EUR/USD
After a waft of weak data the euro eventually succumbed to selling pressure this week, although it staged an impressive recovery from late Wednesday, coming off a low of 1.5522, to trade at a full cent above this level on Thursday morning. The single currency was buoyed to some degree by today’s inflation print for July, which at 4.1% is the highest rate on record, since the ECB came into existence. With the ECB’s target inflation rate at 2%, some market analysts still believe there is scope for further rate hikes from Trichet & co. There is greater evidence however that the euro economy is decelerating at an alarming pace and divergence issues between the euro’s major economic blocks is likely to become an increasing concern over the coming months. US data has mostly surprised to the upside over the course of the past week but the real test will come with Friday’s non-farm payroll number. Thursday’s GDP figure is unlikely to have any sustained impact, given its historical context and the fact the number will be distorted by the Government’s stimulus package which helped prop up consumer spending in May and June. The Initial claims number for last week will be monitored closely as an indicator of what Friday’s payroll number might look like. Oil prices rocketed by almost 5 dollars on Wednesday and if this triggers a new bout of oil buying, the dollar is going to struggle. There are so many factors at play in the market at present and plenty of uncertainty about the direction of the major economies and interest rates, while a worsening credit crisis still looms large in the background. In this environment it will be difficult for either the dollar or the euro to make huge progress without facing some headwinds. Upside surprises in GDP and the non-farm payrolls, together with falling oil prices, is what the dollar needs if it is going to end the week on a high. The biggest risk to the euro in a broader sense could come from any negative comments from ECB council members (admission that the growth slowdown is worse than ECB had anticipated) or destabilising comments from French or Italian government officials about the ECB or euro. The range should remain 1.55 to 1.5660 for now, with Friday’s non-farm number being the key scheduled event which could push the pair beyond the boundaries. There is definite value in selling down on any rallies close to 1.57.
GBP/USD
Sterling has shown remarkable resilience against the adversity of shocking economic data over the past month, data soft enough to have pared several percentage points off any other currency. GBP/USD is still trading at the higher end of its trading range over the past few months and the pound has essentially grown immune to weak domestic data. However, it is primarily negatives which are keeping the currency afloat, primarily a market belief the Bank of England will not step in to save the economy and it is believed if the Bank were to do anything it will raise interest rates rather than cut them, adding to the attraction of sterling’s high yield. Nationwide reported house prices fell 1.7% in July, for an 8.1% annual decline, the steepest drop ever in the series. The UK economy looks destined for a certain recession, if it is not in one already, and with the Bank of England uttering hawkish rhetoric, they are clearly signalling they have a very different view to the US Federal Reserve on inflation prospects, so things are going to get a hell of a lot worse in the UK economy over the coming months. Friday’s Manufacturing PMI will be important to gauge if last month’s appalling run of PMIs in the manufacturing, services and construction sectors was an unlucky once-off or the start of an accelerating deterioration in the wider economy. It is highly dangerous to buy sterling against the dollar with the economic predicament facing the UK, even if sterling does even manage to make some short-term gains. In the medium to longer term sterling looks destined for a return to at least the mid 1.80s and a sudden spike downwards in the currency cannot be ruled out, given the downside risks and the pound’s elevated value at present. The downside against the euro should be more limited in the short run as the euro area economy also slows quite sharply. The pound’s direction through to the end of the week will be determined by US economic data, but we should be looking at a return to 1.9650 over the next week. It could happen this week if US data prints stronger than expected and oil prices are subdued.
USD/JPY
The yen has come under modest selling pressure Thursday as risk tolerance levels rise thanks to two very positive days for global stocks. The Japanese currency has been protected to some degree thanks to sell-off in commodity currencies in recent days, which has seen a paring of carry trade positions, especially against the Australian and New Zealand dollars. There is still sizeable complacency in the market though and both the US dollar and the euro look to be overvalued against the yen, when taking into consideration the deterioration in economic conditions, particularly in the euro area. Friday’s non-farm payroll data out of the US will be a major test of risk tolerance and if the number prints much worse than expectations, the yen should be the biggest gainer on currency markets. There is significant selling of the US dollar above Y108.30, but if the US currency does manage to reach 109 by the end of the week it will mark a further step up in the pair’s trading range and we should see Y110 next week. However it is dangerous to sell the yen at current prices, given all the underlying risks, and there is definite medium term value in selling down the euro on any advances by the single currency towards Y170.
USD/CAD
The loonie has failed to penetrate 1.02 against the greenback since the pair sailed over this important price level several days ago. The US currency though has not managed to capitalise on its momentum and has failed miserably to reach 103. The key economic releases out of the US over the next few days will be critical and could be decisive for the future direction of the pair. The only release out of Canada is today’s monthly GDP number for May, but its significance is likely to be dwarfed by the quarterly GDP figure out of the US. Stronger than expected numbers out of the US today and tomorrow (non-farm payrolls) coupled with a further slide in commodity prices could potentially see the greenback rise to 103.77 (the year’s high) and place the pair firmly in a longer run uptrend, which could see the loonie cede 1.05 very quickly. There is some value in buying at present, with a stop tightly below 1.02. If data prints badly for the greenback, then expect 1.02 to give way very easily and the pair should quickly return to 1.0130.
Bob B - Jul 31
Thứ Năm, 31 tháng 7, 2008
Thứ Năm, 24 tháng 7, 2008
Bob's Currency Focus
EUR/USD
Euro zone data keeps disappointing and this morning’s German Ifo business survey reported the sharpest fall in business sentiment since 2001. Also, preliminary readings for the manufacturing and services sectors of the euro area see another month of contraction in July, with the slowdown accelerating. The Ifo business climate reading fell to 97.5 in July, down from 101.3 in June. The composite PMI for the euro area (measuring both manufacturing and services economic activity) is seen as falling to 47.8 in July, from 49.3 in June. French and Italian business sentiment also fell more than expected in July and all told, economic woes for the single currency zone are mounting. It is difficult to fathom that the ECB has just hiked rates against this background and only time will tell if that policy decision was a big mistake, especially if oil prices continue to ease. The dollar has made significant gains overt the past 2 days but it is essentially only back to the levels it was trading at prior to the breakout of the Fanny Mae/Freddy Mac crisis 2 weeks ago. The real test for the dollar will be if it can break below 1.5610 against the euro and hold below this level. If we can achieve that, it may be time to look for a possible retreat all the way back to 1.5283. The euro picked itself up impressively from a low of 1.5637 to reach 1.5697 in the hour following the Ifo Business survey release and after a brief stint above 1.57 after US existing home sales numbers disappointed the pair is back around 1.5670. Oil prices will continue to play an important role in the greenback’s fortunes. There is a sense that sentiment is beginning to shift against the euro and although weak US economic data will curtail dollar gains, traders need to be on their guard for any comments from ECB and Fed officials. Any softening in tone from ECB Council members will hurt the euro. If the dollar holds below 1.5720, it is worth selling down from close to 1.57, as the pair may have another run at that key 1.5610 price level either today or tomorrow. Any break below that should see us return to 1.55, possibly by Monday. Today is a very important day for direction, because the dollar has not managed a 3 day rally against the euro for 2 months.
GBP
Sterling has had a weird couple of days. On Wednesday it rose sharply against every other major currency, although its gains against the dollar were more modest, while today it has plunged after European currencies came under pressure early this morning and after it was announced monthly UK retail sales plunged by their heaviest amount since the series began. The Bank of England minutes on Wednesday reveal Tim Besley voted for a rate hike at the MPC meeting earlier this month. It is the first time a member has voted for a rate increase since July of last year. The hawkish bias to the minutes sent sterling rising rapidly as investors began to price in the possibility of a future rate hike from the Bank of England. In fact the minutes even stated that August would be a more appropriate time to increase rates, if a rate hike was warranted. One has to wonder if the MPC is seeing the same data as the rest of us. The dollar has finally managed to break below the 1.99 support point that held firm for 10 days and if it can push sterling below 1.98, then we should have a trend reversal and the pair could go considerably lower over the next week. 1.99 is a key price barrier and if the dollar does not hold it, the pound could make another run towards the 2 dollar mark and 2.01. Tomorrow’s GDP release in the UK is crucial and if it shows a contraction, which is unlikely, then sterling will sell off very sharply. If selling down, traders should place a stop around 1.9910. The pair is still being bought on dips and remains dangerous for bears, until 1.98 is broken. Sterling could find itself pegged back towards 79.50 against the euro by early next week.
JPY
The yen has been hammered this week by the dollar, the euro and the pound. The euro registered a new lifetime high on Monday at 169.95, while the dollar hit a 7 week high against the yen yesterday just below 108. The Japanese currency has stabilised somewhat today as falling stocks and a rate cut in New Zealand has temporarily stalled the carry trade. If the current stock rally comes to an abrupt end, then the yen could gain significantly against the US dollar, given the pair currently trades 4% above the worst levels from last week. However any resumption of the stock rally will continue to see the yen out of favour and the dollar could potentially try to rally all the way to 110 over the next week. There is no value on selling the yen against any currency at current prices, given the risk, while any euro moves towards Y170 offer very good medium term value for a sell down on what is the most over-stretched of the yen crosses.
