The dollar is losing value once again this week, with the markets picking up right where they left off. USD/CHF tested the low set in November this morning and USD/JPY came within 10 pips of its November low. Looking longer term I see USD/JPY going to 101.50. UK PPI came out higher than economists guessed year on year. Input is up a staggering 11.3% from last year with output at 5% year on year! Obviously this is not good for U.K. business since there is a net 6.3% increase to operating costs for them. The RICS house price balance survey is to be released at 7:01 PM and will be important to see how far the British housing market has deteriorated.  So the pound will probably rise this morning based on the high inflation but will probably lose value tonight on a weak housing market. If the figure comes out as terrible as is predicted the pound could make its move to $1.9184 quickly. Like any market sentiment is what moves the market, if participants think that the market is weak it is weak. Just like if people think inflation is high it will be high, that is why central banks are so concerned about “anchoring inflation expectations”. Speaking of central bank’s at 10:30 the Bank of Canada releases it’s Business Outlook Survey which should be generally positive, at least from the mining and oil and gas sectors. This will probably give the Loony a boost, which is part of the reason I suggest taking profits on CAD/JPY. USD/CAD already broke both Fibonacci supports today. 

Target in USD/CHF hit! Take your profit if you have not already on this one. 1.0892 will probably hold for the session. Meanwhile CAD/JPY which I mentioned on Fore Factory has earned a penny and a half also. This pair wants to pullback at the moment so it would be wise to take a profit and just add a fresh short at a higher price.

I still like USD/CHF short with a target of 1.0892 but I don’t like holding trades over the weekend. Sure the price may fall between the actual open at 2pm on Sunday and the time your broker opens at 5 or 6 but it could also rise. Any stops you have in wont be hit so it’s really not worth the risks. The stock market is still falling, well the good news is if you have an account with Golden Contract www.forextradersinc.com/company_golden.htm you can sell banking stocks at high leverage and cash in! It makes a great hedge against your stock portfolio as well if your to stubborn to get out while the getting is good. Of course you can also trade USD/JPY to hedge it also.   

Well the carry trade continues to flounder with the Pound cracking $1.95 this morning after a negative reading on industrial production, and the Dow failing to rally. The U.S. trade balance did little to help the stock market’s cause since it came out at a whopping $63.1 billion which was a lot worse than the expected. Also far worse than expected is was the Canadian employment report which showed Canada lost jobs recently. This helped USD/CAD hit 1.02 this morning and now rests on the 38.2 percent retracement of the move from 1.1874 all the way down to .9058 which is 1.0192.  This highlights the fact that the fate of the Canadian economy is still entwined with the fate of the U.S. one. Meanwhile to my surprise the Canadian trade balance increased in size with most of the gains coming from industrial goods and materials. Meanwhile the U.S. import price index continued to climb, beating expectations of economists and has increased10.9% since last year. You would think with a markup like that would cause a smaller trade balance but this is not the case, since Americans are still buying foreign cars and alcohol (two areas where the goods deficit increased) even if the price has climbed. Shrewd car companies have been shorting the dollar for a long time anyways and can therefore absorb the lower profits per car in the U.S. due to the weak dollar anyways. I remember reading that one large German car maker had actually made more money shorting the dollar a few years back than they did selling cars! In any case today’s data does little to support the dollar fundamentally and I would not be surprised to see further dollar weakness next week, especially the way the Federal Reserve is talking it down with them admitting a recession and practically guaranteeing  further rate cuts. Meanwhile the carry trade is in decline as the fallout from banking blunders consider to hamper the carry trader’s favorite currency the pound. The AUD/USD made me proud by finally hitting $.89 as I thought it would and hit the 50% Fibonacci of the move from $.94 to $.855 at $.8975.  It has diverged from the rest of the carry trades because of the economic fundamentals and high commodity prices that are fueling Australia’s economy.  Not to mention the Aussie’s have remained more or less untainted by the banking crisis in North America and Europe. 

Today has been a day which has shown continued disrespect for the U.S. dollar and carry trades and with good reason. It now looks as if EUR/USD will forego testing $1.4533 and run right up to $1.50 instead. If the level is breached it will be huge, if it doesn’t the table will be set for the famous double top formation. The Swiss franc has gained due to Euro strength and the carry unwinding. The target for USD/CHF is 1.09. Really this trade makes the most sense because two strong movements are propelling it.  Even if the Euro backs off and the carry trade is still falling apart it couuld still reach 1.09. Also if the carry trade rebounds but the Euro stays strong it could still hit 1.09. I would say short USD/CHF is the safest bet right now.

