18-Oct 2008

CURRENCIES COMMENTARY

For some reason the Dollar remains in favor but we favor the Yen

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
10/22 Canadian Leading Indicators 7:30 AM
10/22 Canadian Retail Trade 7:30 AM
10/22 Japan Trade Balance 6:50 PM

DOLLAR: With US Treasuries clearly out of favor and seemingly set to fall even further out of favor, it is really surprising that the US Dollar continues to find favor. In fact, even if the Dollar is being seen as a flight to quality currency by the currency trade, it is somewhat surprising that the Dollar didn't setback in the face of suggestions from the EU's Almunia overnight that the worst of the global financial crisis was over. Clearly the market doesn't put that much stock in comments that the crisis is passing. Even more surprising is the fact that the Dollar remains strong in the face of overtly weak US data this week. In short, we suspect that the G7 or G20 is in some way responsible for the Dollar strength. Therefore, one apparently can't fight the up trend, but one can simply not participate in the uptrend. In fact, on another spurt up to the October highs in the US Dollar Index we would then consider some longer dated long puts, but in the near term, the Dollar seems to have more upside capacity.

EURO: Despite comments from the EU, that the worst of the global crisis is over, the trade apparently thinks that the situation in the Euro zone is set to deteriorate even further. In fact, one could suggest that evidence of more significant slowing is ahead for the Euro zone and with the Euro somewhat sitting at a rather extreme high level early in 2008, one shouldn't underestimate the amount of air that might have to come out of the Euro. The big question is, where will the money exiting the Euro go? Next downside targeting in the Euro is eventually seen down at 132.19 (off the weekly charts).

YEN: With doubt running toward the Dollar, weakness expected in the Euro and most other currencies generally out of favor, the Yen continues to be the primary flight to quality currency. In fact, with the setback in the yen early this week and the overnight dip in the Yen and that could allow for a long entry at a slightly more palatable price level. We suggest that traders get long the yen but protect that positioning with a double put position.

SWISS: The Swiss bulls have to be very disappointed in the action in the Swiss this week, especially with the action in the Swiss in the prior trading session! Apparently unless the global crisis spins totally out of control, the troubles inside Switzerland are apparently capable of offsetting periodic flight to quality buying interest in the Swiss. Expect another new low for the move in the Swiss directly ahead.

POUND: The Pound remains in a downward pattern on the charts and with the Wall Street Journal yesterday hinting at "cracks" in the UK financial bailout package, it is clear that the trade is set to remain bearish toward the Pound. In fact, in the face of more dismal US economic data today and or a sharp downside extension in US equity prices, it is possible that the December Pound will fall toward the 170 level again.

CANADIAN DOLLAR: More pain looks to be in store for the Canadian. In fact, with a host of physical commodities expected to remain in a downtrend, the US recession being extended far into the future and the US Dollar seemingly set to retain a flow of buying support, it would not be surprising to see the Canadian fall to new lows before the close today.

TODAY'S MARKET IDEAS:
None.

NEW RECOMMENDATIONS:
Buy 2 November Yen 96.50 puts at 98 or better and then look to buy the December Yen futures at the market. Risk the combination to a net loss of $1,900 and use an objective of either 94.50 on the downside or up at 104.50 on the upside in the December futures.

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) 10/17/2008: The daily stochastics gave a bullish indicator with a crossover up. Studies are showing positive momentum but are now in overbought territory, so some caution is warranted. A positive signal for trend short-term was given on a close over the 9-bar moving average. The market has a slightly positive tilt with the close over the swing pivot. The near-term upside target is at 83.53. The next area of resistance is around 83.18 and 83.53, while 1st support hits today at 82.40 and below there at 81.97.

EURO (DEC) 10/17/2008: The market broke to a new contract low. 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. The swing indicator gave a moderately negative reading with the close below the 1st support number. The next downside target is 132.88. The next area of resistance is around 135.01 and 135.88, while 1st support hits today at 133.51 and below there at 132.88.

JAPANESE YEN (DEC) 10/17/2008: Stochastics turning bearish at overbought levels will tend to support lower prices if support levels are broken. The market's short-term trend is negative as the close remains below the 9- day moving average. The downside closing price reversal on the daily chart is somewhat negative. The swing indicator gave a moderately negative reading with the close below the 1st support number. The next downside objective is now at 99.07. Daily studies pointing down suggests selling minor rallies. The next area of resistance is around 99.73 and 100.06, while 1st support hits today at 99.23 and below there at 99.07.

SWISS (DEC) 10/17/2008: Momentum studies are still bearish but are now at oversold levels and will tend to support reversal action if it occurs. The market's close below the 9-day moving average is an indication the shortterm trend remains negative. The market's close below the pivot swing number is a mildly negative setup. The next downside target is now at 87.73. The next area of resistance is around 88.38 and 88.76, while 1st support hits today at 87.87 and below there at 87.73.