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Currency Trader Magazine January 2008 issue

The January issue of Currency Trader magazine is now ready to download.

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The Current Market Sentiment

This article is from FX Consultant Walid Salah El Din, which mirrors my own personal views of the current market situation.

By God's will, we wait for the US fed's rate decision later this week. After last week surprising .75% interest rate cut, we want to listen to the fed's language to know how far they can go after this recent cut. The market is expecting further cuts but it is split between whether there is another cut or not this week.

The UK growth pace is expected to be negatively impacted too by the same crediting problems of US after the sub-prime mortgage undiminished problems and the increased probabilities of recession in US but it's became clear to the market that the inflation upside risks is to tackle the MPC following to the Fed's for spurring investment bringing back the risk appetite and trust in the equity markets.

The growth worries are looking softer in EU and the ECB ensured that they see this or want this! It is not clear yet! But the expectation of a hike later this year has diminished after the ECB member Mersch's comments that there are signs of growth weakness but the ECB has not discussed but 2 options not 3 which are a hike or a keep of the current interest rate but Last week disappointing 52.0 service PMI ensured that there actually signs of growth weakness amid uneased yet inflation risks and high energy and commodities prices can threat the price stability in EU.

the Japanese yen can keep gaining from this current interest rate outlook differential tightening, the mistrust in the stock market especially after the huge loss of citigroup 4th quarter amid the crediting problems and the increased expectations of a US recession can spread out especially, If the US growth could not get uses of the easing package of 150 Bln Bush's plan and the fed monetary easing.

By God's Will, The gold rates could keep its gains after the surprising .75% Fed's cut getting back above 900 again versus the greenback as the current market prospects of further interest rates cutting persisting offering much more funds to the credit and financial markets which can add to the gold value amid uneased oil and commodities prices. The recent US inflation rates have reached the fastest pace in over two years last November and were mild last December as Dec Core CPI came as expected .2% m/m and 2.4% y/y. the stagflation case is still possible which can add to the gold value too.

FOMC Emergency Rate Cut

The FOMC caught markets off guard on Tuesday with an unexpected inter-meeting 75-basis point rate cut, bringing the Fed Funds rate to 3.5%. In the accompanying statement, the Fed cited “weakening of the economic outlook and increasing downside risks to growth” for the aggressive move. The greenback quickly sold off against the euro and sterling after the announcement and remains weak heading into the Wednesday session.

The Fed’s easing today marks the largest rate cut of this stature since 1982 and first inter-meeting move since the September 11th attacks. The Asian equity bourses took solace in the FOMC’s aggressive action to stave off a US economic recession, with Tokyo’s Nikkei index rallying 3.35% and Hong Kong’s Hang Seng up 7.18% by midday. With the scheduled policy deliberating meeting just a week away, I expect another 50-basis point rate cut when the Fed announces its decision next Wednesday.

Volatility Drives Yen

As Asian capital markets crash in unison, the Japanese Yen is rising at its fastest pace in years. Taken out of context, that sounds like a contradiction, since a positive correlation typically obtains between the strength of a nation's economy, capital markets, and currency. However, the Yen is unique, as most forex traders are doubtlessly aware. The Yen rises and falls with the whims of the carry trade, which in turn is tied closely to volatility. And in case you haven't noticed, global capital markets are seesawing to such an extent that by some measures, volatility levels have reached a nine-year high. One analyst has drawn a parallel between the current credit crisis and the 1998 Asian economic crisis, which also produced a Yen rally.

Read more: History Points to a Yen Rally

Asian, European, and American stocks has dropped in 2 consecutive days. And its not just an ordinary drop. It is reported that Dow Jones reaches its lowest low of/since 1991.

EUR/CHF plunged 891pips since Oct. 11 last year. Surpassed the record low of Aug. 2001 with 868pips. Again, please stay out of the correlation hedge for now. Wait for things get back to normal.

EUR/CHF 1.21.08 Analysis

EUR/CHF 1h chart. After a steep drop early last week, it stays in a consolidation for 3 days, ranging within 1.6196 and 1.6083. And finally broke to the downside just before the market close last friday.

Double top is formed. EMAs pointing down suggesting a continues bear.

A bigger double top formation formed. All indicators are at oversold territory, but still has room for the down side. I'm expecting it to test the 1.6033 first then reached the psychological level of 1.600 on or before the fed rate announcement on January 30. Wait for the confirmation of a reverse on the dailies before placing a buy hedge.


Fed Should Prop Up Dollar

In a recent editorial published in the Wall Street Journal, the Chief Economist for Bear Stearns (an American investment bank) advocated intervention by America's Federal Reserve Bank on behalf of the Dollar. He reasons that the best way both to fight and inflation and alleviate the possibility of recession is to strengthen the USD. Current measures, which include lowering the discount rate and manipulating the money supply, are actually worsening inflation. As a result, institutional investors are moving their capital en masse outside the US in order to prevent the declining dollar from corroding their investment returns. While paying lip service to the prevailing wisdom that Central Banks are essentially impotent when it comes to managing currencies, he insists that strong rhetoric by the Fed could conceivably convince investors that it stood behind the "Strong Dollar Policy" it promotes.

