It looks like the Canadian dollar is due for a rally. Keep an eye on the pound too, if it cannot hold 1.9650 it is a short, especially if the retail sales come out weak.

The euro continues to decline, although it is not going out without a fight. It is down against everything by multiple pennies already. Meanwhile The USD/JPY came close to the 61.8% Fibonacci retracement of the move from 2004 to last summer the level is 105.76. It tried to test it again today but did not have enough follow through to even approach it. Meanwhile CAD/JPY tested support at 1.0338 and is poised to try support again also. It looks like Japanese consumer confidence will need to be very strong at midnight for this to occur this week. Bernake was speaking before congress today and addressed a number of topics. His comments were not well received by the stock market which shed about 500 points today before a modest recovery. Bernake tried his best to talk down the dollar yet it remained resilient in defiance of the fed, actually gaining on the day against most currencies. The dollar really did well against both the Aussie Dollar and the New Zealand dollar despite the increase in retail sales. Most of that increase was due to gas prices and food prices anyways so the data was taken with a grain of salt. The Kiwi came within a whisker of the 68.1% retracement level on the move it made this summer at $.7545 bouncing nicely at $.7550.The Pound has managed to creep up over the key level of 1.9650 and managed to stay there for now. All eyes will be on England this morning when they release retail sales at 4:30am EST. Then when America wakes up Canadian manufacturing sales will be released at 8:30 am. The 200 day moving average is coming in at 1.0333 right now and is getting close to where the market is. This should provide some support for the Canadian dollar which is really leading the way for the rest of the currencies against the dollar. When The Canadian dollar recently got stronger everything else followed suit, now as it gets weaker the other currencies (save the yen and franc) are also weakening. At 10 am the U.S. consumer confidence will be released and is expected to fall slightly to 75 points even. This seems a little optimistic given the pessimism now prevalent in the people I talk too. Leading indicators are also expected to come out down .1% after last months’ .4% decline. I think these two figures could come in a little weaker than forecast and that lack of confidence in the greenback will lead to dollar selling tomorrow going into the weekend. As prudent traders book profits they made by buying a week currency.

The trade I think I like the most right now is AUD/NZD short 1.1320 is the target. I wouldn’t sell the dollar right now it is trying to rally against everything today. If you want to buy dollars I would suggest buying it against euro. It looks like EUR/USD is headed towards $1.4531 real soon. It is also looking good against the Loony right now.

