9400 is a high probability over the course of this week. There is little value in buying the euro against sterling at present prices, although a break above 80 pence could trigger a momentum-driven rise to 81 pence. Sterling is exposed on the yen and Swiss crosses, if stock markets extend their declines through to Wednesday.
JPY
The yen has made modest gains against the dollar Tuesday, but has lost against every other major currency as the Bank of Japan stands pat on interest rates. The Central Bank also today warned of the downside risks to the economy, thereby ruling out the prospect of a near-term rate hike and fuelling a new wave of carry trades. The Aussie dollar has risen to Y100 today despite a sharp decline in equities in both Asia and Europe, while the euro has risen to Y163. While risk appetite remains high the yen is going to struggle to make any headway and it will be prone to immediate sell-offs on any significant rallies. The dollar is currently hemmed into a 103 to 105.50 price range, but the smart money is buying the pair on dips. The euro is over-extended against the yen and while there is a chance of a rally to Y165, there is the risk of a return to Y158, especially if the decline in stocks continues as a theme this week. AUD/JPY should be watched closely as this is the standard bearer for the carry trade and a rally that extends to above Y100 could spark a further wave of carry buying, particularly for the high-yielders.
CAD
The loonie has been on a remarkable rally over the past week, gaining substantially against every other major currency, with the exception of the Aussie dollar. On Tuesday USD/CAD hit a low of 0.9874 and is currently trading just above this price level. Economic data has proven to be of only secondary importance to commodity prices when determining price direction for the loonie and the Canadian currency is the benefactor behind a major speculative drive in the past week. There are some important data releases out this week, with consumer price inflation and retail sales numbers out on Wednesday and Thursday respectively. Even a poor set of data numbers may not derail the loonie as it has shown itself to be pretty much immune to adverse economic data throughout this year. Any prick in the commodity bubble would be much more damaging for the loonie’s immediate fortunes and a reversal in oil prices could signal a sharp retreat in the Canadian currency. A dip below 0.9850 is possible today but a sharp return back above the parity line for USD/CAD is most probably in the coming days. The euro looks to offer good value against the loonie on any dips to or below 1.54, with a probable return to 1.56 later in the week.
Bob B - May 20
Thứ Năm, 15 tháng 5, 2008
Bob's Currency Focus - 15:30 GMT
EUR/USD
US stock markets are proving themselves to be immune to bad news of late and today’s data: disappointing industrial production numbers for April; an increase in last week’s jobless numbers; negative net treasury capital inflows for March; near-record high oil prices, have failed to spook investors with the US industrial averages all trading flat at the time of print. The dollar is holding its own against the euro, although the pair did rise towards 1.5550 this morning after a thriving set of GDP numbers out of Germany. The euro area own annualised GDP figure for quarter 1 was seen at 2.2%, against a 1.9% forecast, meaning the euro area economy grew at a steady pace in the first 3 months, despite the turmoil across the Atlantic. The problem with GDP data is that it is old history as soon as it is released and while today’s results are encouraging, more recent economic data out of the eurozone points to a significant deterioration in the performance of the euro economy in quarter 2. Add to this the presumption that the Fed is done cutting US interest rates and it is difficult to find good reason to aggressively sell the dollar off against the single currency. While some analysts attempt to suggest US inflation was under control following yesterday’s CPI data release (core at 2.3% and headline at 3.9%), the fact remains inflation is well above what should be the Fed’s tolerance rate, at a time when the US economy is in protracted period of stagnant growth and there is little cause for cheer. This news should prove to be positive for the dollar in the medium term though, as it suggests US interest rates may begin to rise as soon as a real pickup in growth is evidenced. Expect EUR/USD to remain trapped in a 1.5287 to 1.56 price range for the foreseeable future, but the better trade would appear to be to sell down on failed rallies close to the 1.56 price band. Friday’s US housing starts and building permits data will be important for gauging immediate dollar confidence, but it is unlikely to have a huge impact, unless the actual results are sharply different to the forecast. There is potential for a dip to 1.5350 by Friday, but it is safer to sell on prices closer to 1.5550, to avoid being caught on the wrong side.
