EUR/USD
Eurozone inflation has surprised on the upside, with the flash estimate for June coming in at an annualised 4.0% rate, against 3.7% in May and a forecast 3.9%. Whatever doubts may have existed about the ECB’s intentions this week have all but vanished and the Governing Council seems certain to raise rates to 4.25% when they meet on Thursday next. Opposition to the move has been mooted and the question now is not a case of whether the ECB will raise rates this week, but rather a case of whether this week’s rise will be the start in a new series of rate rises. The ECB has backed itself into a corner and markets have priced in a further rate hike by September with some analysts now expecting up to 3 rate hikes by the end of the year. Normally this would be very bullish for the currency and indeed the run-up in the euro over the past few weeks has paid testament to this. However we are now looking at a situation where the ECB will be raising interest rates at a time when there is zero or negative growth in the euro zone. An increase in interest rates will serve to expedite the economic slowdown and could potentially derail the euro later in the year. In the short-run this prospect is unlikely to deter traders, whom will want to challenge the 1.6016 high this week. The dollar is being driven by commodity prices, which in turn are influenced by the EUR/USD exchange rate, so with yield differentials set to widen, the immediate outlook for the dollar is not bright. There are a few caveats though, most notably the PMIs out of the euro area on Tuesday and Thursday Vs the US data counterparts. Also, we are dangerously close to further vocal market intervention, as spiralling oil costs sends global stocks plunging and further pits the US economy into recession. Monday sees the end of quarter 2 and some profit-taking is likely to stall the euro’s advance today, but it will continue to be bought on dips in the run-up to Thursday’s ECB. Friday’s US non-farm payroll is unlikely to play a major role in influencing currencies this week, even if we do witness some short-term volatility, because US Fed policy looks set to remain on hold for the foreseeable future. Key resistance on the upside is at 1.5840 and if that gives way, it will leave the way open for euro bulls to push to the illustrious 1.60 price mark. EUR/USD is trading at an uncomfortably high level around 1.58, yet the current risks look to be to the upside and the wise option may be to avoid the pair altogether until after the ECB on Thursday.
GBP/USD
UK mortgage approvals and mortgage lending figures fell to record lows in May, while consumer confidence has sunk to a 16 year low in June against a backdrop of falling house prices and runaway energy costs. Normally such damning data would be sufficient to send sterling packing for a couple of cents against the dollar and over half a penny against the euro, but sterling has found some back teeth in the past week and the UK currency is virtually unchanged on Monday, holding onto the significant gains it made last week against the greenback. There are a few possible reasons for this new-found resilience, one being that we are at the end of the second quarter and profit-taking has led to a liquidation of a large volume of sterling shorts, thus propelling sterling artificially higher. If this is the real reason, then expect sterling to decline, possibly sharply, from Tuesday, as we enter quarter 3. Another plausible reason is the resurgent appetite for high yielding currencies as investors are hedging against a climate of rising inflation and retreating equity values. Sterling is competing again on yield grounds as markets have written off any prospect of rate cuts from the Bank of England this year. The medium to longer term outlook for sterling remains grim however because larger funds are unlikely to want to channel long play funds into a currency where the economy is pretty much tanking. If the CIPS manufacturing and services indices, due out on Tuesday and Thursday, report a contraction in the respective sectors for June, expect sterling’s recent revival to hit a wall. We need to see cable fall below 1.98 to sell the pair again, because while price remains above this support level, bias remains to the upside. The euro could take a run at 80 pence this week against the UK currency, given an expected widening in the rate differentials. Short sterling positions on EUR/GBP could begin to stack up again from Tuesday.
USD/JPY
The yen has been dragged and pulled across the currency markets Monday, first pushing the dollar below Y105 during the morning, only to see the dollar rebound to over Y106 in the afternoon. The euro too has recovered from a low of Y166.08 in the morning to retake the Y167 price handle. Risk aversion, prominent during the Asian session, has given way to complacency as short-term players look for yield and are snapping up USD/JPY and EUR/JPY on dips. Tonight sees the release of the Bank of Japan’s quarterly Tankan Survey, one of the few indicators out of Japan that can really influence the currency market. Thanks to a Reuters slip last Friday, when the news agency inadvertently and prematurely broadcast the quarterly Tankan report results, the market already knows the survey reveals increasing pessimism about the economy and it will help cement the view that the Bank of Japan will not be in a position to start raising interest rates any time soon. The yen is not going to be able to undertake any sustained rally unless we witness a structural breakdown in EUR/JPY. That seems unlikely in the coming days with the rate differential set to widen in favour of the euro on Thursday, so the value trade remains being long on USD/JPY, particularly on dips towards Y105. There is a chance that risk aversion levels could rocket during the week, if the ECB rate announcement has an impact of destabilising the dollar and sending oil prices soaring to even higher record levels.
USD/CAD
The loonie has had a bad day at the office Monday even though GDP was reported to have risen by 0.4% in April, following a contraction over the previous 3 months. The greenback has benefited from profit-taking at the end of the quarter which has seen commodity currencies pare some of the recent gains, and this has hurt the loonie. But it is difficult to see the USD/CAD moving outside of the recent 0.9920 to 103.20 price range anytime soon and the greenback will come under selling pressure on any gains beyond 102.50. In fact Tuesday could witness a sharp reversal in the pair’s direction, if Monday’s greenback rally is nothing more than a profit-taking exercise, which seems likely. Traders should use the opportunity to exit previously stranded USD/CAD longs, rather than use it as an invitation to start going long on the US dollar. Tuesday is a holiday in Canada and this week sees a very light calendar with Friday’s IVEY PMI the only other release of note. Oil prices will continue to be an important influencing factor for the loonie and expect USD/CAD to trade between 1.0050 and 1.0250, with the risk of a breakout to the downside, if the ECB this week helps oil prices to surge. The euro offers no value against the loonie at present values (>1.60), but it is best to wait until after Thursday, before making a decision to enter the market on this trade.
Bob B - Jun 30
Thứ Hai, 30 tháng 6, 2008
Thứ Sáu, 27 tháng 6, 2008
Bob's Currency Focus
EUR/USD
Negative sentiment against the dollar hit fever pitch again over the past few days as the Fed’s rather indifferent approach to rising inflation in their monetary policy deliberations this week led futures markets to pare back expectations for future interest rate rises in the US. The dollar has got it in the neck and oil has risen to a fresh lifetime high, close to $142 a barrel. Bernanke’s credibility has been seriously undermined by recent events with the Fed Chairman seen as talking tough but lacking the conviction to follow through on his words. US stock markets are plunging in recent weeks, primarily thanks to the rash policy decisions taken by the Fed over the course of the past 9 months. If the Fed hadn’t handed the ammunition to commodity traders to more than double the price of oil over the 9 month period of its aggressive rate easing cycle, the US industrial averages might not now be facing their worst monthly performance since the age of the Great Depression. While the Fed may be dithering on inflation, the ECB’s bold determination to signal an imminent rate hike a few weeks back, could come back to haunt the Governing Council. Since that statement from ECB President, Jean Claude Trichet, euro zone economic data has pointed to a marked slowdown, with both the manufacturing and services sectors falling into contraction in June and with consumer and business confidence plummeting across the entire euro area. Add to this the fact euro equity bourses have nosedived, a euro which is rising on ECB rate expectations rather than growth fundamentals and all in all you have a situation where one would believe it is the least opportune time for Mr Trichet to announce a rate hike. However, the ECB is likely to be true to its word and we should expect euro zone interest rates to rise 0.25% to 4.25% next Thursday.