It was a very good day if you were listening to what I said yesterday. The Japanese inflation figures came in higher like I thought they would, the machinery orders also beat expectations the trade balance was still very high even if it did decrease and the yen continued to do well. Aussie Consumer confidence came out way worse than expected and AUD/USD reacted violently. AUD/USD was hanging out around $.90 before the news and when it hit it shocked the market and easily broke the Fibonacci support at $.8975. The UK housing report came out weaker than economists forecast and German CPI was inline with expectations and that set the tone for a weaker euro today.  Not only is it taking a beating against the dollar but also the yen and pound. British employment figures came out spot on for the most part, with fewer than expected jobless claims. EMU CPI was as expected and helped convince euro owners not to hold euros on the prospects of high inflation. The ECB with its only mandate being price stability has done a good job in assuring it from a CPI point of view.  They do not have to perform the balancing act of the BOE or Federal Reserve does with their dual mandates of achieving high employment and low inflation. US mortgage applications came out very strong again this week and helped set the tone for a dollar positive day, except against the yen. When U.S. CPI came out higher than the market expected but in line with what I was thinking in terms of a higher real CPI both month on month and year on year it was gratifying not to mention a reason to buy dollars. Then at 9 am the TICS numbers came in quite strong, even though there was a steep fall off in equities investing having increased by only $4.6 billion total and only $.6 billion by foreign officials. However the figure is likely to be very negative when the January figures are released. T-bill buying was once again very popular up 15.6 billion total. New U.S. treasury bond purchases by foreign reserve managers were almost nonexistent. This make it clearly evident that foreign reserve managers are indeed diversifying out of treasuries. While it is true that some of the private buying is really just disguised official buying the latest figures show $20 billion in government agency bonds and $23 billion in treasuries. Last month there was over $45.9 billion new Treasury bond buying and only $4.8 billion in government agency bonds by foreign governments.  On the year official treasuries buying is -$1.9 billion compared to an increase of $69.4 billion in 2006 so clearly US treasuries have fell out of favor by foreign reserve managers. What was also interesting to note is that in the past 5 years the dollar amount of securities being bought from the Caribbean has doubled. Meanwhile the amount of money invested in the Caribbean by Americans also doubled. Making the “offshore” Caribbean area by far the largest international investment partner of the U.S. The annual amount is about $1.8 trillion invested from that area this year. That should give you some idea of just how huge the hedge funds and sovereign wealth funds that operate out of the area really are. Also it really skews the TIC data when you realize that almost half of that money is actually coming from American investors anyways. So really there is not that much foreign capital coming into the U.S. because much of what does is ours anyways! Capacity utilization also came out strong today increasing when a decrease was expected. Industrial production was flat which also beat expectations, overall the data was clearly positive for the dollar and the Euro was the main pair to suffer. The Canadian dollar also took a beating against it and was not helped by lower oil prices after the EIA reported an increase in inventories beyond expectations. The NAHB new housing index was revised down for December to 18 and is reading 19 this month. It showed slight improvement over a downwardly revised December report but ultimately came in as expected. The beige book said that although most areas showed growth that the growth was slowing; spending was weak but tourism strong. Presumable due to people taking advantage of the greater purchasing power their foreign currency now affords them. Meanwhile it also said that products competing with imports were selling faster except for cars, although Canadians were buying trucks in Minnesota. Real estate was in bad shape and commercial real estate in some areas was also declining. Banking looked grim as well, overall a negative report. At 4:45 pm we have New Zealand CPI coming out and this should attract attention, it is expected to come out at 1% quarter on quarter and I would say it should be at least that with higher commodity prices and finished food products which require petroleum energy for their production and transport having an impact. Food prices are also to be released and were up .4% month on month in November. Then at 7:30 pm Australian employment figures are to be released. Perhaps a negative employment picture is to blame for yesterday’s appalling consumer confidence report. The rate of unemployed is supposed to tick down and 20,000 new jobs are supposed to be created. If this figure comes out weak it will be a very tough day for AUD/NZD which is already trying to give back the gains it made earlier. This pair seems like it is poised to reach 1.1320 once again tonight. Then Japanese industrial production will be released at 11:30 pm and while their economy is shifting more towards services with the rise of China they still produce a lot of the components that are assembled in China. Last month production was strong and this month economists expect a big decrease, I don’t. They are figuring on a fall of 1.6% month on month and a year on year of 2.9%. I see the figure coming in closer to 0% month on month and well over 3% year on year. In the European session we start out with The European trade balance at 5 am which is expected to shrink to 5.5 billion but it has been consistently surprising to the upside. Then US building permits are expected to fall to 1.135 million but an even sharper decline from last month’s 1.152 seems likely. Meanwhile international security transactions in Canada are expected at -20 billion for November which seems a bit hard to believe with the way the market preformed in November I am expecting a figure closer to -15 billion as a result. At 9 am Trichet will be speaking and at 10 the Philly Fed Manufacturing Survey is released. If it comes out in line with yesterday’s Empire Index it will also be bearish for the dollar. Overall though there seems to be a lot of bargain hunting and profit taking going on at these levels. So even though the fundamentals might implore one to sell it just the opposite is occurring. The beige Book didn’t stop the dollar from rallying against the yen just now or the stock market from recovering lost ground for example.