GBP/USD
The data keeps on getting worse out of the UK and what is really worrying for sterling is the fact Wednesday’s spike in consumer price inflation (from 2.5% in March to 3.0% in April) failed to lead to any meaningful rally in the pound and indeed cable came within 0.3 cents of hitting the year’s low, which was registered way back in January. Cable looks certain to move downwards through the remainder of this year and the pace of the downtrend is most likely to be dictated by US data. The Bank of England has a very difficult task on its hands with UK inflation and growth now accelerating in opposite directions. The Bank’s measly offering of 0.75% in rate cuts in response to one of the greatest credit debacles ever to have hit the economy could see Governor King and his colleagues vilified if commodity-driven inflation now pushes the UK economy over the brink, into a prolonged period of stagflation and into recession. If the Bank of England was to take a leaf out of the Fed’s book, then the MPC might proceed and cut interest rates even in an environment of rising inflation. The problem is that the current bout of global inflation has been largely created by the Fed’s recent round of policy easing and aggressive rate cutting by other Central Banks might only exacerbate the inflation issue. The UK economy has bleak outlook through the rest of this year and the trading opportunities look to be on sterling shorts. 1.96 on cable should be a decent barrier on the upside and any rallies that come near this price line offer good selling value. Downside targets are 1.9430 and 1.94, but look for 1.9337 to be taken out in the coming days, opening the way for a decline to 1.92, as early as next week.
JPY
The yen has taken on a decidedly weaker tone this week, losing out significantly to the euro and the dollar as traders seem happy to run with the ‘worst is over’ theory and sell the Japanese currency at each opportunity. The yen has gained modestly today with global stock markets marginally in the red, but it is still 2 cents off Monday’s opening price against the dollar, while the euro is trading between Y162 and Y163, well above recent average price levels. The dollar now looks comfortable trading in the 104 to 105.50 price region and that pair could push up a notch next week, is risk tolerance aversion remains low. There remains huge complacency on the part of investors, particularly with oil prices again edging near recent highs and there is always the danger of a sudden liquidation of positions which would see the yen appreciate rapidly. There is no value in buying the dollar on prices close to Y105 and traders are best advised to wait for dips back towards the 103 price region. The euro is overpriced against the yen on anything above Y163 and a sell down from above this price level offers good value, with the prospect of a decline back to 1.58 over the next couple of weeks. Tonight sees the release of quarter 1 GDP data out of Japan but the data is unlikely to have a major market impact, with global risk tolerance the current driving factor behind the currency’s movement.
CAD
The loonie is the best performing of all major currencies this week, having pushed the dollar back to the parity line and sending the euro back below 1.55. The recent rally is owed exclusively to rising oil prices with the loonie once again the subject of major commodity-driven speculative buying. The Bank of Canada must be wondering what it has to do to curb the loonie’s rise, with the 1.5% in rate cuts delivered since December appearing to have made little difference. If the current commodity price acceleration is indeed a bubble, Canada’s economy could be in for quite a nasty shock over the upcoming quarters. Manufacturing shipments in March declined 1.6%, but this was offset by a 2.9% rise in new orders. There is no further data out of Canada this week and the loonie’s fate is likely to be determined by oil prices. We could see a possible dip to below 0.9940 against the greenback, but it is highly dangerous to sell USD/CAD at current prices given the likely prospect of sharp reversal, with a return to at least 1.02 highly likely. When oil prices finally begin to retreat, the loonie should enter a prolonged period of decline. Strategy: Buy on dips towards 0.9960, with upside price targets of 1.0070, 1.0130, 1.0170 and 1.0220.
