Business-Insider

As any investor who has been profiting from the carry trade during the past few years knows, the Japanese yen (JPY) has been quite volatile lately---which has ripped a lot of profits out of carry traders' pockets. A few days ago, I posted a video about a strategy I've used (the covered carry trade) to allow me to stay in my carry trades and collect my rollover interest.

Click here to see the previous article: http://www.pfxglobal.com/index.php?o...399&Itemid=188

Since then, I've received a few questions via MyPFX regarding Covered Carry Trades, and I wanted to answer them here so everyone else could see the discussion.

Question #1: "In the example you gave on the GBPJPY trade, the strike price for the covered call is 217.00. If we were to set our stop loss in the GBP/JPY trade at 217.00, wouldn't we be in a risk free situation while still collecting the interest diferential for the trade?"

Answer #1: Setting a stop loss at 217.00 would eliminate much of your risk, but it wouldn't be risk free. Here's the reason. If you get stopped out of your spot trade, you are still short the call option. If the pair turns around and moves higher after you get stopped out, you can lose money on the option.

Imagine the pair drops, stops you out at 217.00, and then turns around and moves back up to 218.00. Because you are still short a call option with a strike at 217.00, you would be down 100 pips.

Question #2: "I was very interested with you covered carry trade video. My question is around how to manage the deal if you are close to the point when you could make a loss. In your example, this would be around the 216.70 level. Would the easiest way to do this be to just stop yourself out on the spot position and buy back the call? In your experience, what is the best way to limit your risk?"

Answer #2: You can exit your call option when you get stopped out of, or otherwise exit, your spot trade when the price drops down to your breakeven point. This is usually the best thing to do. However, you will have to buy your call option back for whatever it is worth at the time.

Even though your call option will not have any intrinsic value if the currency price drops below the strike price of the option, it will still have extrinsic (time) value. This could be anywhere from 10 to 150 pips---depending on what your expiration date is. Buying this option back will result in a loss on the trade, but a small loss.

You can see that there is some risk involved in this trade if it goes against you (sorry, no free lunches yet). You will certainly limit your downside losses and give yourself a nice cushion to stay in the trade for as long as possible, but things can still move against you.

To see the remaining 3 questions and my answers to them, click here: http://www.pfxglobal.com/index.php?o...632&Itemid=188
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by John Jagerson

Following a strong correction yesterday, after the FOMC release, the USD has begun to weaken against most of the majors and particularly against the commodity currencies. The USD's slide is only exceeded by the JPY, which has made up all of last session's losses on the USD/JPY.

The bias for risk has shifted overnight as investors begin anticipating further action from the US Fed in the short term to resolve or control the issues in the credit market. Amongst many things, that may mean a mid-period cut to the discount rate and/or changes to borrowing conditions from the Fed, which should continue improving the credit market situation.

Just based on volatility, I am still anticipating a concentration of risk in the commodity currencies and a potential short squeeze on the JPY but as a carry trader, this is nice market action. Because trader expectations are driving the market currently, we should be very conscious of newly released news and hedges or appropriate stops should continue to be in play.

If you are interested in a diversified version of the carry trade strategy, click here to see our learning group on the subject: http://www.pfxglobal.com/index.php?o...stcat&catid=42

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The news that 5 central banks are "teaming up" to fight credit market issues has dominated the forex today. Atlhough this sounds good, I have a couple concerns about the news. First, doesn't the fact that central banks, who usually have different objectives, are combining forces mean that the problem is worse than we thought? Second, increased open market activity by the banks will increase volatility. I don't think we have an account killer event on the horizon but I still maintain that risk levels are high not lower in the forex based on the news today.

In addition to this discussion, I will take a few minutes in the daily video to walk through the new pairs pages we released on our site yesterday. Take a look and tell us what you think.

To see the video, click here: http://www.pfxglobal.com
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I don't have the full info on this yet, but it was announced that a co-ordinated liquidity injection among the Fed, BoE, ECB, BoC and SNB is underway. I'll follow up on this later but there has been a strong positive reaction in the S&P futures, which have already been moving up in the overnight session. That means the equity/carry trade markets look good to go for today as well.

The rise in the S&P futures caused the appreciation in the carry trade pairs. I'll follow up on this a bit later as more info comes out.

Why not try taking advantage of the overnight movement in futures and carry trades with me and the other members of my room. It's still just ten bucks a week. I don't have fancy charts, websites etc, just some fun trading. Join on my blog: the newstraderfx.blogspot.com or contact newstraderfx@yahoo.com

by S. Wade Hansen

The USD/JPY has been steadily falling since late July. Well, that is not actually true. It has had a few moments where the USD has been able to recover a little bit or when the JPY bulls have had to rest and recoup. But after each consolidation period or attempted rally, the USD/JPY has continued its march lower.

This current consolidation is no different. The USD/JPY is heading lower---down to 105.00. Are you ready to make 300+ pips?

To see why I believe the USD/JPY is dropping to 105.00 and how you can take advantage of it, click here: http://www.pfxglobal.com/index.php?o...296&Itemid=188
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LONDON (Thomson Financial) - Gold rose and was steady above 800 usd as dollar weakness and high oil prices spurred buying, although trade was thin as a result of the US Thanksgiving holiday.

Weak equity markets, after US shares slid yesterday, and the growing perception that the world's economy will not escape a serious slowdown next year sparked some gold-buying as the precious metal is seen as a safe haven.

Players like to put their money somewhere safe and into a less risky asset in times of turmoil.

'Gold's pre-eminent allure was demonstrated on Wednesday as it was the only metal, base or precious, to finish in positive territory,' said UBS analyst Robin Bhar.

At 12.38 pm, spot gold was trading up at 802.70 usd per ounce against 798.10 usd in late New York trade yesterday.

Weakness in the greenback, which hit yet another record low against the euro earlier today, spurred buying from those trading in other currencies because they found dollar-denominated gold to be cheaper.

Meanwhile, higher oil prices, which stayed close to a record high of 99.29 usd struck yesterday, sparked inflation jitters -- to which gold is often bought as a hedge.

Gold has risen some 30 pct since the start of this year and surpassed analysts' expectations who had previously seen 750 usd an ounce as the key price milestone.

The precious metal hit 845.58 usd per ounce earlier this month -- less than 5 usd lower than its all time peak in January 1980 of 850 usd.

Dollar weakness, sky high oil prices and ongoing market-turmoil are likely to continue and players reckon these factors are likely to support gold going ahead.

In late October, Credit Suisse said gold could fetch over 1,000 usd per ounce by 2010, and will average 838 usd next year on account of global economic worries.

Other banks' views are not far off either. Gold will race past its record high by early next year on dollar weakness and as the precious metal's safe-haven quality is likely to boost buying, said RBC Capital Markets earlier this month. In the first quarter of 2008, RBC expects gold to rally to as high as 900 usd per ounce.

JP Morgan analyst Michael Jansen said precious metals are likely to draw support 'as long as a) the USD remains weak, b) crude oil remains strong and c) investors continue to look to hold precious metals as a hedge.'

The only way gold might fall is if and when players sell off their holdings in a bid to raise cash to cover losses elsewhere.

In other precious metals, platinum was up at 1,464 usd per ounce from 1,458 usd.

Silver was up at 14.49 usd per ounce against 14.42 usd late in New York yesterday, while palladium dipped to 353 usd per ounce against 355 usd.


anealla.safdar@thomson.com as/slj COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved.

PARIS (Thomson Financial) - European Central Bank president Jean-Claude Trichet will meet French President Nicolas Sarkozy in Paris this evening, the ECB and the Elysee palace said.

Trichet is due to appear before the Attali commission, which was set up by Sarkozy to identify obstacles to French economic growth, at the French Senate at 5.30 pm and he will hold talks with Sarkozy after this, they said.

They could not say whether Trichet or Sarkozy would make any comments after the meeting.