CAD
There was no economic data out of Canada on Thursday and the currency continues to trade within a tight range against the greenback, moving between 1.00 and 1.0115. While headline inflation rose to over 3% in June, the core rate was contained at 1.5% and this affirms the view the Bank of Canada will keep rates on hold for the foreseeable future. Commodity prices have come off considerable in the past week, with oil prices shedding $20, yet the loonie has managed to hold its own across the board, indeed making gains against the euro and the yen, while holding tight against the US dollar. A sustained slump in commodity prices will eventually hurt the loonie against the US currency and it is difficult to see the pair not returning to 1.02 over the next week, unless there is some renewed scare in financial markets. The loonie has also been helped by a rise in risk appetite, but that too is under threat with the recent stock rally looking shaky by Thursday. The euro has fallen to 1.58 this morning, as I projected a few days ago and there is the potential for a decline to 1.56 for EUR/CAD over the next week, if the euro continues its decline against the US dollar.
Bob B - July 24
Euro zone data keeps disappointing and this morning’s German Ifo business survey reported the sharpest fall in business sentiment since 2001. Also, preliminary readings for the manufacturing and services sectors of the euro area see another month of contraction in July, with the slowdown accelerating. The Ifo business climate reading fell to 97.5 in July, down from 101.3 in June. The composite PMI for the euro area (measuring both manufacturing and services economic activity) is seen as falling to 47.8 in July, from 49.3 in June. French and Italian business sentiment also fell more than expected in July and all told, economic woes for the single currency zone are mounting. It is difficult to fathom that the ECB has just hiked rates against this background and only time will tell if that policy decision was a big mistake, especially if oil prices continue to ease. The dollar has made significant gains overt the past 2 days but it is essentially only back to the levels it was trading at prior to the breakout of the Fanny Mae/Freddy Mac crisis 2 weeks ago. The real test for the dollar will be if it can break below 1.5610 against the euro and hold below this level. If we can achieve that, it may be time to look for a possible retreat all the way back to 1.5283. The euro picked itself up impressively from a low of 1.5637 to reach 1.5697 in the hour following the Ifo Business survey release and after a brief stint above 1.57 after US existing home sales numbers disappointed the pair is back around 1.5670. Oil prices will continue to play an important role in the greenback’s fortunes. There is a sense that sentiment is beginning to shift against the euro and although weak US economic data will curtail dollar gains, traders need to be on their guard for any comments from ECB and Fed officials. Any softening in tone from ECB Council members will hurt the euro. If the dollar holds below 1.5720, it is worth selling down from close to 1.57, as the pair may have another run at that key 1.5610 price level either today or tomorrow. Any break below that should see us return to 1.55, possibly by Monday. Today is a very important day for direction, because the dollar has not managed a 3 day rally against the euro for 2 months.
GBP
Sterling has had a weird couple of days. On Wednesday it rose sharply against every other major currency, although its gains against the dollar were more modest, while today it has plunged after European currencies came under pressure early this morning and after it was announced monthly UK retail sales plunged by their heaviest amount since the series began. The Bank of England minutes on Wednesday reveal Tim Besley voted for a rate hike at the MPC meeting earlier this month. It is the first time a member has voted for a rate increase since July of last year. The hawkish bias to the minutes sent sterling rising rapidly as investors began to price in the possibility of a future rate hike from the Bank of England. In fact the minutes even stated that August would be a more appropriate time to increase rates, if a rate hike was warranted. One has to wonder if the MPC is seeing the same data as the rest of us. The dollar has finally managed to break below the 1.99 support point that held firm for 10 days and if it can push sterling below 1.98, then we should have a trend reversal and the pair could go considerably lower over the next week. 1.99 is a key price barrier and if the dollar does not hold it, the pound could make another run towards the 2 dollar mark and 2.01. Tomorrow’s GDP release in the UK is crucial and if it shows a contraction, which is unlikely, then sterling will sell off very sharply. If selling down, traders should place a stop around 1.9910. The pair is still being bought on dips and remains dangerous for bears, until 1.98 is broken. Sterling could find itself pegged back towards 79.50 against the euro by early next week.
JPY
The yen has been hammered this week by the dollar, the euro and the pound. The euro registered a new lifetime high on Monday at 169.95, while the dollar hit a 7 week high against the yen yesterday just below 108. The Japanese currency has stabilised somewhat today as falling stocks and a rate cut in New Zealand has temporarily stalled the carry trade. If the current stock rally comes to an abrupt end, then the yen could gain significantly against the US dollar, given the pair currently trades 4% above the worst levels from last week. However any resumption of the stock rally will continue to see the yen out of favour and the dollar could potentially try to rally all the way to 110 over the next week. There is no value on selling the yen against any currency at current prices, given the risk, while any euro moves towards Y170 offer very good medium term value for a sell down on what is the most over-stretched of the yen crosses.
CAD
There was no economic data out of Canada on Thursday and the currency continues to trade within a tight range against the greenback, moving between 1.00 and 1.0115. While headline inflation rose to over 3% in June, the core rate was contained at 1.5% and this affirms the view the Bank of Canada will keep rates on hold for the foreseeable future. Commodity prices have come off considerable in the past week, with oil prices shedding $20, yet the loonie has managed to hold its own across the board, indeed making gains against the euro and the yen, while holding tight against the US dollar. A sustained slump in commodity prices will eventually hurt the loonie against the US currency and it is difficult to see the pair not returning to 1.02 over the next week, unless there is some renewed scare in financial markets. The loonie has also been helped by a rise in risk appetite, but that too is under threat with the recent stock rally looking shaky by Thursday. The euro has fallen to 1.58 this morning, as I projected a few days ago and there is the potential for a decline to 1.56 for EUR/CAD over the next week, if the euro continues its decline against the US dollar.
Bob B - July 24
Thứ Hai, 21 tháng 7, 2008
Bob's Currency Focus
EUR/USD
Holding in a tight range since last Tuesday’s surge to a new lifetime high. The pair peaked at 1.5906 today before declining to the 1.5850 price range, the equilibrium price for the pair over the past 4 trading days. With no data to direct price, the pair is practically in limbo today, although there remains a decidedly bullish tone as every dip in price is met with a rapid recovery. It is disheartening for dollar supporters to see that 3 days of a rally in stocks and a sharp sell-off in oil has failed to muster any rally whatsoever in the greenback and it seems the market is only interested in news that can justify sinking the US currency further. We are at a very important junction for the pair and the next move up or down could prove critical for how this pair trades through the rest of the summer. The dollar has to send the pair below 1.5750 and push towards 1.5610, otherwise another rally towards the lifetime high of 1.6025 looks certain over the next week. There are a few important indicators out in the euro zone this week, including the German Ifo business survey and preliminary readings for the manufacturing and services PMIs. These could surprise to the downside and pose some risk for the euro. It has been remarkable how silent the ECB has been over the past week in response to the recent run-up in the euro and softening economic data and this may be taken as a signal the ECB is not at all uncomfortable with the current high value of the single currency. There was ample opportunity over the past week for ECB officials to take the steam out of the euro’s rally, but it failed to do so. However, the recent rally in the pair has been wholly because of problems in the US banking sector and if risk aversion abates over the course of this week, the euro could give back most of those gains. While confidence in the US economy remains low, the euro will remain well bid and the dollar will struggle to make much progress, regardless of how the data prints. The dollar must break below 1.780 and hold below this level before we can talk about a possible reversal of sorts. On value grounds, it is worth selling at prices close to 1.59, although traders need to be aware the market may be seeking to push the pair back above 1.60 in the short term.
GBP/USD
Sterling continues to hold its own and cable is trading on Monday in exactly the same range as on Friday last, while the pattern is identical, an early dip in the morning to 1.99 before a recovery to 1.9970 in the afternoon session. Sterling is benefiting from a temporary flow of funds into the currency and this should not be mistaken for a reversal in trend. The economic fundamentals out of the UK keep getting worse and this morning Rightmove reported house prices fell by 1.8% in June. There are a number of key releases this week in the UK, starting with Wednesday’s BoE minutes, followed by retail sales on Thursday and an advance print of quarter 2 GDP on Friday. Markets have essentially priced in a very hawkish MPC but if Wednesday’s minutes show Committee members to be more concerned about declining growth than rising inflation, then sterling could sell off very sharply. Sterling offers no value on prices near 2 dollars, even if the pair temporarily shoots above this level. When markets regain some confidence in the US currency, sterling will be an immediate target of market traders. If UK data prints on the poor side this week, the euro might also rise to above 80 pence and possibly gain some momentum to see it close in on the record price near 81 pence. I would wait until after Wednesday’s minutes before entering the market on sterling, as it in itself could trigger some very volatile trading and we will be in a much better position to judge sterling’s prospects after we have had an insight into the thinking of MPC members.