The euro is close to the recent resistance line of 1.5840 and barring some sudden reversal, this should come under threat, possibly by as early as Monday. There are some data risks for the euro next week, but on Monday, we have the CPI flash estimate, which is likely to come in at or above June’s record 3.7% rate. If it does, it will more or less seal a rate hike from the ECB next Thursday. If we see further deterioration in the manufacturing PMI (Tuesday) and Services PMI (Thursday), both of which contracted in June according to the preliminary readings, it will put added pressure on the ECB to soften its approach on Thursday. This ECB is particularly hawkish though and it is difficult to see them swaying too much from their recent tough stance, given repeated references by members of the committee to the fact the ECB’s sole mandate is to stem inflation, not to stimulate growth, as is the dual mandate of the Fed and the Bank of England. Traders need to be on the lookout for comments on currencies next week, because of the dollar’s fragile market status and runaway oil prices. Central Bank intervention is most unlikely while the Fed and the ECB are adopting opposing strategies in their respective battles with rising inflation and declining growth. The euro will be vulnerable to a sell-off on EUR/JPY if risk aversion levels remain elevated, while a ‘done and dusted’ policy statement from the ECB would also undermine the single currency, given the extent of gains achieved on the back of a very tough ECB stance. It is dangerous to buy the euro on levels close to 1.58, given all the risks, even if there is a chance of a short-term rally higher. Weak economic data out of the euro zone, some of it very significant, has failed to hold the euro back over the past 10 days, but eventually it will come home to roost, particularly if followed by further soft data next week.
GBP/USD
Sterling has got a timely boost over the past week, just at time when it was being written off. The pound has benefited from a broader collapse of the dollar this week, as well as uncertainty about the euro economy, which has helped fuel a flow of funds into the UK currency. While GDP for quarter 1 was revised down to 0.3% from 0.4%, the current account deficit narrowed sharply during the same period, surprising analysts. The principal reason for sterling’s recovery however has been the Bank of England’s shift in emphasis from growth to inflation, which has markets anticipating the next move by the MPC may be to hike rates. This has helped to attract a new wave of investors that are seeking higher yields, with the 5%-earning pound a favourite once again, if just for the short-term. Ongoing stresses in the housing sector and concerns over activity in the manufacturing and services sectors is likely to prevent frantic buying, although cable now has every chance of hitting the 2 dollar line, ahead of the big-hitting economic releases from Tuesday of next week. It is almost certain UK interest rates will be held at 5% when the MPC delivers its latest policy announcement on Thursday, and the pound’s immediate fate will depend on the fate of the dollar and what the ECB does next week. As long as cable remains above 1.98, an upside bias remains, for now, but that could revert very quickly and cable could find itself back in the middle of the recent trading range (1.94 – 1.98) before the Bank of England even delivers its statement next week.
USD/JPY
The yen broke down several price barriers over the past 24 hours as the Japanese currency has been a principal benefactor of the sudden rise in risk aversion and the market attack on the US dollar. The USD/JPY pair has fallen as low as 106.10, down from the 108.20 it was trading at early Thursday. With the Dow plunging 3% on Thursday evening and oil rocketing to record prices, traders are beginning to offload short yen positions. If the unease continues, the yen could gain appreciably, given the exaggerated price levels which still exist on the EUR/JPY and AUD/JPY carry pairs. News out overnight reveals inflation rose the highest in 10 years in May and while an annualised rate of 1.5% is unlikely to frighten too many traders, it does leave options open for the bank of Japan, if the Bank wished to hike interest rates later in the year. Trading on the yen will continue to be volatile and any sign of a return to stability in stock markets will see the yen quickly fall out of favour. It is dangerous to sell down EUR/JPY ahead of the ECB meeting next Thursday, while there may be some value in buying USD/JPY on dips, when US stocks show evidence of a recovery. The wise move may be to wait until the current downside probe has run its course, however long that might take.
USD/CAD
The loonie has hit fresh highs against the dollar on Friday, taking advantage of a weak dollar and spiralling out of control oil prices. All of the commodity currencies have performed remarkably well, despite the rise in risk aversion over the past few days, but there is an ever-growing opinion that the oil price spike is primarily a bubble and were it to prick at any time, the loonie would have most to lose of all the major commodity currencies. We could see the Canadian currency try to take out the parity line later today, especially as the USD/CAD pair has looked decidedly bearish over the past 2 weeks. Oil prices will continue to form an important support for the loonie, even in the wake of soft economic data. A break through parity could see the pair fall to take on support at 0.9970, where a further break could trigger a sharp retreat to 0.9920. The dollar needs to reclaim the 1.01 line quickly and push the pair past Thursday’s high of 1.0140, if it is to regain any sort of upside momentum.
Bob B - Jun 27
Negative sentiment against the dollar hit fever pitch again over the past few days as the Fed’s rather indifferent approach to rising inflation in their monetary policy deliberations this week led futures markets to pare back expectations for future interest rate rises in the US. The dollar has got it in the neck and oil has risen to a fresh lifetime high, close to $142 a barrel. Bernanke’s credibility has been seriously undermined by recent events with the Fed Chairman seen as talking tough but lacking the conviction to follow through on his words. US stock markets are plunging in recent weeks, primarily thanks to the rash policy decisions taken by the Fed over the course of the past 9 months. If the Fed hadn’t handed the ammunition to commodity traders to more than double the price of oil over the 9 month period of its aggressive rate easing cycle, the US industrial averages might not now be facing their worst monthly performance since the age of the Great Depression. While the Fed may be dithering on inflation, the ECB’s bold determination to signal an imminent rate hike a few weeks back, could come back to haunt the Governing Council. Since that statement from ECB President, Jean Claude Trichet, euro zone economic data has pointed to a marked slowdown, with both the manufacturing and services sectors falling into contraction in June and with consumer and business confidence plummeting across the entire euro area. Add to this the fact euro equity bourses have nosedived, a euro which is rising on ECB rate expectations rather than growth fundamentals and all in all you have a situation where one would believe it is the least opportune time for Mr Trichet to announce a rate hike. However, the ECB is likely to be true to its word and we should expect euro zone interest rates to rise 0.25% to 4.25% next Thursday.
The euro is close to the recent resistance line of 1.5840 and barring some sudden reversal, this should come under threat, possibly by as early as Monday. There are some data risks for the euro next week, but on Monday, we have the CPI flash estimate, which is likely to come in at or above June’s record 3.7% rate. If it does, it will more or less seal a rate hike from the ECB next Thursday. If we see further deterioration in the manufacturing PMI (Tuesday) and Services PMI (Thursday), both of which contracted in June according to the preliminary readings, it will put added pressure on the ECB to soften its approach on Thursday. This ECB is particularly hawkish though and it is difficult to see them swaying too much from their recent tough stance, given repeated references by members of the committee to the fact the ECB’s sole mandate is to stem inflation, not to stimulate growth, as is the dual mandate of the Fed and the Bank of England. Traders need to be on the lookout for comments on currencies next week, because of the dollar’s fragile market status and runaway oil prices. Central Bank intervention is most unlikely while the Fed and the ECB are adopting opposing strategies in their respective battles with rising inflation and declining growth. The euro will be vulnerable to a sell-off on EUR/JPY if risk aversion levels remain elevated, while a ‘done and dusted’ policy statement from the ECB would also undermine the single currency, given the extent of gains achieved on the back of a very tough ECB stance. It is dangerous to buy the euro on levels close to 1.58, given all the risks, even if there is a chance of a short-term rally higher. Weak economic data out of the euro zone, some of it very significant, has failed to hold the euro back over the past 10 days, but eventually it will come home to roost, particularly if followed by further soft data next week.
GBP/USD
Sterling has got a timely boost over the past week, just at time when it was being written off. The pound has benefited from a broader collapse of the dollar this week, as well as uncertainty about the euro economy, which has helped fuel a flow of funds into the UK currency. While GDP for quarter 1 was revised down to 0.3% from 0.4%, the current account deficit narrowed sharply during the same period, surprising analysts. The principal reason for sterling’s recovery however has been the Bank of England’s shift in emphasis from growth to inflation, which has markets anticipating the next move by the MPC may be to hike rates. This has helped to attract a new wave of investors that are seeking higher yields, with the 5%-earning pound a favourite once again, if just for the short-term. Ongoing stresses in the housing sector and concerns over activity in the manufacturing and services sectors is likely to prevent frantic buying, although cable now has every chance of hitting the 2 dollar line, ahead of the big-hitting economic releases from Tuesday of next week. It is almost certain UK interest rates will be held at 5% when the MPC delivers its latest policy announcement on Thursday, and the pound’s immediate fate will depend on the fate of the dollar and what the ECB does next week. As long as cable remains above 1.98, an upside bias remains, for now, but that could revert very quickly and cable could find itself back in the middle of the recent trading range (1.94 – 1.98) before the Bank of England even delivers its statement next week.
