08-Oct 2008

CURRENCIES COMMENTARY

Temporary pause in the Dollar rally expect corrective action

Upcoming International Reports (all times CT)

10/08 Japan BOJ Report 1:00 AM
10/08 France Trade Balance 1:45 AM
10/08 Euro-zone GDP 4:00 AM
10/08 German Industrial Production 5:00 AM
10/08 Japan Machinery Orders 6:50 PM
10/09 German Foreign Trade 1:00 AM
10/09 UK Foreign Trade 3:30 AM
10/09 UK Monetary Policy 6:00 AM
10/09 Japan BOJ Minutes 6:50 PM
10/09 German Manufacturing Turnover Index
10/10 Swiss Employment 12:45 AM
10/10 France Industrial Production 1:45 AM
10/10 Canadian Labor Force Survey 6:00 AM
10/10 Canadian International Merchandise Trade 7:30 AM
10/10 Canadian New Housing Price Index 7:30 AM
10/13 UK Producer Price Index 3:30 AM
10/13 Japan Wholesale Prices (CGPI) 6:50 PM

DOLLAR: The Dollar is clearly overbought after the sharp flight to quality run up of the last three weeks. However, a lack of definitive action from the ECB on some form of response to the spread of the financial crisis would seem to leave the Dollar underpinned on the charts. We think the lack of a Euro bounce in the face of better than expected German numbers overnight highlights the ongoing bullish bias toward the Dollar. However, we get the sense that the Dollar is vulnerable to some form of temporary back and fill, especially if the extreme financial market turmoil temporarily abates. Perhaps some players think that the Dollar is vulnerable to selling in the event that the US moves to cut interest rates, but in our opinion, moving to cut US rates could at least temporarily diffuse fears of severe slowing and in turn shore up the December Dollar above close-in support of 81.00. While the US is scheduled to release consumer credit readings late in the trading session today, the market just doesn't seem to be locked onto the US data for now, as the main focal point of the Dollar trade is still the flight to quality angle. Those that are long the Dollar should once again consider temporarily wrapping up those positions with a short out of the money call and a long just out of the money put combination.

EURO: The Euro appears to be showing some signs of strength this morning and that could lead to a corrective bounce. In fact, with German August manufacturing orders overnight managing a somewhat impressive gain, it is possible that the overt fear of severe slowing in the Euro zone is temporarily displaced. In fact, for the trade not to take the EU failure to come forth with a plan to address the looming credit crisis in the Euro zone, the trade could have punished the Euro this morning with another new low for the move. However, we get a sense that world
equity markets might see a temporary bounce (off the hope for coordinated rate cuts) and that in turn could reverse the constant flight to quality buying of the US Dollar and allow the December Euro to regain the 137.50 level over the coming 24 hours of trade.

YEN: While the Yen is clearly short term overbought a number of players are seeing the yen as a flight to quality instrument or perhaps the strength in the Yen is merely a combination of massive repatriation or ongoing carry trade liquidation efforts. For the time being, one can't argue with an eventual continuation of the up trend in the Yen, but a slight bounce in US equities today could result in a temporary back and fill in the December Yen back to close-in support of 98.50.

SWISS: While the Swiss missed the typical flight to quality buying interest seen in the past in the face of historically troubling financial times, it would seem like the December Swiss has now managed to forge a fairly solid support zone around 87.38 level over the last 24 hours. However, it still seems like the Swiss is going to remain out of favor unless the world financial situation is thought to be spinning totally out of control! In short, the ebb and flow of macro economic expectations for the Euro zone looks to dominate the action in the Swiss.

POUND: The Pound is getting a noted bounce off the last 24 hour lows, despite the markets concern that the UK has yet to offer up its own comprehensive containment package. In fact, the Pound is bouncing this morning despite another weak reading from UK industrial production type readings. In short, the Pound was excessively oversold and the mere hope of coordinated rate cuts seems to have prompted some concentrated buying interest. Near term resistance is seen at 174.65.

CANADIAN DOLLAR: With what appears to be a temporary pause in the fear of a severe global recession, the Canadian has managed to bounce off the 90.25 support zone. However, without a clear coordinated set of rate cuts ahead we doubt that the Canadian will be able to mount anything beyond a temporary bounce.

TODAY'S MARKET IDEAS:
None.

NEW RECOMMENDATIONS:
None.

PREVIOUS RECOMMENDATIONS:
1) Long 3 December Canadian 98.50 calls from 82 and short the December Canadian futures at 95.38. Risk the combination to a net loss in excess of $1,000. *Hit objective on the initial short futures 92.30, which more than finances the long call play. **Re-Sold the December futures 93.16 *hit second objective of 92.80. *Re-Sell DecCanadian again at 93.54. Hold the calls for a futures move above 98.00.
2) Short the October Euro 149 call 130 and long a November Euro 150 call for 204. Risk the position to a net loss of $900. *Hit the objective of 40 on the short call keep an objective of 500 on the long call. 3) Long the October Canadian 95 calls for 33 with an objective of 90. *Hit risk of 20.

CURRENCIES TECHNICAL OUTLOOK:
Note: Technical commentary is based solely on statistical indicators and does not necessarily correspond to any fundamental analysis that may appear elsewhere in this report.

US DOLLAR (DEC) 10/07/2008: The market made a new contract high on the rally. The upside crossover of the 9 and 18 bar moving average is a positive signal. Rising stochastics at overbought levels warrant some caution for bulls. The market's close above the 9-day moving average suggests the short-term trend remains positive. There could be more upside follow through since the market closed above the 2nd swing resistance. The near-term upside objective is at 82.56. The 9-day RSI over 70 indicates the market is approaching overbought levels. The next area of resistance is around 82.21 and 82.56, while 1st support hits today at 81.32 and below there at 80.79.

EURO (DEC) 10/07/2008: The market broke to a new contract low. The downside crossover (9 below 18) of the moving averages suggests a developing short-term downtrend. Daily stochastics are trending lower but have declined into oversold territory. A negative signal for trend short-term was given on a close under the 9-bar moving average. The gap lower on the day session chart is bearish and puts the market on the defensive. The defensive setup, with the close under the 2nd swing support, could cause some early weakness. The next downside objective is now at 133.33. The 9-day RSI under 20 suggests the market is extremely oversold. The next area of resistance is around 135.46 and 136.74, while 1st support hits today at 133.76 and below there at 133.33.

JAPANESE YEN (DEC) 10/07/2008: Momentum studies are trending higher but have entered overbought levels. The close above the 9-day moving average is a positive short-term indicator for trend. The gap up on the day session chart gave a bullish indicator and more follow through could be seen this session. The market's close above the 2nd swing resistance number is a bullish indication. The near-term upside objective is at 102.62. The market is becoming somewhat overbought now that the RSI is over 70. The next area of resistance is around 101.52 and 102.62, while 1st support hits today at 98.40 and below there at 96.38.

SWISS (DEC) 10/07/2008: The downside crossover of the 9 and 18 bar moving average is a negative signal. Momentum studies are still bearish but are now at oversold levels and will tend to support reversal action if it occurs. The close below the 9-day moving average is a negative short-term indicator for trend. The defensive setup, with the close under the 2nd swing support, could cause some early weakness. The next downside objective is 86.88. The next area of resistance is around 87.76 and 88.29, while 1st support hits today at 87.06 and below there at 86.88.