22-Oct 2008

CURRENCIES COMMENTARY

Expect the Dollar and the Yen to remain the dominant currencies

Upcoming International Reports (all times CT)
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: For the time being, the US Dollar remains king. However, it would not appear that the majority of the gains the Dollar are simply attributable to intervention by foreign central banks. In other words, talk of severe slowing outside of US, hope for an aggressive US stimulus package and other aggressive US maneuvering appears to leave the Dollar in a relatively stronger position than most other currencies. While the breakneck gains in the US Dollar Index this week, put the greenback in an extreme short-term overbought positioning, it would appear that the trade is content to leave the Dollar in favor. However the failure to hold above the gap area at 84.97 in the December Dollar index could be seen as a key technical failure in the trade today. While the US doesn't have any scheduled data due out on its economy today, an ongoing flow of US corporate earnings news should not be discounted. Unless the US equity market comes under tremendous selling pressure today, we suspect the December dollar index will find support at 85.10 and that it will continue to maintain a generally positive track on the charts.

EURO: With another big range down extension in the euro overnight, the downtrend pattern in the Euro appears to be firmly entrenched. Adding into the down side tilt in the Euro are concerns that the ECB is falling behind the rate cut curve and that failure to act aggressively will ultimately leave the euro zone mired in a slowdown longer than other areas. While the lingering financial sector problems of the euro zone are also adding to the downside in the currency, it is possible that the lack of aggressive monetary policy action is simply serving to accelerate the December Euro's slide down to weekly consolidation support at 125.00.

YEN: Apparently the Yen is poised to regain upside momentum at the expense of weakness in the Pound and Euro. In fact, given the big range up thrust this morning in the Yen it would appear that the December Yen contract is poised to take out the October highs before the end of the week. In fact, in the face of any minor weakness in the US Dollar directly ahead, the Yen might end up being the sole bullish benefactor among the actively traded currencies.

SWISS: Apparently persistent global de-leveraging and severe global deflation is being seen as a definitive negative for the Swiss. It is also possible that a slight tempering of financial sector concerns and an increase in classic slowing fears has prompted outright fresh selling of the Swiss. The next downside target on the Swiss would seem to come in at 85.00 on the weekly charts.

POUND: With the Bank of England overnight projecting the first UK recession in 16 years and the MPC clearly in a position to reduce US interest rates even further, it is not surprising to see the British Pound falling to fresh new lows this morning. With the British Pound failing to hold at critical support levels off the 2005 lows, the next logical downside targeting comes in at a somewhat startling 1.65 level. In fact, the severity of the UK slowing threat was highlighted by MPC Minutes that showed one member wanted a 100 basis point cut in the November meeting.

CANADIAN DOLLAR: With a massive range down extension in the Canadian Dollar decimating the technical structure in the currency and severe ongoing weakness in metals and energy prices, a number of classic fundamentals leave the Canadian Dollar in a downdraft posture. In fact, the Canadian Dollar would appear to be headed to the next consolidation support zone of 79.27 on the charts and it could be difficult to halt the slide in the Canadian in the face of ongoing expectations of a severe global recession.

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. *Hit an objective of 99.88 on the December futures. Risk the call position to a close below 30 in the long puts.
2) 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) 10/22/2008: The rally brought the market to a new contract high. Studies are showing positive momentum but are now in overbought territory, so some caution is warranted. The close above the 9-day moving average is a positive short-term indicator for trend. Market positioning is positive with the close over the 1st swing resistance. The near-term upside target is at 86.00. The market is becoming somewhat overbought now that the RSI is over 70. The next area of resistance is around 85.56 and 86.00, while 1st support hits today at 84.01 and below there at 82.90.

EURO (DEC) 10/22/2008: The market made a new contract low on the break. Momentum studies are declining, but have fallen to oversold levels. The market's close below the 9-day moving average is an indication the shortterm trend remains negative. The gap lower on the day session chart is bearish and puts the market on the defensive. There could be some early pressure today given the market's negative setup with the close below the 2nd swing support. The next downside target is 129.88. The market is approaching oversold levels on an RSI reading under 30. The next area of resistance is around 131.83 and 132.65, while 1st support hits today at 130.45 and below there at 129.88.

JAPANESE YEN (DEC) 10/22/2008: Declining momentum studies in the neutral zone will tend to reinforce lower price action. The market's short-term trend is positive on the close above the 9-day moving average. Follow through buying looks likely if the market can hold yesterday's gap on the day session chart. There could be more upside follow through since the market closed above the 2nd swing resistance. The next downside target is now at 99.21. The next area of resistance is around 99.83 and 99.92, while 1st support hits today at 99.48 and below there at 99.21.

SWISS (DEC) 10/22/2008: Daily stochastics declining into oversold territory suggest the selling may be drying up soon. The market's close below the 9-day moving average is an indication the short-term trend remains negative. The outside day up is a positive signal. Market positioning is positive with the close over the 1st swing resistance. The next downside target is 86.36. The next area of resistance is around 87.33 and 87.48, while 1st support hits today at 86.78 and below there at 86.36.