FOREX TRADING

Dollar Delight At Equity Slump

The next leg higher in dollar index valuations will happen if the S&P fails to get above 1060, (that seems a lot further away at midday on Friday than it did at 08:30 EDT), and oil suffers the indignity of a failure at 79.00. The move to a longer-term currency trade is made easier by the cost of carry in an currency trade not being an issue right now, because swap interest rates are low.

A play on the PowerShares DB U.S. Dollar Bullish (UUP) offers a longer term option to holding spot, (or if you are still a believer that equities will drag the buck lower, the PowerShares U.S. Dollar Bearish (UDN) can be used).

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Euro Zone’s Unemployment Rate Inline With Expectations

The European economy, after witnessing a catastrophic year in 2008 and bleak first quarter this year, started to mitigate with the release of second quarter’s GDP, which surprisingly showed a decline in contraction to 0.2% from 2.5% in the three months ending March.

Wise interventions by the ECB and European national banks; caused data to gradually begin improving, increasing hopes of the euro zone being on the right track, where recovery is expected in just a matter of time. The ECB lowered the borrowing cost to 1% and unveiled 60 billion euros plan to purchase covered bonds, in addition to lending banks at the current benchmark.

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European Market Update

China’s PBoC sees 2009 GDP exceeding the 8.0% target

ECONOMIC DATA

(GE) German Sept Real Wholesale M/M: -1.7%, Y/Y: -9.8%
(GE) German Retail Sales M/M: -0.5% v 1.0%e; Y/Y: -3.9% v -2.2%e

(UK) Nationwide Oct House Prices M/M: 0.4% v 0.6%e; Y/Y: 2.0% v 1.8%e; First annual increase in 19 months since Mar 2008

(FR) French Producer Prices M/M: -0.3% v -0.3%e; Y/Y: -8.1% v -8.1%e

(HU) Hungarian Sept Producer Prices M/M: 0.1% v -0.5% prior; Y/Y: 3.4% v 3.7%e
(HU) Hungarian Aug Final Trade Balance: €254.3M v €229.4M prior

(CZ) Czech Sept Prelim Industrial Output: -11.9% v -12.8%e

(SP) Spain Aug current account: -€3.2B v -€2B prior

(IT) Italian Sept PPI M/M: -0.3% v -0.3%e; Y/Y: -7.9% v -7.9%e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In equities: European markets looked set to ignore the sharp US (and to a lesser extent Asian) equity rally on the back of weak tech earnings out of Alcatel Lucent [ALU.FR]. Equities flirted with the unchanged before trending lower through the 4:00EST hour. Indian equity markets added further negative sentiment following misses from [BHARTI.IN], [SAIL.IN] and [RIL.IN] in yesterday’s session. Downside sentiment was shook off, led by out performance on the FTSE100 into 5:00EST. Earnings and commentary out of WPP [WPP.UK] regarding the ad market sent shares higher. Financials recovered from earlier losses with Lloyds [LLOY.UK] receiving two broker upgrades. Pharma earnings continued to beat with Sanofi-Aventis [SAN.FR] trading higher. Earnings out of Renault [RNO.FR], and Luxotica [LUX.IT] after the close yesterday, provided further equity lightness. Following a furious weak of earnings releases, equity markets have continued to trade on higher volume on the last trading day of October.

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Daily Technical Analysis

EURUSD Outlook

The trendline support on daily chart I showed you yesterday proved to be an important support at this phase as bearish pressure failed to push lower and EURUSD started to regain it’s bullish momentum, topped at 1.4858 and closed at 1.4839. This fact should be seen as potential end to the bearish correction and price seems to ready re-testing 1.5000 once again. The bias is bullish in nearest term targeting 1.4950 – 1.5000 area but we need a consistent movement above 1.4850 to confirm the bullish scenario. Immediate support at 1.4760 area. Break below that area should lead us into no trading zone as price might retesting the trendline support one more time. Overall, as long as the pair able to stay above the trendline, I prefer a bullish scenario at this phase.

