10-Oct 2008

CURRENCIES COMMENTARY

The Dollar looks vulnerable unless Paulson action surprises

Upcoming International Reports (all times CT)

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
10/14 Japan Consumer Confidence Survey 12:00 AM
10/14 France Consumer Price Index 1:45 AM
10/14 UK Consumer Price Index 3:30 AM
10/14 German ZEW Indicator of Economic Sentiment 4:00 AM
10/14 Canadian New Motor Vehicle Sales 7:30 AM

DOLLAR: As suggested in two prior daily comments, the Dollar has seen a transition of sorts. The biggest shift in Dollar action came with the Greenback's failure to rally in the face of indecision by the ECB on their initial bailout efforts seen early in the week. The second shift in the US Dollar action this week took place in the wake of periodic strength in the US equity markets that failed to provide the Dollar with a lift. In our opinion, the fear of international slowing has been temporarily replaced in the markets focus, by interest in how the US bailout
package will be implemented. In other words the currency trade is showing its doubts on the initial effectiveness of the efforts of the U.S. Treasury. Other traders will suggest that the reduction in US interest rates provides the basis for a correction in the Dollar, even though the US rate cut came as part of a coordinated effort. It is also possible that the US Dollar index reached an excessively overbought technical condition around this week highs and the market simply needed to balance its technicals. We also suspect that a temporary calming of anxieties is
cause for some profit-taking. Near-term downside targeting the December Dollar index is seen at 80.60 and then again down at 80.20. In fact, we suspect that regularly scheduled US data this morning will serve to keep some pressure on the Dollar.

EURO: The Euro was certainly technically overdone around this week's lows and deserving of a corrective bounce. Now that global anxieties have been tamped down (at least temporarily) the concern of excess capital flowing away from the euro zone has at least temporarily pushed to the back burner. It is also possible that a favorable German foreign trade surplus reading for August has further tamped down the concerns of slowing in the EU. Using normal corrective measurements, off the record six day sell off in the Euro, the first upside retracement point is pegged up at 139.00, with the 50% retracement point pegged up at 140.40. An initial close-in
resistance point for the December euro today could also be seen at 138.30, but with the focus turning more toward the prospects of a US recession, it would not be surprising to see a return to the 140 level in the coming trading sessions.

YEN: Since the Yen was one of the most favored flight quality instruments over the last five trading sessions, it won't be surprising to see a bit of corrective action in the currency in the days ahead. However, for the liquidation in the yen to unfold consistently, probably requires generally upbeat equity market action. It is also possible that the lack of an interest-rate cut by Japan early this week temporarily foments severe slowing concerns in the Japanese economy. Near-term corrective targeting in the December Yen is seen at 99.50 and then again at 99.10.

SWISS: While the Swiss has rallied significantly off the prior session's low, it is painfully clear to the bull camp that the Swiss was never perceived as a primary flight to quality instrument. While we doubt that the crisis has run its course, a period of temporary calm could provide solid resistance on the Swiss charts. A critical pivot point resistance zone in the December Swiss is seen today at 89.63 and a trade above that level could project a further rise to 90.36. In retrospect, the action in the Swiss this week suggests that the ultimate trend in the currency is still pointing downward. Therefore traders should exit long call plays implemented in the prior trading session.

POUND: Despite the weakening of the US Dollar over the last several trading sessions, the Pound has been unable to capitalize. Apparently aggressive action by the Bank of England to control the financial crisis and ongoing evidence of weakness in the UK economy has undermined the British pound, as it managed a fresh new low for the move overnight. In fact, news of a weaker UK foreign trade balance in August and another decline in Halifax housing prices puts the fear of a recession in the UK into a front and center position. Therefore, traders should be sellers of rallies in the Pound.

CANADIAN DOLLAR: Given the sharp and historical slide in the Canadian over the last two weeks, one might expect a somewhat impressive recovery bounce in the face of macro economic optimism this morning. However in the early going the Canadian hasn't been overly impressive in its recovery attempts and that could be the result of a news conference by the Canadian Minister of Finance later today. A nominal retracement of the late September early October slide in the Canadian would allow for a bounce to 91.96, but that type of move is unlikely unless the outlook for the global economy improves markedly. On the other hand, there might be little resistance in the Canadian until the 90.26 level on the charts.

TODAY'S MARKET IDEAS:
None.

NEW RECOMMENDATIONS:
* If you bought the November Swiss 93 calls yesterday liquidate at the market today.

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. Hold the calls for a futures move above 98.00.

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) 10/09/2008: Momentum studies are trending higher but have entered overbought levels. The market's short-term trend is positive on the close above the 9-day moving average. The market tilt is slightly negative with the close under the pivot. The near-term upside target is at 82.01. The next area of resistance is around 81.55 and 82.01, while 1st support hits today at 80.61 and below there at 80.13.

EURO (DEC) 10/09/2008: Daily stochastics are trending lower but have declined into oversold territory. The market's short-term trend is negative as the close remains below the 9-day moving average. With the close higher than the pivot swing number, the market is in a slightly bullish posture. The next downside objective is now at 135.61. The next area of resistance is around 137.96 and 138.74, while 1st support hits today at 136.40 and below there at 135.61.

JAPANESE YEN (DEC) 10/09/2008: Studies are showing positive momentum but are now in overbought territory, so some caution is warranted. The market's close above the 9-day moving average suggests the short-term trend remains positive. If yesterday's gap higher on the day session chart holds, additional buying could develop this session. There could be more upside follow through since the market closed above the 2nd swing resistance. The next upside objective is 101.92. With a reading over 70, the 9-day RSI is approaching overbought levels. The next area of resistance is around 101.10 and 101.92, while 1st support hits today at 99.86 and below there at 99.43.

SWISS (DEC) 10/09/2008: Momentum studies are declining, but have fallen to oversold levels. The market's short-term trend is negative as the close remains below the 9-day moving average. If yesterday's gap higher on the day session chart holds, additional buying could develop this session. There could be more upside follow through since the market closed above the 2nd swing resistance. The next downside objective is now at 88.05. The next area of resistance is around 89.80 and 90.25, while 1st support hits today at 88.70 and below there at 88.05.