It was a very good day if you were listening to what I said yesterday. The Japanese inflation figures came in higher like I thought they would, the machinery orders also beat expectations the trade balance was still very high even if it did decrease and the yen continued to do well. Aussie Consumer confidence came out way worse than expected and AUD/USD reacted violently. AUD/USD was hanging out around $.90 before the news and when it hit it shocked the market and easily broke the Fibonacci support at $.8975. The UK housing report came out weaker than economists forecast and German CPI was inline with expectations and that set the tone for a weaker euro today.  Not only is it taking a beating against the dollar but also the yen and pound. British employment figures came out spot on for the most part, with fewer than expected jobless claims. EMU CPI was as expected and helped convince euro owners not to hold euros on the prospects of high inflation. The ECB with its only mandate being price stability has done a good job in assuring it from a CPI point of view.  They do not have to perform the balancing act of the BOE or Federal Reserve does with their dual mandates of achieving high employment and low inflation. US mortgage applications came out very strong again this week and helped set the tone for a dollar positive day, except against the yen. When U.S. CPI came out higher than the market expected but in line with what I was thinking in terms of a higher real CPI both month on month and year on year it was gratifying not to mention a reason to buy dollars. Then at 9 am the TICS numbers came in quite strong, even though there was a steep fall off in equities investing having increased by only $4.6 billion total and only $.6 billion by foreign officials. However the figure is likely to be very negative when the January figures are released. T-bill buying was once again very popular up 15.6 billion total. New U.S. treasury bond purchases by foreign reserve managers were almost nonexistent. This make it clearly evident that foreign reserve managers are indeed diversifying out of treasuries. While it is true that some of the private buying is really just disguised official buying the latest figures show $20 billion in government agency bonds and $23 billion in treasuries. Last month there was over $45.9 billion new Treasury bond buying and only $4.8 billion in government agency bonds by foreign governments.  On the year official treasuries buying is -$1.9 billion compared to an increase of $69.4 billion in 2006 so clearly US treasuries have fell out of favor by foreign reserve managers. What was also interesting to note is that in the past 5 years the dollar amount of securities being bought from the Caribbean has doubled. Meanwhile the amount of money invested in the Caribbean by Americans also doubled. Making the “offshore” Caribbean area by far the largest international investment partner of the U.S. The annual amount is about $1.8 trillion invested from that area this year. That should give you some idea of just how huge the hedge funds and sovereign wealth funds that operate out of the area really are. Also it really skews the TIC data when you realize that almost half of that money is actually coming from American investors anyways. So really there is not that much foreign capital coming into the U.S. because much of what does is ours anyways! Capacity utilization also came out strong today increasing when a decrease was expected. Industrial production was flat which also beat expectations, overall the data was clearly positive for the dollar and the Euro was the main pair to suffer. The Canadian dollar also took a beating against it and was not helped by lower oil prices after the EIA reported an increase in inventories beyond expectations. The NAHB new housing index was revised down for December to 18 and is reading 19 this month. It showed slight improvement over a downwardly revised December report but ultimately came in as expected. The beige book said that although most areas showed growth that the growth was slowing; spending was weak but tourism strong. Presumable due to people taking advantage of the greater purchasing power their foreign currency now affords them. Meanwhile it also said that products competing with imports were selling faster except for cars, although Canadians were buying trucks in Minnesota. Real estate was in bad shape and commercial real estate in some areas was also declining. Banking looked grim as well, overall a negative report. At 4:45 pm we have New Zealand CPI coming out and this should attract attention, it is expected to come out at 1% quarter on quarter and I would say it should be at least that with higher commodity prices and finished food products which require petroleum energy for their production and transport having an impact. Food prices are also to be released and were up .4% month on month in November. Then at 7:30 pm Australian employment figures are to be released. Perhaps a negative employment picture is to blame for yesterday’s appalling consumer confidence report. The rate of unemployed is supposed to tick down and 20,000 new jobs are supposed to be created. If this figure comes out weak it will be a very tough day for AUD/NZD which is already trying to give back the gains it made earlier. This pair seems like it is poised to reach 1.1320 once again tonight. Then Japanese industrial production will be released at 11:30 pm and while their economy is shifting more towards services with the rise of China they still produce a lot of the components that are assembled in China. Last month production was strong and this month economists expect a big decrease, I don’t. They are figuring on a fall of 1.6% month on month and a year on year of 2.9%. I see the figure coming in closer to 0% month on month and well over 3% year on year. In the European session we start out with The European trade balance at 5 am which is expected to shrink to 5.5 billion but it has been consistently surprising to the upside. Then US building permits are expected to fall to 1.135 million but an even sharper decline from last month’s 1.152 seems likely. Meanwhile international security transactions in Canada are expected at -20 billion for November which seems a bit hard to believe with the way the market preformed in November I am expecting a figure closer to -15 billion as a result. At 9 am Trichet will be speaking and at 10 the Philly Fed Manufacturing Survey is released. If it comes out in line with yesterday’s Empire Index it will also be bearish for the dollar. Overall though there seems to be a lot of bargain hunting and profit taking going on at these levels. So even though the fundamentals might implore one to sell it just the opposite is occurring. The Beige Book didn’t stop the dollar from rallying against the yen just now or the stock market from recovering lost ground for example.

