I do like the Swiss Franc since it is holding it’s 1.13 Fibonacci and I expect good expectations tomorrow morning, but I would feel more comfortable buying it against Canadian dollars right now than U.S. ones especially since it is at 1.12 right now which has been a tough nut to crack, the Fibonacci at 1.1107 is my target.   Truth be told I like the U.S. Dollar against the Canadian dollar here going into tomorrow’s trade balance releases also.  I think the greenback will get a lift on these figures.  Also I have said it before and I wil say it again, buy the yen.

The Federal Reserve failed to foster price stability as their mandate instructs them too and cut the overnight rate by 25 basis points.  This decision makes clear their intent to further weaken the dollar both at home and abroad as well as bail out their banking buddies.  Apparently some folks thought they would cut rates by 50 basis points and were as a result sellers of European currency and stocks.  The yen having a connection to the Dow of course rallied on this activity and tested and held it’s Fibonacci level at 110.54 but is poised to retest and most likely break through it as I write this.  So basically everything I have expected has come to pass even though the Fed cut rates which I didn’t necessarily want or expect.  So shame on the Fed and yay to me for calling the trades ahead of time for you all.  Going forward we have employment data for the Euro area and UK coming out.  The claimant count has known to move sterling a few pennies with surprise numbers so it is worth keeping an eye on.  Meanwhile I expect the market to shrug of Euro employment data and focus instead on Industrial production figures which should beat expectations or at the very least come out in line with them.  Swiss ZEW is most likely going to become a reason to buy francs.  Later on we have both the US and Canadian trade balances coming out. I don’t expect the dollar to suffer much from this release since it is common knowledge that the US is losing its trade wars.  I do expect the Canadian trade balance to come in weak due to the strong Loony and the Canadian dollar to back off as a result, helping to keep it above parity for a while.   

Expect the Euro to decline tomorrow if the rate decision comes out as no change.  Part of the reason that the Euro made its recent highs is because a rate cut has been priced into the market.  I don’t see this rate cut happening at least not tomorrow at any rate.  Interestingly if you look at rate futures they show rates going down slightly and then back up again next year.  Personally I think we have reached the low point already, but this will come as a shock to many players and you can expect a big correction as a result.  In the meantime you might be able to collect a bit on dollar shorts but I would not bother risking it.  Wait for tomorrow there should be some fireworks.

The big news today was the British PPI at higher than expected levels.  With PPI as high as it is, it is doubtful that the BOE will cut rates again at the next meeting.  The PPI output is an especially worrying figure at 4.5% year on year.  Needless to say Sterling gained on this news since inflationary pressures are undeniable.  Much of it comes from a weak U.S. Dollar since this helps drive up commodity prices, which in turn creates inflation.  So in reality a stable U.S. dollar or pricing of commodities in a stronger currency like Euro could really help curb inflation.  Since commodity traders are basically shorting the dollar when they buy commodities priced in dollars.  I would not be surprised to see oil being priced in euros or even sterling soon.  Tomorrow’s big news is the ZEW in the European session and then the Fed interest rate decision at 2:15 pm EST.  The market is expecting another rate cut but I am not; if I am proven right and the market is shocked by the lack of a cut expect the dollar to rally.  At least against the European currencies, although yen may be a different story since as I mentioned in prior posts is tied to the stock market currently.  Since the stock market is banking on rate cuts a wait in see announcement should be a huge blow to stock market bulls that still seem to believe we will see new highs printed in this stock market cycle.  Anyways, if the market falls you can expect to see the yen gain.  USD/JPY is bumping against resistance at 111.75 right now anyway, which completes the pattern on the daily chart and also happens to be the level it plunged to in August (support turned resistance).  The correlation I failed to mention before is that the carry trade in general is directly tied to the fate of the Dow.      

Although the daily chart yesterday told me too and my gut instinct told me too recommend a short USD/CAD recommendation I failed to advise this yesterday. Maybe the best advice I can give you is to always trust your gut.  It also helps to trust the Fibonacci levels and candle formations on daily charts.  The first answer is usually the right one so don’t second guess yourself.  After bouncing 12 cents in a month the USD/CAD is backing off again.  The dollar’s rally has been strongest on this pair which makes sense because of the beating it took against the Loony.  So far parity has been tough to crack but the weekly and monthly charts are starting to look like the Loony will punch through in addition to the daily.  You probably shouldn’t be jumping into this today but look at this next week. Even though it has already backed off the Fibonacci and fell 2 cents if this thing can break parity again you can expect to see it stay there.

