With USD/CHF hitting all time highs it is without question the superstar right now. The Euro is helping it out big time also. It looks like this pair is destined for parity pretty soon. This move can also be explained as having the carry trade unwinding and the flight to safety occurring in these uncertain times. The Swiss franc is the barometer for the dollar and right now it is showing us the dollar is in big trouble. Meanwhile USD/CAD seems destined to reach .9875 once again very soon now that it has failed the critical resistance of .9963 the 50% retracement of the move from 1.0868 to .9058

I took the last few days off to help out with the election here in Florida, first promoting the only fiscal conservative running, Ron Paul and secondly by helping out with Project Vote Count here in Florida to ensure everyone’s ballots were counted this time. The markets have been interesting in my absence with USD/CAD now back under parity and USD/CHF at 30 year highs. Meanwhile USD/JPY holds support on the back of another Federal Reserve rate cut, this one for 50 basis points. Although the way the stock market ended it seems the rate cut was not as effective this time in rallying the Dow and vanquishing the yen. One thing is for sure, that Bernake and company are hell-bent on running the U.S. dollar into the toilet. If this keeps up it is only a matter time before reserve managers diversify out of the dollar completely and the dollar is as at parity with the Mexican peso. U.S. GDP coming out at .6% for the fourth quarter did not bolster confidence on Wall Street which was expecting a figure twice as large. The cutback in inventories while manufacturers brace for tough times ahead and a large increase in inflation at 3.8% in the fourth quarter were major detractors.  There was a sharp drop in residential fixed investment whose slack was partially taken up by higher nonresidential fixed investments. When I look at the TICS data I can’t help thinking that is just foreign currency reserve intervention. Even a higher than expected durable goods report on Tuesday could not save the dollar probably because a good deal of the increase was due to defense spending. Weaker than economists expected new home sales continued to plunge a this month’s ADP report can out far better than expected and now we can wonder if on Friday the employment number comes out strong. The Japanese economy continues to show signs of life with a lower jobless rate being released and spending on the rise. The U.K. nationwide house prices and German employment data and retail sales are also being released now. Then the official jobless rate in Germany is to be released at 3:55 am and job growth is expected to be about half of last month’s increase of 78,000. Then at 5 is EST Euro CPI will be released and at 8:30 am the feds favorite indicator for inflation the Core PCE will be released as well as spending and income targets. I think that the core PCE will come out a bit higher than forecast and might give you a reason o buy the Dollar, the key word here is right. Meanwhile Canadian GDP is supposed to be released and my guess is that it will be a slight bit better than anticipated. Then at 9:45 am the Chicago PMI comes out and afterward at 10 am it’s German CPI. Of course this Friday is non farm Friday and will be closely watching everything.   

Not that it is my idea of a good time to place a trade but if I had to make a recommendation at this point it would be to sell USD/JPY. I expect to see this pair reach 106 and then 105.71 next week at least.

Sorry I did not post yesterday, I was at the Ron Paul rally in Boca Raton. It was fun meeting a real fiscal conservative who knows how to get this country and consequentially the world out of the economic grave it has dug for itself. It appears that one hot shot trader at France’s second biggest bank, Societe Generale is responsible for losses of over $7 billion. The bank will probably stay in business due to loans from the ECB but this kind of nonsense provides clear evidence as to why we need to enact Dr. Paul’s reforms immediately and let these banks sink or swim on their own. Otherwise it is just rewarding a child who has been naughty, and you are encouraging them to misbehave again. The head of Societe Generale called the trader’s actions irrational, underlining just how irrational traders can be. Meanwhile the South African power company cut electricity production and has caused gold to hit a new all time high as a result. It turns out that it’s hard to mine gold without electricity, go figure. Good thing the government was responsible for South Africa’s and two thirds of Africa’s power supply. Of course you can’t blame the South African government solely for the record prices; you also have to blame the U.S. government as well for creating the Federal Reserve Bank. Their emergency cut really seals the fat of the dollar which was in the midst of a rally when the decision was announced. U.S. existing home sales came out weaker than economists expected but inline with the worse than forecast reading I had envisioned. German IFO surprised to the upside earlier in the day Thursday and coupled with the weak home sales data really helped the euro regain the ground it lost last week. The Swiss franc also benefited from the news, coming within 10 pips of the high it set against the dollar earlier in the month. Japanese inflation continues to build actually exceeding economist forecasts on a country wide basis. This is core CPI too which indicates that companies are passing off their higher production costs to consumers and that leads the common man to perceive there is inflation in the economy which invariably leads to more inflation. This is a good reason to buy yen because it is now only a matter of time before the Japanese raise rates. I would say there is a good chance of this happening next month and if not in February then certainly by March. Further narrowing the interest rate gap between the British and U.S. who are eagerly cutting rates and spurning further unwinding of the carry trade. After the 1,000 point bounce the stock market is resuming its downward course and this is yet another reason why the yen is attractive. Today the strength of the Canadian dollar was evidenced by the negative CPI reading. This is the six consecutive month of a negative core reading and it is enough to make me jealous. This is mainly due to the lack of domestic price pressures from consumption because of Canadian’s buying abroad (clothing and car prices fell) and Canadian retailers slashing prices to remain competitive. A strong currency also helps decrease the cost of commodity’s which are priced in U.S. dollars such as gasoline and oranges. This CPI level is well within the comfort range of the Bank of Canada and gives them a green light to cut rates again. This data put the brakes on the USD/CAD rally that was occurring prior to the news release. Next week should be intersting as well with the yen poised to rally again and the dollar on the ropes once more. Even the pound which has been out of favor lately is rallying agaisnt it.