Well I think it is high time to sell euros. To bad it took so long for me to write my commentary or the recommendation would have come before EUR/USD broke $1.48. The way the stock market finished I would be hesitant to short yen, I still like yen here especially against the dollar but also against the euro and Canadian dollar.  

Another day of eventful Forex trading. As I suspected U.S. retail sales were abysmal but real PPI came out less than expected while core PPI was spot on.  Meanwhile the Empire Manufacturing index also underperformed. The end result of this news was a weaker dollar against the Yen. The pound was on its way up before the US data broke, with inflation coming out higher than the market had expected but in line with my predictions. When everything was said and done though the euro and Swiss franc gave back their gains as soon as they made them. Obviously is lots of interest and profit taking at 1.0850 in USD/CHF and the $1.49-$1.50 area in EUR/USD. It is looking more and more like a double top in EUR/USD with each day that goes by. There was terrible news from the U.S. yet the euro could not hold on to its gains from the news. Yes the ZEW came out worse than expected this morning and that certainly weighs on the minds of euro owners but still it seems like there is more than just a fundamental reason to sell Euros up here. If you look at the Euro historically, it tends to make double tops when it peaks out and history has a habit of repeating itself. Looking ahead it will be interesting to see if the yen can hold onto its recent gains. Core machinery Orders which were up a staggering 12.7% in the prior period are expected to fall 4.7% from that seemingly untenable level. This points to strong demand from China for sophisticated equipment used in new manufacturing plants. The same type of purchasing which has helped Germany out on the industrial front where they have also posted large machinery order increases.  Also of interest is the current account balance which is expected to stay positive to the tune of about 1.8609 TRILLION yen for the MONTH which works out to about $17.5 billion dollars at current exchange rates. Which is still a pretty big figure even if it is a decline, and should help remind people that there is good reason to buy yen. Also worth eyeballing is the Domestic Corporate Goods Price Index which is a helpful gauge of inflation on the corporate front. This figure is expected to moderate to .1% month on month and stay at 2.3% year on year this is all happening at 6:50 pm. The CPI and other indicators show that inflation is now occurring in Japan and the perception of it occurring is a powerful thing. With this in mind I envision the inflation index come out higher than expected. German CPI will lead the way in Europe at 2 am and is expected to come out at .5% month on month and 2.8% year on year. Down slightly from last month’s year on year reading if this is the case or it comes in even lower then the Euro should suffer. I suspect this will be the case and that the double top will become apparent to many more traders as a result. Then at 4:30 am U.K. wage and employment data is to be released. Wages are expected to be basically flat for the quarter reported and elevated very slightly year on year. The employment rate is also expected to hold steady for the month and jobless claims are expected to decrease. Employment has yet to be adversely effected the economic crisis Britain is experiencing but I fear not for long. I think these figures could easily come out worse than expected. Then it’s EMU CPI at 10 am which is supposed to tick down and will probably do so. More importantly at 8:30 am we have U.S. CPI which is expected to moderate on all fronts but seems unlikely to me. I can see real CPI coming out at much more than .2% month on month. Then an enlightening TICS Flow figure which should show a big decrease over last months huge inflow for a few reasons. Mainly the fact that the stock market took a beating in November and the last time it did in August there was a withdrawal of 40.7 billion from equities. October’s figures showed an inflow of 30 billion to stocks, but if these foreigners know what’s good for them they will have got out again in November. Bond Buying has increased a lot in the past few months, especially corporate paper as foreign reserve managers look to diversify away from treasuries and seek better returns. Capacity utilization and industrial production are both predicted to continue decrease and I have to agree with that prognosis. The EIA crude stocks could affect USD/CAD quite a bit at 10:30 am. The NAHB housing index will be released at 1 pm and is expected to come in at 19 again but I think a lower number is more realistic. Then it’s the Fed’s beige book at 2 pm and judging by the chairman’s recent rhetoric will not support the dollar. In short tomorrow will be a news traders wet dream.

