29-Oct 2008

CURRENCIES COMMENTARY

Less flight to quality interest to weaken the $ and the Yen

Upcoming International Reports (all times CT)
10/30 France Employment Situation
10/30 France Producer Price Index
10/30 German Employment Situation
10/30 Euro-zone Business and Consumer Survey
10/30 Canadian Industrial Product and Raw Materials
10/30 Canadian Producer Price Index
10/30 Japan Manufacturing PMI
10/30 Japan Consumer Price Index
10/30 Japan Household Spending
10/30 Japan Unemployment Rate
10/31 Euro-zone Unemployment Rate
10/31 Swiss KOF Leading Indicator
10/31 UK Consumer Confidence (GfK)
10/31 Canadian GDP (By Industry)
11/03 Swiss PMI
11/03 German Manufacturing PMI
11/03 Euro-Zone RBS\NTC Research Manufacturing PMI
11/03 Euro-Zone RBS\NTC Research Services PMI
11/03 UK CIPS/NTC Research Manufacturing PMI

DOLLAR: While there is a significant amount of information flying around in these markets, one constant hasbeen strength in the Dollar in the face of growing anxiety and weakness in the Dollar in the face of declining anxiety. Certainly the Dollar was over wound around its recent highs and we have to think that the US efforts to control its financial sector turmoil are starting to tamp down the problems somewhat. We also think that another US rate cut today was factored into the Dollar around its recent highs and seeing the US Fed follow through witha 50 basis point cut today could give off the impression that help is on the way for the threat of classic slowing in the US economy. However, it isn't a given that the US Fed will go the full 50 basis point cut expected by many traders, as some former Fed members have suggested that the Fed doesn't want to use up its ammunition. In the end, the Dollar will continue to be seen as a periodic primary flight to quality instrument, but there is a chance now that the high this week could be a moderately significant high! However, one can't sell the Dollar index futures inthe face of such historic potentials ahead and therefore one has to be content to purchase Dollar puts and quantify risk. Buy the December Dollar 84 puts for 100.

EURO: While the euro has already managed a short covering bounce off the recent lows and the Dollar mighthave made a moderate top, we aren't willing to chase the euro on the upside, especially since the ECB still looks to be one of the last to move toward lower interest rates. Clearly the ECB President has promised to act, but waiting until everyone else have moved to cut rates could mean that sentiment in the Euro zone is set to be thelast to improve and that could leave the Euro languishing in a 130 to 123 trading range over the coming weeks. Infact, with French and German employment figures due in on Thursday morning, we have to think that the euro is going to remain vulnerable to some near term weakness, even if the October lows are starting to look a little more solid. Keep in mind, not all of the weakness in the euro in the July through October slide was exclusively the macro economic or interest rate differential impact, some of the declines were pure and simply flight to quality interest in the Dollar. One should pick a top in the Dollar, before one picks a bottom in the Euro because the Euro might be the last currency to gain consistently on the Dollar.

YEN: While the yen has already extracted some of the crazy pricing seen early in the week, it could take an offthe charts negative global event to put the Yen back to the recent highs. However, on a rise back above 104.66 traders should consider the purchase of some November Yen puts for a position trade! With the BOJ expected to reduce interest rates and the US moves potentially yielding some calming results we think that the overall financial or credit crisis component is about to be reigned in and that should leave the world with only a very severe slowdown projection ahead and that might not be enough to justify ongoing historic flight to quality pricing in the Yen!

SWISS: We think that the Swiss is in a good position to benefit from a slight shift in sentiment. Certainly the Swissis oversold and in the face of a temporary calm, we would not be surprised to see the December Swiss mount a recovery move back toward the upper end of a trading range defined as 87.28 to 89.52.

POUND: It goes without saying that the Pound was extensively oversold around the recent 6 year lows and it should also be noted that the Pound was one of the primary whipping posts for the magnitude of the slowing expected in the global economy. While we are not suggesting that the all clear signal has been sounded, we think that extreme anxiety off the complicated financial market turmoil is capable of calming down now and that could allow for a moderate recovery reaction in the Pound. Just a normal retracement off the October slide in the Pound would allow for a bounce to 162.54, while a 50% retracement would project the December Pound up to 165.72.

CANADIAN DOLLAR: Just a normal retracement of the September and October failure in the Canadian would project a bounce to 84.64 and that clearly highlights the historical magnitude of the sell off in the Canadian. Whileit might be premature to buy Canadian futures, traders should consider selling a March Canadian Dollar 81 call for199 and using that money to buy three March Canadian Dollar 84.00 calls for roughly a net cost of 140.

TODAY'S MARKET IDEAS:
None.

NEW RECOMMENDATIONS:
1) Buy three March Canadian Dollar 84.00 calls and then sell 1 March Canadian 81 call for a net cost of 140 or less. Use an objective of 86.50 basis the futures and risk the combination to a net loss of 80 points.
2) Buy the December Dollar 84 puts for 99, with an objective of 210. Risk to a close below 30.

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): The market made a new contract high on the rally. The daily stochastics gave a bearish indicator with a crossover down. 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 closeover the 9-bar moving average. The daily closing price reversal down puts the market on the defensive. It is a slightly negative indicator that the close was under the swing pivot. The next downside target is now at 85.51. The 9-day RSI over 70 indicates the market is approaching overbought levels. The next area of resistance is around 87.65 and 88.93, while 1st support hits today at 85.95 and below there at 85.51.

EURO (DEC): Daily momentum studies are on the rise from low levels and should accelerate a move higher on a push through the 1st swing resistance. A negative signal for trend short-term was given on a close under the 9-bar moving average. The close over the pivot swing is a somewhat positive setup. The next upside target is 127.31. The 9-day RSI under 20 suggests the market is extremely oversold. The next area of resistance is around 126.78 and 127.31, while 1st support hits today at 125.14 and below there at 124.02.

JAPANESE YEN (DEC): A bearish signal was triggered on a crossover down in the daily stochastics. Daily stochastics turning lower from over bought levels is bearish and will tend to reinforce a downside breake specially if near term support is penetrated. The market's close above the 9-day moving average suggests the short-term trend remains positive. The gap lower price action on the day session chart is a bearish indicator fortrend. The defensive setup, with the close under the 2nd swing support, could cause some early weakness. The next downside target is 101.32. The next area of resistance is around 103.58 and 104.87, while 1st support hits today at 101.81 and below there at 101.32.

SWISS (DEC): Daily stochastics are showing positive momentum from oversold levels, which should reinforce a move higher if near term resistance is taken out. A negative signal for trend short-term was given on a close under the 9-bar moving average. The market's close below the pivot swing number is a mildly negative setup. The next upside target is 86.81. The next area of resistance is around 86.57 and 86.81, while 1st support hits today at 86.13 and below there at 85.92.