USD/JPY
The yen broke down several price barriers over the past 24 hours as the Japanese currency has been a principal benefactor of the sudden rise in risk aversion and the market attack on the US dollar. The USD/JPY pair has fallen as low as 106.10, down from the 108.20 it was trading at early Thursday. With the Dow plunging 3% on Thursday evening and oil rocketing to record prices, traders are beginning to offload short yen positions. If the unease continues, the yen could gain appreciably, given the exaggerated price levels which still exist on the EUR/JPY and AUD/JPY carry pairs. News out overnight reveals inflation rose the highest in 10 years in May and while an annualised rate of 1.5% is unlikely to frighten too many traders, it does leave options open for the bank of Japan, if the Bank wished to hike interest rates later in the year. Trading on the yen will continue to be volatile and any sign of a return to stability in stock markets will see the yen quickly fall out of favour. It is dangerous to sell down EUR/JPY ahead of the ECB meeting next Thursday, while there may be some value in buying USD/JPY on dips, when US stocks show evidence of a recovery. The wise move may be to wait until the current downside probe has run its course, however long that might take.
USD/CAD
The loonie has hit fresh highs against the dollar on Friday, taking advantage of a weak dollar and spiralling out of control oil prices. All of the commodity currencies have performed remarkably well, despite the rise in risk aversion over the past few days, but there is an ever-growing opinion that the oil price spike is primarily a bubble and were it to prick at any time, the loonie would have most to lose of all the major commodity currencies. We could see the Canadian currency try to take out the parity line later today, especially as the USD/CAD pair has looked decidedly bearish over the past 2 weeks. Oil prices will continue to form an important support for the loonie, even in the wake of soft economic data. A break through parity could see the pair fall to take on support at 0.9970, where a further break could trigger a sharp retreat to 0.9920. The dollar needs to reclaim the 1.01 line quickly and push the pair past Thursday’s high of 1.0140, if it is to regain any sort of upside momentum.
Bob B - Jun 27
Thứ Hai, 23 tháng 6, 2008
Bob's Currency Focus - 16:00 GMT
EUR/USD
The euro on Monday gave back all of its gains from Friday following a poor run of data releases. The timeliness of this data could not be more significant, given the ECB is expected to a deliver a 0.25% rate hike when it deliberates next week. Germany’s monthly Ifo business survey, an important business sentiment measure for the euro area’s largest economy, fell more than expected in June, the index declining to 101.3 from 103.5, against a forecast decline to 102.5. A more damaging release came in the form of June’s preliminary PMI readings for the euro area’s manufacturing and services sectors, both of which recorded a contraction (<50) and the combined composite PMI index is now seen at 49.5, the lowest reading in 5 years. Some pressure may now be put on the ECB to suspend next week’s signalled rate hike, although the ECB is likely to stand firm against opposition and raise rates by 0.25%, if only to protect its credibility. Concerns are beginning to grow about the health of the euro zone economy and the next 10 days could prove to be a defining period for the single currency. If the Fed acts tough this week (policy statement due out on Wednesday), i.e. the FOMC points to future rate hikes, followed next week by a ‘stand pat’ ECB or an ECB which states the July rate hike is a ‘once off,’ then the euro could capitulate and we could be at 1.50 within the next 2 weeks. For now, the dollar must break below 1.5460 if it is to have any chance of giving euro supporters a bloody nose in the short-term. A break below 1.5460 should pave the way for a retreat to 1.5350 ahead of the Fed on Wednesday evening. Markets need to be on their guard for comments from members of the ECB Governing Council in the next few days, because any softening in tone ahead of next week’s key rate setting meeting will badly hurt the euro. Expect direction to gravitate more towards the lower end of 1.53 to 1.58 trading range over the coming days, with euro supporters needing a more dovish sounding Fed to boost the single currency. Between now and then, sell on any rallies back towards 1.56, with downside price targets of 1.5480, 1.5410 and 1.5360. A tough policy stance on inflation from the Fed could force the pair down to test the near 4-month low at 1.5287.
GBP/USD
Cable has proven itself to be the most lucrative of the major trading pairs over the past few months, with the pair essentially bobbing between 1.94 and 1.98 on an ongoing basis. The pound burst from its lows near 1.94 a week ago to almost hit 1.98 on Friday, thanks almost exclusively to a stunning set of retail sales figures for May, released last Thursday. As to whether one can believe the numbers is another thing, particularly when it coincides with a slowdown in money supply and a further deterioration in UK house prices. The market has gone off the idea of imminent rate cuts from the Bank of England, with some analysts even forecasting a rate hike in the near-term, and this is protecting the pound, for now. Sterling has given back almost 2 cents against the dollar on Monday as the US currency picked up gains across the board. UK data is on the light side this week, with Thursday’s Nationwide House prices likely to be the only real market moving release its side of the Atlantic. The pound’s fate over the course of the week will be determined by the markets reaction to US data and to the Fed’s statement on Wednesday next. US data has been soft of late and there is no reason to suspect anything different this week, particularly from Tuesday’s Consumer Confidence index and Wednesday’s Durable Orders numbers. Any sustained falloff in oil prices will prove to be negative for the pound as it could temporarily erode global inflation, fears which are preventing the Bank of England from cutting interest rates. Key support levels to watch are 1.9460, 1.94 and 1.9335. Anything that leads to a decline to below 1.9335 will mean a major rethink for the pair’s trading range. Barring a very tough Fed statement, cable should be contained within recent trading ranges, but the preferred trade is to sell down on any rallies above 1.9750. Target downside prices are 1.96, 1.9550, 1.9480 and 1.9410.
USD/JPY
The yen has failed to make inroads today and it has ceded Friday’s gains to the dollar. It has strengthened modestly against the euro, but only because the euro is coming off the back of some very weak economic data on Monday. With inflation the key influencing factor, yield outlook is the principal driver for currency markets right now and with no rate hikes in Japan probable this year, the low-yielding Japanese currency remains a favourite sell. This is clearly demonstrated by the fact the yen has fallen rather sharply against every other major currency in the past month, despite a significant unravelling in global stock indices. The currency is clearly undervalued, particularly against the euro, but it will struggle to make any headway against the majors in the short-term, unless we see a dramatic unwinding in the EUR/JPY cross. Any hint of an imminent rate hike from the Fed, when it deliberates this week, is likely to push the dollar higher against the yen and could open the way for a move to Y110, possibly even by the end of this week, particularly if US economic data is more robust than expected. The safest trade involving the yen probably remains a ‘bid’ on USD/JPY, when the pair dips towards Y107 or below. The yen’s exchange rate will continue to be dictated by interest rate expectations elsewhere, rather than by domestic economic data out of Japan.
USD/CAD
The loonie has essentially been stuck within a 101 to 102 trading range for the past week, with the dollar once again failing to make any real impact while momentum was on its side. The loonie is being protected by soaring oil prices and last Friday’s better than expected retail sales numbers from Canada reveals the economy has yet to capsize under the weight of a strong domestic currency. The loonie/greenback pair is lacking direction right now, though it has taken on more of a bearish tone in recent days. But the risks for USD/CAD probably lie to the upside this week, given the possibility of some hawkish rhetoric from the Fed, the risk of a retreat in oil prices and a light economic calendar in Canada. Weak economic data out of the US over the next few days could push the pair either way, as soft US economic data is not generally a positive for the loonie, because of the importance of the US economy to Canada’s huge exporting sector. There is evidence over the last week that petro traders are back on the loonie and the currency’s wider fate this week should be dictated by oil prices. 1.01 has held in recent days on USD/CAD and any price close to this level does offer a decent entry price for buyers, given the upside risks coming later in the week. Traders should be wary and use a short stop as a break below 1.01 could trigger a rapid return to the parity line. Longer run positional traders should just hold out on their long USD/CAD positions and wait for a return to 103.20 at the very least.