Yen and franc are going for broke tonight. Should they break through the highs they set in November tonight or tomorrow expect big things from these two. Now that CAD/JPY has broken support at 106.75 it has its sights set on 97.60. Meanwhile USD/JPY will try to make its way towards 101.50 should it break the highs here. Meanwhile the Swiss Franc is being helped by a flight to safety as it and gold reach all time high prices in exchange for the dollar. The franc is also helped by the strong euro although that support will be coming to an end if the Euro fails $1.50. One thing is for sure, with the carry trade unwinding and Bush on the warpath the Franc is getting a lift.

A ton of economic data to be released tomorrow that is worth commenting on. Starting with U.K. CPI which will be released at 4:30 am and is expected to fall to only 2% year on year core and 2% real. This is something I have trouble believing, I know the Pound has been strong and that has helped mitigate high commodity prices but with PPI at such outrageous proportions I inclined to expect a higher than forecast increase. The retail price index is expected to gain on the month but hold steady on the year at 4.3% and also bears watching. Later on at 5 am we have the German ZEW to be released which gauges economic sentiment and is a very important insight into German business expectations and therefore purchasing and employment. The consensus is that expectations will deteriorate further and if the figure comes in any worse than -40 expect the Euro to fall a good 50 pips or more. Then it is a huge batch of U.S. numbers at 8:30 am with Empire manufacturing Index to be released but more importantly retail sales which are expected to rise a measly .1% and PPI which is expected to come in at .2 % month on month and be at an even 2% core year on year. Real PPI is expected to be 7.4% year on year. What I see happening is that retail sales miss the mark and the dollar falls but that PPI is higher than expected and helps limit the dollars losses in the A.M. session.

The rise of the Euro has been shrugged off by the ECB and that the pleas of prominent politicans to weaken the Euro have been ignored by the ECB. They have a point because the strong euro has not helped Europeans sell goods in the U.S. However a lot of the big exporters have had the foresight to short the dollar with large positions and have covered much of the loss on the Forex market. I remember hearing a few years ago that a large German automaker (I think it was Daimler) made more money in the quarter by trading forex than they did by selling cars. Meanwhile external price pressures which translate to inflation have been partially absorbed by the stronger Euro. Yet there is still inflationary pressure domestically to contend with although it is not really consumption based but more a result of money stock increasing at a high rate. What you should realize is that the ECB’s mandate is to deliver price stability by as they say “firmly anchoring inflation expectations” which is accomplished by raising rates and not bending to the will of whimpering politicians and companies. Will Europe suffer from this action from a growth standpoint? Absolutely, but the good news is that while they are not exactly flooding the U.S. with affordable goods they are doing brisk business with the far east. Particularly in the area of machinery orders to China who needs these to build it’s new factories. Luckily the Europeans are also shrewd enough not to spend every dime they get like the yanks and as a result help tame their domestic inflation and prepare for a slowdown that is most likely coming. The best part of the ECB sticking to it’s mandate and trying to tame inflation is that they do not encourage a bubble to build as a result of lax monetary policy. Sadly no such fiscal conservancy exists in the U.S. both the consumers and the government are up to their eyeballs in debt, and it doesn’t look like it will be getting better anytime soon. Luckily America still has good credit (even though it is not creditworthy) and the talk about switching to the Euro by the Arabs is at this point still just talk and this remains the saving grace of the dollar. Once the foreign reserve managers and oil producers finally make the inevitable switch the dollar will be worth much less. I see the Euro gaining as a result of that eventual move as well as the Yen and Yuan which have both been artificially kept far to weak for far to long. Allowing unsustainable inbalances to occur and an overdependance on American consumers from a global economic standpoint as well. Now it should be clear why gold is at all time highs, because confidence in the dollar is at all time lows. Those of you who know anything about markets understand that perception is a very powerful thing. Even if it’s not true if enough market participants believe something to be true which is false the reaction by the market is the same as if it is true.  With this in mind the lingering rumors of a switch in reserve currency from dollar to Euro help weaken the dollar and make the prospect all the more likely. The key test here will be Euro at $1.50 if this level is broken and a double top in Euro does not form we will be seeing oil priced in Euro or more likely bullion sooner than you think. There was another time in American history where the Arabs were only taking bullion, WW2. Paper money loses it’s appeal when people figure out it is worthless.