USD/JPY
The yen fell to a record low against the euro Monday as risk tolerance levels rose thanks to 4 consecutive rallies in global stocks. The pair hit a high of 169.90, which is an extraordinary price when one considers the market panic that followed the Fannie Mae and Freddy MAC mortgage crisis in the US early last week. The euro’s price is totally exaggerated and one could do worse than sell the EUR/JPY down at the current price around 169.50. If the current rally in stocks proves to be a false dawn and risk aversion levels rise again, the yen will gain very quickly. In addition, the euro has a number of economic risk events this week, which could send the single currency lower. Economic data out of Japan will not have a market impact this week and with the calendar in the US, also on the light side, the yen’s fate against the greenback will very much depend on the performance of US stocks. There is definite value in selling down, if prices rise close to 108, as the pair actually hit a low of 103.78 last week, and the pace of the dollar’s rapid recovery might prove to have been premature.
USD/CAD
The Loonie has taken on a firmer tone on Monday and has made modest gains across the board, against all major currencies. There was no economic data on Monday to influence the currency, although a rebound in commodity prices has offered some support. The market has been reluctant to see the loonie break parity against the greenback over the past week, but an upside surprise in Tuesday’s domestic retail sales could be the trigger the Canadian currency needs. Also this week we have got the latest consumer price inflation report on Wednesday and here again, another higher than forecast print, especially in the core rate, should send the loonie higher. The loonie should also be able to appreciate to at least 1.58 against the euro, while the currency would also benefit from any sustained rally in the US dollar, against the other majors.
Bob B - Jul 21
Holding in a tight range since last Tuesday’s surge to a new lifetime high. The pair peaked at 1.5906 today before declining to the 1.5850 price range, the equilibrium price for the pair over the past 4 trading days. With no data to direct price, the pair is practically in limbo today, although there remains a decidedly bullish tone as every dip in price is met with a rapid recovery. It is disheartening for dollar supporters to see that 3 days of a rally in stocks and a sharp sell-off in oil has failed to muster any rally whatsoever in the greenback and it seems the market is only interested in news that can justify sinking the US currency further. We are at a very important junction for the pair and the next move up or down could prove critical for how this pair trades through the rest of the summer. The dollar has to send the pair below 1.5750 and push towards 1.5610, otherwise another rally towards the lifetime high of 1.6025 looks certain over the next week. There are a few important indicators out in the euro zone this week, including the German Ifo business survey and preliminary readings for the manufacturing and services PMIs. These could surprise to the downside and pose some risk for the euro. It has been remarkable how silent the ECB has been over the past week in response to the recent run-up in the euro and softening economic data and this may be taken as a signal the ECB is not at all uncomfortable with the current high value of the single currency. There was ample opportunity over the past week for ECB officials to take the steam out of the euro’s rally, but it failed to do so. However, the recent rally in the pair has been wholly because of problems in the US banking sector and if risk aversion abates over the course of this week, the euro could give back most of those gains. While confidence in the US economy remains low, the euro will remain well bid and the dollar will struggle to make much progress, regardless of how the data prints. The dollar must break below 1.780 and hold below this level before we can talk about a possible reversal of sorts. On value grounds, it is worth selling at prices close to 1.59, although traders need to be aware the market may be seeking to push the pair back above 1.60 in the short term.
GBP/USD
Sterling continues to hold its own and cable is trading on Monday in exactly the same range as on Friday last, while the pattern is identical, an early dip in the morning to 1.99 before a recovery to 1.9970 in the afternoon session. Sterling is benefiting from a temporary flow of funds into the currency and this should not be mistaken for a reversal in trend. The economic fundamentals out of the UK keep getting worse and this morning Rightmove reported house prices fell by 1.8% in June. There are a number of key releases this week in the UK, starting with Wednesday’s BoE minutes, followed by retail sales on Thursday and an advance print of quarter 2 GDP on Friday. Markets have essentially priced in a very hawkish MPC but if Wednesday’s minutes show Committee members to be more concerned about declining growth than rising inflation, then sterling could sell off very sharply. Sterling offers no value on prices near 2 dollars, even if the pair temporarily shoots above this level. When markets regain some confidence in the US currency, sterling will be an immediate target of market traders. If UK data prints on the poor side this week, the euro might also rise to above 80 pence and possibly gain some momentum to see it close in on the record price near 81 pence. I would wait until after Wednesday’s minutes before entering the market on sterling, as it in itself could trigger some very volatile trading and we will be in a much better position to judge sterling’s prospects after we have had an insight into the thinking of MPC members.
USD/JPY
The yen fell to a record low against the euro Monday as risk tolerance levels rose thanks to 4 consecutive rallies in global stocks. The pair hit a high of 169.90, which is an extraordinary price when one considers the market panic that followed the Fannie Mae and Freddy MAC mortgage crisis in the US early last week. The euro’s price is totally exaggerated and one could do worse than sell the EUR/JPY down at the current price around 169.50. If the current rally in stocks proves to be a false dawn and risk aversion levels rise again, the yen will gain very quickly. In addition, the euro has a number of economic risk events this week, which could send the single currency lower. Economic data out of Japan will not have a market impact this week and with the calendar in the US, also on the light side, the yen’s fate against the greenback will very much depend on the performance of US stocks. There is definite value in selling down, if prices rise close to 108, as the pair actually hit a low of 103.78 last week, and the pace of the dollar’s rapid recovery might prove to have been premature.
USD/CAD
The Loonie has taken on a firmer tone on Monday and has made modest gains across the board, against all major currencies. There was no economic data on Monday to influence the currency, although a rebound in commodity prices has offered some support. The market has been reluctant to see the loonie break parity against the greenback over the past week, but an upside surprise in Tuesday’s domestic retail sales could be the trigger the Canadian currency needs. Also this week we have got the latest consumer price inflation report on Wednesday and here again, another higher than forecast print, especially in the core rate, should send the loonie higher. The loonie should also be able to appreciate to at least 1.58 against the euro, while the currency would also benefit from any sustained rally in the US dollar, against the other majors.
Bob B - Jul 21
Thứ Năm, 17 tháng 7, 2008
The Dollar Malaise
Negative sentiment towards the dollar has reached fever pitch proportions over the past week and for once it is not weak economic data that is the driving force. No, rather it is the US Government’s plans to shore up ailing mortgage lenders Fannie Mae and Freddy MAC that has put the frighteners on investors. If the US government needs to follow its plan with actual cash, the cash will come from the taxpayer, via issuance of more government debt. And let us face it, we are not talking about small numbers here, but mind-boggling figures that run into the trillions, potentially pushing the country to even more extreme debt proportions and undermining the value of the US dollar. Markets have been spooked by this prospect and a report in the Financial Times today about some sovereign wealth funds diversifying out of US dollar assets is hardly a surprise. A major loss of confidence in the future direction of the dollar on the part of major debt holders is a very serious concern for the US Treasury and it is the one thing that could potentially trigger some market intervention, if the fears of these debt holders do not abate soon. Despite clear evidence of a marked slowdown in European economies, the currencies of these countries have no difficulty hammering the dollar, on an almost daily basis at present, as the US currency appears incapable of holding onto gains for anything more than a few hours at a time. Investors have thus far been happier to forgive Europeans economies for their underperformance, rather than be caught holding low-yielding US dollars. It is clearly a mistake to believe these European economies are going to ride the storm and come out smelling of roses, but for now the focus is less on economic data and more on market fear about the future of the US financial system. Although US inflation (5% in June) is running higher than that in the euro area (4% in June) and the UK (3.8% in June), the chances of a US interest rate hike are dwindling with the Fed stating its overriding focus is a resolution of the credit crisis. The Fed expects inflation to moderate as growth eats into demand. Markets still expect to see the ECB hike at least once more, while the Bank of England is also seen leaning on the hawkish side, which is justifying the recent rush of cash into European currencies. This is merely a short run play, because eventually the European Central Banks will creak under the weight of an accelerating downturn and will need to soften their tone. When they do, it will mark the beginning of a dollar revival. If they wait too long, or believe rate hikes are the way forward even against slowing growth, then we are certainly in for an even more extended period of discontent for the US dollar.
