FOREX TRADING

USD Carry Trade Under Threat

U.S. Dollar Trading (USD) finished the weak on a strong footing with fresh multi-week highs against the Euro, GBP and AUD. Talk in the markets is of traders closing out short USD positions ahead of the end of the year and that weakness in global stock markets is souring the investors mood. In US Stocks, DJIA -14 points closing at 10318, S&P -3 points closing at 1091 and NASDAQ -10 points closing at 2146. Looking ahead, October Existing Home sales are forecast at 5.7Mln vs. 5.57Mln previously.

The Euro (EUR) tested the noted 1.4800 support level before recovering late in the US session with stock markets also rising off lows. October German PPI was at 0.0% vs. 0.1% forecast. EUR/JPY came under increasing pressure as the technical picture continues to weaken testing 132 supports. Overall the EUR/USD traded with a low of 1.4800 and a high of 1.4935 before closing at 1.4859. Looking ahead, November PMI Manufacturing is forecast at 51.2 vs. 50.7 whilst PMI services is forecast at 52.8 vs. 52.6 previously.

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Euro Set for Further Losses

The main attention over the past few weeks has been on the US economy and dollar. There has been a tentative shift in sentiment over the past few days and there is a strong probability that the Euro-zone will be in greater focus over the next few weeks. The structural weaknesses are still very important and the bad-debt situation in the banks has not been dealt with during 2009. Credit conditions are also liable to deteriorate.

Option expiry is liable to trigger further volatility in the very short term with immediate Euro support at 1.48, but the net risks suggest that the Euro will weaken to 1.4650 against the dollar next week.

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BoJ Holds Rates Steady

Market Brief

Risk appetite stayed weak in the Asian session, after Wall Street closed lower but, overall, most of the trading in currencies and commodities was well in their ranges. The EURUSD traded between 1.4880 and 1.4940, while spot Gold traded between $1140 and $1147. With no first tier economic releases scheduled today, we don’t expect any one way trade of break out of the monthly ranges. But ranges can also be very profitable, especially the EURCHF. The USDJPY remains heavy below 90.61 high, with the break of 88.74 low opening the 88.01 key support.

As was universally expected, the BoJ held its uncollateralized overnight cash rate at 0.1%. The decision was unanimous and the BoJ statement stated that the domestic economy was improving but would continue with its ‘extremely accommodative’ monetary policy. Finance Minister Fujii warned about the dangers of rising bond yields, which could counteract the ultra loose monetary policy and small business improvement initiatives.

Today, China’s Central Bank Governor, Zhou Xiao Chuan, said ‘It’s like watching a tournament,…We just watch the game. Regardless who wins or loses, the issue of whether the winner or loser benefits the spectator doesn’t arise.’ In short, don’t expect pressure from the West to have any influence on China’s exchange rate mechanism.

There is little economic data of note today. More significantly, speakers in Frankfurt today include ECB President Trichet and Bundesbank President Weber. Outside the euro area, SNB President Roth will speak in Fribourg.

ACM FOREX

Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

USD Extends Gains as Risk Appetite Falls

• USD: Higher, risk appetite drops as stocks and commodities decline, fear of double dip recession
• JPY: Higher, supported by safe haven demand, gains in cross trade
• EUR: Lower, German Wiseman said Germany may be at risk to double dip recession in late 2010
• GBP: Lower, retail sales improve and public-sector borrowing rose more than expected
• CAD and AUD: AUD & CAD lower, tracking weaker equity and commodity prices, RBA policy uncertainty

Overview

A wave of pessimism hit the global equity and commodity markets Thursday sending the USD sharply higher as investors trim risk exposure. President Obama’s warning that too much US debt could increase the risk of a double dip recession, a similar warning from the German Wiseman that Germany could be at risk for a double dip recession in late 2010 and a statement from Treasury Secretary Geithner that the credit crunch is not over appeared to have dented enthusiasm about the global recovery.

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Yields Grind Lower as Stock Markets Weaken

Interest rate futures are higher across the globe as investors continue to tread further and further down the seemingly endless red carpet rolled out by global central banks. Recent accentuation by various political and monetary chiefs confirming the period of low rates is practically a permanent fixture in the global house of cards is again a key factor today. With jobless claims in the U.S. coming in at an in-line 505,000 reading bond and short term yields continue to heed the words of central banks as interest rate yield curves flatten out.

An OECD report overnight predicts firmer growth than at the time of its previous June survey but still expects no change in Fed or ECB policy until one year from now. The OECD forecasts growth across its leading 30-member nations will be 1.9% next year and 2.5% in 2011. Underscoring the impact of the healing banking crisis is the fact that they don’t predict the pace of growth last seen during the first quarter of 2008 until the third quarter of 2011.

