03-Nov 2008

CURRENCIES COMMENTARY

Expect some sideways action as the US election restrains sentiment

Upcoming International Reports
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
11/04 Swiss Consumer Price Index
11/04 German Retail Sales
11/05 German Service PMI
11/05 UK CIPS/NTC Research Services PMI
11/05 UK Industrial Production
11/05 Euro-zone Retail Trade
11/05 Japan BOJ Minutes
11/05 Japan Leading Indicators
11/06 UK Halifax Housing Price Index
11/06 German Manufacturing Orders Received
11/06 UK Monetary Policy
11/06 Euro-zone Monetary Policy
11/06 Canadian Building Permits
11/07 Swiss Employment
11/07 German Foreign Trade
11/07 France Trade Balance
11/07 Euro-zone ECRI Future Inflation Gauge
11/07 France ECRI Future Inflation Gauge
11/07 Germany ECRI Future Inflation Gauge
11/07 UK ECRI Future Inflation Gauge
11/07 German Industrial Production
11/07 Canadian Labor Force Survey
11/09 Japan Machinery Orders
11/10 France Industrial Production
11/10 UK Producer Price Index
11/10 Canadian New Housing Price Index
11/10 German Manufacturing Turnover Index

DOLLAR: The Dollar starts the new month out sitting within a broad formation and fresh off a rather historical 4 month run up. It would seem like global equity markets are confident that the financial crisis is at least being contained in the near term and that could have been the genesis of the sharp setback in the Dollar last week! Clearly the US Dollar was lifted by the view that the US Dollar was the place to be in the face of a global financial crisis that might be spreading to the somewhat defenseless emerging markets. It also seems as if the world is confident that the US Fed will in the end, Shepard the US economy through the impending recession better than other central banks. In fact, the Fed's Lacker might have hit right on the flight to quality theme in the Dollar overnight, by suggesting that the US Fed was well positioned to handle the recession. However, it is also possible that a slightly positive tilt in global equity markets will serve to diffuse the flight to quality buying interest in the Dollar today and we also have to wonder if the trade will be able to remain positive toward the Dollar in the face of an avalanche of soft US numbers this week. Furthermore, with the October 28th Commitment of Traders with Options report for US Dollar showing the Non-commercial position to be net long 19,709 contracts and the Nonreportable position net long 1,130 contracts, that made the "combined" spec and fund position net long 20,839 contracts as of early last week. However, with the Dollar index at last week's lows falling almost 400 points, we suspect that the Dollar enters the week with only a moderate net spec long positioning. Critical support is pegged at 85.50, with the true measure of the bulls control seen in the event that the Dollar strengthens on patently weak scheduled US data flow!

EURO: The Euro was clearly oversold around the October lows, as the October 28th Commitment of Traders with Options report for Euro showed the Non-commercial position to be net short 32,604 contracts, with the Nonreportable position also net short 2,790 contracts and that made the "combined" spec and fund position net short 35,394 contracts as of early last week. However, the Euro has managed a rather significant bounce in the wake of the COT report mark off and it is possible that a slight tempering of global financial sector anxiety will take some of the distinct pressure off the Euro. On the other hand, for the Euro to show signs of bottoming this week, probably requires the Euro to rally in the face of slack US economic readings. At least initially, the Euro looks to have solid support at the 126.53 level but more solid support isn't seen until the even number zone of 125.00. For the Euro to rise sharply, off current levels probably requires a series of gains in global equity markets in the coming trading sessions.

YEN: The yen starts the week out with a bad technical trade on the charts and clearly seeing global equity markets on a positive footing serves to extract flight to quality interest from the Yen. Initial support in the December Yen is pegged at 100 and then again all the way down at 98.00. For the time being, the Yen looks to have a direct inverse relationship with the equity markets and for the time being, the Yen doesn't seem to be capable of rising off the concern for severe slowing in the global economy. In other words, the yen bulls need financial or credit market uncertainty just to attract flight to quality buying.

SWISS: The Swiss looks to start the week out sitting within a wide consolidation zone. In fact, we can't rule out a sideways chop in the December Swiss between 88.50 and 86.00 over the coming two trading sessions. In the end, the down trend pattern would seem to have an ongoing edge, as one gets the sense that more evidence of US slowing is destined to translate into fears of more slowing outside of the US.

POUND: While the Pound has managed a somewhat significant bounce off its October lows, the outlook for more significant slowing ahead is hardly an environment that is expected to pull buyers toward the Pound. However, with UK PMI manufacturing readings actually managing a slight gain over the prior month that could lend the December Pound some support at the 160.00 level, especially if global equity markets managed to stay positive throughout the US trading session today.

CANADIAN DOLLAR: The Canadian Dollar was certainly oversold around the October lows and seeing the markets in general absorb the threat of severe recessionary conditions ahead clearly takes some of the pressure off the Canadian Dollar. In fact, the Canadian fell so hard in the September/October time frame that a simple retracement of that slide would allow for a bounce up to 84.64 without even altering the entrenched down trend pattern on the charts. While the October lows might end up being a major low, we are not convinced that the Canadian will be able to sustain a rise above 85.00, without seeing a noted improvement in the global economic outlook.

TODAY'S MARKET IDEAS:
None.

NEW RECOMMENDATIONS:
None.

PREVIOUS RECOMMENDATIONS:
1) Long December Dollar 84 puts 99, *Liquidated at the market Friday 1445.
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): Momentum studies are trending lower from high levels which should accelerate a move lower on a break below the 1st swing support. The market's short-term trend is positive on the close above the 9-day moving average. The close over the pivot swing is a somewhat positive setup. The next downside target is now at 84.92. The next area of resistance is around 87.22 and 87.81, while 1st support hits today at 85.78 and below there at 84.92.

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. The market's short-term trend is negative as the close remains below the 9-day 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 upside objective is 128.19. The next area of resistance is around 127.88 and 128.19, while 1st support hits today at 126.94 and below there at 126.30.

JAPANESE YEN (DEC): Momentum studies trending lower at mid-range could accelerate a price break if support levels are broken. The close under the 18-day moving average indicates the intermediate-term trend could be turning down. The gap down on the day session chart is bearish with more selling pressure possible today. The market's close below the 1st swing support number suggests a moderately negative setup for today. The next downside target is now at 101.40. The next area of resistance is around 101.40 and 101.40, while 1st support hits today at 101.40 and below there at 101.40.

SWISS (DEC): Momentum studies are rising from mid-range, which could accelerate a move higher if resistance levels are penetrated. The close under the 18-day moving average indicates the intermediate-term trend could be turning down. The gap lower on the day session chart is bearish and puts the market on the defensive. The close below the 1st swing support could weigh on the market. The near-term upside objective is at 87.66. The next area of resistance is around 87.24 and 87.66, while 1st support hits today at 86.04 and below there at 85.27.