Ted B - Jul 17
Ted B - Jul 17
Thứ Hai, 14 tháng 7, 2008
Bob's Currency Focus
Currency markets are very volatile at present with the fallout from stock markets and commodity markets essentially dictating the short-term direction of all the major currencies. Economic data is hardly getting a look in as panic of financial market collapse in the US becomes the over-riding factor. One striking observation from the past few weeks is that the euro has replaced the yen as the market’s preferred ‘risk aversion’ currency, when stresses are undermining global financial markets. The primary reasons for this is the single currency’s more attractive higher yield and a hawkish ECB. All of the high yielding currencies, in particular sterling and the Aussie dollar, have done particularly well in the past month, despite the crash in global stock markets. The yen is the worst performing currency during this period, which is something of a major surprise, given the yen steamrolled everything before it during the last 3 bouts of major risk aversion in March, January and last August. Sentiment surrounding the US dollar is at an all-time low because of the Fannie Mae and Freddy Mac mortgage lending crisis in the US and because oil prices refuse to let up. Traders are using every ounce of bad news to push up the price of crude and thus put downward pressure on the dollar, which in turn gives added impetus to the spike in prices for the wider commodity class, creating a vicious cycle. It may take direct market intervention to break this cycle because commodity investors are not being deterred by the global economic slowdown theory, while confidence in the wider financial market system is at an all-time low.
EUR/USD
The euro is knocking on the door of the lifetime high of 1.6016 and while we have seen a slight retreat on Monday, the dollar came unstuck at support at 1.5840 and the pair has since advanced back towards the 1.59 line. Markets shrugged off the announcements by US Treasury and US Fed in terms of declaring financial support for the ailing mortgage lenders Fannie Mae and Freddy Mac and it is going to take something more special to regain confidence in the US financial system. Another poor economic print from the euro area Monday saw Industrial Production in May plunge by 1.9%, although this was slightly better than the forecast decline of 2.3%. Economic data is taking a back seat at present as dollar sentiment is effectively driving this pair and that sentiment has never been more negative. Tuesday sees the release of the latest ZEW investment sentiment survey from Germany and producer prices in the US, but neither is likely to have any real impact and of more importance will be the testimony before Congress by Fed Chairman Ben Bernanke in the afternoon GMT and any planted comments that may come from governing members of the European Central Bank. The euro looks dangerously overvalued but while it remains so close to the 1.60 price line, traders will want to try and challenge the record highs set back in April. On the other hand any vocal interventions by Central Bankers could send the pair spiralling back 200 points. It is best to stay on the sidelines until the pair settles down somewhat, although medium to longer term traders might see value in selling down on any prices close to 1.59.
GBP/USD
Producer prices came in slightly below expectations in June but it still has not prevented output prices from climbing the most in annual terms in 10 years. While economic activity may be depressed, prices certainly are not and markets are using price inflation to keep the pound well bid, in hope of a rather unlikely rate hike from the Bank of England in the coming months. Tuesday’s consumer price inflation numbers for June will be critical for the pound and the market has already priced in an annualised CPI rate of 3.6%, and anything significantly lower than this will hurt the pound. Like the euro, the pound offers no value on current prices against the dollar, but it is likely to continue to trade in the higher trading range of 1.9650 to 2.0050 until there is some shift in the goalposts. Investors are weighing in behind the pound on yield grounds and also because the euro looks over-priced, but it is dangerous to buy cable on prices above 1.9850, even if the pair does go higher in the short term. Cable is likely to come under increased selling pressure the closer it gets to the 2 dollar mark, particularly if economic data continues to disappoint and points to a more marked downturn for the UK economy. The euro does not offer any value above 80 pence and EUR/GBP could easily decline towards 0.79 if there is a broader US dollar recovery that sees the euro sell off more than its UK rival.
USD/JPY
The yen has resisted a sell-off on Monday despite a strong recovery in European stocks, ahead of the US bell. Some profit-taking on the euro has seen EUR/JPY return to the 1.59 line, having hit a lifetime high earlier in the session of 169.65. The US dollar is back to where it started the day at 106.26, giving up all of the day’s earlier gains. Markets have gone cold on the Fannie Mae and Freddy Mac rescue package already, which does not augur well for risk aversion as we go deep into the US trading session. The yen needs to appreciate back towards the 105 mark against the dollar, if it is to have any chance of joining the euro in severely punishing the US currency. The Bank of Japan has a rate announcement on Tuesday morning and it is certain to signal no change in rates and it is also unlikely the Bank’s Governor will signal future rate hikes when he attends his Press Conference, given the precarious economic situation in the world’s second largest economy. The yen will continue to trade on dollar sentiment and it may continue, for the time being at least, to pay second fiddle to the euro when risk aversion levels are on the up. Any dips towards 105 would offer some decent dollar buying opportunities, given the speed at which the market has been willing to sell off the yen in recent weeks. The yen is undervalued on all the crosses and the only one with some semblance of value is NZD/JPY, which has hardly moved in the past month.
USD/CAD
The loonie has powered its way to 1.0050 against the US dollar on Monday and made smaller gains against the other leading majors, as commodity currencies meet renewed demand. Oil prices rising to record highs have not hurt the loonie, while increased concerns about the US financial system are making Canadian assets look a safer bet. Friday’s marginally negative labour report has not harmed the loonie as the labour force has proven itself to be resilient amid troubling times. Volatility will remain high with the loonie and it will struggle to break parity against the greenback, while North American currencies remain largely on the defensive. The Bank of Canada has a rate announcement on Tuesday and the Central Bank is likely to leave rates unchanged for the second consecutive meeting although the accompanying statement will need to be monitored carefully because if there is emphasis on rising inflation it could signal a rate hike in the months ahead and help fuel a strong loonie rally. The likelihood is the Bank of Canada will remain neutral and the impact should be minimal on currency markets. The euro returned to over 1.61 against the loonie early on Monday, before retreating back below 1.60. There is still potential for a return to 1.58 in the days ahead, if we witness a broader euro sell-off.
Bob B
EUR/USD
The euro is knocking on the door of the lifetime high of 1.6016 and while we have seen a slight retreat on Monday, the dollar came unstuck at support at 1.5840 and the pair has since advanced back towards the 1.59 line. Markets shrugged off the announcements by US Treasury and US Fed in terms of declaring financial support for the ailing mortgage lenders Fannie Mae and Freddy Mac and it is going to take something more special to regain confidence in the US financial system. Another poor economic print from the euro area Monday saw Industrial Production in May plunge by 1.9%, although this was slightly better than the forecast decline of 2.3%. Economic data is taking a back seat at present as dollar sentiment is effectively driving this pair and that sentiment has never been more negative. Tuesday sees the release of the latest ZEW investment sentiment survey from Germany and producer prices in the US, but neither is likely to have any real impact and of more importance will be the testimony before Congress by Fed Chairman Ben Bernanke in the afternoon GMT and any planted comments that may come from governing members of the European Central Bank. The euro looks dangerously overvalued but while it remains so close to the 1.60 price line, traders will want to try and challenge the record highs set back in April. On the other hand any vocal interventions by Central Bankers could send the pair spiralling back 200 points. It is best to stay on the sidelines until the pair settles down somewhat, although medium to longer term traders might see value in selling down on any prices close to 1.59.
GBP/USD
Producer prices came in slightly below expectations in June but it still has not prevented output prices from climbing the most in annual terms in 10 years. While economic activity may be depressed, prices certainly are not and markets are using price inflation to keep the pound well bid, in hope of a rather unlikely rate hike from the Bank of England in the coming months. Tuesday’s consumer price inflation numbers for June will be critical for the pound and the market has already priced in an annualised CPI rate of 3.6%, and anything significantly lower than this will hurt the pound. Like the euro, the pound offers no value on current prices against the dollar, but it is likely to continue to trade in the higher trading range of 1.9650 to 2.0050 until there is some shift in the goalposts. Investors are weighing in behind the pound on yield grounds and also because the euro looks over-priced, but it is dangerous to buy cable on prices above 1.9850, even if the pair does go higher in the short term. Cable is likely to come under increased selling pressure the closer it gets to the 2 dollar mark, particularly if economic data continues to disappoint and points to a more marked downturn for the UK economy. The euro does not offer any value above 80 pence and EUR/GBP could easily decline towards 0.79 if there is a broader US dollar recovery that sees the euro sell off more than its UK rival.
USD/JPY
The yen has resisted a sell-off on Monday despite a strong recovery in European stocks, ahead of the US bell. Some profit-taking on the euro has seen EUR/JPY return to the 1.59 line, having hit a lifetime high earlier in the session of 169.65. The US dollar is back to where it started the day at 106.26, giving up all of the day’s earlier gains. Markets have gone cold on the Fannie Mae and Freddy Mac rescue package already, which does not augur well for risk aversion as we go deep into the US trading session. The yen needs to appreciate back towards the 105 mark against the dollar, if it is to have any chance of joining the euro in severely punishing the US currency. The Bank of Japan has a rate announcement on Tuesday morning and it is certain to signal no change in rates and it is also unlikely the Bank’s Governor will signal future rate hikes when he attends his Press Conference, given the precarious economic situation in the world’s second largest economy. The yen will continue to trade on dollar sentiment and it may continue, for the time being at least, to pay second fiddle to the euro when risk aversion levels are on the up. Any dips towards 105 would offer some decent dollar buying opportunities, given the speed at which the market has been willing to sell off the yen in recent weeks. The yen is undervalued on all the crosses and the only one with some semblance of value is NZD/JPY, which has hardly moved in the past month.