Bob B - May 16
US stock markets are proving themselves to be immune to bad news of late and today’s data: disappointing industrial production numbers for April; an increase in last week’s jobless numbers; negative net treasury capital inflows for March; near-record high oil prices, have failed to spook investors with the US industrial averages all trading flat at the time of print. The dollar is holding its own against the euro, although the pair did rise towards 1.5550 this morning after a thriving set of GDP numbers out of Germany. The euro area own annualised GDP figure for quarter 1 was seen at 2.2%, against a 1.9% forecast, meaning the euro area economy grew at a steady pace in the first 3 months, despite the turmoil across the Atlantic. The problem with GDP data is that it is old history as soon as it is released and while today’s results are encouraging, more recent economic data out of the eurozone points to a significant deterioration in the performance of the euro economy in quarter 2. Add to this the presumption that the Fed is done cutting US interest rates and it is difficult to find good reason to aggressively sell the dollar off against the single currency. While some analysts attempt to suggest US inflation was under control following yesterday’s CPI data release (core at 2.3% and headline at 3.9%), the fact remains inflation is well above what should be the Fed’s tolerance rate, at a time when the US economy is in protracted period of stagnant growth and there is little cause for cheer. This news should prove to be positive for the dollar in the medium term though, as it suggests US interest rates may begin to rise as soon as a real pickup in growth is evidenced. Expect EUR/USD to remain trapped in a 1.5287 to 1.56 price range for the foreseeable future, but the better trade would appear to be to sell down on failed rallies close to the 1.56 price band. Friday’s US housing starts and building permits data will be important for gauging immediate dollar confidence, but it is unlikely to have a huge impact, unless the actual results are sharply different to the forecast. There is potential for a dip to 1.5350 by Friday, but it is safer to sell on prices closer to 1.5550, to avoid being caught on the wrong side.
GBP/USD
The data keeps on getting worse out of the UK and what is really worrying for sterling is the fact Wednesday’s spike in consumer price inflation (from 2.5% in March to 3.0% in April) failed to lead to any meaningful rally in the pound and indeed cable came within 0.3 cents of hitting the year’s low, which was registered way back in January. Cable looks certain to move downwards through the remainder of this year and the pace of the downtrend is most likely to be dictated by US data. The Bank of England has a very difficult task on its hands with UK inflation and growth now accelerating in opposite directions. The Bank’s measly offering of 0.75% in rate cuts in response to one of the greatest credit debacles ever to have hit the economy could see Governor King and his colleagues vilified if commodity-driven inflation now pushes the UK economy over the brink, into a prolonged period of stagflation and into recession. If the Bank of England was to take a leaf out of the Fed’s book, then the MPC might proceed and cut interest rates even in an environment of rising inflation. The problem is that the current bout of global inflation has been largely created by the Fed’s recent round of policy easing and aggressive rate cutting by other Central Banks might only exacerbate the inflation issue. The UK economy has bleak outlook through the rest of this year and the trading opportunities look to be on sterling shorts. 1.96 on cable should be a decent barrier on the upside and any rallies that come near this price line offer good selling value. Downside targets are 1.9430 and 1.94, but look for 1.9337 to be taken out in the coming days, opening the way for a decline to 1.92, as early as next week.
JPY
The yen has taken on a decidedly weaker tone this week, losing out significantly to the euro and the dollar as traders seem happy to run with the ‘worst is over’ theory and sell the Japanese currency at each opportunity. The yen has gained modestly today with global stock markets marginally in the red, but it is still 2 cents off Monday’s opening price against the dollar, while the euro is trading between Y162 and Y163, well above recent average price levels. The dollar now looks comfortable trading in the 104 to 105.50 price region and that pair could push up a notch next week, is risk tolerance aversion remains low. There remains huge complacency on the part of investors, particularly with oil prices again edging near recent highs and there is always the danger of a sudden liquidation of positions which would see the yen appreciate rapidly. There is no value in buying the dollar on prices close to Y105 and traders are best advised to wait for dips back towards the 103 price region. The euro is overpriced against the yen on anything above Y163 and a sell down from above this price level offers good value, with the prospect of a decline back to 1.58 over the next couple of weeks. Tonight sees the release of quarter 1 GDP data out of Japan but the data is unlikely to have a major market impact, with global risk tolerance the current driving factor behind the currency’s movement.