Bob B - Jun 23
The euro on Monday gave back all of its gains from Friday following a poor run of data releases. The timeliness of this data could not be more significant, given the ECB is expected to a deliver a 0.25% rate hike when it deliberates next week. Germany’s monthly Ifo business survey, an important business sentiment measure for the euro area’s largest economy, fell more than expected in June, the index declining to 101.3 from 103.5, against a forecast decline to 102.5. A more damaging release came in the form of June’s preliminary PMI readings for the euro area’s manufacturing and services sectors, both of which recorded a contraction (<50) and the combined composite PMI index is now seen at 49.5, the lowest reading in 5 years. Some pressure may now be put on the ECB to suspend next week’s signalled rate hike, although the ECB is likely to stand firm against opposition and raise rates by 0.25%, if only to protect its credibility. Concerns are beginning to grow about the health of the euro zone economy and the next 10 days could prove to be a defining period for the single currency. If the Fed acts tough this week (policy statement due out on Wednesday), i.e. the FOMC points to future rate hikes, followed next week by a ‘stand pat’ ECB or an ECB which states the July rate hike is a ‘once off,’ then the euro could capitulate and we could be at 1.50 within the next 2 weeks. For now, the dollar must break below 1.5460 if it is to have any chance of giving euro supporters a bloody nose in the short-term. A break below 1.5460 should pave the way for a retreat to 1.5350 ahead of the Fed on Wednesday evening. Markets need to be on their guard for comments from members of the ECB Governing Council in the next few days, because any softening in tone ahead of next week’s key rate setting meeting will badly hurt the euro. Expect direction to gravitate more towards the lower end of 1.53 to 1.58 trading range over the coming days, with euro supporters needing a more dovish sounding Fed to boost the single currency. Between now and then, sell on any rallies back towards 1.56, with downside price targets of 1.5480, 1.5410 and 1.5360. A tough policy stance on inflation from the Fed could force the pair down to test the near 4-month low at 1.5287.
GBP/USD
Cable has proven itself to be the most lucrative of the major trading pairs over the past few months, with the pair essentially bobbing between 1.94 and 1.98 on an ongoing basis. The pound burst from its lows near 1.94 a week ago to almost hit 1.98 on Friday, thanks almost exclusively to a stunning set of retail sales figures for May, released last Thursday. As to whether one can believe the numbers is another thing, particularly when it coincides with a slowdown in money supply and a further deterioration in UK house prices. The market has gone off the idea of imminent rate cuts from the Bank of England, with some analysts even forecasting a rate hike in the near-term, and this is protecting the pound, for now. Sterling has given back almost 2 cents against the dollar on Monday as the US currency picked up gains across the board. UK data is on the light side this week, with Thursday’s Nationwide House prices likely to be the only real market moving release its side of the Atlantic. The pound’s fate over the course of the week will be determined by the markets reaction to US data and to the Fed’s statement on Wednesday next. US data has been soft of late and there is no reason to suspect anything different this week, particularly from Tuesday’s Consumer Confidence index and Wednesday’s Durable Orders numbers. Any sustained falloff in oil prices will prove to be negative for the pound as it could temporarily erode global inflation, fears which are preventing the Bank of England from cutting interest rates. Key support levels to watch are 1.9460, 1.94 and 1.9335. Anything that leads to a decline to below 1.9335 will mean a major rethink for the pair’s trading range. Barring a very tough Fed statement, cable should be contained within recent trading ranges, but the preferred trade is to sell down on any rallies above 1.9750. Target downside prices are 1.96, 1.9550, 1.9480 and 1.9410.
USD/JPY
The yen has failed to make inroads today and it has ceded Friday’s gains to the dollar. It has strengthened modestly against the euro, but only because the euro is coming off the back of some very weak economic data on Monday. With inflation the key influencing factor, yield outlook is the principal driver for currency markets right now and with no rate hikes in Japan probable this year, the low-yielding Japanese currency remains a favourite sell. This is clearly demonstrated by the fact the yen has fallen rather sharply against every other major currency in the past month, despite a significant unravelling in global stock indices. The currency is clearly undervalued, particularly against the euro, but it will struggle to make any headway against the majors in the short-term, unless we see a dramatic unwinding in the EUR/JPY cross. Any hint of an imminent rate hike from the Fed, when it deliberates this week, is likely to push the dollar higher against the yen and could open the way for a move to Y110, possibly even by the end of this week, particularly if US economic data is more robust than expected. The safest trade involving the yen probably remains a ‘bid’ on USD/JPY, when the pair dips towards Y107 or below. The yen’s exchange rate will continue to be dictated by interest rate expectations elsewhere, rather than by domestic economic data out of Japan.
USD/CAD
The loonie has essentially been stuck within a 101 to 102 trading range for the past week, with the dollar once again failing to make any real impact while momentum was on its side. The loonie is being protected by soaring oil prices and last Friday’s better than expected retail sales numbers from Canada reveals the economy has yet to capsize under the weight of a strong domestic currency. The loonie/greenback pair is lacking direction right now, though it has taken on more of a bearish tone in recent days. But the risks for USD/CAD probably lie to the upside this week, given the possibility of some hawkish rhetoric from the Fed, the risk of a retreat in oil prices and a light economic calendar in Canada. Weak economic data out of the US over the next few days could push the pair either way, as soft US economic data is not generally a positive for the loonie, because of the importance of the US economy to Canada’s huge exporting sector. There is evidence over the last week that petro traders are back on the loonie and the currency’s wider fate this week should be dictated by oil prices. 1.01 has held in recent days on USD/CAD and any price close to this level does offer a decent entry price for buyers, given the upside risks coming later in the week. Traders should be wary and use a short stop as a break below 1.01 could trigger a rapid return to the parity line. Longer run positional traders should just hold out on their long USD/CAD positions and wait for a return to 103.20 at the very least.
Bob B - Jun 23
Thứ Tư, 11 tháng 6, 2008
Bob's Currency Focus
EUR/USD
The dollar rallied to its biggest 2 day gain over the euro since 2005, thanks to dollar defensive comments on Monday from Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke. Paulson stated the US Administration had not ruled out intervention in currency markets to help halt the dollar’s slide, while Fed Chairman Bernanke, speaking in Boston on Monday night, upped his hawkish tone on inflation, leading futures markets to price in higher US interest rates for later this year. US economic data has yet to point to any justification for a rise in interest rates and the timing of Bernanke’s comments may simply be an attempt to halt the surge in oil prices, by way of encouraging a stronger US dollar. Thus far markets have taken him at his word, but we saw a similar move on Tuesday of last week after Bernanke stated the Fed was ‘attentive’ to the dollar, only for the Chairman to be upstaged by ECB President Jean Claude Trichet on Thursday, who dropped a bombshell about an imminent rise in euro area interest rates. Markets will be looking ever closer at economic data for an indication of which way the market should lean and tomorrow’s retail sales out of the US will be an important barometer, but of more importance will be Friday’s consumer price inflation numbers. Oil prices too need to be watched closely and if commodity markets push the price of crude higher, it will undermine dollar confidence and potentially lead to another sudden sharp decline in the US currency, almost without warning. US crude inventory data released on Wednesday afternoon will have a significant impact for the direction of oil prices for the remainder of this week. Range trading between 1.54 and 1.5550 is likely in the lead up to Thursday’s US retail sales data and if economic data, particularly the CPI numbers on Friday, favours the US currency, we could witness a test of key support levels below 1.53 before the end of the week. If oil prices soar, traders need to be on guard for possible market intervention (vocal at first), if EUR/USD returns back above 1.58. Aggressive dollar selling is dangerous in this environment, particularly with a G8 summit this coming weekend.