Trichet regularly holds talks with European heads of state and government but this is understood to be his first such meeting with Sarkozy since the French president's election in May.

Sarkozy has regularly complained about the euro's appreciation and criticised ECB interest rate hikes.


steve.whitehouse@thomson.com sw/slj COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved.

Equity markets and carry trades had a strong finish on Tuesday, with a good amount of bullish momentum in the last 90-120 minutes in spite of the fact that Citibank will have additional sub prime related writedowns. There were several good reasons for this but probably the most significant was the news that Citigroup named Richard Stuckey to unwind their sub prime positions. What's interesting is that Stuckey was the executive who helped unwind Long-Term Capital Management's bad bets nine years ago.

Meanwhile, in what could be remembered as he quote of the day (month, year?), Lawrence White, professor of economics at NYU's Stern School of Business, said that unwinding Citi's positions might be difficult due to the "opaqueness as well as the stinkiness'' of what Citibank is holding in sub prime paper.

What also helped support the market was a classic case of bad news= good news. The Fed yesterday reported that major banks made it much tougher for all types of customers to get loans over the past three months and that residential mortgages were harder to get than at any time in the 17-year history of the Fed's survey of banks' senior loan officers. The reason why this disturbing news went over so well is because it brings a further rate cut, or cuts, back into play.

And now that the fed is back in play, the Non-Farm Productiviy report will take on special significance because as productivity rises, inflation falls. High productivity basically means that business' can provide goods and services at lower cost at the consumer level becasue their cost of production is low.

Productivity is a key factor that the fed looks at in making their inflation projections and it's something they discuss at every meeting, according to the minutes. So with commodities like Oil (and now gasoline) rising in price, productivity will be especially important for market participants.

In this time of market uncertainty, any bullish momentum will need to see the fed's door open to the possibility of reducing rates further in order to be maintained. Low productivity means higher inflation and far less chance of the fed making another move and as far as this market is concerned, that's an especially bad thing.

Thanks for reading my post and I hope you use my blog occasionally:
thenewstraderfx.blogspot.com

If you're interested in finding out about my ten dollar/week trade room (no comittiment-cancel any time) contact newstraderfx@yahoo.com.

No it didn't blow up in one day, Christmas is still coming and your kids will be OK. That's why i changed the title from "Ended" to "Changed". But they may need to learn a bit more about Chinese culture then was taught when we were in school. Two events that occured today will be where the dividing line in the shift of economic power from West to East will officially be noted.

Citibank will go bust unless The Federal Reserve prints as much money as it needs and gives it to them. Even so, the bail-out will be seen as further evidence of hospice care, much as the so-called SIV superfund is being viewed.

At the same time PetroChina tripled in value from it's IPO and it's valuation is over one trillion dollars. That makes it a bigger company then ExxonMobil and General Electric COMBINED and it makes the state-owned oil company worth more then the entire Russiian stock market. It also means that 5 of the 10 largest companies in the world are from China and it also makes the Chinese stock market bigger then London's.

And unless they pull the plug on the S&P 500 today-

1. Carry trades will unwind as the dollar strengthens vs. the high yielding currencies and depreciates vs. the Yen

2. Gold and Oil will fall in price.

3. U.S. debt will be bought, especially the shorter end of the yield curve.

4. Fear indexes like the VIX and Ted Spread will appreciate.

5. It will become more and more difficult for Hong Kong to maintain it's dollar peg as the demand for HKD (needed to buy Chinese H-shares) rises. The Hong Kong government and economy benefit from the peg so it's doubtful that they will abandon it however, currency specualtion may force the issue. De-pegging the HKD would cause it to rise rapidily and dramatically vs the dollar.

Thanks for reading my post and please do not vote usesless UNLESS you have a specific comment to make that expresses your opinion. Any and all opinions are always welcome whether you agree with me or not. If you're interested in finding out more about my trade room (ten dollars a week, no minimum number of weeks) contact newstraderfx@yahoo.com. Thanks.

HONG KONG (Thomson Financial) - The US dollar gained against the euro in afternoon Asian trade Monday as investors bet the European Central Bank (ECB) will likely keep its key interest rate steady when council members meet this week to decide on monetary policy

'There is significant uncertainty in the market and on the economy that the ECB has to consider, including higher oil prices and a weak financial sector,' said Thomas Lam, treasury economist at United Overseas Bank. 'I don't think the current backdrop warrants a rate hike.'

At 1.00 pm (0500 GMT), the euro was trading at 1.4490 dollars, down from 1.4518 in Sydney this morning. The euro on Friday rose to an all-time high of 1.4527 dollars in New York.

Against the Japanese currency, the dollar was quoted at 114.56 yen, little changed from 114.54 this morning.

The ECB is meeting on November 8 and most economists are expecting European policy makers to keep the benchmark rate at 4 percent.

Some economists expect the ECB to increase the key rate in coming months to curb inflation, which accelerated to 2.8 percent in October from 2.1 percent in September.

'There is a little bit of profit-taking, so the dollar strengthened a bit,' said Tim Concon, research head at ING Financial Markets.

The dollar's gain is expected to be short-lived on growing speculation of another rate cut in the US by the year-end, which would weaken the greenback further.

The Federal Reserve on Oct 31 cuts its key rate by 25 basis points, sending the dollar plunging against other major currencies. It was the Fed's second rate hike this year as policymakers struggled to rescue the troubled financial sector and keep the economy from slipping into a recession.

Aside from falling to record lows against the euro, the dollar also slumped to a 57-year low against the Canadian dollar and a new 26-year low against the sterling last week, as investors switched to higher-yielding currencies.

The euro's recent strength is supported by 'real portfolio flows' such as purchases by other central banks to boost their foreign exchange reserves. Thus, even if the ECB decides to keep its rate unchanged for the rest of the year, the single currency won't suffer a major correction against the dollar.

'It seems that in recent weeks, there appears to be real portfolio flows into the euro zone and these are non-speculative flows. So even if there is a sudden shift in expectations, the euro won't retreat aggressively,' Lam said.

Meanwhile, the yen strengthened against the dollar this morning from 114.85 in New York on Friday, as money flowed back into the Japanese economy.

Citigroup Inc, the world's biggest bank, said it expects to make additional writedowns of up to 11 billion US dollars to reflect the declining value of the roughly 55 billion dollars in US subprime-related securities it holds on its books.

The bank said its subprime assets have experienced 'significant declines' in value since September 30, following downgrades by major ratings agencies and other market developments.

The writedowns will shave about 5 to 7 billion dollars off net income, Citigroup said in a statement.

Citigroup made the disclosure a day after it announced the resignation of chief executive Charles Prince. Prince is the second CEO of a major US financial institution to quit in the last week because of massive losses from subprime assets. Merrill Lynch CEO Stanley O'Neal also resigned last week after Merrill disclosed its biggest-ever quarterly loss.

'The yen's movement is consistent with what's happening in the equities market,' said ING's Condon. 'The unwinding of carry trades is the theme today as investors become more risk-averse.'

Under the yen carry trade, investors borrow from Japan, where the 0.5 percent rate is the lowest among developed countries, and invest the proceeds in higher-yielding securities including stocks.

The greenback was buying 93.62 Canadian cents this morning compared with 93.35 cents at the end of last week, off a low of 93.20 cents, its lowest level against the Canadian currency, or ''loonie,'' since the latter was floated in 1950.

Hong Kong 1.00 pm (0500 GMT)

US dollar

114.56 yen

1.1535 sfr

Euro

1.4490 usd

166.05 yen

1.6719 sfr

0.6939 stg

Sterling

2.0878 usd

239.20 yen

2.4086 sfr

Australian dollar

0.9205 usd

0.4407 stg

105.47 yen

New Zealand dollar

0.7640 usd

jun.ebias@thomson.com

je/zr

COPYRIGHT

Copyright Thomson Financial News Limited 2007. All rights reserved.