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USD Lower, Housing Starts Fall 10.6% and Stocks Slide

• USD: Mixed, housing starts and building permits drop sharply, CPI rises
• JPY: Lower, JAL may be on the verge of bankruptcy, monitoring the debate over the Yuan
• EUR: Higher, current account slipped to deficit, construction output falls, gains in cross to GBP
• GBP: Lower, MPC split on quantitative ease, discussed possible cut in the remuneration rate
• CAD and AUD: AUD lower & CAD higher, Australia’s leading indicators rise, Canada’s CPI turns higher

Overview

After a two-day rally the USD was back on the defensive Wednesday pressured by the return of risk appetite as equity markets rally in Europe and gold trades at a new record high. A statement from Fed Chairman Bernanke that US interest rates would remain low for extended period and maybe longer if unemployment continues to rise appears to be the latest catalyst for the USD selloff. The fact that the Fed is not prepared to withdraw stimulus at this time fuels demand for commodities and contributes to improving risk sentiment.

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Another Day Brings Another Direction for the Greenback. Bank of England Minutes Show Diverging Views within the MPC

Fundamental market inputs tell confusing story for the USD – perhaps a reason for its erratic behavior of late.

MAJOR HEADLINES – PREVIOUS SESSION

• US Nov. HAHB Housing Market Index out at 17 vs. 19 expected and 17 in Oct.
• US Weekly ABC Consumer Confidence rose to -45 vs. -46 the previous week
• Australia Q3 Wage Cost Index rose 0.7% QoQ as expected
• EuroZone Sep. Current Account was -5.4B vs. +0.6B in Aug.
• UK BoE Minutes showed split vote of 1-7-1 for latest monetary policy decision
• EuroZone Sep. Construction Output fell -8.0% YoY vs. -10.0% in Aug.
• UK Nov. CBI Industrial Trends Total Orders rose to -45 from -51 in Oct.
• Canada Oct. CPI fell -0.1% MoM vs. +0.1% expected
• Canada Oct. Core CPI rose +0.1% vs. 0.0% expected
• US Oct. CPI rose +0.3% MoM and fell -0.2% YoY vs. +0.2%/-0.3% expected, respectively
• US Oct. CPI ex Food and Energy rose +0.2% MoM and +1.7% YoY vs. +0.1%/+1.6% expected, respectively
• US Oct. Housing Starts fell to 529k vs. 600k expected and 592k in Sep.
• US Oct. Building Permits fell to 552k vs. 580k expected and 575k in Sep.

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Dollar Index Finds Buyers

Overall, the dollar index started slowly to add points during the Asian session and continued doing so throughout the first part of the European session. Right now, every major currency is trading below Tuesday’s opening price against the dollar, even thought the U.K. sterling and Japanese yen currencies showed some resilience. The dollar’s uptrend seen overnight reflects the selling from the equity markets, and echoes Mr. Bernanke’s latest comments, which called for a stronger dollar.

Dollar Index Technical View: TheLFB Member Charts

4 Hour Chart: Mixed. Main price points: 74.70, and 75.77. Looking for: Wave V)

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European Market Update

Two-way risk returns to the market

ECONOMIC DATA

(FI) Finland Oct PPI M/M 0.1% v 0.1%e; Y/Y; -8.4% v -8.0%e

(HU) Hungary Sept Avg Gross Wages Y/Y: 0.7% v 0.1%e

(SZ) Swiss Sept Retail Sales-Real Y/Y: -1.6% v -1.0% prior

(SW) Sweden Q3 Total Number of Employees Y/Y: -2.8% V -1.9% prior

(SP) Spain Sept Industrial Orders Y/Y: -18.8% v -18.6% prior; Service Sector Sales Y/Y: -10.6% v -13.4% prior; Service sector employment Y/Y: -6.0% v -6.3% prior

(HK) Hong Kong Oct Unemployment Rate: 5.2% v 5.3% prior

(RU) Russian Oct Industrial Production M/M: 0.8% v 5.1% prior, Y/Y: -11.2% v -8.1%e

(UK) Oct CPI M/M: 0.2% v 0.1%e; Y/Y: 1.5% v 1.4%e; Core CPI Y/Y: 1.8% v 1.8%e

(UK) Oct RPI M/M: 0.3% v 0.1%e; Y/Y: -0.8% v -1.0%; Retail Price Index Y/Y: 1.9% v 1.8%e

(EU) Euro-Zone Sept Trade Balance 3.7B v -2.3B prior; Trade Balance sa: 6.8B v 2.2B prior

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Bernanke… Got Buck’s Back

When the falling USD is in the headlines daily, gold at a record high and US Treasury having little luck in stabilizing the dollar (many still think this is something the Obama admin opposes in favor of a still weaker dollar), is it any wonder that Fed Chairman Bernanke has addressed the dollar and monetary policy and implied a risk to the economic forecast from continued depreciation in the dollar? In other words the dollar decline to date has unwound the safe haven rally of the second half of 2008 and hence is normal.

However, additional dollar depreciation (against floating developed economy currencies I add) is a threat to inflation and any significant change in the outlook for inflation (employment) could lead to a change in policy. Yes Bernanke said the USD is one factor among a number that the Fed sees impacting inflation but it is clear that currently it is the leading risk to inflation and inflation expectations (behind rising commodity prices too in part) albeit in a world with excess resource slack. So the motivation is not there yet for the Fed to move on inflation via a weak dollar channel. Nevertheless, the Fed is sensitive to the currency’s decline and it could in due course craft policy to address this source of inflation.