Risk Aversion Lifts Carry Trade

Since July, the Japanese Yen has notched a stellar performance in climbing 15% against the Dollar, without garnering much attention. Within the last week, however, analysts have begun to take notice, as the carry trade temporarily collapsed and the Yen appreciated by another 3%. 'But Japan's Central Bank is no hurry to raise interest rates,' you are probably wondering. 'What on earth is all the fuss about?' Volatility, the sworn enemy of carry traders has exploded. Global capital markets, including the US stock market, are in a state of turmoil. The financial services industry, the perennial bulwark of the US economy, is set to record its worst year in recent memory. Leading the way, so-to-speak, is Citigroup, which recently announced that it will write-down an additional $10 Billion in worthless subprime paper and will also receive a proportionately large infusion of capital.

Greenback Woes Linger

The greenback struggled against the yen and euro at the start of the week amid a dearth of fresh US economic news. The currency also tumbled to a new all-time low against the Swiss franc. Speculation that the Fed may step in to cut interest rates before the next policy meeting at the end of the month dragged the dollar lower. The market is now fully pricing in a 50-basis point rate cut after last week’s dovish tone from Chairman Bernanke, in which he said that the FOMC would adopt “substantive additional action” to prop the economy.

US economic reports and Fed Chairman Bernanke’s Congressional testimony will drive the markets this week.

Fed Chairman Bernanke testifies before Congress on Thursday and will be questioned about his comments last week, which signaled aggressive rate cuts were imminent. Given the current outlook for inflation and growth, the Fed still runs the risk of sparking inflationary pressure by easing interest rates to jumpstart the faltering economy. With the FOMC stuck between a rock and a hard place, it remains to be seen how much ammunition the Fed has to ease policy in light of further increases in oil and commodity prices.

USD Draws Support from Abroad

2008 is still in its infancy, which means the self-proclaimed forex experts can be excused for offering their projections on what the year has in store for the Dollar.

If currencies were traded in a vaccum, the Dollar would probably trend upward, since many technical factors suggest it is oversold. From a fundamental standpoint, however, it is probably overvalued, per the laws of interest rate parity and purchasing power parity.

Relative to other countries, though, it may be undervalued. From this standpoint, argue some analysts, the biggest impetus for a Dollar upswing will come not from good news emanating from the US, but rather from bad news emanating from the rest of the world. For example, the British economy, balance of trade, and monetary policy outlook is even more bleak than the US. The CEO of Airbus, one of the EU's most important companies, has threatened to shift production away from the EU if the Euro remains expensive. Finally, the Central Bank of China is allowing the Yuan to appreciate at a faster pace against the Dollar. As far as Dollar bulls are concerned, it might be best if the US government simply sits tight.

Read more on BBC.

I'm expecting the US dollar to drop more, down to 1.5 against the Euro before a recovery up to 1.4 or 1.3 by year end.

On the eur/chf side. after a small rebound, it dropped below the lower trendline before the market close last friday. Maybe due to the war tension building between US and Iran. Bullish is off for a meantime for the carrys, probably will plunge same number of pips from the neck to the head of previous swing up, unless we hear some good news from US. Again, I might be wrong...

Forex Themes for 2008

A week ago, we recounted what happened across forex markets in 2007, in all of its drama. Now, we would like to offer a nice counterpoint, in the form of the major themes expected to dominate forex headlines in 2008, courtesy of Dow Jones. The list includes eight distinct themes, though there is some overlap. Three of the themes pertain directly to the USD, which is the currency most worth watching in the upcoming year. The fundamentals bode well for the Dollar; the economy has not suffered from the credit crunch nearly as much as economists feared; the cheaper currency has boosted exports; foreigners have proven surprisingly willing to finance the twin deficits.

Then, there is inflation, which has reared its ugly head in the US as well as abroad. Foreign Central Banks, especially in Asia, may have to tighten monetary policy in order to maintain price stability. Those countries with already-high interest rates, such as Australia and New Zealand, are expected to keep rates high. The next theme, accordingly, is the carry trade, which should continue its run due to the aforementioned high interest rates. Next is China, which will be watched on two fronts: its economy and its currency, both of which are expected to continue rising.

The final two themes pertain especially to the Middle East: currency pegs and Sovereign Wealth Funds. As the Dollar declined in 2007, several nations in the Mid East mulled the possibility of de-linking their respective currencies from the Dollar, but thus far, the status quo has obtained. Sovereign Wealth Funds also made a big splash in 2007 with several high-profile investments in the US, implicitly underscoring their their commitment to the Dollar. They represent a growing force in global capital markets, and will be watched vigilantly in 2008.

1.9.08 Multi-Pairs Analysis

EURO (eur/usd)
Bullish above 1.4594, rising support coming in at 1.4386. and resistance at 1.4830 (friday's high). Look for a buy opportunity on a dip.