The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

Here is the original post: http://www.forexfactory.com/news.php...0p#post1697689

Here is Part II from us, a can of worms may be opening up here, so let's go fishing. This may be hard to read, and for some they will not agree, and that is fine. Its importance cannot be ignored, or can it?:

Until the US can instigate a replacement Energy source, or against all odds, convince itself that a life-style change has to be made because the 'Good ol' Oil Days of Oil at $50' are just around the bend, it will remain crippled with a Current Account deficit, and a Trade Imbalance. It is OK hearing that a cheap $ helps Export Prices, the reality is however that the US is a net Importer (more comes in as Imports than goes out as Exports), and therefore a cheap $ may not be as beneficial as some think.

Just look at the options outside of Saudi Arabia, the main source of US Oil Imports;
Canada.
The Trade disputes over Soft-Wood lumber did damage to trade relations that are still being felt now, and instigated Canada opening up Exports to other Global regions more quickly than it otherwise might have.
Venezuela.
When the President of Venezuela said at an International Convention that he could “still smell the sulpher” having followed George Bush to the podium (a reference to the Devil) it summed up the desire that each country would have in expanding further relationships that benefit each other.
Nigeria.
Strong links to Europe and the Middle East that the US will not break.
Russia.
Increased Oil production in 1990, the first Global producer to be able to do so since the 1970’s, but that collapsed as quickly as the new private company, Yukon, collapsed. Russia now just about produces enough Oil to feed itself and the surplus goes to China.
Iran.
The second largest producer of oil in the world. Iran states that it needs to build a Nuclear reactor because in a decade its own Energy needs will not be enough; without the reactor they say that they will become a Net Importer of Energy. If Iran needs to have Nuclear, and the power that gives the country, it will be in return for a continued flow of global Oil. What price to pay is that for Global Powers? Whatever the answer is, Iran needs Nuclear to allow Oil to flow; will their excess be fed straight to the US? Just think about the politics there for a moment; neither country has too much trust of the other, and both will say, "for good reason".
UK
The staunchest ally of the US, but that is getting questioned by public opinion. The growing minority population in the UK are becoming politically strong, as is their right, and as such the UK/US link may not be as strong in 10 years as it is right now. The North Sea Oil production cannot increase capacity to supply excess US needs, there is just about enough to cover the UK needs, and they still import Oil.

So, back to Saudi Arabia; they seem to have peaked in production, and for whatever reason cannot increase the flow at a rate that the US and Chindia (China and India, the worlds future Super Powers?) need just to feed the current growth rates. The Saudi's walk a fine line in the close Export link that they have with the US, as the religion that is practised by many is Wahhabi, a form of Sunni Islam. As such there is a distrust of Christian, Jew, Shiites, and, as a seperate group, the US.

So, where next? We need to look in the mirror and see if we can find Oil there, if not we need to look at whether we are each prepared to make something change, because the arguments are that if we don’t tough times ahead are going to be very likely.

This is not going away, and Traders could be seeing historical times if the US is not to be dominated by Oil Exporting countries. It is moving that way right now, a change in lifestyle is what is required;

1) Look to renewable Energy like Wind, and Tidal, the initial cost of infrastructure on them will soon look cheap compared to the cost of a Global shortage in Oil.

2) The Industrial Revolution was enabled only after switching from burning wood, an easily accessible source of Energy that was dwindling, to Coal, an Energy source that was plentiful but harder to find. Without making that sacrifice the UK would have stayed as an Island in the North Sea, rather than a tiny country that lead a Global revolution of change and advancement.

3) Maybe look to learn how to fend for ourselves, asking and learning from Parents and Grandparents the basics of Family life and survival on our own terms, and to do it before they are not able to teach us. Survival enslaved to Energy that powers our cars and computers that link us to the world will be redundant if the Oil situation is not addressed.

4) Save more, (Hard to understand for a society that has the largest net per capita income and the lowest net per capita savings rate in the world), but the lack of savings makes us reliant on Government help in creating liquidity in hard times. If Energy is not addressed the Government, running the largest deficit ever seen and the ballooning Trade Balance, will be facing debt numbers that look small at these historically high levels right now. In the next cycle of economic slow-down where will the cash come from for the Government to flood the market with cheap Interest Rates, lower Mortgage levels and Tax cuts to jump-start things again? We can't expect the Fed to just turn the printers on, or can we?

We would not maybe be as concerned if we were flexible enough and prepared to change our lifestyles, learn from older generations, (who needs to ask Grandpa when it's a lot easier just to Google it), and to save to be able to look after ourselves. In reality however we are just not prepared to do that, and unfortunately that may be our downfall in regard to Energy.

One thing is certain out of all of this; there are few, if any, nations on earth as adaptable as the US, and few more committed to 'getting it done' in good time, and therefore it will be surprising if this realization does not get addressed, it may be however that the US public need to instigate the moves at home, rather than wait for the consequences of this Energy Shortfall.

1929, 1945, 1982. Sound familiar? Depression, World War II and Recession. All three had record Government deficits and Resource shortages. In all cases Government spending tripled, higher Energy costs were then reflected in high unemployment, and the Government needed to spend its way out of trouble with Tax cuts, Interest Rate cuts, and Government work contracts. (Remember the White House having a wood burner put in to save Energy costs, and a wind turbine fitted? Where have they gone?).

If it sounds familiar it is because that is what we have now, and that is why most Trade Desks are not in Dollar Long positions for anything other than Hedges against forward positions, or to address end-of-day Risk/Assets Ratio excess and looking to earn overnight Swap Interest. (Remember that the USD is now a net PAYER of Swap Interest on some Pairs, and if the Rate Cuts continue it will cost money to hold $ Longs overnight.

We have not even started on Gold, that looks the same to us regarding US debts. Long Gold, deliverable Gold too, not paper, is where some are looking to be, the stuff that you can touch, and in small denominations that are easily tradable, and hideable. But, that really is another story.

Our Alerets have been centered around this for a while now, if you are interested please feel free to pop in each day, most of our information is free, and some say it is also priceless. Free and Priceless? How unusual is that!!!
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Analysis by TheLFB.com
© 2007 LFB Services, LLC. All rights reserved.
99 Wall Street, New York. Scottsdale. London.

by John Jagerson

It is unlikely that the tier of small announcements due this week will be able to change the trend on their own, which means we need to be on the lookout for the unexpected. Technicals will likely be important this week as traders try to set profit targets and projections for the next few weeks.

Outside the forex, I am watching yields and stocks very closely for signs of a breakout. A change in the risk bias in these markets through a breakout or unexpected news will ripple through the forex. Clearly that would impact the JPY but the commodity currencies may also be sensitive to these changes if investors flee to quality again. Although the AUD and NZD look very fundamentally sound, it makes sense to manage our risk more aggressively on those pairs in the short term.

To listen to the podcast, click here: http://www.pfxglobal.com/
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Analysis by Profiting With Forex (PFX)

This is an excerpt from an article written by Danske Bank. For the full text of the original please visit: http://www.danskebank.com/danskeresearch


The EUR/USD has risen again to a new all-time high of around 1.45. The greenback has thereby weakened close to 9% vis-à-vis EUR since the beginning of the year. But USD weakness is even more widespread, with the DXY index also falling to an all-time low. We argue here that even though the USD weakness is prevailing, it is not inexplicable or out of touch with the factors normally driving USD. In fact, these estimations suggest an even weaker USD and that a level of 1.50 is not far away. We advise, however, that these results should be treated cautiously, since investors might be reluctant to buy EUR against USD at current levels and some latent factors might come into play if USD keeps declining.