GBP/USD
Cable took something of a battering on Tuesday, sterling losing a full 2 cents, as the UK currency retreated against a broadly stronger dollar. UK data has remained soft and the medium to longer term outlook for sterling is bleak, especially against the dollar. Sterling has held its own against the euro this week, but this is due to the fact the euro was sold off more aggressively against the US currency than sterling, rather than any shift in fundamentals. In fact the fundamental outlook for sterling against the euro has worsened for the UK currency, since last week’s ECB announcement of a pending rate hike in the euro area. Today’s labour data out of the UK revealed the claimant count rose for the 4th consecutive month in May and the unemployment rate ticked up 0.1% to 5.3%. Of more immediate significance is the GDP number for the 3 months to the end of May from the NIESR think tank group, which reveals a sharp slowdown in growth in the UK economy over the past month - GDP slowed to 0.2% from the 0.4% reported in the 3 months to the end of April. Sterling’s only real form of protection right now is high commodity costs, something which is keeping UK inflation rates elevated and preventing the Bank of England from cutting interest rates. But any sharp falloff in commodity prices will probably see sterling fall sharply against the dollar, as markets start to raise bets on pending rate cuts in the UK. Cable offers good sell down value on any prices over 1.9750 against the dollar, with the prospect of a challenge of the year’s lows around 1.9330 over the next week, while there is every likelihood the euro will return to over 80 pence sterling, although this is a more dangerous trade, given the potential for growing weakness in the euro economy.
USD/JPY
Complacency has returned in major fashion as witnessed by a virtual collapse of the Japanese yen in recent weeks, at a time when equity markets have been slumping. Although Japan’s economy grew faster than any of the other G7 economies in the first quarter, the low-yielding yen has found itself out of favour as Central Banks notch up their hawkish rhetoric and threaten higher interest rates. The yen has fallen to a year’s low against the euro and to a 14-week low against the dollar with traders anxious to place bets on a widening of interest rate differentials on USD/JPY and EUR/JPY. A weakening yen is unlikely to deter Japanese authorities and it is most unlikely the Bank of Japan will follow the Fed and the ECB and threaten higher rates in the world’s second largest economy. The Bank of Japan deliberate on monetary policy this Thursday and while rates are certain to remain on hold, if the Bank’s Governor delivers a passive statement on the rate outlook, the yen will likely come under further selling pressure. However traders need to be very attentive to what is happening on equity markets and given the extent to which the yen has been sold off recently, there is every chance of a sharp correction higher if credit woes intensify. The G8 meeting this coming weekend could also destabilise currency markets, but it is certain the yen will not come in for any direct comment. If anything is said at the G8, it will probably be a call for a stronger dollar and this should push USD/JPY even higher in the short term. The yen is out of favour right now, but because of the danger of a reversal, it may be wise to avoid trading it. Buying on sharp dips on USD/JPY probably offers the best value trade currently, given the calls for a stronger dollar.
USD/CAD
The decision to stand pat on rates surprised markets, although the switch to a more hawkish line by many of the world’s central banks over the past week meant holding rates steady was a safer play for Bank of Canada on Tuesday. The loonie got a timely boost and prevented the dollar from rallying towards the year’s highs at 103.70, while the Canadian dollar also gained a tidy 2 cents against the euro. It is difficult to see the loonie extending its gains much further, particularly against the greenback, because the rate outlook has shifted in the US currency’s favour following Bernanke’s comments earlier in the week. Commodity currencies have taken on a softer tone this week, with the Aussie and New Zealand dollars in retreat and falling below key support levels, so the loonie’s reprieve could be short-lived. Oil prices will remain a dominant factor in influencing direction and elevated prices will offer important protection, although any collapse in the price of crude will encourage a sell-off in the loonie, given the weak economic fundamentals emanating from Canada in recent weeks. We should range trade between 1.0120 and 1.0320 for now, but the risks are for a breakout to the upside, given the broader and firmer tone earned by the greenback in recent days. The loonie should be able to trade below 1.60 against the euro, with the possibility of a pullback to 1.56 before the end of the week. The value trade is to buy USD/CAD on dips towards 1.0130, with target prices of 1.0210, 1.0240 and 1.03.
Bob B - Jun 11
The dollar rallied to its biggest 2 day gain over the euro since 2005, thanks to dollar defensive comments on Monday from Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke. Paulson stated the US Administration had not ruled out intervention in currency markets to help halt the dollar’s slide, while Fed Chairman Bernanke, speaking in Boston on Monday night, upped his hawkish tone on inflation, leading futures markets to price in higher US interest rates for later this year. US economic data has yet to point to any justification for a rise in interest rates and the timing of Bernanke’s comments may simply be an attempt to halt the surge in oil prices, by way of encouraging a stronger US dollar. Thus far markets have taken him at his word, but we saw a similar move on Tuesday of last week after Bernanke stated the Fed was ‘attentive’ to the dollar, only for the Chairman to be upstaged by ECB President Jean Claude Trichet on Thursday, who dropped a bombshell about an imminent rise in euro area interest rates. Markets will be looking ever closer at economic data for an indication of which way the market should lean and tomorrow’s retail sales out of the US will be an important barometer, but of more importance will be Friday’s consumer price inflation numbers. Oil prices too need to be watched closely and if commodity markets push the price of crude higher, it will undermine dollar confidence and potentially lead to another sudden sharp decline in the US currency, almost without warning. US crude inventory data released on Wednesday afternoon will have a significant impact for the direction of oil prices for the remainder of this week. Range trading between 1.54 and 1.5550 is likely in the lead up to Thursday’s US retail sales data and if economic data, particularly the CPI numbers on Friday, favours the US currency, we could witness a test of key support levels below 1.53 before the end of the week. If oil prices soar, traders need to be on guard for possible market intervention (vocal at first), if EUR/USD returns back above 1.58. Aggressive dollar selling is dangerous in this environment, particularly with a G8 summit this coming weekend.
GBP/USD
Cable took something of a battering on Tuesday, sterling losing a full 2 cents, as the UK currency retreated against a broadly stronger dollar. UK data has remained soft and the medium to longer term outlook for sterling is bleak, especially against the dollar. Sterling has held its own against the euro this week, but this is due to the fact the euro was sold off more aggressively against the US currency than sterling, rather than any shift in fundamentals. In fact the fundamental outlook for sterling against the euro has worsened for the UK currency, since last week’s ECB announcement of a pending rate hike in the euro area. Today’s labour data out of the UK revealed the claimant count rose for the 4th consecutive month in May and the unemployment rate ticked up 0.1% to 5.3%. Of more immediate significance is the GDP number for the 3 months to the end of May from the NIESR think tank group, which reveals a sharp slowdown in growth in the UK economy over the past month - GDP slowed to 0.2% from the 0.4% reported in the 3 months to the end of April. Sterling’s only real form of protection right now is high commodity costs, something which is keeping UK inflation rates elevated and preventing the Bank of England from cutting interest rates. But any sharp falloff in commodity prices will probably see sterling fall sharply against the dollar, as markets start to raise bets on pending rate cuts in the UK. Cable offers good sell down value on any prices over 1.9750 against the dollar, with the prospect of a challenge of the year’s lows around 1.9330 over the next week, while there is every likelihood the euro will return to over 80 pence sterling, although this is a more dangerous trade, given the potential for growing weakness in the euro economy.
