23-Oct 2008

CURRENCIES COMMENTARY

The Dollar and Yen retain a leadership role

Upcoming International Reports (all times CT)
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
10/28 France Consumer Confidence 1:45 AM
10/28 France Housing Starts 1:45 AM
10/28 Japan Industrial Production 6:50 PM

DOLLAR: Despite seeing the Dollar defy fundamental logic and produce an almost unbelievable three day explosion, the Greenback remains within close proximity to its new highs. The rally in the Dollar has the same feel as the Treasury market, which seems to be operating on some nonsensical set of rules. However, with the markets apparently seeing concerns that the credit crisis is beginning to impact emerging markets, we can understand the flight to Dollars. In other words, the crisis inside the US is really big and complicated, but at least the US has the mechanisms to attempt to handle the crisis. It is also possible that the sharp declines in oil prices is indirectly fueling the Dollar upward, as a large portion of the world's oil is priced in Dollars and seeing the Dollar strengthen, in a way cushions some oil producers against the slide in revenues. In fact, the relationship between the Dollar and oil prices over the last two years has become quite prolific and we can't rule out ongoing Dollar support from even more severe declines in oil prices. If one really takes a leap of faith, the very sharp slide in oil prices and the sharp run up in the US Dollar could actually mean that the US is "relatively" getting the biggest economic bang out of the slide in oil (with the exception of the Japanese who have also seen their currency rise). Therefore, there is a sketchy fundamental angle that supports the Dollar off the slide in oil prices. Personally we think the Dollar only manages to streak to an even higher level, in the event that the global equity markets fall to an even lower level in the coming two trading sessions.

EURO: The Euro remains on the ropes and we suspect that more declines are ahead for the currency. Apparently the market is unwilling to see the Euro zone as a potential safe haven and instead the trade continues to downgrade the ECB's capacity to handle the crisis or the ensuing slowing. While the market doesn't seem to be that interested in the regularly scheduled macro economic news, the news from the Euro zone overnight would still seem to favor the bear camp in the Euro. In fact, a French business survey declined sharply for the month of October, while a French Household consumption reading was also weak. We would suggest that traders consider the purchase of November just out of the money Euro puts on any minor near term bounce in the currency.

YEN: With global financial anxiety remaining very high and global equity markets sitting just above extremely critical chart points, we suspect that flight to quality buying interest is going to remain in place for the yen in the coming two trading sessions. In fact, we get the sense that some type of major decision point is upon the markets and that global equity markets are poised to at least retest the lows and the failure to hold those lows, could shift the Yen into overdrive on the upside. However, we also had the sense before the debacle slide in the stock market on Wednesday that the short rate markets were beginning to thaw and therefore the risk to longs in the yen at current levels is very extreme. Be long the Yen, but consider put coverage or a short call/long put fence as protection.

SWISS: The trend in the Swiss is still down but with equity markets seemingly drifting back toward a panic zone on the charts, those that are short the Swiss should give some consideration to the potential for a sharp rebound. While we seriously doubt that things are going to get out of hand, another panic might mean the Swiss finally gets some flight to quality buying, especially with gold falling, the US condition still highly suspect and US Treasuries acting unnatural.

POUND: While the Pound is certainly extremely oversold, it isn't clear whether the markets have any interest in technicals in the face of the extreme fundamental analysis and fear that is operating in the market place. In fact, with the MPC this morning expressing concern over ongoing inflation threats in the morning press, one gets the sense that the UK policy makers and the Pound remain caught between a rock and a hard place. As in other comments this morning, expect the down trend to continue, but it might be beneficial to hedge short side positions with a short out of the money put and a long call, as that still leaves one short.

CANADIAN DOLLAR: With the gold market seemingly into a sever deflationary washout and the outlook for the world economy apparently worsening this week, there would seem to be little reason to think that the Canadian was poised to make a major reversal of trend. In fact, in the face of fresh news lows in global equity markets over the coming two trading sessions, the Canadian probably falls to the lowest level in since 2004.

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) 10/23/2008: The market rallied to a new contract high. Rising stochastics at overbought levels warrant some caution for bulls. The close above the 9-day moving average is a positive short-term indicator for trend. The gap upmove on the day session chart is a bullish indicator for trend. With the close over the 1st swing resistance number, the market is in a moderately positive position. The next upside target is 87.15. The market is becoming somewhat overbought now that the RSI is over 70. The next area of resistance is around 86.51 and 87.15, while 1st support hits today at 85.10 and below there at 84.34.

EURO (DEC) 10/23/2008: The sell-off took the market to a new contract low. 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. More selling pressure is likely given yesterday's gap lower price action on the day session chart. The defensive setup, with the close under the 2nd swing support, could cause some early weakness. The next downside objective is 127.52. The 9-day RSI under 20 suggests the market is extremely oversold. The next area of resistance is around 129.03 and 129.51, while 1st support hits today at 128.03 and below there at 127.52.

JAPANESE YEN (DEC) 10/23/2008: A bullish signal was given with an upside crossover of the daily stochastics. Momentum studies are trending higher but have entered overbought levels. The market's close above the 9-day moving average suggests the short-term trend remains positive. Follow through buying looks likely if the market can hold yesterday's gap on the day session chart. The market's close above the 2nd swing resistance number is a bullish indication. The next upside objective is 102.55. The market is approaching overbought levels with an RSI over 70. The next area of resistance is around 102.54 and 102.55, while 1st support hits today at 102.48 and below there at 102.44.

SWISS (DEC) 10/23/2008: 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. The gap lower price action on the day session chart is a bearish indicator for trend. The market setup is somewhat negative with the close under the 1st swing support. The next downside objective is 85.39. With a reading under 30, the 9-day RSI is approaching oversold levels. The next area of resistance is around 86.78 and 86.99, while 1st support hits today at 85.98 and below there at 85.39.