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Retail Sales Rise Better than Forecasts as Auto Sales Rise, While Manufacturing Activity Ease in November!

Retail sales rose in October amid a huge increase in auto sales, though the “cash for clunkers” program has ended, as the program helped in boosting auto sales indeed, yet still with unemployment levels standing at a 26-year high we should still expect consumer spending to suffer, meanwhile activity in the manufacturing sector seems to have eased slightly, though manufacturing activity is still expanding.

Retail sales increased in October by 1.4% more than median estimates of 0.9% and following a prior revised drop of 2.3% back in September according to the U.S. Commerce Department, while retail sales that exclude autos rise by 0.2% down from the prior revised rise of 0.4% and below median estimates, and retail sales that excludes both autos and gas sales rose by 0.3% inline with the prior revised and median estimates as well.

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European Market Update

Risk appetite theme remains intact; Lack of non-conciliatory FX-rhetoric from the U.S.-China discussion

ECONOMIC DATA

(EU) EU Oct 25 Car Registrations: 11.6% v 6.3% prior

(SP) Spain Sept House Transactions Y/Y: -17.2% v -9.9% prior

(CZ) Czech Oct PPI Industrial M/M: -0.2% v 0.0%e; Y/Y: -4.6% v -4.5%e

(CZ) Czech Sept Export Price Index Y/Y: -4.3% v -2.7% prior; Import Price Index Y/Y: -9.3% v -7.2% prior

(TU) Turkey Oct Consumer Confidence: 80.5 v 81.9 prior

(TU) Turkey Aug Unemployment rate: 13.4% v 13.0%e

(SW) Swedish Oct Avg House Prices (SEK): 1.78M v 1.78M prior

(DE) Denmark Oct Wholesale Prices M/M: -0.3% v -0.1% prior; Y/Y: -5.3% v -7.6% prior

(RU) Russia Oct Producer Prices M/M: -0.9% v 1.3%e; Y/Y: -1.8% v 1.6%e

(IT) Italian Oct Final CPI NIC incl tobacco M/M: 0.1% v 0.1%e; Y/Y: 0.3% v 0.3%e

(IT) Italian Oct Final CPI-EU Harmonized M//M: 0.4% v 0.5%e, Y/Y: 0.3% v 0.4%e

(NO) Norway Oct Trade Balance (NOK): 27.4B v 22.6B prior

(EU) Euro-Zone Oct CPI M/M: 0.2% v 0.3%e; Y/Y: -0.1% v -0.1%e; CPI-Core Y/Y: 1.2% v 1.1%e

(IT) Sept Current Account: -€4.2B v -€3.2B prior

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Dollar Weakness Shown Early In The Week

Overall, the major pairs saw some minor spikes in price as the new trading week began. During the session, Japan released a report detailing their preliminary gross domestic product which has been shown to have increased to 1.2 percent over analysts estimates of 0.7 percent.

The euro (Eur/Usd 1.4957) opened the new trading week 10 pips higher as the pair raced ahead to the R1 swing point at 1.4965 which stopped the pair in its tracks. The gap, although minor, may still be closed if the pair decides to test the 20 day moving average at 1.4885.

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Majors Running On Sentiment

Overall, the major pairs were testing immediate support and resistance areas during the overnight session. Some volume entered the market as the dollar began to weaken. There were no major news reports released during the session so the pairs are currently running on sentiment until the European session begins.

The euro (Eur/Usd 1.4857) is currently testing the 20 day moving average as resistance after falling below during the last half of the US session. Just above the moving average is the neutral swing point at 1.4892 which will add to the resistance.

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USD Trying to Rally, Though Volatility Looks Rather Muted so Far

Improved Jobless Claims sees bond yields higher, USDJPY trying resistance. US 30-year auction results up later.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Oct. Business PMI out at 50.6 vs. 51.5 in Sep.
• New Zealand Sep. Retail Sales out at 0.2%/0.0% MoM less Autos vs. 0.4%/0.4% expected, respectively
• Japan Oct. Domestic CGPI fell -0.7% MoM and -6.7% YoY vs. -0.1%/-6.0% expected, respectively
• Australia Oct. Employment Change rose 24.5k vs. -10k expected
• Sweden Oct. CPI out at +0.3% MoM and -1.5% YoY vs. +0.2/-1.6% expected, respectively
• EuroZone Sep. Industrial Production rose 0.3% MoM vs. 0.5% expected (YoY was -12.9% vs. -14.1% exp.)
• Canada Sep. New Housing Price Index rose +0.5% MoM vs. +0.2% expected
• US Weekly Initial Jobless Claims fell to 502k vs. 510k expected and 514k last week
• US Weekly Continuing Jobless Claims fell to 5631k vs. 5700k expected and 5770k last week

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