CAD
The loonie is the best performing of all major currencies this week, having pushed the dollar back to the parity line and sending the euro back below 1.55. The recent rally is owed exclusively to rising oil prices with the loonie once again the subject of major commodity-driven speculative buying. The Bank of Canada must be wondering what it has to do to curb the loonie’s rise, with the 1.5% in rate cuts delivered since December appearing to have made little difference. If the current commodity price acceleration is indeed a bubble, Canada’s economy could be in for quite a nasty shock over the upcoming quarters. Manufacturing shipments in March declined 1.6%, but this was offset by a 2.9% rise in new orders. There is no further data out of Canada this week and the loonie’s fate is likely to be determined by oil prices. We could see a possible dip to below 0.9940 against the greenback, but it is highly dangerous to sell USD/CAD at current prices given the likely prospect of sharp reversal, with a return to at least 1.02 highly likely. When oil prices finally begin to retreat, the loonie should enter a prolonged period of decline. Strategy: Buy on dips towards 0.9960, with upside price targets of 1.0070, 1.0130, 1.0170 and 1.0220.
Bob B - May 16
Thứ Tư, 7 tháng 5, 2008
Bob's Currency Focus
EUR/USD
This week is relatively quiet in terms of key data and the main event is Thursday’s ECB meeting. While rates are certain to be kept on hold, markets will be looking for any shift in tone from the Bank’s monetary policy committee in the accompanying release. We have witnessed deterioration in the performance of the euro economy in the past month and while the Committee may point to further downside risks to growth, any such reference is likely to be offset by a hawkish statement on inflation. The ECB is not likely to let its guard down at a time when oil prices are trading at $122 a barrel and Euro zone inflation remains elevated at 3.3%. Euro area retail sales in March disappointed yet again coming in negative both on the month and on the year, while German factory orders also declined surprisingly in March. The euro has dipped sharply back to 1.5410 from the high of 1.5595 hit on Tuesday and the dollar looks poised to test key support at 1.5350, unless Thursday’s ECB statement is seen as providing additional hawkish bias. The euro is currently capped around the 1.56 price mark and the downtrend looks set to continue as long as the pair remains below this key price level. The catalyst for a further leg down in the pair could be oil prices. If crude oil sells off sharply, it will renew interest in the dollar and this could trigger a move to 1.5280 in EUR/USD. It is best to sell on prices close to 1.56 at present, with target prices of 1.5430, 1.54, 1.5360, 1.5341 and 1.53. Traders need to be cautious on Thursday because recent history has shown us that hawkish ECB statements tend to trigger strong short-term rallies for the euro.
GBP/USD
I called it last week when looking for a sell-off on cable and today the pair fell below the critical 1.96 support line, a price level which has held for the past 2 months. With the Bank of England meeting Thursday and sterling coming off the back of a string of weak economic indicators, the pound could dip to 1.94 against the US currency over the next 2 days. Tuesday’s services PMI signalled the UK services sector grew at its slowest pact in over 5 years and on Wednesday there was the print of negative industrial and manufacturing output numbers for March. Sterling has been protected to some degree in the past few weeks by fresh concerns over the euro economy and a revival in stock markets, something that has drawn temporary funds into the high-yielding pound. On Wednesday however the euro rose back above 79 pence, although it has since dipped below this level once again. There is an outside chance of a rate cut from the Bank of England on Thursday and sterling will struggle to attract buying support between now and 12 noon tomorrow. With 1.96 support having given way on cable, the bias certainly favours the downside and cable should be sold down on any rallies towards 1.98. Sterling risks a retreat to 80 pence against the euro this week.
USD/JPY
The yen retreated across against the dollar Wednesday as a pick-up in stock markets led to a sell-off of the low yielding yen and Swiss franc. The carry trade has moved with a vengeance in recent weeks and today AUD/JPY is trading just below Y100, having been as low as Y87 just 6 weeks ago. Weak economic data is failing to put a dent in risk appetite as investors believe the worst in the financial market crisis is behind us. A slowing global economy has failed to dampen investor demand for commodities and it is this which is driving the current wave of support in the carry trade. There is a major disconnection however between the economic fundamentals and the prices of many asset classes and the current move away from the Japanese yen could prove to be premature. The yen will need a significant downturn in global stock indices to trigger a sustainable rally, but until this happens the currency will remain vulnerable. The US dollar will struggle to break above Y106, but the best value in terms of buying the yen remains against the euro, with any advances towards Y165 offering medium term sell-down value.