I still like the yen but I fear the irrationality of the stock market and what it means to the yen. Namely as it rallies for no explicable reason that the yen will decline. Sure there was some bargain hunting going on and irrational optimism to boot but I don’t buy it. These investors seem to think that the Fed can just wave it’s magic wand and voila! All your economic problems are now solved… if only that were true. The Canadian dollar looks like a good buy, it is just encountering some resistance at $1.0225 if it can break through that it will then try $1.0192 and then $1.0177 which are Fibonacci levels. After that the next stop is parity. 

I hope you took my comments about a strong Yen to heart because it strengthened to 105 this morning vs. the dollar. At the same time GBP/JPY fell 600 pips and retested the lows it set the day before and completing the pattern on the chart. The combination beginning of the yen rally (after the stock market closed) plus the GBP/USD failing 1.9650 at the same exact time made this possible. Not even better than expected GDP from Britain could prevent the pound’s decline and the bank of England minutes pointing out that Britain’s current account deficit had increased to 5.7% of GDP did little to help. The stock market rally helped the dollar recover 200 pips against the yen today. However once the stock market closed today the yen started to gain value again against both the pound and the dollar. The fact that the GBP/JPY rally up to the highs it set yesterday is very bearish. Tonight’s Japanese merchandise trade balance came out at 880 billion yen versus expectations of 943 billion yen. Still when you consider that this a still a surplus of $8.3 billion dollars for the month it gives a good fundamental reason to buy yen. Especially when you consider that the Japanese can’t intervene in the currency markets forever. The RBNZ kept rates unchanged as expected and the Aussie CPI came out slightly below expectations of .9% quarter on quarter to my surprise. This helped drive AUD/USD lower but in all fairness everything but the yen was backing off at the time the news was released. The Euro Monetary Union’s Industrial New orders came out better than expected this morning but did not stop the EUR/USD from falling and testing support today at 1.4535 and then 1.45 even. Interestingly, the Swiss franc was strengthening against the dollar while the euro was weakening against it. Shedding it’s relationship to the euro and instead correlating to the yen. USD/CHF currently rests at major support at 1.09. Should the franc continue to move along with the yen in tandem and figure give way then the Swiss franc should be well on it’s way to parity with the dollar. German IFO will be the big data in the European session and could sink the euro for the morning since there has been increasing pessimism lately in the Deutschland. Even bigger will be the existing home sales report at 10 am which is expected to come in down a full 1% and will probably be even worse than that.  

Today’s emergency action by the Fed has obviously halted the recovery that was occurring in the dollar. The only thing keeping USD/JPY above key support right now is today’s rally in the stock markets. In my mind it is still by far the best buy out of all the major currencies. USD/JPY just failed 107 and seems destined to try 105.72 again soon.