USD/JPY
Complacency has returned in major fashion as witnessed by a virtual collapse of the Japanese yen in recent weeks, at a time when equity markets have been slumping. Although Japan’s economy grew faster than any of the other G7 economies in the first quarter, the low-yielding yen has found itself out of favour as Central Banks notch up their hawkish rhetoric and threaten higher interest rates. The yen has fallen to a year’s low against the euro and to a 14-week low against the dollar with traders anxious to place bets on a widening of interest rate differentials on USD/JPY and EUR/JPY. A weakening yen is unlikely to deter Japanese authorities and it is most unlikely the Bank of Japan will follow the Fed and the ECB and threaten higher rates in the world’s second largest economy. The Bank of Japan deliberate on monetary policy this Thursday and while rates are certain to remain on hold, if the Bank’s Governor delivers a passive statement on the rate outlook, the yen will likely come under further selling pressure. However traders need to be very attentive to what is happening on equity markets and given the extent to which the yen has been sold off recently, there is every chance of a sharp correction higher if credit woes intensify. The G8 meeting this coming weekend could also destabilise currency markets, but it is certain the yen will not come in for any direct comment. If anything is said at the G8, it will probably be a call for a stronger dollar and this should push USD/JPY even higher in the short term. The yen is out of favour right now, but because of the danger of a reversal, it may be wise to avoid trading it. Buying on sharp dips on USD/JPY probably offers the best value trade currently, given the calls for a stronger dollar.
USD/CAD
The decision to stand pat on rates surprised markets, although the switch to a more hawkish line by many of the world’s central banks over the past week meant holding rates steady was a safer play for Bank of Canada on Tuesday. The loonie got a timely boost and prevented the dollar from rallying towards the year’s highs at 103.70, while the Canadian dollar also gained a tidy 2 cents against the euro. It is difficult to see the loonie extending its gains much further, particularly against the greenback, because the rate outlook has shifted in the US currency’s favour following Bernanke’s comments earlier in the week. Commodity currencies have taken on a softer tone this week, with the Aussie and New Zealand dollars in retreat and falling below key support levels, so the loonie’s reprieve could be short-lived. Oil prices will remain a dominant factor in influencing direction and elevated prices will offer important protection, although any collapse in the price of crude will encourage a sell-off in the loonie, given the weak economic fundamentals emanating from Canada in recent weeks. We should range trade between 1.0120 and 1.0320 for now, but the risks are for a breakout to the upside, given the broader and firmer tone earned by the greenback in recent days. The loonie should be able to trade below 1.60 against the euro, with the possibility of a pullback to 1.56 before the end of the week. The value trade is to buy USD/CAD on dips towards 1.0130, with target prices of 1.0210, 1.0240 and 1.03.
Bob B - Jun 11
Thứ Hai, 9 tháng 6, 2008
Woeful error of judgment questions credibility of the ECB
On June 5th last, Jean Claude Trichet shook the world’s financial markets when he made what now looks like being his bravest statement since becoming ECB President, when he boldly signalled to the world’s media the ECB may raise interest rates when they meet again in July. To be fair to Trichet his statement was merely echoing the sentiment of the ECB’s Governing Council which had just deliberated on monetary policy for the 15-nation euro economic block. Markets were taken completely by surprise by the remarks as most Central Bank analysts had expected the next move in ECB interest rates to be down, albeit much later in the year. While inflation is running at a 16-year high in the euro zone, the recent surge in consumer price inflation is not because of excess consumption or demand from a slowing economy and an increasing cash-strapped euro area population, but rather because of a spike in global oil and commodity prices. These commodities are priced in dollars and only a rebound in the US dollar or some major global demand destruction is going to curb commodity price inflation. As to how the ECB believed a direct threat to raise euro zone interest rates exactly at the time the US Dollar was attempting to steer a tentative path to recovery is a mystery, but the record jump in crude oil prices witnessed in the 31 hours following Mr Trichet’s bombshell, would suggest the ECB’s strategy has backfired rather spectacularly already. Oil prices jumped a staggering $16.50 during this 31-hour period, or 13.5%, with oil futures posting lifetime gains on both Thursday and Friday’s sessions. The euro jumped 4 cents against the dollar over the same period and rose to its highest level against the yen in a year and this on a week when eurozone economic data added to growing evidence of a sharpening downturn in the euro area economy.
Spain’s Prime Minister, this past weekend, was correct to question the wisdom of Mr Trichet’s remarks and he essentially blamed the ECB President for the spike in oil prices seen at the end of last week. The nature in which the ECB ignored and steamrolled comments made by Fed Chairman Ben Bernanke earlier in the week, about the benefits of a stronger US dollar, does not augur well for a coordinated effort by the World’s Central Banks to solve the global inflation problem, a problem which is fast becoming a crisis. The ECB’s glaring lack of insight begs one to question the relevance and comprehensiveness of the data models used by ECB staff in making projections used in advising the Governing Council in its decision making process. A rate rise now by the ECB means higher inflation for the euro area, given trends and the driving factors behind the recent rally in commodity prices and this should have been known in advance of last week’s ECB meeting. As evidenced last Thursday and Friday, monetary policy which translates into a weaker dollar in the current climate means a disproportionate increase in fuel and food commodity prices for everyone, including all euro zone citizens. Why did the ECB Governing Council ignore this in its deliberation? The second round inflation effects that so concern the ECB is certain to become a self-fulfilling prophecy, if first round inflation is merely being fuelled by calamitous ECB monetary policy. This policy could trigger a vicious cycle that sees the ECB having to hike again and ultimately not only send the euro economy into a damaging recession, but it could lead to a major divergence in performance of the constituent states of the euro area. A divergence in performance will lead to greater political sniping and undermine not just the ECB’s credibility, but its very independence.
The ECB may feel it will lose face if it now fails to follow through with a July rate hike, having quite clearly signalled its new-found ‘heightened alertness’ last week. However, in light of the rapid evidence we have seen of how commodity traders have shown their willingness to translate this ‘heightened alertness’ into ‘heightened price inflation’, it means if the ECB is to follow through with this ill-timed threat, it may well constitute the most serious ‘dearth of alertness’ ever displayed by an ECB Governing Council, one for which all euro area inhabitants could pay very dearly, for some considerable time to come. Many would ague they are already paying too much.
Ted B
Spain’s Prime Minister, this past weekend, was correct to question the wisdom of Mr Trichet’s remarks and he essentially blamed the ECB President for the spike in oil prices seen at the end of last week. The nature in which the ECB ignored and steamrolled comments made by Fed Chairman Ben Bernanke earlier in the week, about the benefits of a stronger US dollar, does not augur well for a coordinated effort by the World’s Central Banks to solve the global inflation problem, a problem which is fast becoming a crisis. The ECB’s glaring lack of insight begs one to question the relevance and comprehensiveness of the data models used by ECB staff in making projections used in advising the Governing Council in its decision making process. A rate rise now by the ECB means higher inflation for the euro area, given trends and the driving factors behind the recent rally in commodity prices and this should have been known in advance of last week’s ECB meeting. As evidenced last Thursday and Friday, monetary policy which translates into a weaker dollar in the current climate means a disproportionate increase in fuel and food commodity prices for everyone, including all euro zone citizens. Why did the ECB Governing Council ignore this in its deliberation? The second round inflation effects that so concern the ECB is certain to become a self-fulfilling prophecy, if first round inflation is merely being fuelled by calamitous ECB monetary policy. This policy could trigger a vicious cycle that sees the ECB having to hike again and ultimately not only send the euro economy into a damaging recession, but it could lead to a major divergence in performance of the constituent states of the euro area. A divergence in performance will lead to greater political sniping and undermine not just the ECB’s credibility, but its very independence.
The ECB may feel it will lose face if it now fails to follow through with a July rate hike, having quite clearly signalled its new-found ‘heightened alertness’ last week. However, in light of the rapid evidence we have seen of how commodity traders have shown their willingness to translate this ‘heightened alertness’ into ‘heightened price inflation’, it means if the ECB is to follow through with this ill-timed threat, it may well constitute the most serious ‘dearth of alertness’ ever displayed by an ECB Governing Council, one for which all euro area inhabitants could pay very dearly, for some considerable time to come. Many would ague they are already paying too much.
Ted B
Thứ Tư, 4 tháng 6, 2008
What did Bernanke mean by ‘attentive’ to the dollar?