USD/CAD
The loonie has powered its way to 1.0050 against the US dollar on Monday and made smaller gains against the other leading majors, as commodity currencies meet renewed demand. Oil prices rising to record highs have not hurt the loonie, while increased concerns about the US financial system are making Canadian assets look a safer bet. Friday’s marginally negative labour report has not harmed the loonie as the labour force has proven itself to be resilient amid troubling times. Volatility will remain high with the loonie and it will struggle to break parity against the greenback, while North American currencies remain largely on the defensive. The Bank of Canada has a rate announcement on Tuesday and the Central Bank is likely to leave rates unchanged for the second consecutive meeting although the accompanying statement will need to be monitored carefully because if there is emphasis on rising inflation it could signal a rate hike in the months ahead and help fuel a strong loonie rally. The likelihood is the Bank of Canada will remain neutral and the impact should be minimal on currency markets. The euro returned to over 1.61 against the loonie early on Monday, before retreating back below 1.60. There is still potential for a return to 1.58 in the days ahead, if we witness a broader euro sell-off.
Bob B
Thứ Năm, 10 tháng 7, 2008
Bob's Currency Focus
EUR/USD
The euro has performed remarkably well since last Thursday, when it shed 2 cents against the dollar after a less hawkish than expected monetary policy statement from the ECB. The pair has moved within a 1.5610 to 1.5750 trading range since Friday and if anything, the euro has looked the more bullish, with the market seemingly ready to jump on any reason to offload the dollar. An Iranian missile test Wednesday morning saw oil prices stall their recent decline and this has given a bearish tone to the greenback. Poor trade and industrial data out of Germany and France was ignored by markets. German exports fell a sharp 3.2% in May, from April, the 3rd month in 5 that exports have contracted, while the French trade deficit for May was wider than forecast and industrial production came off by a whopping 2.5% in May. The euro’s ability to shake off poor economic data is becoming too much of a habit of late and it is a classic case of nervous currency markets favouring directional trends over economic facts. The US dollar has been unable to sustain any rally it has undergone all year for very long and dollar bulls are proving themselves to be fear-driven creatures, jumping off the train at the slightest hint of weakness or price stalling. The G8 concluded in Japan with leaders failing to make any mention of the weak dollar, something else which has in essence given license to traders to sell the US currency without fear of market intervention. ECB President Jean Claude Trichet, in his address to the European Parliament on Wednesday, sounded much more hawkish than he did last Thursday after the rate setting meeting, and this encouraged further euro buying. The euro currently stands at 1.5710 and while there is little value in buying the single currency at these prices, any rally above that sees price go above 1.5760 might generate greater momentum and send the pair back up to 1.5820. The pair is due a retreat back to 1.55 at least, but the dollar needs something to spark the move. Bernanke addresses Congress on Thursday and any hint of a future rate hike in his testimony will fuel a strong dollar rally. There is very good medium term value in selling down EUR/USD on prices near 1.5750, because of the significant downside risks for the euro economy in the months ahead and the fact the ECB’s growth forecasts may prove to be over-optimistic.
GBP/USD
Sterling has bounced off a low of 1.9672 Wednesday to rally to 1.9836 against the dollar early Thursday, before retracing back to 1.9750. UK economic data disappointed again this week and sterling’s rise has more to do with a broadly weaker dollar than a stronger pound. The Nationwide consumer confidence survey for June reported another dip in consumer sentiment, the index falling to 61 from 65 the previous month, while HBOS reported house prices fell 2.0% alone in June. In addition the UK trade deficit was reported to have widened to £7.5B in May, marginally above expectations. Data out of the UK over the past 3 weeks has been depressing and points to an economy that is teetering on recession. However, sterling has hardly budged during this time and if anything it is now trading higher as traders bet the BoE will not cut rates while inflation is a threat and markets have priced in an actual hike in the coming months. In a normal economic cycle, the pound would now be pummelled, but the currency is currently evading collapse because the Bank of England’s hands are tied and traders are opting to persist with sterling because of its attractive yield of 5.0%. The MPC on Thursday, as expected, left rates unchanged and the Committee refrained from issuing an accompanying statement. Markets are currently rewarding higher yielding currencies, regardless of economic data and outlook and in this scenario sterling is likely to hold within current ranges, although there remains the risk of speculators going after the currency in the near future, because of the dismal economic picture in the UK. The dollar must break below 1.9650 to have any chance of pushing the pair back to the lower end of the range and the year’s lows under 1.94, otherwise the pair may well move between 1.97 and 2.00. The value trades are selling down on prices above 1.98. Sterling should be able to hold the euro below 80 pence, unless there is some hint of monetary policy easing from the Bank of England.
JPY
The yen is lower against every major currency on Thursday even though equity markets plunged in New York on Wednesday evening and the European bourses are trading between 1% and 2 % lower on Thursday. This apparent disconnect is the strongest evidence available that investors are now more concerned about yield than they are about growth and currency risk. The euro is trading close to its lifetime high against the yen even though European equities have collapsed over the past 6 weeks and economic data out of the euro area has been significantly sifter than that out of Japan. The carry trade seems determined to march on and the only event that might undermine it at the moment is if there is a sustained and convincing retreat in commodity prices, or evidence of a another major bank failure. It is fruitless buying the yen in this environment and the value trade is to buy the dollar against the Japanese currency on dips towards 105 and below 106. If Ben Bernanke’s testimony in front of Congress on Thursday gets the thumbs up from US stock markets, expect the yen to face another sell-off later today.
CAD
The loonie had one of its best days in weeks against the greenback on Wednesday, gaining almost a cent, although it failed to penetrate below the 1.01 line. Broad dollar weakness and a bounce in commodity prices helped the loonie gain some impetus. Housing Starts in Canada came off slightly in June, but were I line with forecasts and the data underscores that Canada’s housing sector is essentially free of the financial crisis currently ravaging the US housing sector. The loonie is likely to remain contained within a 1.0070 to 1.02 price range until Friday’s employment report. Another positive employment report could help push the loonie higher against all other currencies, especially if oil prices continue to trade at elevated levels, while a negative employment number could spark a significant sell-off and see USD/CAD return to 102.50 at least. If data is in Canada’s favour, look for the euro to drop to 1.58 by week’s end.
Bob B - Jul 10
The euro has performed remarkably well since last Thursday, when it shed 2 cents against the dollar after a less hawkish than expected monetary policy statement from the ECB. The pair has moved within a 1.5610 to 1.5750 trading range since Friday and if anything, the euro has looked the more bullish, with the market seemingly ready to jump on any reason to offload the dollar. An Iranian missile test Wednesday morning saw oil prices stall their recent decline and this has given a bearish tone to the greenback. Poor trade and industrial data out of Germany and France was ignored by markets. German exports fell a sharp 3.2% in May, from April, the 3rd month in 5 that exports have contracted, while the French trade deficit for May was wider than forecast and industrial production came off by a whopping 2.5% in May. The euro’s ability to shake off poor economic data is becoming too much of a habit of late and it is a classic case of nervous currency markets favouring directional trends over economic facts. The US dollar has been unable to sustain any rally it has undergone all year for very long and dollar bulls are proving themselves to be fear-driven creatures, jumping off the train at the slightest hint of weakness or price stalling. The G8 concluded in Japan with leaders failing to make any mention of the weak dollar, something else which has in essence given license to traders to sell the US currency without fear of market intervention. ECB President Jean Claude Trichet, in his address to the European Parliament on Wednesday, sounded much more hawkish than he did last Thursday after the rate setting meeting, and this encouraged further euro buying. The euro currently stands at 1.5710 and while there is little value in buying the single currency at these prices, any rally above that sees price go above 1.5760 might generate greater momentum and send the pair back up to 1.5820. The pair is due a retreat back to 1.55 at least, but the dollar needs something to spark the move. Bernanke addresses Congress on Thursday and any hint of a future rate hike in his testimony will fuel a strong dollar rally. There is very good medium term value in selling down EUR/USD on prices near 1.5750, because of the significant downside risks for the euro economy in the months ahead and the fact the ECB’s growth forecasts may prove to be over-optimistic.