A falling USD should in fact be a mystery to nobody. It is consistent not only with relative interest rate trends but also with wider developments in both financial markets and the global economy. Among the key drivers behind recent dollar weakness we note the following:

* Led by emerging markets, the global economy continues to grow well above trend; in particular, Chinese output has been impressively high and thus carries on to be the world's growth locomotive. While USD is a good defensive currency, it performs quite badly in good times.
* US interest rates have fallen sharply relative to other markets during the year. Since the middle of June the 3M US-Euroland spread one-year forward has narrowed by 70bp.
* Oil prices have rallied more than 40% since June, which is directly negative for USD / positive for EUR. Combined with sky-rocketing freight rates this makes energy extremely expensive in the US causing growth to slow down further.
* The stock market has risen rather strongly since the middle of August while equity volatility has slumped. None of that favours USD.
* US house data has of late been frankly terrible. US housing starts are currently at a 14-year low, existing home sales are at the lowest level since the series began in 1999 and new home sales have dropped since late 2005.
* The Fed has performed 'damage control' by lowering rates to help home-owners in distress. Speculation on a new easing cycle from the Fed might have spurred some of the USD sell-off.
* The huge deficit on the current account is the big elephant in the room nobody talks about. There is currently not much attention on this topic and the somewhat weaker USD will to some extent reduce the problem. It can, however, pop up occasionally causing further stress on USD.
* USD tends to under-perform when risk aversion rises. The credit crunch pushed risk aversion to all-time highs and we remain at an elevated level of risk aversion.

As we have argued on a number of occasions during the past few months, US dollar weakness has been entirely consistent with relative economic and financial trends. This continues to be the case. The combination of strong global growth, rising oil prices and relative US weakness is a highly negative mix for the dollar. Hence, we still see no reason to argue that the dollar weakness is driven by structural rather than cyclical factors, nor does EUR/USD strength seem excessive.

The dollar can stay weak for some time. The factors mentioned above are likely to persist - to a greater or lesser extent - for some time. The global economy is still expanding, US yields do not seem to go higher than elsewhere, oil prices might adjust but are still elevated, the stock market is not heading towards a major correction, US housing data is still awful, the Fed has a 'neutral' bias (ie, no tightening bias) and it will probably take some time before risk aversion returns to those levels we saw as 'normal' before the credit crunch.

We run a simple model on EUR/USD based on 3M forward rates, five-year real rates, oil prices, VIX and S&P500 (R2 0.88). Based on these fundamentals, this generates an estimate of 1.48(!). In fact, we are only one standard deviation from the psychologically important level of 1.50. There is - in other words - plenty of room for USD to drop even further. When one adds seasonality effects (USD tends to under-perform at year-end) we would not be surprised if we take 1.50 out soon.

So are there not any risks to this? Of course there are. That is why we take profit at 1.4510 on our long EUR/USD position opened on 10 October. And no-one has ever been blamed for locking in profit. USD has gained 7% in two and a half months. That said, if we see more USD negative factors ahead, we might take another ride upwards. Some investors will be tempted to cash in before a correction, which can be based on a number of things:

* US growth is still strong. Preliminary numbers for Q3 surprised on the upside by rising 3.9% y/y. If Europe could post such growth rates, we would still be celebrating.
* Q3 earnings for US companies have been strong. Around two-thirds have reported better than expected earnings (which, however, is quite normal), ie, the situation for US companies has not been shaken that much by the recent market turmoil.
* US business confidence and consumer confidence are still at reasonable levels, although declining but not unambiguously pointing towards a forthcoming US recession.
* The prospects for growth in the euro zone might have been exaggerated. If that is the case, this will not favour EUR going forward.
* The USD is fundamentally undervalued relative to EUR. Our PPP analysis suggests that EUR/USD should correct towards 1.20 if purchasing power should equalise in the regions. This level is not far away - we were there in March 2006.
* If USD keeps drifting lower, a coordinated central bank rescue plan might be set up to stop the decline. The G7 meeting failed to deliver a common point of view for the delegates but this forum has earlier intervened to correct currency movements considered 'unhealthy'.

Our newly adjusted EUR/USD forecasts are now as follows: 1m at 1.43, 3m at 1.46, 6m at 1.50 and 12m at 1.38.

We will monitor the situation closely as USD obviously is of primary concern. We recommend to hedge USD positions as the uncertainty towards USD is linked with considerable risks at the moment.

Danske Bank
http://www.danskebank.com/danskeresearch

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This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets' research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

The only time that the Forex Market can Open higher than it closes is, as you know, on a Sunday. The main importance of the Gap in price this week, where prices opened higher/lower than Friday's close, was that the moves jumped straight past price points that in normal trading could not get broken.

Cable: 2.0500 area was big Daily Chart resistance, and 2.0250 was great support, in 16 trading session the upside and downside attempts were rejected. On Sunday the Pair opened above those price Points that had held them up previously, price points that Institutions had set by putting enough Resting Orders there that they would absorb any attempts to break them. Those Resting Orders may be Hedges against other assets being held, they could be Central Bank price points that protect Reserve valuations; whatever they are is none of our business, until they get broken.

In the Gap situation, where Trading starts above those Orders, the Market Mechanics are put out of line, and those protective orders, that were put there for a reason, have to either be moved higher or the commodity has to be sold to get it back below those areas.

In normal market conditions, in the middle of a normal market day that is very difficult to do, the Market is in full swing and volume levels are normal. On a Sunday evening there is the chance to put that right by operating in a low volume environment that normally does not pick up momentum until the western side of Europe comes to work. Institutions are free to work on getting the prices back to where there is an equilibrium to where they wanted them.

This tends to be a self-fulfilling prophesy as Traders then see the Gap that the Institution would like to fill, and working with the law of probability help to fill it by selling the Gap up or down, or ‘Fading the Gap’.

In the Equity Market it is seen every day at Market open, and because of the constant stop/start of the Equity Market these Gaps in price can last for months before getting filled. In Forex the once a week opportunity to Gap a price leads it to normally get filled in that same session, Foreign Exchange is a market of necessity for Institutions, much more than choice. It provides a way to swap goods and services around the world and is used as a Hedge (or insurance) against a forward transaction, or to hold as Reserve Currencies. Therefore Gaps are a real issue, much more important than in Equities, in the Forex Market, and get filled 99% of the time. Look at any Cross pair Daily/Weekly chart and you will see hardly any Gaps that remain unfilled.

So, the chances of the Cable (Gapping into Daily Resistance), Swissy (that gapped lower straight into Resistance from September/October) and Euro (that gapped up to start trade at an all-time high) holding that ground was remote. Not only could the Market not gauge the reaction to the tests of very important prices, that would have also meant that the US Dollar Index, a basket of currencies traded against the Dollar (Euro, Yen, Pound, Canadian, Krona and Swiss franc) would have been pushed straight to 76.5, a huge area of Support for that Index.
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Analysis by TheLondonForexBlog.com
Copyright © 2007 LFB Services, LLC.

For weeks the posts on our site have been centered around a Short US$ Trend that will offer 'Bounce Days', and today Traders have another one. Some reasons could be:

* Oil prices are pulling back from all-time highs, and that automatically creates Long US$ positions; Sell Oil in US$’s = Long $. That is one of the reasons that the US$ is strengthening today.

* As the US session gets underway the price of Gold is sitting at $750, a drop of $14 in quick time. That move has helped strengthen the US$ and put the Aussie under pressure. Selling Gold positions creates a Long $ position, another reason that the US$ is having a Bounce Day.

* Equities look weaker in the near-term, US Markets have followed Asia and Europe lower. The commodities to benefit are the US$, (as the Markets turn Risk Averse selling Oil, Gold and Equity Long positions), and the Japanese Yen. The first currencies to get liquidated are the higher yielding ones (Pound, Aussie, Kiwi).

