07-Oct 2008

CURRENCIES COMMENTARY
10/06/08

Expect the Dollar to be the primary flight to quality instrument

Upcoming International Reports (all times CT)

10/07 Japan Leading Indicators 12:00 AM
10/07 UK Industrial Production 3:30 AM
10/07 German Manufacturing Orders Received 5:00 AM
10/07 Japan BOJ Rate
10/07 Japan Index of Business Conditions
10/08 Japan BOJ Report 1:00 AM
10/08 France Trade Balance 1:45 AM
10/08 Euro-zone GDP 4:00 AM
10/08 German Industrial Production 5:00 AM
10/08 Japan Machinery Orders 6:50 PM
10/09 German Foreign Trade 1:00 AM
10/09 UK Foreign Trade 3:30 AM
10/09 UK Monetary Policy 6:00 AM
10/09 Japan BOJ Minutes 6:50 PM
10/09 German Manufacturing Turnover Index
10/10 Swiss Employment 12:45 AM
10/10 France Industrial Production 1:45 AM
10/10 Canadian Labor Force Survey 6:00 AM
10/10 Canadian International Merchandise Trade 7:30 AM
10/10 Canadian New Housing Price Index 7:30 AM
10/13 UK Producer Price Index 3:30 AM
10/13 Japan Wholesale Prices (CGPI) 6:50 PM

DOLLAR: We still aren't totally sold on the idea that the US is the ultimate safe haven. However, with the overnight headline news suggesting that the Euro zone is in the midst of a huge financial sector containment effort, it is clear that the Dollar is still being seen as the favored currency. In fact, despite glaring signals of slowing inside the US, money seems to be flowing toward the US. We wondered last week if the ECB would be able to circle its wagons quickly or if they were destined to freeze in the headlines of the credit crisis like the US Congress and this morning it is clear that they are also behind the curve on the problem. While there is talk of a possible 50 basis point US rate cut, there is also talk of a possible coordinated rate cut among central banks and that could to a degree, reduce the currency market reaction to an upcoming US rate cut. In fact, if the US were to cut and it does so without any coordinated action, that could mean that the US is attempting to get out ahead of the severe slowing threat and that could simply add to the positive flow toward the Dollar. The September 30th Commitment of Traders with Options report for US Dollar showed the Non-commercial position to be net long 25,246 contracts, with the Non-reportable position net short 755 contracts and that made the "combined" spec and fund position net long 24,491 contracts. With the Dollar at the highs last week almost 200 points above the level where the COT report was measured we suspect that the net long positioning is moderately understated. With the record spec and fund long in the Dollar registered at 35,820 contracts on September 16th, the Dollar into the opening today probably isn't at an extremely overbought level yet. For now, we doubt that technical considerations are going to hold back the Dollar.

EURO: With troubles in the European real estate sector being tossed around this morning, it is clear that the ECB failed to stay out in front of the credit crisis. For the time being, money looks to flee the Euro, with the next downside target on the charts not seen until the 133.70 level on the weekly charts. While the September 30th Commitment of Traders with Options report for Euro showed the Non-commercial position to be net short 32,075 contracts, with the Non reportable position net short 3,423 contracts, that made the "combined" spec and fund position net short 35,498 contracts. However, we doubt that technical considerations are going to slow the erosion of the Euro in the wake of the ongoing credit market concerns. In fact, we would not be surprised to see the Euro slide all the way down to the 130 level at some point this week!

YEN: With a big range up extension in the Yen overnight it would seem like extreme risk aversion has pushed some buying toward the Yen. While the market might be lifted by some carry trade short covering, we suspect most of that influence has already run its course and that the buying of the Yen is geographical buying by traders looking to get away from the US and the Euro zone troubles. While Asia won't be totally immune to global slowing, we suspect that Asian currencies might avoid some of the significant travails seen in the West. The yen trend is pointing upward with the 100 level a possibility later this week.

SWISS: The Swiss is still out of favor despite the fact that the world seems to be drifting toward the crisis of the century. Unfortunately for flight to quality Swiss players, the Swiss is being locked into step with the declining Euro and the Euro zone credit crisis and that could put the December Swiss on a path to retest the 86.41 level at some point later this week.

POUND: For the time being, the Pound has managed to hold weekly chart support of 175, but with the UK working hard to contain its credit market turmoil close-in support probably won't be able to hold up the currency. Therefore, the path of least resistance remains down and the December Pound could easily return to the September lows down around 173.50 at some point later this week.

CANADIAN DOLLAR: With another range down washout coming in the wake of the flight to quality toward the US Dollar, it is clear that the Canadian is going to de-link from its fundamental value in the face of the global meltdown. Clearly expectations of a sharp and sustained slide in commodity prices adds to the downside tilt in the Canadian Dollar and that could leave the currency on a path to re-test the mid 2006 consolidation zone that starts at 91.50 on the weekly charts.

TODAY'S MARKET IDEAS:
None.

NEW RECOMMENDATIONS:
None.

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. *Re-Sell Dec Canadian again at 93.54. Hold the calls for a futures move above 98.00.
2) Short the October Euro 149 call 130 and long a November Euro 150 call for 204. Risk the position to a net loss of $900. *Hit the objective of 40 on the short call keep an objective of 500 on the long call. 3) Long the October Canadian 95 calls for 33 with an objective of 90. Risk the trade to 20.

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) 10/06/2008: The market rallied to a new contract high. Rising stochastics at overbought levels warrant some caution for bulls. The market's close above the 9-day moving average suggests the shortterm trend remains positive. It is a mildly bullish indicator that the market closed over the pivot swing number. The
next upside objective is 81.79. The 9-day RSI over 70 indicates the market is approaching overbought levels. The next area of resistance is around 81.30 and 81.79, while 1st support hits today at 80.28 and below there at 79.74.

EURO (DEC) 10/06/2008: 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 market tilt is slightly negative with the close under the pivot. The next downside objective is 136.16. With a reading under 30, the 9-day RSI is approaching oversold levels. The next area of resistance is around 139.26 and 140.05, while 1st support hits today at 137.32 and below there at 136.16.

JAPANESE YEN (DEC) 10/06/2008: The daily stochastics have crossed over up which is a bullish indication. Momentum studies are rising from mid-range, which could accelerate a move higher if resistance levels are penetrated. The close above the 9-day moving average is a positive short-term indicator for trend. The downside closing price reversal on the daily chart is somewhat negative. It is a slightly negative indicator that the close was lower than the pivot swing number. The next upside objective is 97.23. The next area of resistance is around 96.43 and 97.23, while 1st support hits today at 94.83 and below there at 94.04.

SWISS (DEC) 10/06/2008: Stochastics trending lower at midrange will tend to reinforce a move lower especially if support levels are taken out. A negative signal for trend short-term was given on a close under the 9-bar moving
average. Since the close was above the 2nd swing resistance number, the market's posture is bullish and could see more upside follow-through early in the session. The next downside objective is now at 87.52. The next area of resistance is around 89.72 and 90.21, while 1st support hits today at 88.38 and below there at 87.52.