20-Oct 2008

CURRENCIES COMMENTARY

Minor Dollar weakness ahead as flight to quality temp wanes

Upcoming International Reports (all times CT)
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
10/23 France Business Survey 1:45 AM
10/23 Euro-zone Balance of Payments 3:00 AM
10/23 UK Retail Sales 3:30 AM
10/23 Euro-zone Industrial New Orders 4:00 AM
10/24 UK GDP 3:30 AM
10/24 Canadian Consumer Price Index 6:00 AM
10/27 German IFO Business Climate Index 3:00 AM
10/27 Japan Retail Sales 6:50 PM

DOLLAR: Apparently seeing a host of international equity markets forging gains overnight has dented the US Dollar from a flight to quality perspective. Critical support in the Dollar is seen at 82.42 this morning, but it is possible that the Dollar will be at least temporarily undermined by the decline in the US Leading Indicators report this morning but recently the currency markets have not paid that much attention to the regularly scheduled US data flow. The October 14th Commitment of Traders with Options report for US Dollar showed the Noncommercial position to be net long 25,349 contracts, with the Non-reportable position net long 811 contracts and that made the "combined" spec and fund position net long 26,160 contracts as of early last week. On the other hand, with the US Dollar climbing another 2 points in the wake of the COT report mark off, we suspect that the magnitude of the net spec long positioning is understated into the opening today. Given a short period of financial sector calm, that could open up the door for a temporary corrective slide in the Dollar. Initial support levels into the opening this morning are pegged at 82.42, 82.31 and then again at 82.21.

EURO: While the Euro seems to have a slightly positive bias in the early going today, the market still looks somewhat range bound. In fact, if the market were poised for a distinct run up today, we suspect that the slightly hotter than expected German PPI report released overnight would have provided the Euro with the capacity to rise above close-in resistance of 135.12 in the December Euro contract. The October 14th Commitment of Traders with Options report for Euro showed the Non-commercial position to be net short 34,732 contracts, with the Non-reportable position also net short 6,577 contracts and that made the "combined" spec and fund position net short 41,309 contracts as of early last week. Furthermore, with the Euro falling almost 2 additional points in the wake of the COT report mark off early last week, we suspect that the net spec short positioning in the Euro was understated into the opening today and that could provide the Euro with the capacity to rise back into a range bound by 135.33 to 136.00.

YEN: With global equity markets showing initial strength today it would appear that anxiety is somewhat on the decline. Therefore, the Yen which has recently been seen as one of the primary flight to quality instruments, would seem to be destined to give some ground. Near term downside targeting is seen at 96.00 and then again down at the 97.54 level basis the December contract. In fact, as long as calm reigns in the stock market, one might assume that the path of least resistance in the Yen is pointing down.

SWISS: The Swiss remains in a vulnerable status on the charts with the 88.00 level potentially a critical pivot point today. However, given that the Swiss on Thursday was hammered sharply lower and ultimately rejected the 87.00 level, the Swiss appears to have already liquidated a good portion of the weak handed longs. In fact, unless the US stock market mounts a very strong rally this morning, we doubt that the December Swiss will fall below the 87.80 level.

POUND: The Pound is exhibiting a short covering action in the early going today and that appears to be the result of coordinated efforts to unfreeze the credit markets. In our opinion, the Pound needs to see the Libor market soften for the Pound to mount a quick run back up to the 177.50 level. However, given the magnitude of the oversold condition in the Pound around the recent October spike low, it would not be surprising for the Pound to make a run at the 50% retracement level off the September/October slide which is seen up at 177.04 in the action today.

CANADIAN DOLLAR: The Canadian Dollar is another currency that is extensively oversold and perhaps one currency that has factored in the most significant slowing of the global economy. While it might be premature to downplay the magnitude of the slowing expected in the global economy, it is possible that shorts in the Canadian will be uncomfortable in their positions today and that could allow for a temporary recovery bounce back above the 86.00 level on the charts.

TODAY'S MARKET IDEAS:
None.

NEW RECOMMENDATIONS:
None.

PREVIOUS RECOMMENDATIONS:
1) Long 2 November Yen 96.50 puts at 94 and long the December Yen futures at roughly 98.80. 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. 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) 10/20/2008: The market's close above the 9-day moving average suggests the short-term trend remains positive. The market has a slightly positive tilt with the close over the swing pivot. More downside action may be limited by the RSI under 20 putting the market in extremely oversold territory. The next area of resistance is around 83.15 and 83.38, while 1st support hits today at 82.57 and below there at 82.20.

EURO (DEC) 10/20/2008: Momentum studies are still bearish but are now at oversold levels and will tend to support reversal action if it occurs. A negative signal for trend short-term was given on a close under the 9-bar moving average. The market tilt is slightly negative with the close under the pivot. The next downside objective is 133.38. The next area of resistance is around 134.65 and 135.17, while 1st support hits today at 133.75 and below there at 133.38.

JAPANESE YEN (DEC) 10/20/2008: Momentum studies trending lower at mid-range should accelerate a move lower if support levels are taken out. The market's short-term trend is negative as the close remains below the 9- day moving average. The close below the 2nd swing support number puts the market on the defensive. The next downside target is 97.88. The next area of resistance is around 99.35 and 100.07, while 1st support hits today at 98.25 and below there at 97.88.

SWISS (DEC) 10/20/2008: Momentum studies are declining, but have fallen to oversold levels. A negative signal for trend short-term was given on a close under the 9-bar moving average. It is a mildly bullish indicator that the market closed over the pivot swing number. The next downside objective is 87.87. The next area of resistance is around 88.59 and 88.87, while 1st support hits today at 88.09 and below there at 87.87.