The US non-farm payrolls came out above expectations as I expected but the dollar did not react as much as one could expect from prior releases.  In fact the last few releases overall have been anticlimactic.  The Yen looks to be headed for the 114 area now as the stock market rallies a bit on positive U.S. data.  What is cause for concern or at least should be is the fact that the Michigan Consumer Sentiment figure is at 75 now a far cry from the highs it was setting in the low 90s a few years ago.  Since the U.S. economy is based almost entirely on people consuming all manner of goods even when they can’t afford them this is very troublesome.  If Americans don’t have a big shopping season then this economy is going to falter.  What I am hearing from people in retail this season has been particularly weak.  Some of this can be attributed to online buying but the troubled housing market and inflation have taken their toll no doubt.  This could be what ultimately leads to a further dollar slide next year.  Meanwhile carry traders are picking up the pieces and the down under currencies are benefiting as a result.  The greed of carry traders should not be underestimated, many of them will not be scared off untill the exchange rate on carry pairs falls below 2006 levels.  It is quite possible that many took profits and have bought back in at these lower prices, so that they can earn on the exchange rate on top of the interest.  These people have also been emboldened by the recent rate announcements from the RBA and the RBNZ. Also of note is the fact that the RBA is now releasing a statement with the rate decision ala the Federal Reserve.   The comments released from both banks could be called hawkish as both say that inflation is high but they also say they will sit on their hands for now and see what happens with the financial markets going forward.

I am still bearish on the Australian dollar at this point.  Not only against the U.S Dollar but also against the Yen currently since the charts and the fundamentals are pointing towards a cheaper Aussie.  This is also in line with the carry trade meltdown which has been so apparent in recent times.  There is a good 5 cent move left in AUD/USD to the downside.     

With a whole slue of economic data out yesterday and today as well as key figures released tomorrow this has been one action packed week.  If the ADP employment report is any indicator for NFP tomorrow (which it normally is) then the figure will blow away expectations and help the dollar recover some of its recent losses.  The Bank of England cut rates as house price inflation was nonexistent in November, indeed the index actually fell for the first time in recent memory, quite possibly related to the fallout from the U.S. housing debacle.  Meanwhile consumer confidence is also shaken in Great Britain so the bank felt the need to alleviate some of the pain induced by the credit crunch.  Across the world Aussie GDP missed the mark and as expected the RBA kept rates at 6.75%.  The RBNZ followed suit and as expected kept rates unchanged as well.  The tightening orgy has apparently reached its climax now that the markets have suffered a nasty but necessary shock.  I wouldn’t rule out further rate hikes from the ECB and the SNB though.  I have been bearish on the Pound over $2 and at 250 yen for quite some time and it looks as if Sterling will be back below the $2 mark as soon as tomorrow.  Although it is holding the fibo at 2.0225 for now, I wouldn’t expect that to last much longer.  It did get some help from positive data this morning but couldn’t undo the fresh shorts and position squaring following the rate decision. Turning to the ECB, their decision to wait and see what happens underlines what I have been saying about their willingness to raise rates since Trichet’s accompanying statement mentioned inflation a number of times and also mentions that money growth is “robust”.  I applaud them for not cutting rates just to cater to the interest of big banks which took a thumping in the financial crisis and also for not discounting the fact that food and energy inflation is rampant.  Unlike the subservient Fed they seem to have the interests of the people closer to heart.  Also of note he mentioned the strength of emerging markets having a big positive impact to investment and exports, large enough to offset at least part of the slowdown from the U.S.  Don’t expect the ECB or the Swiss to cut rates anytime soon.  Tonight we have Japanese GDP coming out which I for one expect to be healthy due to strong export growth with China.  Then tomorrow morning we have German industrial Production which will probably also be strong for similar reasons.  Then Canadian employment coming out shortly before us figures are released.  There could very well be some Yen buying tonight and some price increases in EUR/USD prior to tomorrow’s figures.  The chart on USD/CAD looks like the dollar is done rallying for now but be sure to exit any short you have before tomorrow’s NFP.    

I have not yet mentioned on this blog that there is a strong correlation between the Dow Jones Industrial Average and the value of yen but it certainly does exist.  I attribute this mainly to the hedge funds who are in both the carry trade and the stock market and also to shrewd Japanese investors securing profits and sending that money home.  Perhaps they are more confident on in the “emerging markets” stocks (as I am) than the inflated share prices on Wall Street.  Being bullish on Yen as I am means I am implying that the stock market will fall which it must cyclically speaking.  But it is not only the “law of cycles” that compels it to do so but the fundamental economic situation as well.  Although the markets are anything but rational sooner or later reality kicks in.  My advice, sell your stocks and buy some yen.

I certainly hope that you were able to make some money on the franc and Aussie trades I gave you if not the Loony.  Looking ahead we have crucial rate announcements coming out from Australia and New Zealand as well as Aussie GDP to look forward too.  Be wary of a rally in AUD before the rate announcement as people who have been short today look to cash in and take a profit.  I still favor the yen although it looks as if it will not do much going into tonight’s session and may be effected today by what happens down under.  My guess at this point is that the Aussie will rally going into the numbers and then falter once the announcement is made.  The GDP a half hour later will probably add momentum to whatever move is occurring since the bank no doubt has that information already and at least partly based its decision on it.  AUD/JPY could be in for a wild night, of multiple penny movement.  I like the idea of waiting for the data to be released and then shorting that pair.  The next stop will probably be 94.30.