* The Dollar Index is Trading higher on Monday, and the Yield on the 10 year Treasury Note is just turning positive, indicating that the bounce on the Dollar maybe more inline with Oil and Gold falling dramatically, than the initial move to Treasuries, but that is righting itself. As soon as the Dollar Index and Treasury Yields get back inline, which they look to be now doing, the next leg of Dollar strength may happen.

Monday is showing the $ sitting in the positive, a sign that the Market may be looking to move to US Treasuries as an alternative to Equities. Oil and Gold Long positions being sold are creating $ strength, and giving Traders a very strong $ Bounce Day, even if the economy looks weak, the respect for the $ Globally cannot be underestimated, although it is being challenged.

The Europeans are sitting at Daily SMA areas, as are the Yen Cross Pairs. A close below them today really could draw Technicals and Fundamentals together for some heavily confirmed moves.

The Gap yesterday on Cable got rejected as it hit the Daily chart resistance just above 2.0500. It now looks to want to test the lower part of the Daily Chart Channel at 2.0250. The Swissy gapped lower and straight into Support from July, it then failed and was sent packing. The Euro gapped into all-time highs and failed. The reasons for failure are that protective Institutional Resting Orders were not initiated, and the likelihood was that on a Sunday evening whilst Europe and the US were away from their desks that the US$ Index would not collapse, and the gaps would be filled.
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Analysis by TheLondonForexBlog.com
Copyright © 2007 LFB Services, LLC. All rights reserved.

It's never felt better to be so wrong. Yesterday, I predicted that labor would come in less than 100K but that it would still be positive. I also projected that stocks would climb, the EUR/USD would rise, the USD/CAD would fall and the USD/JPY would also rise. Although I completely missed the labor estimate, the end result was accurate. As much as I would like to say that I had the inside track, it really wasn't anything more than the technical and fundamental analysis we have already been doing.

Today in our daily pairs technical analysis we will take a look at the breakouts and renew our support and resistance levels. With all new lows and highs this is an exciting time to be in the market but it also means we have to be a little more unconventional about our projections.

Here's the link:

http://www.pfxglobal.com/index.php?o...944&Itemid=149
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Analysis by Profiting With Forex (PFX)

Related Topics: Relative Index Performance – RIP
Standardized Unexpected Events - SUE

I. Context of the Trade
a. Relative Index Performance – RIP
Use TD Supply and Demand Lines to determine expected turning points.
b. Use Standardized Unexpected Events – SUE to confirm expected currency direction.
c. Use daily, weekly and monthly DMA, DMACD, Stochastic, Detrended Price Oscillator
to determine if there is a higher time period direction and trend.

II. Plan the Trade
a. If the announcement is in the RIP direction:
i. Enter as soon as possible with a SUE > 0.5.
ii. Hold for change in technical indicators.
b. If the surprise strong enough to go against RIP:
i. Enter a trade with SUE > 1.5.
1. Retracement on the same side of the 3x3 DMA.
2. Use alternate entry points if not a F3 or F5 retracement
ii. Hold until first bar in the opposite direction or technical indication.

III. Trade the Plan
a. The Announcement – Use visual SUE scales to determine the magnitude and
direction of the unexpected surprise component of the announcement.
i. Current month’s announcement.
ii. Revisions to prior month.
b. Initial Spike and Retracement
i. 3x3 DMA
ii. DMACD
iii. Detrended Oscillator
c. FibLevels for Entry, Stop and Profit Objectives
d. Brokerage Report - 42 Pips

For a pdf file containing charts for this trade, please email info@quartustrading.com,
Subject: NFM Trade – 5 Oct 07.

Best regards and good trading,
Quartus Trading LLC
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Analysis by Quartus Trading LLC

by John Jagerson 9/17/2007

Panic in the streets is what I expected after Friday's news about Northern Rock. But, inexplicably, the only market that seemed really affected was the GBP. In the mean time, we have a major lender in the UK going out of business and blaming credit market issues arising in the US. I would have expected stocks to get beat up at least a little. This event leaves a big stinky question laying out there about how many more legitimate lenders and banks are going to have to be bailed out before this crisis is over?

Like most traders I talked to, I suspect that the lack of volatility is due to the imminent Fed announcement tomorrow. However, in my experience, volatility doesn't just go away. Most of the time, it lies waiting in the shadows and unwinds suddenly once the market is past the distraction. That is what I am expecting following the Fed release tomorrow. This is great because it gives us a chance to prepare.

On Friday, I reevaluated my stops and placed hedges against my portfolio holdings in the forex where appropriate. This is good but any time I am expecting volatility another trading opportunity arises that can be quite profitable. In this case I am referring to using options on a currency pair. Right now, I can buy a call and a put on the EUR/USD that has the potential to provide a nice profit if the market breaks out either direction. The key, of course, is that the market will have to move big but losses are generally kept to a minimum as the two positions offset each other to a certain extent if the market doesn't move anywhere.

I prepared a webinar on this strategy that I had posted earlier but if you have not seen it you might find it interesting. Click here to access it:

http://www.pfxglobal.com/index.php?o...508&Itemid=136
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I'm going to divide this post into two sections. In the first, i'll discuss the background and provide some trading scenarios in the second. There is likely to be a fairly predictable short term market reaction however, the ultimate direction of global equity markets and currency prices (and therefore the global economy as a whole) will be determined in the interbank (LIBOR) market because LIBOR is the real key to global liquidity.

BACKGROUND

In order to understand what this means, you need a brief introduction to LIBOR. LIBOR is a daily reference rate at which banks offer to lend unsecured funds (in a specific currency) to other banks in the London wholesale money market (or interbank market). LIBOR provides rates for banks lending in Sterling, Dollars, Euros, Yen, Swiss Francs, Canadian dollars, Australian Dollars, Swedish Krona, Danish Krone and New Zealand dollars. Rates for a wide variety of debt instruments (including currencies) are set from LIBOR.

Right now, LIBOR's for Sterling, Euros and Dollars are well above central bank target rates. Three month Sterling LIBOR is 6.75% (down from a high of 6.90%) while the overnight rate has risen to to 6.47%. As long as central bank expectaions remain constant, LIBOR spends most of its time around 15 basis points above official central bank overnight rates, meaning that Sterling LIBOR is around 85 basis points higher then where it would be under normal circumstances.

This is essentially where the re-pricing of credit has occured and where the vital signs of global liquidity can be taken. The sub prime and U.S. housing situations were the catylists for the spreading of fear to the ABCP market and this (along with things like Northern Rock) led to the upside re-pricing of LIBOR. It's the fear of what assets such as CDO's, CLO's, Conduits and SIV's are now worth. It's the fear about what the losses will be and the fear about who exactly holds what. It's a guessing game regarding who will be the next Northern Rock.

If you're interested in knowing whether the fed's move will have the intended effect of easing the global liquidity squeeze-this is where to look. Because so many financial instruments (including currencies) are priced here, if LIBOR's do not ease the global liquidity situation will not improve. It is by no means definate that the fed's target rate reduction will have an immediate effect on LIBOR. What we can say is that so far, all of the world's central bank actions to this point have not eased the situation to an appreciable degree and that the Northern Rock incident has increased overnight LIBOR for Sterling.

In one sense you can view the situation as if The Fed, BoE and ECB had all raised their overnight rates. You could also draw the conclusion that central banks do not at this time have the same degree of influence in the interbank market that they had prior to the liquidity crisis. It's a very unstable and dangerous situation that unquestionably will lead to a global recession if not corrected because high interest rates have the effect of slowing growth and because real interest rates have risen into slowing U.S. job and housing markets. It's really as simple as that.

TRADING

In all likelihood, the 25 basis point reduction is a done deal and it's likely that another move will be made in the discount rate. All eyes will therefore be on the statement and what it implies, however, in my opinion a dovish or hawkish statement are both equally dangerous to the global economy right now.

