05-Nov 2008

CURRENCIES COMMENTARY

More weakness in the Yen, Swiss and Pound directly ahead

Upcoming International Reports
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 trade is somewhat confused on the direction of the Dollar today, as the market isn't sure whether the dominating flight to quality focus will be able to totally dominate over the near term flow of US slowing evidence. If the US offers up some form of stimulus package, or there are moves to lower international interest rates, those actions could be a flight to quality tempering force. On the other hand, if the US numbers are as weak as expected that could also temper the flight to quality interest in the Dollar in favor of the Yen. We suspect that the Dollar is somewhat overbought technically, especially when one considers that the US Dollar is almost 10 full points above the September lows and 14 points above the July lows. In the near term, we can't rule out some back and fill action in the Dollar, with initial support pegged at 85.52 and 85.00. However, in order for the Dollar to sustain below the 85.00 level, probably requires a resumption of the upward thrust in global equity prices, which in turn suggests that the credit crisis continues to thaw.

EURO: Evidence of slowing outside of the US is serving to limit the upward bias in the Euro this morning. In fact, with the Euro zone PMI readings rekindling concerns of a deep global recession again, one has to think that the odds of an ECB rate cut are increasing. In the current market condition, seeing the ECB cuts rates probably doesn't have a sustained impact on the Euro, as an ECB cut comes after most other mainstream central banks have already acted. In fact, while we aren't sure that the Dollar is going to spring to life in the face of slack US number flow ahead, we do think that slow US numbers will leave the bear camp in the Euro in control over prices. Current resistance at 130.29 looks solid and a return to at least 125 is certainly possible before this Fridays close. For the Euro to breakout to the upside, probably requires another upside breakout in the US equity markets.

YEN: Given the extreme flight to quality conditions that were required to lift the yen to the October highs, it is not surprising to see the Yen remain under pressure in the face of somewhat normal conditions. In fact, since we see a measure of calm ahead, that looks to leave the Yen in a downward posture on the charts. In the end, to turn up the Yen trend, probably requires a sharp slide in equity prices and evidence that credit markets are seizing up again. For the time being, resistance is pegged at 102.00 in the December Yen.

SWISS: The Swiss charts continue to look negative. In fact, evidence of extremely soft Euro zone PMI readings overnight and the prospect of a near term ECB rate cut just doesn't seem to benefit the Swiss. In order to turn the Swiss back up, might require a very serious deterioration of global confidence and for now that seems unlikely. Selling resistance in the December Swiss is seen at 86.48.

POUND: The Pound remains in a very negative chart posture and seeing the prospect of a UK rate cut doesn't seem to alter the patently bearish stance in the marketplace. In fact, the UK September manufacturing figures decline this morning simply foments the idea that the UK economy has significant slowing capacity ahead and that should leave the December Pound on a downward track. In fact, in the face of more US slowing evidence directly ahead, the Pound could easily return to the October lows.

CANADIAN DOLLAR: Clearly the Canadian Dollar was fundamentally and technically oversold around the October lows. We think the October lows are major lows and that a corrective profit taking slide in the Canadian into the upcoming set of US numbers should be viewed as a buying opportunity. In fact, traders should consider getting long futures and tightly wrapping up that position up with options for the coming three sessions.

TODAY'S MARKET IDEAS:
None.

NEW RECOMMENDATIONS:
Buy a December Canadian Dollar at 86.40 and then purchase a December Canadian 85.00 put for 176 or better. Once in the long futures/long put position, look to sell the December Canadian 89.50 calls for 137 or better. In the event of a hard break over the coming three trading sessions, we might consider banking a profit on the short call. Risk the combination to a net loss in excess of 1,000.

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): Declining momentum studies in the neutral zone will tend to reinforce lower price action. The market's short-term trend is negative as the close remains below the 9-day moving average. The outside day down and close below the previous day's low is a negative signal. The close below the 2nd swing support number puts the market on the defensive. The next downside objective is 82.90. The next area of resistance is around 86.17 and 88.13, while 1st support hits today at 83.55 and below there at 82.90.

EURO (DEC): Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. The market's close above the 9-day moving average suggests the short-term trend remains positive. 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 near-term upside target is at 131.36. The next area of resistance is around 130.43 and 131.36, while 1st support hits today at 128.19 and below there at 126.87.

JAPANESE YEN (DEC): Stochastics trending lower at midrange will tend to reinforce a move lower especially if support levels are taken out. The close below the 9-day moving average is a negative short-term indicator for trend. The gap lower price action on the day session chart is a bearish indicator for trend. The defensive setup, with the close under the 2nd swing support, could cause some early weakness. The next downside target is 99.54. The next area of resistance is around 100.69 and 100.85, while 1st support hits today at 100.03 and below there at 99.54.

SWISS (DEC): Daily stochastics declining into oversold territory suggest the selling may be drying up soon. The market's short-term trend is negative as the close remains below the 9-day moving average. The market has a slightly positive tilt with the close over the swing pivot. The next downside objective is 85.01. The next area of resistance is around 86.31 and 86.80, while 1st support hits today at 85.42 and below there at 85.01.