Well the fireworks sure went off this morning with the Bank of Canada cutting rates as expected the Bank of Japan deciding unanimously not to do anything. The Bank of Japan said that they still expect growth to be strong and that exports are strong and there is a “virtuous” cycle of increased production, growth, and income. They said that the housing market is the only disappointment in their economy currently, that inflation will persist and that they are not lowering their growth projections for 2008. The Bank of Canada said they are lowering their growth projections for 2008 and that inflation has been lower due to increased competition in the retail sector due to the stronger Canadian Dollar. I think it is also due to the fact that the rise in commodity prices has been mostly offset by the rise in the Canadian Dollar’s purchasing power of commodities priced in U.S. dollars. They also mention that further monetary stimulus will be needed, from which it can be implied that they will cut rates again soon. The big news of course was the 75 basis point cut (.75%) to the overnight interest rate in the U.S. during an emergency meeting. This hardly buoys confidence when the situation is so dire that the supposedly stoic central bank is scrambling around trying to bail water out of a sinking ship. No amount of rate cutting at this point is going to save our ship; it will most likely just serve to sink it faster due to the meddling of the Fed. The Stock market was able to rally today on the news and make back most of what it lost on Monday while the dollar is giving back its recent gains. This should make the Fed happy with their unofficial weak dollar policy in place. Dollar sellers now have another reason to sell the dollar, lower interest rates which will make already weak interest in treasuries that much weaker. Now that the Federal Reserve is buying them up like crazy and driving yields down. Really the only reason to buy them at this point would be bargain hunting, by betting that the dollar will recover. The problem with this whole situation is that as long as the dollar remains weak, commodity prices will remain high and inflation will also be high. This bail out tax relief plan is a joke also. Since as some astute members of congress pointed out last week most of the money from the last such refund went straight to the banks anyways. While this might improve the lot of some already enormously wealthy institutions it does nothing to help the average man. If we wanted to help the working man we would get rid of the I.R.S. all together and tell the Fed to find another way to make their money. Then maybe we could affect some structural reforms that are badly needed.  Put simply the system is broken a tax kickback won’t fix it and sooner or later the house of cards the Fed built will come tumbling down. The Richmond Fed manufacturing Index came out twice as bad as last month at -8. Tonight some important data from Australia is to be released, first the WestPac Leading Index and then Quarter on Quarter CPI which is expected to come out 1% higher but which I suspect will beat that expectation. Also the heads of the Bank of England and the ECB are scheduled to speak this afternoon and tomorrow respectively. The deputy governor of the BOE already said that growth was ”slowing quite sharply” and that inflation was going to be high for a long time, especially if the pound loses more value. I am sure the rest of the central bankers out there will try to soothe the markets and tell them it will be alright. It is all about damage control at this point. The bank of England minutes from the last meeting are to be released at 4:30 am along with UK GDP which is supposed to show slower growth than the last reading at .5% quarter on quarter and to shave overall growth to 2.8% on the year.  This would not exactly an endorsement to buy Sterling. Tomorrow night at 6:50 pm The RBNZ is expected to keep rates at 8.25% and based on everything I have heard and seen I would agree with this forecast. This should help the Kiwi hold on to today’s gains. 

The Canadian dollar did attempt to rally against the greenback on Friday morning and I hope you were able to cash in. Be ready to buy yen tonight, with the stock market in a freefall and the carry trade in collapse the time is right for the yen to punch trough its first serious resistance levels. If the BOJ raises rates as I suspect they might tonight we should see GBP/JPY 200 really soon and USD/JPY at 100 before you know it. If the rate is unchanged then the yen could quite easily decline this evening as it has just tested major resistance today. So in other words there should be a lot of volatility tonight surrounding the release. If the rates are raised don’t expect a buy the rumor and sell the fact situation, expect a buy the rumor and buy the fact situation.   

Happy MLK day today is a reminder that powerful change can be effected by nonviolent means and also that ideas cannot be killed. Turning to the FX markets it is obvious now too many that the double top is in on the Euro whose formation was provoked in part by low German CPI today. Something which I have been talking about occurring for at least a week and which has now come to fruition. Somewhat surprising was a lack of profit taking by dollar buyers on Friday, or perhaps there was profit taking but new buyers taking their places. In either case the dollar has added to last week’s gains today against the European currency which has been frankly overvalued and due for a correction. Pathetic retail sales figures on Friday out of Britain and another decline in the house price index did little to make the case for a $2 pound any stronger. Also the Swiss Franc is retreating against the dollar after hitting my target of 1.09 again it has formed it’s own double top and the correlation to the Euro is outweighing it’s correlation to the yen as part of the carry trade. Speaking of the carry trade, it is in a shambles and it continues to get worse for those to foolish to see the writing on the wall.  The Aussie and Kiwi Dollar’s are reeling (lower than forecast Aussie PPI didn’t help) and the yen has came down to test support at 105.71 today finally. If this is broken the next major support level will be 101.64 followed by 101.23 and the physiologically important 100. If all that is broken we could see USD/JPY at 79.95 before you know it. Especially now that the stock market is crashing and there is such a strong correlation between USD/JPY and the Dow Jones. Carry traders are hoping to find some support in GBP/JPY at 205.14 which is the 38.2% retracement of the low set during the Asian Currency Crisis in the mid nineties to the highs set last year. If that does not hold the next level is 199.66.  It seems likely that we will see 200 pierced sometime soon in this pair. The market is now eyeing the BOJ’s rate decision tonight and wondering what Fukui will say afterwards. The market is expecting no change but I would not be surprised by a rate hike at all. So far this year has been anything but boring, and you should expect to continue seeing fireworks in the weeks and months to come. Tomorrow’s Canadian retail sales and rate announcement by the BOC will also be closely scrutinized. A cut is being forecast and could be in the cards but the housing market is still pretty strong there as far as I know. Now that the Canadian dollar is below parity once again the need may not be as pressing for that rate cut. Especially with mining and oil and gas businesses still booming and food prices steep as well. This translates to more cash in the pockets of ranchers and welders and could translate into inflation as well. On the other hand central banks are known to protect their own and seem more likely to bail out their buddies than keep inflation in check.