A hawkish statement basically means that the fed is confident that the economy will continue to grow, but will no doubt cause equity markets to sell off strongly in part because there is a 50% chance of a 50 basis point cut currently priced in. In that case GBP/JPY will depreciate as the Dollar gains vs the Pound (and the other high yielders) and dives vs the Yen. Besides being bad for the equity markets, you can also basically forget about LIBOR (and by proxy, global liquidity) easing anytime soon. In this situation, LIBOR and equities can only improve if and when those markets agree with the fed's outlook on growth and that's not likely to occur until a whole lot more economic data points in that direction, especially with jobs trending down to an anemic 1.2% YoY and housing starts off over 40% from the January 2006 peak.

A dovish statement will no doubt give a short term boost to equity markets, meaning that GBP/JPY will appreciate as the Dollar dives vs the Pound (and the other high yielders) and gains on the Yen, but a dovish statement is risky on at least four levels:

1. A weak dollar is inflationary.

2. As the dollar weakens, foreigners may be less inclined to fund the current accout by purchasing U.S. debt. We might become dependent on Japan to take up any slack that occurs.

3. Oil will go to $100/bbl within weeks, if not days.

4. Once the euphoria dies, markets will come to the conclusion that growth looks to be getting weaker going forward which obviously will not help equities or liquidity.

CONCLUSION

It's perfect timing that Alan Greenspan has released his book and is giving interviews, because what the markets need right now is a strong dose of Greenspan's "Fed Speak". It's essential that the Fed not remain transparent about its future moves at this time while repeating assurances that it stands ready to provide liquidity.

What also must happen is what always happens in times of squeezed liquidity: banks must be persuaded to lower rates and agree to lend. In this case, the banks involved (British Bankers Association) are those involved in the interbank market, because it is those banks who set LIBOR.

If you're interested in finding out about my trade room, blog and trading primer contact newstraderfx@yahoo.com

The U.K. currency slid to $1.9995, from $2.0121. Dollar may slump against pound, snapping 2 days rally after Fed minutes showed FOMC members will keep a close eye on financial market conditions. Fed minutes may cause weaker dollar against pound and other high yield currencies. Consumer confidence is negative for dollar too. Pound may be also supported on speculation carry traders will return.

By Luckasi

Given what happened today on Wall Street, expect to see further unwinding in equity/carry trade markets in the next Asian and European trading sessions.

Kind of a perfect storm for a bear market occured today, starting with Merill's downgrading several important financials. Citigroup, Lehman Brothers and Bear Stearns led all 93 financial companies in the Standard & Poor's 500 Index lower after Merrill Lynch reduced its recommendation on the shares saying earnings would be decreased due to the ongoing problems in the housing and commercial credit markets.

The FOMC minutes, though dated at this point, gave markets no indication that the Fed was closer to making a rate cut, despite the fact that the Fed's economic team had revised down their growth estimates prior to the last rate decision.

News that State Street was having problems in the ABCP market also upset market participants, who has gotten used to seeing a bit of easing there. The Consumer Senitiment report indicated that gas prices and falling home values were putting a dent in the all-mighty U.S. consumer.

There was a strong flight to quality today, as 3 mo T-Bills gained nearly 30 basis points on the day, a clear indication that traders want to get as far away as possible from anything related to asset backed paper.

As carry trades unwind, the dollar appreciates vs the high yielders and loses value vs. the Yen, meaning that currency pairs such as the GBP/JPY depreciate. You could see 225.5 there by the time the smoke clears.

If you're interested in finding out about my trade room, blog and trading primer contact newstraderfx@yahoo.com

By John Jagerson, 28 Aug 2007

I am already seeing some reports today that the huge decline in U.S. consumer confidence was due to housing problems. For once, that is not the only culprit. Concerns about job security and the labor outlook in the confidence report was the big leader. Overall confidence fell to June levels and completely reversed July's "confidence rally." With a reading of 105, the report has hit a year low at a level we have not seen since 2005.

This volatility in consumer confidence is not a surprise. Debt his very high, savings are extremely low and anxiety over falling home prices and rising mortgage rates are psychologically very stressing to the U.S. consumer. This volatility is only going to increase and ultimately it will undermine the fragile strength in the U.S. economy to the point that the Fed may have to jump in and take extreme action. Lowering interest rates aggressively could buy a lot more time for the economy to work itself out and may begin to reduce the impact of the sub-prime nightmare on the U.S. consumer and businesses.

In my opinion, the take away here is that investors are going to have to deal with a high risk financial market environment in the near term. The wild-card Fed will continue to spook investors and a shift out of riskier assets is likely to continue. Therefore, I think the USD/JPY is a long term sell and the USD will ultimately weaken against currencies with monetary policies that emphasize stability over growth.
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The volatility of the 1st Friday of each month that NFP is released is not just down to the number of jobs created, this is a complex release that has four components that Traders must be aware of:

1. The actual number of jobs reported as being created this month,
Augusts' number is expected in at 135k, and is an average of analysts’ figures that range from 200k to 60k. The High to Low difference is enormous.

2. The revision to the previous month’s number,
Probably as important as the new number, the revision can add 50k to the previous amount, and that is what creates the volatility as Traders re-align their previous thoughts on what happened four weeks ago.

3. Employment Rate,
Currently at 4.5% is one of the lowest in the world and has stayed between 4.5-4.6% recently.

4. Average Hourly Earnings,
Looking at coming in around 0.3%, this is the number that the Fed stated was causing it concern as an inflationary read. Wage increases stoke inflationary pressures and the FOMC members have said that they are more concerned with inflation than they are the housing market.

If the NFP prints an increase in jobs, and the Revision stays close to last month’s number (132k) or higher, the Unemployment Rate stays below 4.5% and the Hourly Earnings post at 0.3% as expected, Traders will have confirmation that the economy is looking robust, inflationary pressures are around and no interest rate decrease is likely from the FED. That will likely strengthen the $ as the weakness in the Greenback recently has come from the fear that the housing sector will drag the manufacture and service industry lower; a positive read on jobs and wage growth will reduce those concerns.

The fly in the ointment is the US housing sector, it is weighing on most analyst's minds as they look towards 2008 and some are predicting an interest rate cut to compensate for the sub-prime lending problems that are prevalent now. The FED will not want to be lowering rates to appease the housing problem if there is any sign of CPI increases and inflation in the economy. It is a fine balancing act, one that will be made a little easier if the releases tomorrow are strong.

Be very careful Trading the NFP, there are many components to look at, maybe better to find the Support and Resistance ahead of time, let the explosion of price take place, hold fire, keep the gunpowder dry and let the Market come to you, one way or the other after the first 10-15 minutes. The initial breakouts are always retraced, let the Market show which way it wants to go, check that the $ is running the same way against all of the Major Pairs and be in control of anything that gets taken tomorrow.

The Asian Markets are closed by the time NFP is released, they will pick up the baton on Sunday evening, so do not be in a hurry to get involved, if it comes your way then get on board, but do not be standing on the platform waiting for the Non Farm Express only to see it rush straight past you going down the track in the opposite direction.
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The Japanese Yen continued to rally higher against its higher yielding counterparts, as continued tumbles in the Dow Jones Industrial Average led to pronounced carry trade liquidation. The US dollar also had a strong day of gains, matching its largest intraday advance in six months. A flight to safety across the board led to continued volatility across all asset classes, with especially pronounced moves in interest rate and stock markets.

Euro traders saw the single currency lose another 140 points against the Japanese Yen, leaving the EURJPY at its worst peak-to-trough drawdown since March. The high-yielding British Pound was likewise among the worst performers as it shed an incredible 250 points to ¥240.56. Finally, US dollar traders saw the greenback remain relatively stable against its Japanese counterpart, adding a minimal 6 points to ¥118.77 through time of writing.