Ben Bernanke’s unusual comments on Tuesday when linking a weakening dollar with inflation threw financial markets into a spin and sparked a mini exodus of dollar short position from the currency markets. The euro fell by 2 cents against the greenback in the matter of a couple of hours. Currency markets have since stabilised and it remains to be seen whether Bernanke’s verbal intervention will help fuel a more sustained dollar rally. It is highly unusual for a Fed Chairman to make a direct reference to the dollar’s valuation as it is generally the responsibility of the Treasury Department to talk about Exchange rates. Heretofore Treasury Secretary Hank Paulson’s limp statements about a ‘strong dollar’ being Administration policy have fallen on deaf ears within financial markets. Most traders believe the US Administration has taken on a role of indifferent to the dollar’s demise, believing a weak dollar would stimulate the US economy, through making the country’s exports more competitive.
So why has Bernanke chosen to speak now? It is a stark admission from the Fed Chairman that inflation is a major problem at a time when the US economy is screeching to a halt. With headline inflation running at 4% even before $4 gas hit the pumps in May, it is clear that the path to economic recovery is threatened by spiralling inflation costs. This inflation is exclusively driven by rocketing energy and food costs, thanks to spiralling commodity prices denominated in US dollars. The more the dollar declines, the higher commodity prices go and the greater the impact on US inflation, i.e. US inflation is essentially an imported problem. Of course dollar weakness only accelerated after the Fed embarked upon an aggressive rate cutting campaign in September last with 325 basis points shaved off the Fed Funds rate by April. The US dollar has lost more than 10% against the euro in this time while oil prices have increased by 80%. The Fed believed at the time that inflation would gradually moderate as the economy slowed. They were clearly wrong. Nobody knows to what extent speculation has contributed to driving commodity prices to record highs, but the dramatic rise in oil prices over the past 9 months has directly coincided with the Fed’s aggressive easing policy and there is a very strong correlation between the two. The Fed failed miserably to recognise that a unilateral interest rate policy would stoke inflation risks and pose major difficulties for US consumers, long before the policy had time to bed down and have a real positive impact in stimulating the economy.
The Fed clearly cannot turn around now and raise US interest rates to curb this rising inflation because it would be an admission the FOMC got it desperately wrong and the Subsequent loss of credibility might fatally undermine a financial system already reeling from the recent subprime debacle. Bernanke now hopes external factors might do the Fed’s work for it and hence this public ‘attentive’ eye on the dollar. A rebound in the dollar would certainly force a liquidation of speculative positions in dollar denominated commodities, thus resulting in a fall in commodity prices, thereby easing US imported inflation, in oil and food. What is uncertain at this stage is if Bernanke meant this ‘attentive’ statement to act as a ‘veiled threat’ to speculators and hedge fund managers, i.e. hinting at possible currency market intervention to curb the dollar’s decline, or whether it is an ‘invitation signal’ to market players to now buy the dollar, because the Fed has come to the end of its easing cycle. The latter is most likely what Bernanke had in mind, but if currency markets fail to pick up on his invitation and dollar bears rule the roost and send the currency lower over the coming months, then the Fed will not only look as if it is the one which got got it wrong, but it will also be seen to look powerless to do anything about it, something that could have serious implications for the direction of currency markets, and indeed the dollar, over the next number of years.
Ted B – Jun 5
So why has Bernanke chosen to speak now? It is a stark admission from the Fed Chairman that inflation is a major problem at a time when the US economy is screeching to a halt. With headline inflation running at 4% even before $4 gas hit the pumps in May, it is clear that the path to economic recovery is threatened by spiralling inflation costs. This inflation is exclusively driven by rocketing energy and food costs, thanks to spiralling commodity prices denominated in US dollars. The more the dollar declines, the higher commodity prices go and the greater the impact on US inflation, i.e. US inflation is essentially an imported problem. Of course dollar weakness only accelerated after the Fed embarked upon an aggressive rate cutting campaign in September last with 325 basis points shaved off the Fed Funds rate by April. The US dollar has lost more than 10% against the euro in this time while oil prices have increased by 80%. The Fed believed at the time that inflation would gradually moderate as the economy slowed. They were clearly wrong. Nobody knows to what extent speculation has contributed to driving commodity prices to record highs, but the dramatic rise in oil prices over the past 9 months has directly coincided with the Fed’s aggressive easing policy and there is a very strong correlation between the two. The Fed failed miserably to recognise that a unilateral interest rate policy would stoke inflation risks and pose major difficulties for US consumers, long before the policy had time to bed down and have a real positive impact in stimulating the economy.
The Fed clearly cannot turn around now and raise US interest rates to curb this rising inflation because it would be an admission the FOMC got it desperately wrong and the Subsequent loss of credibility might fatally undermine a financial system already reeling from the recent subprime debacle. Bernanke now hopes external factors might do the Fed’s work for it and hence this public ‘attentive’ eye on the dollar. A rebound in the dollar would certainly force a liquidation of speculative positions in dollar denominated commodities, thus resulting in a fall in commodity prices, thereby easing US imported inflation, in oil and food. What is uncertain at this stage is if Bernanke meant this ‘attentive’ statement to act as a ‘veiled threat’ to speculators and hedge fund managers, i.e. hinting at possible currency market intervention to curb the dollar’s decline, or whether it is an ‘invitation signal’ to market players to now buy the dollar, because the Fed has come to the end of its easing cycle. The latter is most likely what Bernanke had in mind, but if currency markets fail to pick up on his invitation and dollar bears rule the roost and send the currency lower over the coming months, then the Fed will not only look as if it is the one which got got it wrong, but it will also be seen to look powerless to do anything about it, something that could have serious implications for the direction of currency markets, and indeed the dollar, over the next number of years.
Ted B – Jun 5
Thứ Ba, 3 tháng 6, 2008
Bob's Currency Focus - 12:30 GMT
EUR/USD
The euro has staged a recovery Tuesday, pushing back above 1.56 against the dollar with the dollar being hurt by a Wall Street Journal report that US investment bank Lehman Brothers needs to raise extra capital while the euro is boosted as markets anticipate a firm stance on inflation from the ECB in its policy statement this coming Thursday, following a jump in the annualised inflation rate to 3.6% for the single currency economy. Quarter 1 GDP for the euro area was revised to 0.8% today from the 0.7% originally reported last month and producer prices in the euro area rose a record 6.1% on the year in April , something that is sure to fuel further hawkish rhetoric from the ECB. The ECB could decide to up the ante this week given the explosion seen in fuel costs over the past month and this could see the euro advance, even if the move is temporary. There is little value in selling the euro ahead of the ECB, given the underlying risks, although any advance back towards 1.58 offers good sell down value. US data has proven to be more robust than expected over the past week but the critical test will come this Friday with May’s employment report. Wednesday’s ADP employment report and the ISM services PMI will give the market some direction ahead of Friday. All told, we are likely to remain in a tight range ahead of the ECB on Thursday, but any gains earned by the euro on Thursday could be cancelled out by a better than expected non-farm payroll number on Friday. With the rate outlook quite uncertain at present, i.e. rates are expected to be kept on hold in both jurisdictions for the foreseeable future, the risks over the medium term remain to the downside because of the elevated value of the euro and the potential for further deterioration in euro area economic data. Keep a close watch on Wednesday’s Services PMI from the euro area because if it dips below 50, it will shake confidence in the single currency ahead of the ECB on Thursday.
GBP/USD
Sterling is mostly unchanged Tuesday after giving up much of last week’s gains in a single session on Monday. Economic data out of the UK continues to get worse and after a flat reading yesterday for the manufacturing sector in May, the construction sector on Tuesday reported its steepest decline in 11 years in May. Add to this the woes currently being experienced by the UK financial sector and we begin to see an economy on the brink. Wednesday’s CIPS services PMI reading will complete the economic picture ahead of Thursday’s Bank of England meeting. If this reading reports a contraction (<50) in the non-manufacturing sector, we could see sterling nosedive ahead of the MPC rate announcement on Thursday. Sterling is essentially being protected by the MPC’s hawkish stance on inflation with markets pricing out the prospect of any imminent rate cuts, but a sharp deterioration in economic performance could erode that confidence in the currency and send it into freefall, particularly against the dollar. Cable does not offer any value on prices over 1.98, given the stresses in the UK economy and the fact the US Fed is more or less done cutting rates and the pair should come under ongoing selling pressure on prices above this level. A break below support at 1.96 could see the pair slide all the way back to 1.94 later in the week. If the Bank of England surprises markets and cuts rates this Thursday, then expect sterling to sell off broadly across the board.