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Sharp Bounce Rescues Bulls

U.S. Dollar Trading (USD) gave back all the gains of the previous day as the US economy emerged from recession a blistering 3.5% pace in Q3. Major stimulus programs and large rebounds in asset values all helped the economy recover. Stocks soared and risk appetite came back to life. In US Stocks, DJIA +199 points closing at 9962, S&P +23 points closing at 1066 and NASDAQ +37 points closing at 2097. Looking ahead, September Core PCE Index previously at 0.2% vs. 0.1%. Chicago PMI for October is forecast at 49 vs. 46.1 previously.

The Euro (EUR) stabilized in Asia on solid Central Bank support before gaining with the US data back above 1.4800. Helping sentiment towards the single currency was the better than expected German unemployment change of -15k vs. +15k forecast in October. Overall the EUR/USD traded with a low of 1.4684 and a high of 1.4859 before closing at 1.4840. Looking ahead, October EU inflation is forecast at -0.1% vs. -0.3% previously.

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Majors Looking For Volume And Momentum

Overall, the major pairs preferred to trade in tight ranges during the Asian session. During the session Australia released a report on the leading index which has risen to 1.8 percent. Also, from Japan, comes a preliminary industrial production report which increased to 1.4 percent.

The euro (Eur/Usd 1.4692) has remained below the neutral swing point in the Asian session. The pair has multiple levels of resistance standing in the way of a stronger euro. The high of the previous day coincides with the 20 day moving average at 1.4832. Meanwhile, support will be seen at 1.4650 which closely relates to the 50 day moving average.

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Daily Technical Analysis

EURUSD Outlook

As I had expected, the EURUSD continued it’s bearish momentum yesterday, bottomed at 1.4690 and closed at 1.4715. As you can see in my daily chart below, we area in critical technical phase where price is now testing the major trendline support. This trendline support could be a strong support area since overall in longer term the bullish outlook remains intact, but once violated to the downside, we should have further bearish scenario. So I think what is going to happen on that trendline support today and the rest of this week should be our technical focus at this phase.

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European Market Update

Risk Aversion continues to simmer as Germany’s SAP guides lower, ArcelorMittal misses revenues estimates

ECONOMIC DATA

(MA) Malaysian Central Bank leaves Overnight rate unchanged at 2.00%; As expected

(GE) German Sept Import Price Index M/M: -0.9% v -0.7%e; Y/Y: -11.0% v -10.7%e

(FI) Finland Sept Prelim Retail Sales- Volume Y/Y : -1.4% v -2.2%e -

(GE) German Oct CPI-Saxony M/M: -0.1% v -0.3% prior; Y/Y: -0.1% v -0.3% prior

(SP) Spanish Retail Sales (Real) Y/Y: -3.4% v -4.0% prior, Adj Real Retail Sales: -3.4% v -3.3%e

(SW) Swedish Oct Consumer Confidence: 7.5 v 6.0e; Economic Tendency: 94.8 v 93.0e
(SW) Swedish Q3 Manufacturing Confidence: -12.0 v -17.1e
(SW) Swedish Sept Retail Sales M/M: 0.2% v 0.5%e; Y/Y: 2.7% v 3.0%e

(IT) Italian Oct Business Confidence: 77.1 v 75.1e; Retailer’s Confidence: 93.4 v 95.4 prior; Services Survey: -7 v -5 prior

(NO) Norwegian Aug Unemployment Rate (AKU): 3.2% v 3.1%e

(GE) German Oct CPI – Brandenburg M/M: 0.0% v -0.3% prior, Y/Y: -0.2% v -0.4% prior
(GE) German Oct CPI – Hesse M/M: 0.0% v -0.5% prior, Y/Y: -0.1% v -0.8% prior

(SA) South African Sept CPI M/M: 0.4% v 0.5%e; Y/Y: 6.1% v 6.3%e

(GE) German Oct CPI -North Rhine Westphalia M/M: 0.1 v -0.3% prior, Y/Y: 0.0% v -0.3% prior

