17-Oct 2008

CURRENCIES COMMENTARY

The $ retains a slight edge despite weak numbers directly ahead

Upcoming International Reports (all times CT)
10/17 Euro-zone Foreign Trade 4:00 AM
10/20 German Producer Price Index 1:00 AM
10/20 Canadian Wholesale Trade 7:30 AM
10/21 Swiss Trade Balance 1:15 AM
10/21 Canadian Monetary Policy 8:00 AM

DOLLAR: We continue to think that the Dollar is being supported by intervention or that the Dollar is being purchased in a potentially misguided flight to quality positioning. Ideas that the US has a better chance of recovering quicker from a global economic recession has supported the Dollar against the Euro and Pound. We suspect the dollar has also been able to seemingly discount the bearish news on the US economy on ideas that European interest rates have a lot farther to fall. But while the trend might be pointing up in the Dollar, the action in the US equity market and the US Treasury markets this week would seem to suggest that the Dollar could be setting up for a sharp fall in the coming trading sessions. While many currency traders have lumped the Dollar and the Yen together as primary flight to quality instruments, a severe meltdown in the US equity market and clear disdain for US Treasuries would seem to set the stage for a failure in confidence in the Dollar. However, given the potential for violent price action ahead, traders should attempt to utilize options and futures positions to control risk. A recovery bounce in US equity markets off of overnight lows has trimmed gains in the Dollar overnight. US equity markets will continue to have the biggest influence on Dollar and the Dollar likely has the potential to trade higher even in the face of weak economic reports today if the data triggers more price weakness in US equity markets.

EURO: The euro traded weaker overnight weighed down by concerns Europe could suffer a more severe economic recession than the US leaving the need for the ECB to aggressively cut rates in the months ahead. Certainly seeing lower readings on Euro-zone and German inflation data supports the view that easing price pressures will enable the ECB to cut rates sooner rather than later. Investors seem to have a low tolerance for risk and that is certainly a factor that has been undermining the Euro. But if US equity markets manage a strong recovery bounce this session the euro may manage a temporary move back above the 135 level given the oversold condition of the market. But the bleak outlook for the global economy leaves more downside than upside price risk in the euro and that suggests an eventual break to 130 can't be ruled out.

YEN: The Yen has gained overnight as weakness in global equity markets have provided safe haven support to the currency as investors continue to lower their risk tolerance. Unwinding of the carry trade continues to be a key factor supporting the Yen as tight credit conditions have investors needing to raise cash. A recovery bounce in US equity markets has trimmed overnight gains in the Yen. However, if the US economic data comes in patently weak, we suspect the Yen could retest overnight highs if the economic data causes US equities to take a big hit. Given the bearish outlook for global economic conditions we suspect a further lowering in investor risk tolerance has the potential to eventually lift the Dec Yen back towards the March high. Key support for the Dec Yen today is at 99.79 with resistance at 101.27.

SWISS: The Swiss franc has managed an impressive recovery off of the overnight lows despite indications of more troubles facing the Swiss banking industry. Some flight to safety buying may be supporting the currency given the sell off in global equity markets overnight. In fact, the Dec Swiss seemed to reject a probe below 87.50. But since the Swiss has become oversold, perhaps the market's recovery is more technically based. In fact, the market may have the technical short covering capacity to trade back towards 90 before another attempt to trade under 87.50 is seen.

POUND: Optimism from the UK banking rescue plan seems to be quickly wearing off and the economic reality that the UK is facing the possibility of a severe and protracted recession is putting downward pressure on the Pound. The UK economic news continues to point to a further depreciation in the Pound given that the unemployment rate reached an eight year high, the decline in housing prices is accelerating and retail sales dropped for the 4th straight month. Therefore, the path of least resistance will remain down and that leaves the market vulnerable to a test of last week's lows near 167.50.

CANADIAN DOLLAR: The Canadian has attempted a recovery bounce from overnight lows. But if weak price action in the energy and gold markets holds, we suspect the upside potential in the Canadian will be limited. The weak price action in the Canadian yesterday suggests the currency will certainly be affected by the bleak economic outlook for the US. In fact, weak US economic data today could weaken the Canadian as a contraction in US demand certainly lowers the export potential for the Canadian. Therefore, there appears to be more downside risk for the Canadian despite the market's oversold technical condition.

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. 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) 10/16/2008: Daily stochastics turning lower from overbought levels is bearish and will tend to reinforce a downside break especially if near term support is penetrated. The close above the 9-day moving average is a positive short-term indicator for trend. There could be more upside follow through since the market closed above the 2nd swing resistance. The next downside objective is now at 81.13. The next area of resistance is around 82.96 and 83.23, while 1st support hits today at 81.91 and below there at 81.13.

EURO (DEC) 10/16/2008: Daily stochastics declining into oversold territory suggest the selling may be drying up soon. A negative signal for trend short-term was given on a close under the 9-bar moving average. There could be some early pressure today given the market's negative setup with the close below the 2nd swing support. The next downside objective is 133.88. The next area of resistance is around 135.86 and 136.88, while 1st support hits today at 134.36 and below there at 133.88.

JAPANESE YEN (DEC) 10/16/2008: Momentum studies trending lower from overbought levels is a bearish indicator and would tend to reinforce lower price action. A positive signal for trend short-term was given on a close over the 9-bar moving average. Follow through buying looks likely if the market can hold yesterday's gap on the day session chart. Since the close was above the 2nd swing resistance number, the market's posture is bullish and could see more upside follow-through early in the session. The next downside objective is 99.24. The next area of resistance is around 100.01 and 100.12, while 1st support hits today at 99.57 and below there at 99.24.

SWISS (DEC) 10/16/2008: 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. It is a slightly negative indicator that the close was lower than the pivot swing number. The next downside target is 87.57. The next area of resistance is around 88.59 and 88.97, while 1st support hits today at 87.89 and below there at 87.57.