USD/JPY
The yen advanced again on Tuesday but has failed to hold onto its gains and is currently trading lower against every other major currency as risk appetite outscores risk aversion in the currency markets, despite global stock markets trading in the red for the past 24 hours. There is little in the way of domestic data out of Japan this week and the yen’s fortunes are wholly dependent on broader risk sentiment with the demand for carry trades likely to keep the currency under pressure. The dollar keeps bouncing back from any dips in the USD/JPY exchange rate and the value buy is on this pair, with dips towards 103 offering good short - medium term value. If US data surprises to the upside this week and stock markets recover, the dollar could rally to above Y106 for the first time this quarter. The euro offers little value at current prices and while EUR/JPY could approach Y165 around the time of the ECB meeting later in the week, this may offer a good sell down opportunity, with the possibility of a return to 1.58 over the next month. The yen remains under pressure against the high yielding aussie and kiwi dollars but any prick in the commodity price bubble would see these pairs plunge and they offer little medium term value.
USD/CAD
The loonie gave up parity against the greenback for the first time in 2 weeks on Monday but has steadied today as the US currency failed to extend its rally beyond 1.0026. Friday’s negative GDP number is unlikely to be forgotten so quickly though and with a Bank of Canada monetary policy meeting on the horizon next week, the loonie may likely come under further selling pressure, particularly if oil prices retreat. A rate cute now seems likely next Tuesday, even if the Bank keeps it to 25 basis points. The strength of the loonie now appears to be a bigger risk to the Canadian economy than a US slowdown, as Canada’s economy underperformed the US economy by a full percentage point in the first quarter, despite the well-documented woes in the US. The Bank of Canada must be very worried by the fact the loonie has failed to depreciate at all despite rate cutes equalling 150 basis points since last November and an economic performance which now registers as the worst across all G8 countries for the past 6 months. It seems speculators cannot easily be dissuaded from buying the loonie or Canadian energy and resource stocks while commodity prices are on the rise, regardless of how the domestic economy performs. This Friday’s labour figures for May will be an important gauge for the economy, although it may not greatly influence the Bank of Canada’s decision next Tuesday. Fear over a potential rate cut is likely to lead to an exodus of Loonie longs over the next week and we should see a climb to 1.02 between now and then for USD/CAD. The euro could also extend its gains against the loonie this week as the ECB meeting on Thursday is likely to reaffirm the divergent positions of the two Central Banks.
Bob B - Jun 3
The euro has staged a recovery Tuesday, pushing back above 1.56 against the dollar with the dollar being hurt by a Wall Street Journal report that US investment bank Lehman Brothers needs to raise extra capital while the euro is boosted as markets anticipate a firm stance on inflation from the ECB in its policy statement this coming Thursday, following a jump in the annualised inflation rate to 3.6% for the single currency economy. Quarter 1 GDP for the euro area was revised to 0.8% today from the 0.7% originally reported last month and producer prices in the euro area rose a record 6.1% on the year in April , something that is sure to fuel further hawkish rhetoric from the ECB. The ECB could decide to up the ante this week given the explosion seen in fuel costs over the past month and this could see the euro advance, even if the move is temporary. There is little value in selling the euro ahead of the ECB, given the underlying risks, although any advance back towards 1.58 offers good sell down value. US data has proven to be more robust than expected over the past week but the critical test will come this Friday with May’s employment report. Wednesday’s ADP employment report and the ISM services PMI will give the market some direction ahead of Friday. All told, we are likely to remain in a tight range ahead of the ECB on Thursday, but any gains earned by the euro on Thursday could be cancelled out by a better than expected non-farm payroll number on Friday. With the rate outlook quite uncertain at present, i.e. rates are expected to be kept on hold in both jurisdictions for the foreseeable future, the risks over the medium term remain to the downside because of the elevated value of the euro and the potential for further deterioration in euro area economic data. Keep a close watch on Wednesday’s Services PMI from the euro area because if it dips below 50, it will shake confidence in the single currency ahead of the ECB on Thursday.
GBP/USD
Sterling is mostly unchanged Tuesday after giving up much of last week’s gains in a single session on Monday. Economic data out of the UK continues to get worse and after a flat reading yesterday for the manufacturing sector in May, the construction sector on Tuesday reported its steepest decline in 11 years in May. Add to this the woes currently being experienced by the UK financial sector and we begin to see an economy on the brink. Wednesday’s CIPS services PMI reading will complete the economic picture ahead of Thursday’s Bank of England meeting. If this reading reports a contraction (<50) in the non-manufacturing sector, we could see sterling nosedive ahead of the MPC rate announcement on Thursday. Sterling is essentially being protected by the MPC’s hawkish stance on inflation with markets pricing out the prospect of any imminent rate cuts, but a sharp deterioration in economic performance could erode that confidence in the currency and send it into freefall, particularly against the dollar. Cable does not offer any value on prices over 1.98, given the stresses in the UK economy and the fact the US Fed is more or less done cutting rates and the pair should come under ongoing selling pressure on prices above this level. A break below support at 1.96 could see the pair slide all the way back to 1.94 later in the week. If the Bank of England surprises markets and cuts rates this Thursday, then expect sterling to sell off broadly across the board.
USD/JPY
The yen advanced again on Tuesday but has failed to hold onto its gains and is currently trading lower against every other major currency as risk appetite outscores risk aversion in the currency markets, despite global stock markets trading in the red for the past 24 hours. There is little in the way of domestic data out of Japan this week and the yen’s fortunes are wholly dependent on broader risk sentiment with the demand for carry trades likely to keep the currency under pressure. The dollar keeps bouncing back from any dips in the USD/JPY exchange rate and the value buy is on this pair, with dips towards 103 offering good short - medium term value. If US data surprises to the upside this week and stock markets recover, the dollar could rally to above Y106 for the first time this quarter. The euro offers little value at current prices and while EUR/JPY could approach Y165 around the time of the ECB meeting later in the week, this may offer a good sell down opportunity, with the possibility of a return to 1.58 over the next month. The yen remains under pressure against the high yielding aussie and kiwi dollars but any prick in the commodity price bubble would see these pairs plunge and they offer little medium term value.
USD/CAD
The loonie gave up parity against the greenback for the first time in 2 weeks on Monday but has steadied today as the US currency failed to extend its rally beyond 1.0026. Friday’s negative GDP number is unlikely to be forgotten so quickly though and with a Bank of Canada monetary policy meeting on the horizon next week, the loonie may likely come under further selling pressure, particularly if oil prices retreat. A rate cute now seems likely next Tuesday, even if the Bank keeps it to 25 basis points. The strength of the loonie now appears to be a bigger risk to the Canadian economy than a US slowdown, as Canada’s economy underperformed the US economy by a full percentage point in the first quarter, despite the well-documented woes in the US. The Bank of Canada must be very worried by the fact the loonie has failed to depreciate at all despite rate cutes equalling 150 basis points since last November and an economic performance which now registers as the worst across all G8 countries for the past 6 months. It seems speculators cannot easily be dissuaded from buying the loonie or Canadian energy and resource stocks while commodity prices are on the rise, regardless of how the domestic economy performs. This Friday’s labour figures for May will be an important gauge for the economy, although it may not greatly influence the Bank of Canada’s decision next Tuesday. Fear over a potential rate cut is likely to lead to an exodus of Loonie longs over the next week and we should see a climb to 1.02 between now and then for USD/CAD. The euro could also extend its gains against the loonie this week as the ECB meeting on Thursday is likely to reaffirm the divergent positions of the two Central Banks.
Bob B - Jun 3
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