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Daily Technical Analysis

EURUSD Outlook

The EURUSD had a significant technical bearish movement yesterday, break below my key support level 1.4850, bottomed at 1.4769 and closed at 1.4805. This fact should open the door for further bearish momentum towards 1.4670 area. The bias remains bearish in nearest term. 1.4850 area now become immediate resistance. Break above that area should trigger further bullish momentum testing 1.4920/50 area but I prefer a bearish scenario at this phase. From a longer term point of view, the failure to keep moving above 1.5000 area and the fact that now traded below 1.4850 could create a downside reversal scenario at least toward 1.4450/80 area.

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USD Mixed as Consumer Confidence Deteriorates

• USD: Mixed, equities firm, home price index falls less than expected, consumer confidence falls
• JPY: Higher, supported by repatriation flows, Fujii says bond issuance will not exceed ¥44 trln
• EUR: Lower, M3 and private sector loan growth slows, tracking equities
• GBP: Higher, CBI retail sales rise more than expected
• CAD and AUD: AUD & CAD higher, Australia’s NAB business confidence rises, tracking equities

Overview

USD traded mixed Tuesday as the stock market traded both sides of settlement and US consumer confidence posted an unexpected decline. FX price action was partly limited by uncertainty over whether Monday’s sharp USD rebound is a sign of a turn for the USD or just a temporary rebound. Monday’s USD rally was attributed to a sharp selloff in US equities sparked by concern about US banks and a spike in US bond yields to a two month high. Six US banks were closed Monday bringing the total to 106 banks that have failed this year in the US. More bank failures are expected before year end. The spike in bond yields reflects this week’s record US bond supply and speculation that the recent improvement in US economic data may encourage the Fed to hike interest rates earlier than expected. USD was also supported Monday by report that comments from a research analyst at the Central Bank of China that China should add more EUR and JPY reserves reflected the researchers’ personal opinion and not government policy. Government officials in China said that reserve diversification is a long-term goal and is not intended to impact short-term FX volatility. US economic data was mixed with Case Shiller Home price index declining less than expected and consumer confidence declining by more than expected. USD direction remains closely correlated to the direction of the S&P. USD firmed after the release of the consumer confidence report as stocks decline. Stocks returned to higher levels and the USD rebound stalled. The week’s main focus will be Thursday’s release of US advanced Q3 GDP. US Q3 GDP is expected to show a sharp gain and confirm that the US is emerging from recession. How US equities react to the GDP report will determine the short-term direction for the USD.

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European Market Update

India’s Central Bank begins exit from stimulus measures; Financial sector concerns continue to hamper equity sentiment

ECONOMIC DATA

(SZ) Swiss UBS Consumption Index: 0.632 v 0.623 prior

(FI) Finland Oct Business Confidence: -15 v -13e; Consumer confidence: 12.3 v 12.0e

(FR) France Oct Business Survey Overall Demand: -15v -41
(FR) France Oct Consumer Confidence Indicator: -35 v -35e

(TT) Taiwan Sept leading Indicator M/M: 1.7% v 1.9% prior; Coincident Indicator M/M: 1/7% v 0.6% prior

(SP) Spain Aug Mortgages on Houses Y/Y: -6.6% v -19.1% prior; Mortgages on Capital Loaned Y/Y: -14.9% v -26.2% prior

(TU) Turkey Aug Industrial Production M/M: -0.1% v 0.9% prior, Y/Y: -8.9% v -9.2% prior

(IT) Italian Oct Consumer Confidence 111.7 v 113.7e

(SW) Swedish Sept PPI M/M: -0.9% v -0.5%e; Y/Y: -1.6% v -1.5%e
(SW) Swedish Sept Household Lending Y/Y: 8.2% v 8.0% prior