GBP/USD
Sterling has bounced off a low of 1.9672 Wednesday to rally to 1.9836 against the dollar early Thursday, before retracing back to 1.9750. UK economic data disappointed again this week and sterling’s rise has more to do with a broadly weaker dollar than a stronger pound. The Nationwide consumer confidence survey for June reported another dip in consumer sentiment, the index falling to 61 from 65 the previous month, while HBOS reported house prices fell 2.0% alone in June. In addition the UK trade deficit was reported to have widened to £7.5B in May, marginally above expectations. Data out of the UK over the past 3 weeks has been depressing and points to an economy that is teetering on recession. However, sterling has hardly budged during this time and if anything it is now trading higher as traders bet the BoE will not cut rates while inflation is a threat and markets have priced in an actual hike in the coming months. In a normal economic cycle, the pound would now be pummelled, but the currency is currently evading collapse because the Bank of England’s hands are tied and traders are opting to persist with sterling because of its attractive yield of 5.0%. The MPC on Thursday, as expected, left rates unchanged and the Committee refrained from issuing an accompanying statement. Markets are currently rewarding higher yielding currencies, regardless of economic data and outlook and in this scenario sterling is likely to hold within current ranges, although there remains the risk of speculators going after the currency in the near future, because of the dismal economic picture in the UK. The dollar must break below 1.9650 to have any chance of pushing the pair back to the lower end of the range and the year’s lows under 1.94, otherwise the pair may well move between 1.97 and 2.00. The value trades are selling down on prices above 1.98. Sterling should be able to hold the euro below 80 pence, unless there is some hint of monetary policy easing from the Bank of England.
JPY
The yen is lower against every major currency on Thursday even though equity markets plunged in New York on Wednesday evening and the European bourses are trading between 1% and 2 % lower on Thursday. This apparent disconnect is the strongest evidence available that investors are now more concerned about yield than they are about growth and currency risk. The euro is trading close to its lifetime high against the yen even though European equities have collapsed over the past 6 weeks and economic data out of the euro area has been significantly sifter than that out of Japan. The carry trade seems determined to march on and the only event that might undermine it at the moment is if there is a sustained and convincing retreat in commodity prices, or evidence of a another major bank failure. It is fruitless buying the yen in this environment and the value trade is to buy the dollar against the Japanese currency on dips towards 105 and below 106. If Ben Bernanke’s testimony in front of Congress on Thursday gets the thumbs up from US stock markets, expect the yen to face another sell-off later today.
CAD
The loonie had one of its best days in weeks against the greenback on Wednesday, gaining almost a cent, although it failed to penetrate below the 1.01 line. Broad dollar weakness and a bounce in commodity prices helped the loonie gain some impetus. Housing Starts in Canada came off slightly in June, but were I line with forecasts and the data underscores that Canada’s housing sector is essentially free of the financial crisis currently ravaging the US housing sector. The loonie is likely to remain contained within a 1.0070 to 1.02 price range until Friday’s employment report. Another positive employment report could help push the loonie higher against all other currencies, especially if oil prices continue to trade at elevated levels, while a negative employment number could spark a significant sell-off and see USD/CAD return to 102.50 at least. If data is in Canada’s favour, look for the euro to drop to 1.58 by week’s end.
Bob B - Jul 10
Thứ Ba, 8 tháng 7, 2008
The BoE is in the horns of a dilemma
The Bank of England is meeting this week to deliberate on monetary policy, at a time when the UK economy looks to be slipping into a steeper downturn, while inflation is rising to new highs thanks to rocketing oil and commodity costs. It is only a few months since markets had been pricing in up to 3 further rate cuts this year, but that position was reversed when inflation bubbled back above 3% in April, then hitting 3.3% in May. The inflation rate is likely to register higher again for June when the numbers come out later in the month. Markets suddenly began pricing in rate hikes over the past month with many analysts predicting it would come as soon as this week. But in the past fortnight economic data has revealed an acceleration in the downturn of the UK economy, with the manufacturing, services and construction sectors all contracting in June, while confidence amongst consumers and businesses alike are at rock bottom. It is difficult to see how the Bank of England can raise interest rates against this backdrop, unless they wish to push the economy into an even sharper downturn and into recession.
The Governor Mervyn King has recently admitted that rising inflation is owing to spiralling costs of imported oil and commodities and short-term adjustments in interest rates is not going to alleviate this problem. What the Bank will need to determine is if an interest rate hike would be successful in anchoring inflation expectations and might ward off potential second round effects, where unions are demanding higher wages from employers. But with economic growth grinding to a halt, it is likely the labour market will soften over the next 2 quarters and wage inflation should not be an issue. Also, while inflation may rise higher in the coming months until such time as there is a stabilisation or a decline in commodity costs, inflation should moderate accordingly from the middle of next year. Indeed there is every prospect that commodity prices could collapse, given the stagnant state of the global economy and in this situation inflation could begin to decline sharply from the middle of next year. It would be totally irresponsible of the MPC of the Bank of England to raise interest rates to combat an inflation threat they largely have no control over. Indeed the MPC would be better served to coordinate actions with other major Central banks who find themselves in exactly the same dilemma. The diversification in polices of the ECB and the Fed serves to remind us no coordination currently exists.
The ECB went it alone and decided to raise interest rates last week, but economic data from the euro zone in the coming months could indicate that the ECB’s decision to tighten now was a huge mistake. In any event recent economic data out of the euro area has not been as soft as that out of the UK, while the euro economy significantly outperformed the UK economy in the first quarter of 2008, the last period for which comparative GDP data is available. Therefore, the Bank of England is not under undue pressure to follow the precedent set by the ECB.
The Bank of England is clearly not in a position to raise interest rates in the current climate and in fact there should be considerable more airing for an argument to cut them this week, than there was a month ago, even allowing for the subsequent rise in consumer price inflation. It seems certain rates will be kept on hold, given all of the risk and uncertainty currently surrounding growth and inflation. A brave decision would be to take a leaf out of the Fed’s book and to cut rates, to help stimulate growth at a crucial time for the economy, on the assumption that longer run inflation will be forced to moderate anyhow as the economy slows. Either way, markets should be on the lookout for comments from Bank of England committee members in the days after the meeting, because business and consumers alike will be looking to the Central Bank for some words of wisdom or reassurance, at a time when economic growth is deteriorating at an alarming pace. It is not beyond the bounds of possibility the MPC will break with normal tradition and issue a more detailed statement this week, even if rates are kept on hold, in an attempt to more promptly address growing fears about the state of the economy.
Sterling should continue to hold its own against the euro and the dollar, trading within recent ranges, while markets continue to rule out the possibility of rate cuts. But any sustained move against commodities will tend to undermine the pound because a relaxation in energy and food costs would make the Bank of England a certain candidate to then ease its monetary policy in the months ahead. This week’s MPC meeting could prove to be a non-event for the currency, if, as expected, rates are left on hold and the Bank does not issue any detailed statement. There is serious downside risk for the currency over the medium to longer term.
Ted B - Jul 8
The Governor Mervyn King has recently admitted that rising inflation is owing to spiralling costs of imported oil and commodities and short-term adjustments in interest rates is not going to alleviate this problem. What the Bank will need to determine is if an interest rate hike would be successful in anchoring inflation expectations and might ward off potential second round effects, where unions are demanding higher wages from employers. But with economic growth grinding to a halt, it is likely the labour market will soften over the next 2 quarters and wage inflation should not be an issue. Also, while inflation may rise higher in the coming months until such time as there is a stabilisation or a decline in commodity costs, inflation should moderate accordingly from the middle of next year. Indeed there is every prospect that commodity prices could collapse, given the stagnant state of the global economy and in this situation inflation could begin to decline sharply from the middle of next year. It would be totally irresponsible of the MPC of the Bank of England to raise interest rates to combat an inflation threat they largely have no control over. Indeed the MPC would be better served to coordinate actions with other major Central banks who find themselves in exactly the same dilemma. The diversification in polices of the ECB and the Fed serves to remind us no coordination currently exists.
The ECB went it alone and decided to raise interest rates last week, but economic data from the euro zone in the coming months could indicate that the ECB’s decision to tighten now was a huge mistake. In any event recent economic data out of the euro area has not been as soft as that out of the UK, while the euro economy significantly outperformed the UK economy in the first quarter of 2008, the last period for which comparative GDP data is available. Therefore, the Bank of England is not under undue pressure to follow the precedent set by the ECB.
The Bank of England is clearly not in a position to raise interest rates in the current climate and in fact there should be considerable more airing for an argument to cut them this week, than there was a month ago, even allowing for the subsequent rise in consumer price inflation. It seems certain rates will be kept on hold, given all of the risk and uncertainty currently surrounding growth and inflation. A brave decision would be to take a leaf out of the Fed’s book and to cut rates, to help stimulate growth at a crucial time for the economy, on the assumption that longer run inflation will be forced to moderate anyhow as the economy slows. Either way, markets should be on the lookout for comments from Bank of England committee members in the days after the meeting, because business and consumers alike will be looking to the Central Bank for some words of wisdom or reassurance, at a time when economic growth is deteriorating at an alarming pace. It is not beyond the bounds of possibility the MPC will break with normal tradition and issue a more detailed statement this week, even if rates are kept on hold, in an attempt to more promptly address growing fears about the state of the economy.