USD/CAD
The loonie has been the strongest currency amongst all the principals this week, making significant advances against all the major currencies. The move has been primarily driven by runaway oil prices, although Tuesday’s IVEY PMI reading, which printed higher than expected, was also a welcome boost. It is difficult to see the loonie sustaining any break below the parity level against the greenback, particularly as the Fed signalled a pause in US interest rates last week. Any falloff in the price of oil could trigger a sharp reversal and see the greenback rise back towards 102 in the next day or two. The loonie is also vulnerable to a sharp correction against the euro, with the ECB meeting on Thursday likely to see the Bank’s monetary policy committee reiterate its hawkish stance on euro zone inflation and interest rates. There is definitely value in buying EUR/CAD around the current price of 1.5450, while the greenback offers real value on prices close to parity against the Canadian currency. Oil prices will be the principal driver of the loonie through the remainder of this week.
Bob B - May 7
This week is relatively quiet in terms of key data and the main event is Thursday’s ECB meeting. While rates are certain to be kept on hold, markets will be looking for any shift in tone from the Bank’s monetary policy committee in the accompanying release. We have witnessed deterioration in the performance of the euro economy in the past month and while the Committee may point to further downside risks to growth, any such reference is likely to be offset by a hawkish statement on inflation. The ECB is not likely to let its guard down at a time when oil prices are trading at $122 a barrel and Euro zone inflation remains elevated at 3.3%. Euro area retail sales in March disappointed yet again coming in negative both on the month and on the year, while German factory orders also declined surprisingly in March. The euro has dipped sharply back to 1.5410 from the high of 1.5595 hit on Tuesday and the dollar looks poised to test key support at 1.5350, unless Thursday’s ECB statement is seen as providing additional hawkish bias. The euro is currently capped around the 1.56 price mark and the downtrend looks set to continue as long as the pair remains below this key price level. The catalyst for a further leg down in the pair could be oil prices. If crude oil sells off sharply, it will renew interest in the dollar and this could trigger a move to 1.5280 in EUR/USD. It is best to sell on prices close to 1.56 at present, with target prices of 1.5430, 1.54, 1.5360, 1.5341 and 1.53. Traders need to be cautious on Thursday because recent history has shown us that hawkish ECB statements tend to trigger strong short-term rallies for the euro.
GBP/USD
I called it last week when looking for a sell-off on cable and today the pair fell below the critical 1.96 support line, a price level which has held for the past 2 months. With the Bank of England meeting Thursday and sterling coming off the back of a string of weak economic indicators, the pound could dip to 1.94 against the US currency over the next 2 days. Tuesday’s services PMI signalled the UK services sector grew at its slowest pact in over 5 years and on Wednesday there was the print of negative industrial and manufacturing output numbers for March. Sterling has been protected to some degree in the past few weeks by fresh concerns over the euro economy and a revival in stock markets, something that has drawn temporary funds into the high-yielding pound. On Wednesday however the euro rose back above 79 pence, although it has since dipped below this level once again. There is an outside chance of a rate cut from the Bank of England on Thursday and sterling will struggle to attract buying support between now and 12 noon tomorrow. With 1.96 support having given way on cable, the bias certainly favours the downside and cable should be sold down on any rallies towards 1.98. Sterling risks a retreat to 80 pence against the euro this week.
USD/JPY
The yen retreated across against the dollar Wednesday as a pick-up in stock markets led to a sell-off of the low yielding yen and Swiss franc. The carry trade has moved with a vengeance in recent weeks and today AUD/JPY is trading just below Y100, having been as low as Y87 just 6 weeks ago. Weak economic data is failing to put a dent in risk appetite as investors believe the worst in the financial market crisis is behind us. A slowing global economy has failed to dampen investor demand for commodities and it is this which is driving the current wave of support in the carry trade. There is a major disconnection however between the economic fundamentals and the prices of many asset classes and the current move away from the Japanese yen could prove to be premature. The yen will need a significant downturn in global stock indices to trigger a sustainable rally, but until this happens the currency will remain vulnerable. The US dollar will struggle to break above Y106, but the best value in terms of buying the yen remains against the euro, with any advances towards Y165 offering medium term sell-down value.