(NV) Netherlands Oct Producer Confidence: -7.8 v -9.0e

(HK) Hong Kong Sept Trade Balance (HKD): -29.1B v -19.9Be

(EU) Euro-zone Sept M3 Y/Y: 1.8% v 2.2%e; 3-Month Average 2.5% v 2.5%e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In equities: European markets have traded erratically through the first 90 minutes of action. The pre-market session was dominated by corporate earnings highlighted by a smashing BP [BP.UK] that beat on all metrics and maintained its y/y quarterly dividend. BP’s earnings rallied the broader major integrated names. Other earnings included Bayer [BAYN.GE] that reiterated FY09 Rev guidance, but missed on some first call Q3 figures. Vestas [VWS.DC], BBVA [BBVA.SP] and Akzo Nobel [AKZO.NV] also reported figures broadly in line with targets. Earnings sentiment mixed with yesterday’s sharp equity sell off that initiated at 11:00EST. Following positive opening levels, markets have traded lower in linear fashion, moving through the unchanged mark before 5:00EST. Weight in markets has been heavily focused in financial names with ING [INGA.NV] under intense pressure for the second straight session, Commerzbank [CBK.GE] trading lower following rumors of revised guidance and RBS [RBS.UK] and Lloyds [LLOY.UK] moving lower due to capital raise, APS and the effects of the ING split up weighing the names.

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Dollar Holds Gains In Mixed Overnight Trade

Overall, the overnight session was rather undecided, with the major pairs moving in opposite direction. This might have been caused by the S&P futures, which moved up and down without a clear direction or trend during the overnight session, and by the light momentum observed in the market. The euro, the aussie and the swissy managed to post some gains earlier in the day, but now are trading near the break-even line. At the same time, the Gbp advanced against the dollar, while the Canadian dollar declined.

The euro (Eur/Usd 1.4875) advanced 60 pips during the overnight session, up to the neutral pivot point (1.4925), and is trading once again near Tuesday’s opening price. This happened as the market turned around, to re-test the lows set around the opening bell.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD had a significant bearish momentum yesterday, bottomed at 1.4844 and closed at 1.4863. The CCI bearish divergence I showed you on Saturday give us a valid signal about bullish exhaustion and bearish momentum. On h4 chart below we can see that price violated the bullish channel to the downside indicating potential bearish view.

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Storm Brews As Dollar Moves

Overall, the overnight session was very slow, with the major pairs trading in tight ranges. However, the U.S. session proved to be volatile, with the major pairs dropping at a very fast pace. The only exceptions were the pound and the yen, which are trading close to the break-even line. The pound had already dropped a ton in last week’s reaction to poor U.K. GDP numbers, and the major pairs played catch-up in trade on Monday. The declines seen throughout the U.S. session were caused by the losses in the equity and commodity markets. Ahead of this selling, the major pairs were starting to look deeply overbought.

The euro (Eur/Usd 1.4870) plunged 130 pips throughout the day and managed to break below a trend-line that has been holding the market for three weeks. This is usually seen as very negative, but at this value the pair is starting to look as a good buy once again. In order to advance from here, the euro will need S&P futures to hold into the green, above 1055, and ideally through 1075. If not, fair value will drop lower.

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Dollar Stands Still

Most currencies are higher versus the dollar to start the trading week although the dollar index is down a mere seven basis points to stand at 75.53. There are several contrary influences weighing on near-term direction, yet none seem persuasive enough to create a breakout from the recent range. With U.S. growth data due on later in the week the stakes were raised by Monday’s strong 2.9% GDP reading from South Korea – a whole percentage point better than was expected. This reminder that the Asian and pacific economies are snapping back fast and arguably bodes badly for the dollar. Will a strong U.S. report card hinder or bolster it, we wonder?

The Wall Street Journal dedicated a speculative column this weekend to the view that at next week’s FOMC meeting the committee will put forth the issue of how and when to announce the issue of raising interest rates to the world. It makes sense since other central banks around the world are having to deal with the subject, yet some members have recently indicated that given the spare capacity and rising level of unemployment, there really is no rush to jump-start the monetary engine. However, the yield curve is taking its cue from the article and is becoming steeper as back-month Eurodollar futures weaken.

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