A positive surprise in US Gross Domestic Product data lent the dollar support through early morning trade, with continued flight to safety leaving the greenback higher on the New York afternoon. The US economy grew at a faster pace than expected through the second quarter of the year, registering a 3.4 percent annualized expansion versus 3.2 percent expected. The attached Price Index was slightly subdued, however, adding weight to the argument that inflationary pressures are receding in the world's largest economy.

The result shows that the economy posted a strong recovery from the first quarter's dismal 0.6 percent annualized rate, with a sizeable improvement in the Trade balance and Government Consumption spurring a jump in GDP. Yet not everything is rosy on the release; Personal Consumption fell to a 2.7 percent annualized pace, worse than the 3.4 percent expected and considerably below the 4.2 percent clip seen in the first quarter. The net implications of the report are arguably mixed, but such a strong rebound in headline GDP rates nonetheless quelled fears of a continued US economic slowdown.

Strong GDP rates were unable to hold back equity market tumbles. Continued risk aversion led the Dow Jones Industrial Average another 94 points off to 13,379 by 17:34 GMT. Losses were actually worse earlier in the day, but bears were unable to drive the closely-followed index beyond yesterday?s panic-lows. The S&P 500 posted a similar 0.71 percent decline to 1,472, while the tech-heavy NASDAQ Composite had the largest percentage drop at 0.86 to 2,577. Continued gains in corporate bond yields and overall credit concerns brought financial shares lower, while speculators cut back expectations of mergers and acquisitions for the same reasons.

Fixed income markets showed small gains on the session, sending yields further from their recent highs. The benchmark 10-year note inched up 3/32 points to 97 and 7/8, with the yield losing a single basis point 4.77 percent. Treasuries had moved considerably higher in early trade, but a subsequent stabilization may signal a pending turnaround in markets. A bounce in yields would certainly boost the dollar, offering better rates of return to the yield-hungry international investor.
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The sharp fall in oil prices on Tuesday (Brent crude fell $3 per barrel to around $76) shows the lack of support at these high levels. the wobble in prices illustrates the vulnerability of prices when speculative long positions are close to record highs. Analysts continue to expect Brent crude to fall to around $65pb by year-end.

The Bank of Japan is expected to raise interest rates at only a glacial pace this year, posing little threat to the carry trade. But worries that weakness in the US sub-prime mortgage market is spreading to the wider economy could cause a flight from risky assets -- leading to a rush to buy back yen.

The Yen already surged across the board on Tuesday as growing turmoil in U.S. credit markets led investors to bail out of stocks and risky trades financed by borrowing in the Japanese currency.

News and Events:
The sharp fall in oil prices on Tuesday (Brent crude fell $3 per barrel to around $76) shows the lack of support at these high levels. The immediate triggers appear to be linked to two developments involving Iran: signs of progress in talks between Iran and the UN nuclear watchdog agency IAEA, and comments from an Iranian official that OPEC would increase production if required to cap prices.

But whatever the precise reasons, the wobble in prices illustrates the vulnerability of prices when speculative long positions are close to record highs. Analysts continue to expect Brent crude to fall to around $65pb by year-end.

The yen surged across the board on Tuesday as growing turmoil in U.S. credit markets led investors to bail out of stocks and risky trades financed by borrowing in the Japanese currency. The yen rallied sharply as mounting worries about the housing market drove some major U.S. stock indexes down nearly 2 percent by the close. The Dollar also sank to a record low against the Euro. Some analysts said "We're teetering very close to the edge of a carry trade unwind, actual view is that there are reasons to bail out right now".

The yen, the lowest-yielding currency in the industrialized world, has been a popular financing vehicle for speculators investing in higher-yielding assets of countries such as Australia and New Zealand through so-called carry trades. As investors unwound some of those bets, the yen fell about 0.7% against the currencies of both countries on Tuesday.

UsdJpy sank 0.57% to 120.27 yen after touching a two-month low of 120.00. Meanwhile, the EurJpy dropped 0.44% to 166.20. EurUsd jumped to a record high of 1.3852 before settling back at 1.3820 up 0.14% on the day. GbpUsd climbed to a 26-year high 2.0654 before settling back at 2.0610 up 0.09%.

The Bank of Japan is expected to raise interest rates at only a glacial pace this year, posing little threat to the carry trade. But worries that weakness in the US sub-prime mortgage market is spreading to the wider economy could cause a flight from risky assets -- leading to a rush to buy back yen. If problems stemming from the sub-prime market spread to other sectors, foreign demand for U.S. corporate debt -- a major source of financing for the trade deficit -- could waver and further hurt the dollar, some analysts say.

Given the market's sensitivity about the health of the housing market, US existing home sales data due on Wednesday and new homes sales due on Thursday are likely to be major centers of attention this week.

Both precede the first reading of second-quarter US Gross Domestic Product, due on Friday, which will indicate to what extent the economy bounced back from the January-March period, it most sluggish quarter of economic growth in more than four years. The latest plunge lower in the dollar coincided with a report showing Canadian Retail Sales in May had the biggest increase in nearly a decade, pushing the Dollar to a 30-year low against the Canadian dollar of 1.0340.

Import Price Index (JUN) (12:30 GMT; 08:30 EST) Advance Retail Sales (JUN) (12:30 GMT; 08:30 EST)
Expected: 0.7% Expected: -0.1%
Previous: 0.9% Previous: 1.4%

How Will The Markets React?
On Friday morning, the release of the US import price index and advance retail sales hold major market-moving potential, as the news will reflect two of the most important topics relating US asset trading: inflation and consumption. First, while import price growth is anticipated to slow in June to 0.7 percent, the figure is still relatively buoyant and will likely be supported by high petroleum product prices. Nevertheless, core inflation (CPI excluding food and energy) remains the Federal Reserve's predominant concern, so an oil-price led increase in import costs may not lead to extremely hawkish Fed expectations.

Meanwhile, advance retail sales are estimated to fall 0.1 percent in June after surging 1.4 percent in May. With average gasoline prices over $3/gallon during that period, the decline is likely to be led by a slump in automobile purchases, as cars and light trucks sold at a 15.6 million annual rate in June - the slowest since October 2005. Excluding automobiles, retail sales are still anticipated to slow substantially to a rate of 0.2 percent from 1.3 percent the month prior. However, there are risks to both the upside and the downside. Good news first: stores like Wal-Mart and Costco have reported better-than-estimated sales results in June.

Now the negative: Wal-mart has said that the jump in sales was generally due to price discounts, while Home Depot Inc. and Sears Holdings Corp. warned sales and profits will be weaker than expected, partly blaming the woes in the housing sector. Meanwhile, Macy's, JC Penney, and Kohl's all reported disappointing results on soft apparel sales. US markets are likely to respond in similar manners to Friday?s data. If the import price report is softer than estimates, bonds and equities are likely to rally while the US dollar will continue to take on additional losses. However, the combination of upside surprises in both the inflation report and retail sales figure will lead the markets to consider the possibilities of policy tightening by the Federal Reserve later this year.

FX - EUR/USD
As traders desperately search for a top in EUR/USD, the release of US economic data regarding both inflation and consumption will draw a significant amount of attention. However, the estimates for Friday?s import price index and retail sales figure may only push the pair up to 1.3800, as price growth is expected to ease while consumption is predicted to take a hit.

These factors would be highly bearish for the US dollar, as the markets will see such data as a signal that the Fed will remain on hold throughout the rest of the year, despite their persistently hawkish stance. Nevertheless, 1.3800 represents a psychologically important level for EUR/USD, so a sell-off of the US dollar to that figure may be capped. Furthermore, the move could result in a sharp turnaround, especially if the data is mixed, as dollar bulls waiting in the wings will be looking for any reason to fade the overextended pair.
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Analysis by DailyFX

Today was like the St Valentine’s Day Massacre for the US$ after what seemed a benign Asian trading session.

NEW YORK (AP) - The euro shot to an all-time high against the U.S. dollar Tuesday on concerns about the American economy that were fueled by discouraging growth forecasts from key U.S. retailers and homebuilders.