Sterling should continue to hold its own against the euro and the dollar, trading within recent ranges, while markets continue to rule out the possibility of rate cuts. But any sustained move against commodities will tend to undermine the pound because a relaxation in energy and food costs would make the Bank of England a certain candidate to then ease its monetary policy in the months ahead. This week’s MPC meeting could prove to be a non-event for the currency, if, as expected, rates are left on hold and the Bank does not issue any detailed statement. There is serious downside risk for the currency over the medium to longer term.
Ted B - Jul 8
Thứ Hai, 7 tháng 7, 2008
Bob's Currency Focus
EUR/USD
The euro fell to 1.5610 early Monday as the knock-on impact of the ECB’s more dovish than expected statement last Thursday rolled into Monday, leading to a further liquidation of euro long positions. Monday’s economic releases did not help the euro with Germany’s Industrial Production declining by 2.4% in May, the steepest decline in 9 years, against a consensus rise of 0.5%. Recent economic data out of the euro area has been very poor and the only reason the euro has held up is because of the hawkish stance of the ECB. If euro zone economic data continues to reflect a sharpening slowdown in economic activity, the ECB’s rate hike last Thursday could begin to look like a serious error of judgement and could lead to a longer run sell-off in the single currency. In fact with commodity prices at risk of a sharp decline owing to the global economic slowdown and US interest rates almost certainly at their nadir, the medium to long-term outlook for the euro over the next 6-9 months does not look particularly bright. The euro may have peaked at 1.6016 and current prices around 1.5650 would appear to offer very good medium term value, even if the euro has come off sharply in the past few days. There looks to be no reason why EUR/USD will not now retreat to test key support levels around 1.53. This is a data light week on both sides of the Atlantic and direction will be influenced more by scheduled statements from the G8 and Fed Chief Ben Bernanke than by economic data. Oil prices will continue to play a dominant role and any further rise in oil prices will be seen as a reason to sell the US currency. The G8 has been pretty much ineffective in the past in dealing with the oil/dollar crisis and it may be wishful thinking to expect anything from the Japan summit of the leaders of the 8 largest economies. Indeed a return to the usual mantra of the requirement for oil producing nations to support increased oil production will likely be laughed off by financial markets and rather than leading to support for the dollar, it may well undermine it. There is value in selling down the pair on prices close to 1.57, with the potential for a return to 1.55 or even 1.54 over the next week. Watch out for Bernanke’s speeches on Tuesday and Thursday as these are likely to be the most important events of the week. Unless the Fed Chief signals an intention to raise interest rates to offset rising inflation, the dollar will not be aided.
GBP/USD
Sterling is coming off the worst 2 weeks of economic data we have seen in years, with one report after another signalling a sharp downturn in the performance of the UK economy. Soft data has not been restricted to the housing sector, with economic activity in the manufacturing and services sectors entering contraction in June while the retail sector also comes under pressure. Sterling rose to 2 dollars against the dollar last week as traders speculated the Bank of England might raise interest rates to stave off the rising threat of inflation. This inflation however is commodity-driven and is outside the influence of the Bank of England and there is zero chance the MPC will move to raise rates when they meet later this week. This realisation has finally sunk in with markets and this morning the pound slid to below 1.97 against the greenback while the euro rose to above 79.5 pence. The Bank of England would normally be rushing to cut interest rates in an environment where growth is flat or negative but feel constrained by inflation concerns. In this environment the UK slowdown is only likely to become more pronounced and the medium term outlook for sterling is bleak. The Bank of England may feel forced into cutting rates, even while inflation is rising, as the Fed has done in the US, gambling that commodity prices are likely to retreat in the medium term. Mervyn King has not sown the inclination to be so creative in his policy thinking, so expect a wait and see approach this week and the Bank of England to stand pat on rates. Cable should be heading back to test the lower end of the trading range at 1.94, so it is still worth selling down on prices close to 1.97. There could be a lot of volatility this week, while any retreat in commodity prices will prove to be negative for sterling as it will relieve inflation pressures and make it easier for the Bank of England to cut UK interest rates. The euro will struggle to climb much above 80 pence against the pound, in the absence of any signal from the Bank of England to ease rates.
USD/JPY
The yen is the worst performing of all the major currencies Monday as markets use the pick-up in stocks and rumours of a G8 reference to the need for a strong dollar as a reason to offload the low-yielding Japanese currency. The yen may struggle in the short-term in a situation where G8 leaders might issue some coordinated statement on the dollar and commodity prices, as the impact could lead to a rise in stocks and risk tolerance that would undermine the yen. However, expectations from the G8 summit are probably exaggerated, particularly with respect to any direct reference being made to the dollar, and any resultant disappointment in markets could see risk aversion rise again and lead to the yen recovering somewhat against the dollar and the euro. Domestic data will not have any significant impact on the direction of the yen during this week. The euro is clearly massively over-valued against the yen at prices over Y168 but it is difficult to see the trend being reversed in the immediate term unless there is some sustained downward move against the single European currency. The only currency offering value against the yen at the present time is the US dollar and that is only on dips back towards the Y105 price level. Stock market performance will need to be monitored closely over the coming days as will the scheduled speeches from Fed Chairman Ben Bernanke.
USD/CAD
The loonie has continued its see-saw battle against the greenback over the past week and the pair remains pinned in a 1.0050 to 1.0250 price range, offering the most lucrative range-trading pair of all the majors. Soft economic data and concerns over the country’s sagging growth are preventing the loonie from getting away while equally soft economic data from the US and rising commodity prices continue to prevent the greenback from making a decisive move. The medium term outlook would tend to favour the US currency given the risk of a sharp correction in commodity prices, while any signal from Ben Bernanke that US interest rates are destined to rise could see the upside gain in the short run. Next Friday’s employment data out of Canada will be important although only a sharp decline in the employment total is likely to lead to any meaningful rally on either side, to the upside in this case for USD/CAD. In the unlikely event the G8 meeting results in some coordinated effort that sees in a retreat in commodity prices, then the loonie would also come under selling pressure. For now, expect the loonie to range between 1.01 and 1.03, with the value trades being bids on prices nearer to 1.01. The loonie could extend its rally this week against the euro, given the ECB has signalled a pause in interest rates and the euro could retreat to 1.58 at least against the Canadian currency.
Bob B - 7th July 2008
The euro fell to 1.5610 early Monday as the knock-on impact of the ECB’s more dovish than expected statement last Thursday rolled into Monday, leading to a further liquidation of euro long positions. Monday’s economic releases did not help the euro with Germany’s Industrial Production declining by 2.4% in May, the steepest decline in 9 years, against a consensus rise of 0.5%. Recent economic data out of the euro area has been very poor and the only reason the euro has held up is because of the hawkish stance of the ECB. If euro zone economic data continues to reflect a sharpening slowdown in economic activity, the ECB’s rate hike last Thursday could begin to look like a serious error of judgement and could lead to a longer run sell-off in the single currency. In fact with commodity prices at risk of a sharp decline owing to the global economic slowdown and US interest rates almost certainly at their nadir, the medium to long-term outlook for the euro over the next 6-9 months does not look particularly bright. The euro may have peaked at 1.6016 and current prices around 1.5650 would appear to offer very good medium term value, even if the euro has come off sharply in the past few days. There looks to be no reason why EUR/USD will not now retreat to test key support levels around 1.53. This is a data light week on both sides of the Atlantic and direction will be influenced more by scheduled statements from the G8 and Fed Chief Ben Bernanke than by economic data. Oil prices will continue to play a dominant role and any further rise in oil prices will be seen as a reason to sell the US currency. The G8 has been pretty much ineffective in the past in dealing with the oil/dollar crisis and it may be wishful thinking to expect anything from the Japan summit of the leaders of the 8 largest economies. Indeed a return to the usual mantra of the requirement for oil producing nations to support increased oil production will likely be laughed off by financial markets and rather than leading to support for the dollar, it may well undermine it. There is value in selling down the pair on prices close to 1.57, with the potential for a return to 1.55 or even 1.54 over the next week. Watch out for Bernanke’s speeches on Tuesday and Thursday as these are likely to be the most important events of the week. Unless the Fed Chief signals an intention to raise interest rates to offset rising inflation, the dollar will not be aided.
GBP/USD
Sterling is coming off the worst 2 weeks of economic data we have seen in years, with one report after another signalling a sharp downturn in the performance of the UK economy. Soft data has not been restricted to the housing sector, with economic activity in the manufacturing and services sectors entering contraction in June while the retail sector also comes under pressure. Sterling rose to 2 dollars against the dollar last week as traders speculated the Bank of England might raise interest rates to stave off the rising threat of inflation. This inflation however is commodity-driven and is outside the influence of the Bank of England and there is zero chance the MPC will move to raise rates when they meet later this week. This realisation has finally sunk in with markets and this morning the pound slid to below 1.97 against the greenback while the euro rose to above 79.5 pence. The Bank of England would normally be rushing to cut interest rates in an environment where growth is flat or negative but feel constrained by inflation concerns. In this environment the UK slowdown is only likely to become more pronounced and the medium term outlook for sterling is bleak. The Bank of England may feel forced into cutting rates, even while inflation is rising, as the Fed has done in the US, gambling that commodity prices are likely to retreat in the medium term. Mervyn King has not sown the inclination to be so creative in his policy thinking, so expect a wait and see approach this week and the Bank of England to stand pat on rates. Cable should be heading back to test the lower end of the trading range at 1.94, so it is still worth selling down on prices close to 1.97. There could be a lot of volatility this week, while any retreat in commodity prices will prove to be negative for sterling as it will relieve inflation pressures and make it easier for the Bank of England to cut UK interest rates. The euro will struggle to climb much above 80 pence against the pound, in the absence of any signal from the Bank of England to ease rates.