USD/CAD
The loonie has been the strongest currency amongst all the principals this week, making significant advances against all the major currencies. The move has been primarily driven by runaway oil prices, although Tuesday’s IVEY PMI reading, which printed higher than expected, was also a welcome boost. It is difficult to see the loonie sustaining any break below the parity level against the greenback, particularly as the Fed signalled a pause in US interest rates last week. Any falloff in the price of oil could trigger a sharp reversal and see the greenback rise back towards 102 in the next day or two. The loonie is also vulnerable to a sharp correction against the euro, with the ECB meeting on Thursday likely to see the Bank’s monetary policy committee reiterate its hawkish stance on euro zone inflation and interest rates. There is definitely value in buying EUR/CAD around the current price of 1.5450, while the greenback offers real value on prices close to parity against the Canadian currency. Oil prices will be the principal driver of the loonie through the remainder of this week.
Bob B - May 7
Thứ Năm, 1 tháng 5, 2008
What does Fed pause mean for currency markets?
The Fed appeared to signal a pause in its easing cycle Wednesday when stating ‘The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity’. Of course the downside risks to growth are still highlighted, as they should, but the Fed’s policy of aggressively cutting rates in recent months has failed to translate into lower borrowing costs for consumers while the credit crunch persisted. Markets won’t be convinced the Fed will remain on hold if economic data deteriorates further, particularly in terms of employment. But for now, the Fed would appear to have adopted a ‘wait and see’ policy and this will have implications for currency markets as we move into the summer and through the remainder of the year. With interest rate differentials a major factor in determining exchange rates, we need to look at currency pairs where the rate differential is likely to narrow or widen in favour of the US dollar over the coming quarters.
The only major currency for which we can say with a degree of certainty that interest rates are going to be cut is sterling. Rates in the UK currently stand at 5.00%, having been cut by 75 basis points since last November. The UK economy is slowing, house prices are falling rapidly, inflation is significantly lower than in the euro area, the credit crisis is taking its toll on UK business and the UK itself has a vast current account deficit, all which point to a need for lower interest rates and a weaker currency. We could see UK interest rates cut by a further 100 basis points this year, something which is going to undermine the country’s currency. Cable is currently riding high close to 1.99, but we could easily see it fall to 1.85 or much lower this year, if interest rate differentials between the UK and the US narrow by a further 100 basis points.
In terms of the yen, the dollar has fallen from a high of Y124 last year to a low of just below Y96 earlier this year. Currently trading around Y104, the dollar has an opportunity to appreciate significantly against the Japanese currency, even if interest rates remain on hold in both jurisdictions over the next 6 months, because the dollar offers a higher yield to investors (2% Vs 0.5%). The key driver for any acceleration in this exchange rate will be a return to broader market stability and a rise in risk tolerance levels. We could see the dollar appreciate back up to Y112 through this year.
The EUR/USD currency pair is something of a conundrum but the net risks to the pair are to the downside. With inflation riding high in the euro area, the ECB will not move to cut rates unless there is a marked slowdown in inflation and a significant deterioration in the euro economy. However, some economies within the euro block are struggling, notably Spain and Italy, while a diversification in the performance of France and Germany is becoming ever more noticeable. This poses a major headache for the ECB and it threatens the euro’s ability to sustain its 2.5 year rally against the dollar, at least in the medium term. Interest rate differentials are unlikely to widen in favour of the euro over the next 12 months and with the heightened risk of a sharp downturn in the performance of the euro economy, the euro is beginning to look like an unattractive proposition against the dollar through the remainder of this year. The next leg in EUR/USD could be to the downside and it could prove to be quite a sharp move, especially if the ECB is forced to cut euro area interest rates later this year. A return to 1.45 is probable, with a chance of a retreat to 1.38, if interest rate differentials look like narrowing significantly. If the US enters a prolonged recession and the Fed move to further cut US interest rates, then of course the euro may benefit, but it is very difficult to see the pair sustaining any rally back above 1.60. The Swiss franc will most likely follow the euro’s fortunes, although it will perform better if Swiss interest rates remain on hold when euro rates are cut.