The British pound, which has been trading around 26-year highs against the dollar, briefly touched $2.0273 after reports showed British consumer prices were rising at a faster pace than the target set by the Bank of England.

The euro hit a new record of $1.3738 Tuesday, its highest level against the dollar since the 13-nation currency started trading in 1999, before retreating to $1.3729. That was still above the euro's previous high of $1.3682 reached on April 27 and the $1.3623 it bought late Monday in New York.

A higher euro makes goods from the 13-nation currency zone more expensive for customers abroad.

Along with the rise in the pound, the stronger euro also makes visits to much of Europe more expensive for travelers from elsewhere and makes shopping trips to the U.S. more appealing to Europeans.

'The dollar is a basket case,' said Peter Schiff, president of Euro Pacific Capital Inc. 'We are going to pay the piper for years of having the underlying fundamentals of our economy disintegrate beneath our feet.'

Given the state of the U.S. economy, he said, the dollar could continue to fall in the coming years against the euro, to $2.50 or even $3.

In late New York trading, the pound was changing hands at $2.0267, up from $2.0151 late Monday in New York. The dollar also fell against the Japanese currency, drifting to 122.03 yen from 123.33 yen.

The dollar bought 1.0512 Canadian dollars, up from 1.0484 late Monday, after the Bank of Canada raised its key rate by a quarter of a percentage point to 4.5 percent on Tuesday.

In other trading, the dollar bought 1.2053 Swiss francs, down from 1.2161.

The dollar's plunge against the euro and pound came as U.S. stocks fell, reacting to forecasts from retailers including Home Depot Inc., Sears Holding Corp. and homebuilder DR Horton Inc. that raised concerns about whether corporate America's growth will give stocks the boost investors have been hoping for.

Adding to the dour news on Wall Street was a move by Standard & Poor's Ratings Service to place credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral under review for a possible downgrade. Subprime mortgage loans are those made to people with questionable debt repayment records.

Also Tuesday, a speech by U.S. Federal Reserve Chairman Ben Bernanke in Cambridge, Mass., offered little insight into the central bank's next move, and instead focused on how the Fed makes its inflation-fighting decisions.

The Fed has left the benchmark rate unchanged at 5.25 percent for a year now, after two years of steady increases.

That contrasts with the European Central Bank, which regularly raised rates and is expected to do so again to 4.25 percent in September; and the Bank of England, which last week increased its benchmark rate to 5.75 percent, a six-year high.

Higher interest rates, a weapon against inflation, can bolster a currency by giving better returns on fixed-income investments.

The euro began its most recent run against the dollar in June after the European Central Bank lifted its benchmark rate to 4 percent. Further increases would be aimed at countering threats of inflation in the euro zone, a bloc of 318 million people that accounts for more than 15 percent of the world economy.

On Tuesday the European Union gave Cyprus and Malta final approval to start using the euro, raising to 15 the number of nations that will be using the currency when the two Mediterranean nations join the euro zone on Jan. 1.

Michael Schubert, a currency analyst for Commerzbank, said it was fair to expect the euro 'to trade around $1.35 to $1.37 for the short and middle term.'

AP Business Writer Matt Moore in Frankfurt, Germany, contributed to this report.

Copyright 2007 Associated Press. All rights reserved.

Daily Support and Resistant...

**EUR/USD
R 1.3680 1.3750 1.3800 1.3850
S 1.3580 1.3530 1.3480 1.3410

**USD/JPY
R 123.80 124.30 125.00 125.50
S 122.80 122.30 121.50 120.80

**GBP/USD
R 2.0230 2.0280 2.0350 2.0400
S 2.0130 2.0060 2.000 1.9925

**USD/CHF
R 1.2230 1.2280 1.2330 1.2380
S 1.2130 1.2080 1.2030 1.1975

**AUD/USD
R 0.8630 0.8680 0.8750 0.8800
S 0.8580 0.8530 0.8480 0.8430

From Mr. Juvent....
Happy profit......

The Bank of England Monetary Policy Committee (MPC) faces a very important interest rate decision this Thursday as policy mistakes now could prove costly.

After a surge in headline consumer inflation at the beginning of 2007, the rate has started to moderate as big price increases last year are coming out of the calculation.

There are still concerns that underlying inflation is edging higher and the bank will need to keep inflation expectations under control. The headline rate is also still significantly above the 2.0% target at 2.5%

The economy is still growing steadily and house prices have remained strong even though there is evidence of an underlying deterioration in conditions. Consumer spending levels appear to have weakened slightly.

Failure to increase interest rates this month would risk damaging credibility, but a decision to increase rates when the economy is already slowing would risk a very sharp economic downturn later in 2007.

The recent comments from Bank of England officials suggest that a unanimous vote is unlikely this week. Indeed, it is certainly possible that the decision will be very close and a rate increase is by no means certain as there will be some votes for unchanged rates.

The evidence suggests that Bank Governor King will again vote for an increase and will exert pressure for dissenters to back his judgement this time around.

If interest rates are increased, the statement accompanying the decision will need to be watched closely to assess future policy decisions. If rates are held unchanged, there will not be a statement.

Overall, there is around a 70% chance that rates will be increased with the MPC deciding that an increase can be reversed quickly if necessary. There has been some speculation over a 0.5% increase, but this option should be rejected.

Sterling has effectively fully priced in a rate increase this month and the UK currency will weaken sharply if rates are not increased.

The UK currency should strengthen initially if rates are increased, but gains will probably not be sustained and Sterling could well end up with net losses, especially if the statement expresses doubts over a further increase.

__________________
Tim Clayton
Investica Ltd Head of Research
Forex Factory Analyst

Dollar Slumped vs Euro, Sterling

The dollar fell sharply against the euro and sterling on the disparity between the Fed and the other two central banks in monetary policy outlook.

The Fed yesterday left its interest rate unchanged at 5.25% as expected. The post-meeting statement pointed out that the inflation is still the Fed's predominant concern, reinforcing the expectations that the Fed would not cut rate within the year. While on the other side of the world, the European Central Bank and the Bank of England are widely anticipated to lift interest rates at least one more time this year. The euro rose above the 1.35 level versus the dollar, the first time in three weeks. Should the pair stand firmly above the 1.3460-80 support area, further rally may extend to 1.3660 with a near target at 1.3550.

Daily Support and Resistant...

**EUR/USD
R 1.3480 1.3530 1.3580 1.3630
S 1.3410 1.3350 1.3300 1.3250

**USD/JPY
R 123.60 124.30 124.80 125.50
S 122.80 122.30 121.50 120.80

**GBP/USD
R 2.0040 2.0080 2.0130 2.0180
S 1.9970 1.9910 1.9850 1.9780

**USD/CHF
R 1.2350 1.2430 1.2480 1.2530
S 1.2280 1.2230 1.2150 1.2080

**AUD/USD
R 0.8530 0.8580 0.8650 0.8720
S 0.8430 0.8350 0.8280 0.8230

From Mr. Juvent...
Happy pips everyone......

ps. i'm very sorry for not updating my blog...its been a very busy week for me...

Today Support and Resistant...

**EUR/USD
R 1.3430 1.3480 1.3530 1.3580
S 1.3350 1.3300 1.3260 1.3180

**USD/JPY
R 124.30 124.80 125.50 126.00
S 123.40 122.80 122.30 121.50

**GBP/USD
R 1.9950 2.0030 2.0080 2.0130
S 1.9880 1.9830 1.9770 1.9710

**USD/CHF
R 1.2450 1.2530 1.2580 1.2650
S 1.2380 1.2330 1.2280 1.2230

**AUD/USD
R 0.8500 0.8580 0.8630 0.8680
S 0.8450 0.8390 0.8330 0.8280

From Mr. Juvent...
Happy trading....