Daily Analysis – 10/06/08

Today’s US Dollar Trading
• USD two-way is moderate trade
• Majors correct into support but hold firm
• US data surprises to the upside

Overnight Preview
• Look for the USD to trade two-way
• Not a lot of news until later in the week

Looking Ahead to Tuesday
All times EASTERN (-5 GMT)
• 8:30am USD Trade Balance -58.2B
• 10:00am USD IBD/TIPP Economic Optimism

The Greenback is mixed to end New York after a whippy start to the week. Initially weaker in Asia, the minor holiday along the Pacific Rim slowed action until the start of European trade. The USD gained a bit on the EURO and GBP as UK data was mildly supportive for Cable but was ignored as the New York session got underway. The release of US housing data was above expectations and the USD rallied into the middle of the day; however technical levels held firm and the USD’s recovery from the thrashing it got Friday is likely to be brief. Both ECB Trichet and US Tres. Sec. Paulson were speaking today and hinted that the USD strength was welcome but Trichet was less than enthusiastic about the USD’s potential to recover. He said that he welcomed the advances seen in recent weeks but warned that the oil shock seen on both continents was the result of “poor policies”; Paulson also said that intervention by the US Fed “can’t be ruled out”. In my view I think that Mr. Paulson takes the trading community for fools because anyone with any experience at all knows that it is impossible for intervention to accomplish anything of lasting value; the trading community only sees that as an opportunity to add to winning positions. I suppose if the Treasury and the Fed wish to repeat the mistakes of the BOE then we should look to that as an opportunity. For the record, the GBP reversed from the highs at 1.9804 to close around the 1.9720 area leaving a strong selling wick on the day. EURO had more than a 200 point range today and closed lower but did hold the 50 bar MA in moderate trade. Most desks are expecting the EURO to again rally this week as the fundamentals are surely supporting a higher EURO. USD/JPY rallied but traders feel this is more in line with Yen weakness rather than USD strength. The rate held the weekly highs from last week and for all intents and purposes the rate is topping at the weekly highs as volumes were light on the move. Look to sell this USD strength the next 24-48 hours. No rush as the majors have a lot of give and take likely to develop near-term; US data is thin this week and may not be a factor.

Resistance 3:  1.5900
Resistance 2:  1.5880
Resistance 1:  1.5850
Latest New York:  1.5721
Support 1:  1.5710/20
Support 2:  1.5680
Support 3:  1.5650/60

Disappointing day for the bulls; close under the 50 bar argues for return to bearish action. Stops and offers noted above the 1.5790/1.5800 areas, COT data showed an increase in EURO shorts through last week and those are likely cleared now; fall back today tests the 50 bar MA; close below likely signals a further decline. Trichet hints at a rate hike for July but today’s rhetoric a bit softer; I think that is only to stem a rapid rise too quickly. Overhead resistance appears firmer on the approach to the 1.5800/20 area which is a likely to offer upside resistance through the rest of the week. Now that the break is out of the way we will look for a place to re-enter our longs.     
Data due Tuesday: All times EASTERN (-5 GMT)

2:45am EUR French Industrial Production m/m -0.8%
4:00am EUR Italian Industrial Production m/m -0.2%

Resistance 3:  1.0380
Resistance 2:  1.0350
Resistance 1:  1.0300/10
Latest New York:  1.0291
Support 1:  1.0150
Support 2:  1.0110/20
Support 3:  1.00080

Rate rallies to test the 50 bar MA where the stops were on Friday—fails to back a break higher stick suggesting the rate will rotate lower the next 24 hours. No doubt some bids are profit-taking from the shorts but that won’t last in my view. Any rally likely to attract selling so be ready for a short; sell signal today suggests rate is ready to rotate lower again. In my view, the rate needs to be sold on any strength. Look for a sell signal again overnight. Light volumes suggest whipsaw coming.