A broader dollar rally should trigger a fall in commodity prices and in turn in the commodity currencies which appreciated sharply over the past year, notably the Canadian dollar, Norwegian Krone and the Australian dollar. The Australian dollar will be protected to a degree because of its higher yield attraction but the Norwegian Krone in particular could fall significantly, especially if oil prices come off sharply and if there is a general malaise within the wider European economy. The Canadian dollar has not looked comfortable on prices higher than parity against its US counterpart and with growth in Canada coming to a near standstill, Canada needs some respite from its currency, to allow the economy breathe again. The greenback could appreciate sharply against the loonie and a return to at least 1.10 looks very achievable.
The above synopsis does not mean we are going to witness a long-term reversal in the dollar trend, which is downwards, but the fundamentals are stacking up to favour a sustained period of relief and a medium-term retracement for the embattled greenback. It is only a stronger dollar that can deflate the commodity price bubble and relieve the current spate of rising global inflation.
Ted B - May 1
The only major currency for which we can say with a degree of certainty that interest rates are going to be cut is sterling. Rates in the UK currently stand at 5.00%, having been cut by 75 basis points since last November. The UK economy is slowing, house prices are falling rapidly, inflation is significantly lower than in the euro area, the credit crisis is taking its toll on UK business and the UK itself has a vast current account deficit, all which point to a need for lower interest rates and a weaker currency. We could see UK interest rates cut by a further 100 basis points this year, something which is going to undermine the country’s currency. Cable is currently riding high close to 1.99, but we could easily see it fall to 1.85 or much lower this year, if interest rate differentials between the UK and the US narrow by a further 100 basis points.
In terms of the yen, the dollar has fallen from a high of Y124 last year to a low of just below Y96 earlier this year. Currently trading around Y104, the dollar has an opportunity to appreciate significantly against the Japanese currency, even if interest rates remain on hold in both jurisdictions over the next 6 months, because the dollar offers a higher yield to investors (2% Vs 0.5%). The key driver for any acceleration in this exchange rate will be a return to broader market stability and a rise in risk tolerance levels. We could see the dollar appreciate back up to Y112 through this year.
The EUR/USD currency pair is something of a conundrum but the net risks to the pair are to the downside. With inflation riding high in the euro area, the ECB will not move to cut rates unless there is a marked slowdown in inflation and a significant deterioration in the euro economy. However, some economies within the euro block are struggling, notably Spain and Italy, while a diversification in the performance of France and Germany is becoming ever more noticeable. This poses a major headache for the ECB and it threatens the euro’s ability to sustain its 2.5 year rally against the dollar, at least in the medium term. Interest rate differentials are unlikely to widen in favour of the euro over the next 12 months and with the heightened risk of a sharp downturn in the performance of the euro economy, the euro is beginning to look like an unattractive proposition against the dollar through the remainder of this year. The next leg in EUR/USD could be to the downside and it could prove to be quite a sharp move, especially if the ECB is forced to cut euro area interest rates later this year. A return to 1.45 is probable, with a chance of a retreat to 1.38, if interest rate differentials look like narrowing significantly. If the US enters a prolonged recession and the Fed move to further cut US interest rates, then of course the euro may benefit, but it is very difficult to see the pair sustaining any rally back above 1.60. The Swiss franc will most likely follow the euro’s fortunes, although it will perform better if Swiss interest rates remain on hold when euro rates are cut.
A broader dollar rally should trigger a fall in commodity prices and in turn in the commodity currencies which appreciated sharply over the past year, notably the Canadian dollar, Norwegian Krone and the Australian dollar. The Australian dollar will be protected to a degree because of its higher yield attraction but the Norwegian Krone in particular could fall significantly, especially if oil prices come off sharply and if there is a general malaise within the wider European economy. The Canadian dollar has not looked comfortable on prices higher than parity against its US counterpart and with growth in Canada coming to a near standstill, Canada needs some respite from its currency, to allow the economy breathe again. The greenback could appreciate sharply against the loonie and a return to at least 1.10 looks very achievable.
The above synopsis does not mean we are going to witness a long-term reversal in the dollar trend, which is downwards, but the fundamentals are stacking up to favour a sustained period of relief and a medium-term retracement for the embattled greenback. It is only a stronger dollar that can deflate the commodity price bubble and relieve the current spate of rising global inflation.
Ted B - May 1
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