USD/JPY
The yen is the worst performing of all the major currencies Monday as markets use the pick-up in stocks and rumours of a G8 reference to the need for a strong dollar as a reason to offload the low-yielding Japanese currency. The yen may struggle in the short-term in a situation where G8 leaders might issue some coordinated statement on the dollar and commodity prices, as the impact could lead to a rise in stocks and risk tolerance that would undermine the yen. However, expectations from the G8 summit are probably exaggerated, particularly with respect to any direct reference being made to the dollar, and any resultant disappointment in markets could see risk aversion rise again and lead to the yen recovering somewhat against the dollar and the euro. Domestic data will not have any significant impact on the direction of the yen during this week. The euro is clearly massively over-valued against the yen at prices over Y168 but it is difficult to see the trend being reversed in the immediate term unless there is some sustained downward move against the single European currency. The only currency offering value against the yen at the present time is the US dollar and that is only on dips back towards the Y105 price level. Stock market performance will need to be monitored closely over the coming days as will the scheduled speeches from Fed Chairman Ben Bernanke.
USD/CAD
The loonie has continued its see-saw battle against the greenback over the past week and the pair remains pinned in a 1.0050 to 1.0250 price range, offering the most lucrative range-trading pair of all the majors. Soft economic data and concerns over the country’s sagging growth are preventing the loonie from getting away while equally soft economic data from the US and rising commodity prices continue to prevent the greenback from making a decisive move. The medium term outlook would tend to favour the US currency given the risk of a sharp correction in commodity prices, while any signal from Ben Bernanke that US interest rates are destined to rise could see the upside gain in the short run. Next Friday’s employment data out of Canada will be important although only a sharp decline in the employment total is likely to lead to any meaningful rally on either side, to the upside in this case for USD/CAD. In the unlikely event the G8 meeting results in some coordinated effort that sees in a retreat in commodity prices, then the loonie would also come under selling pressure. For now, expect the loonie to range between 1.01 and 1.03, with the value trades being bids on prices nearer to 1.01. The loonie could extend its rally this week against the euro, given the ECB has signalled a pause in interest rates and the euro could retreat to 1.58 at least against the Canadian currency.
Bob B - 7th July 2008
Thứ Ba, 1 tháng 7, 2008
Oil crisis and forex market
Oil prices have hit $143 a barrel and there appears to be little let-up as traders push the energy commodity to record highs, almost on a daily basis. At the same time the US dollar is hovering near record lows against a line of major currencies with markets continuously seeking to send the US currency lower. Commodity traders jump on any reason, no matter how minute, to send crude prices higher. The subsequent rise in oil prices is then taken as a vote of no confidence in the dollar and the greenback duly obliges, going lower in value. This would not be so bad were the related moves in some way proportionate, but the reality is that since last summer every 1% fall in the US dollar index has corresponded to a massively disproportionate 10% rise in the price of crude. Of course there are other factors driving crude prices, but it is no coincidence that oil prices began scaling the current spike around the same time the US Federal Reserve embarked upon an aggressive rate cutting campaign, a policy move that caused the US dollar to nosedive. Oil prices have reached such an alarming level that they are now having a damaging effect on global stock markets (inflated energy costs are eating into disposable income and drying up consumption demand for other products and services). US and European bourses are today officially in bear markets (the major indices having lost 20% from the peaks achieved within the past 9 months). As investors scramble for returns outside of equities, we are seeing some major fundamental disconnects in currency markets, something which has been amplified in recent weeks.
What are these disconnects?
1) A rise in risk aversion no longer translates into liquidation of carry trades. If one glances at the major carry pairs – EUR/JPY, AUD/JPY and NZD/JPY, one will notice that even in a situation where equity markets have plummeted over the past month, these carry pairs have in fact gone higher. The reason for this is twofold: a) while stocks have retreated, commodity prices have gone up and commodity currencies like the Aussie and Kiwi dollars have been well bid and b) Volatility levels as measured by the VIX indicator have remained low, even while stocks were selling off at a record pace in June. This is encouraging risk takers to keep selling the yen against higher yielding currencies.
2) Weak economic data is not weakening a currency in the current market. A case in point here is sterling, which has appreciated against every other major currency over the past 2 weeks, despite some dire economic releases from the UK which point to an ailing economy on the brink of recession. The euro has also been appreciating against a backdrop of softening economic data. Why? The Central Banks in the euro area and the UK have highlighted that they are more concerned about rising inflation trends than slowing growth conditions. The ECB is expected to raise interest rates this week at a time when the euro zone economy is slowing rather sharply, while the Bank of England has hinted the next move by the MPC is more likely to be a rate hike rather than a rate cut (markets had been expecting further cuts given the economic downturn). For the immediate term investors are more interested in higher yield, not growth prospects, and the comfort of higher interest rates is attracting their money. This of course is having a damaging effect on the dollar, with the Fed less concerned about rising inflation than the ECB and Bank of England, even though headline inflation is running higher in the US than in the euro area or in the UK.
This disconnect of course cannot last. Eventually markets will reach breaking point, which will happen when there is clear evidence of demand destruction for crude oil, or when spiralling energy inflation sparks some form of direct market intervention, or when the Fed is forced to hike US interest rates before they would like to do so. It may be premature to start expecting conciliatory tones from an ultra-hawkish ECB.
This disconnect situation does throw up some interesting medium term value trades in currency markets. The one that currently jumps out is GBP/USD, which is on offer to sell today just below the 2.00 mark. The UK economic situation is fast developing into a crisis and it is difficult to see how sterling can hold its elevated market position, regardless of what reality disconnect appears to be gripping the Bank of England. The euro also looks to have been on an extended honeymoon, although the ECB still holds considerable street cred with traders and Trichet & Co. cannot be dismissed as lightly as a Bank of England which is less than consistent in its policy approach.
Ted B - Jul 1
What are these disconnects?
1) A rise in risk aversion no longer translates into liquidation of carry trades. If one glances at the major carry pairs – EUR/JPY, AUD/JPY and NZD/JPY, one will notice that even in a situation where equity markets have plummeted over the past month, these carry pairs have in fact gone higher. The reason for this is twofold: a) while stocks have retreated, commodity prices have gone up and commodity currencies like the Aussie and Kiwi dollars have been well bid and b) Volatility levels as measured by the VIX indicator have remained low, even while stocks were selling off at a record pace in June. This is encouraging risk takers to keep selling the yen against higher yielding currencies.
2) Weak economic data is not weakening a currency in the current market. A case in point here is sterling, which has appreciated against every other major currency over the past 2 weeks, despite some dire economic releases from the UK which point to an ailing economy on the brink of recession. The euro has also been appreciating against a backdrop of softening economic data. Why? The Central Banks in the euro area and the UK have highlighted that they are more concerned about rising inflation trends than slowing growth conditions. The ECB is expected to raise interest rates this week at a time when the euro zone economy is slowing rather sharply, while the Bank of England has hinted the next move by the MPC is more likely to be a rate hike rather than a rate cut (markets had been expecting further cuts given the economic downturn). For the immediate term investors are more interested in higher yield, not growth prospects, and the comfort of higher interest rates is attracting their money. This of course is having a damaging effect on the dollar, with the Fed less concerned about rising inflation than the ECB and Bank of England, even though headline inflation is running higher in the US than in the euro area or in the UK.
This disconnect of course cannot last. Eventually markets will reach breaking point, which will happen when there is clear evidence of demand destruction for crude oil, or when spiralling energy inflation sparks some form of direct market intervention, or when the Fed is forced to hike US interest rates before they would like to do so. It may be premature to start expecting conciliatory tones from an ultra-hawkish ECB.
This disconnect situation does throw up some interesting medium term value trades in currency markets. The one that currently jumps out is GBP/USD, which is on offer to sell today just below the 2.00 mark. The UK economic situation is fast developing into a crisis and it is difficult to see how sterling can hold its elevated market position, regardless of what reality disconnect appears to be gripping the Bank of England. The euro also looks to have been on an extended honeymoon, although the ECB still holds considerable street cred with traders and Trichet & Co. cannot be dismissed as lightly as a Bank of England which is less than consistent in its policy approach.
Ted B - Jul 1
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