Support: 1.4594 (trendline support), 1.4520, 1.4386 (ky rising support).
Resistance: 1.4830, 1.4880

Cable (gbp/usd)
Resistance at 1.9886 and support at 1.9650. The pivot 1.9652 has been support point on several occassions and I think we will either see a run higher or a breakdown over the next 2 days to decide where we are heading next. Still bearish on the sentiment as long as falling resistance line hold at 2.0060. Have another falling resistance at 2.0138.

Support: 1.9700, 1.9652 (August key low)
Resistance: 1.9886 (falling resistance), 2.000 (phychological level), 2.0072 (former rising support from 1.86 area), 2.0060 (falling resistance, 2.0138 (falling resistance), 2.0503 (key level)

Swissy (usd/chf)
Bearish outlook below 1.1200

Support: 1.1100, 1.1074, 1.0950
Resistance: 1.1205 (previous support level), 1.1350 (previous support), 1.1630 (previous support), 1.1538 and 1.1631 (falling key resistance)

Nippy (usd/jpy)
Bearish below 110.00 level and any approach looks like a decent sell. 108.00 is the downside key support.

Support: 109.02 (previous falling resistance), 108.70, 108.00 (key level), 107.20
Resistance: 110.00, 110.70, 112.80 (key support) 114.60 (key level), 114.73 (high of Nov. '07)

Loonie (usd/cad)
Key rising support at 0.9876 and key support at 0.9703 (any approach towards this level should provide a decent buy set up). Falling resistance coming in at 1.0103 that should hold on the first test.

Support: 0.9876 (rising support from low) 0.9703 (1 month low)
Resistance: 1.0103 (key level, overhead resistance), 1.0330 (overhead resistance)

Risk Warning: The usual drill. Any information in this post is based on data considered to be reliable, but no representations o guaranteed regards to the accuracy of the data. Neither the information nor any opinion expressed shall be construed to be, or constitute an offer to sell or a solicitation of an offer to buy any investments mentioned herein. There are risks inherent in trading, including the risk of loss greater than the original capital. Past performance is no guarantee of future results.

1.9.08 EUR/CHF Analysis

From my last report, EURCHF bounced off the lower trendline as expected. Supported by the news announcement the US will soon cut their tax rate, and a possible 50 basis point cut on interest rate next meeting, which help the carrys make a nice rebounds after last friday slump.

The above chart is EURCHF dailies at 1.6400. I'm expecting it to touch the upper trendline or at least in the middle of the last swing down in the a couple of days to come. Breaking of the upper trendline will confirmed a bull trend, which is good for truenorthfx hedge. While a bad news can pull the price down to at least 1.6200 or even lower.

1.4.08 EUR/CHF Analysis

EUR/CHF Daily Chart


A side by side double top that I missed. Dragging the price down to the lower trendline. Stoch & CCI both are oversold but ADX showing strong bearish volume. Are we gonna see a reversal here?

If it bounced, expect price to touch the upper trendline. If it broke below, expect target or reversal at 1.6218. 2nd target or reversal point is at the round number 1.6000.

The above chart is a daily chart for long term view. Don't expect to see price reached targets in a single day trade.

2007 Recap

Forex market will start again tommorow. Lets do a summarized recap of 2007 before we move on to 2008.

During the early part of 2007, evidence mounted that the current US economic cycle had peaked, and analysts began to speculate that the US Federal Reserve Bank would cut interest rates. Nonetheless, the Dollar traded sideways for months until the housing bubble burst and the ensuing credit crisis quickly metastasized to the rest of the economy. The Fed responded by cutting interest rates by 50 basis points, and the Dollar began to unravel, losing 10% of its value in a matter of weeks. After that point, the bad news began to pour in.

The oil-exporting countries delivered a one-two punch to the Dollar, first by announcing that the possibility of accepting payment for oil in other currencies, than hinting towards a collective dissolution of their respective Dollar pegs. The Canadian Dollar reached parity with its counterpart to the south shortly thereafter. Countries in the developing world, including Brazil, Russia, and India, also witnessed surges in their respective currencies. The Chinese Yuan continued its slow climb, rising over 6% for the year, though this figure is probably closer to 2-3% in real terms. Even the Japanese Yen, previously held in place by the carry trade, notched an impressive performance as the credit crunch touched off a cascade of risk aversion. Then, of course, there was the interest rate story: by the end of the year, US interest rates were only 25 basis points above EU rates, and Dollar bears were licking their lips.

The news was not all bad, however. Foreign investors proved that they were willing to continue to finance the US twin deficits, though perhaps to a lesser extent than before. There were even several high-profile investments in US financial institutions, led by Sovereign Investment Funds, which collectively claim hundreds of billions of dollars at their disposal. In addition, the world's Central Banks announced plans to pump over $500 Billion into global capital markets, which should especially benefit the Dollar since the US bore the brunt of the credit crunch. Finally, economic data now indicate that US exports have been helped by the declining dollar.

All things considered, it could have been worse.