Both the ECB and BOE kept rates unchanged. The first question asked to Trichet was why you did you not raise rates today? I just don’t understand you anymore. This illustrates the situation in Europe, where the ECB’s mandate is only price stability and not to foster growth. Therefore it makes sense that the ECB should be raising rates, especially with M3 at over 12%. Apparently some people at the ECB wanted a rate hike last month and again this month and all of this has helped the euro Strengthen today. Meanwhile Trichet said that they made money by bailing out the banks and will also provide liquidity for the U.S. banks to the tune of 10 billion in January as well. He seemed uncomfortable discussing this and with good reason, as it makes the unified globalization movement between banks, central and otherwise quite clear. He also mentioned that the correction to the stock and real estate markets as being necessary. Bernake is speaking now and says he is willing to keep cutting rates to keep his banking buddies in the black. He is making the case that the economy is so screwed up that they should cut rates to try and save it. While ignoring the fact that inflation is out of control and that this correction was necessary after that the Federal Reserve created these problems. Earlier in the day the British trade balance shocked to the downside to the tune of $4,000,000,000 and does little to support the Pound. Meanwhile the deficit in Australia came out smaller than economists expected but more in line with what I was expecting. Japan’s leading economic index came out spot on expectations and wholesale inventories from the U.S. beat expectations which is not a good thing.  Interesting data from Canada this morning as building permits declined a lot but the New Housing Price Index increased by a staggering 6% for the second month in a row. Indeed when I called my realtor friend in British Columbia last night he explained he had stopped trading Forex because he was making so much more money as a real estate developer and planned on retiring very soon. Bernake is speaking now. Tomorrow UK industrial production is to be released at 4:30 am and is expected to moderate; if this number comes in negative month on month then the pound should suffer greatly. At 7 am Canadian employment is to be released and the net change is expected to be 15,000 new jobs. I expect this figure to be higher than what is being anticipated but that at 8:30 am Canadian international merchandise trade is going to suffer from the strong Loony and will probably be negative.  Also you can expect the import price index to increase with the sagging dollar causing the increase. The trade balance is expected to worsen and this could be the case with cheap Christmas items from China and elsewhere. Purchases from Canada and other places whose currency has increased should help balance the equation though and I don’t see much change in the figure.

The coming session should be interesting. Sterling is getting beat up across the board and all I can say is it’s about time. Look to short the pound before the announcement. If the BOE doesn’t cut rates the Pound will probably rally nicely. Don’t stay in when the decision is released that is asking for trouble. Also exit the market by 8:30 am because once Trichet starts speaking the market will probably just chop around.

The Australian retail sales did come out strong as I expected them too and that helped AUD/NZD hit 1.15 which is the 50% Fibonacci of the move from 1.09 in August to 1.21 in November. It is worth noting that when the carry trade collapses the Aussie tends to gain against the Kiwi. The reason for this is that the rates are higher in New Zealand and this has been the major motivator for Kiwi buying. Meanwhile rates are also high in Australia but the economy is considered to be stronger and they have a good deal more natural resources which with high commodity prices make the Aussie the intelligent choice. The strong sales figures also helped the Australian dollar quickly recover yesterday afternoon’s losses and touch my target of $88.50 against the U.S. dollar. The yen’s bull move petered out as soon as the sagging stock market closed (does anyone need further proof of the correlation?) but remains firmly entrenched below 110. In Europe German retail sales were weak once again, coming in far worse than expected by the market. However the German trade balance improved as I had anticipated it would to the surprise of economists. German industrial production contracted and surprised many including me. Even though Euro GDP was revised upward by 1/10th of a percent the Euro has had a bearish tone ever since the European traders woke up. I think they were disappointed in the retail sales data and that set the tone for the day. Seemingly economists can’t get it through their heads that Europeans and Asians are not Americans and do not have the same spending habits. While rampant consumerism is expected in the U.S. it cannot be counted on in other parts of the world. The Canadian housing starts did little to help the Canadian dollar break parity once again and it looks as if the dependence of the Canadian economy on the U.S. is become evident to traders. Tonight the Australian trade balance is expected to be much more negative than last month when it is released at 7:30 pm. I for one find this hard to believe with commodity prices soaring but perhaps the influx of cheap goods from China for the holidays will make a larger impact. At midnight Japan’s Leading Economic Index will be released and will hopefully shed some light on the future of Nippon’s economy. The market is calling for a reading of 10 but I think the number will be higher than anticipated. The Euro Monetary Union is releasing industrial production at 2:45 am to start the European session but more importantly the UK trade balance is coming out at 4:30 am. More important than that is the BOE and ECB rate decisions coming out at 7 am and 7:45 am respectively. According to economists both are expected to keep rates unchanged but the British could decide to cut tomorrow. The market certainly seems to think so, judging by where GBP/USD is currently trading. If the rates stay where they are expect the Pound to rally.  If there is a cut expect the pound to continue it’s descent to $1.91 and change. Once Trichet speaks the market is likely to chop around. We could be seeing a double top forming here in the weekly chart in EUR/USD just like at the end of 2004. Were are probably heading for $1.4538 in EUR/USD before trying $1.50 once again which would be my proposed double top. 

AUD/USD went up and touched $.8840 during and right after I finished posting the daily advice and it completed it’s chart pattern. The Dow broke support and the carry trade is going down the tubes with it so I felt it necessary to post this. Even thought the fundamentals support the Aussie the overwhelming move to dump the carry trade is influencing AUD/USD pricing. With this in mind I suggest buying AUD/NZD only and not AUD/USD tonight. Instead look to sell USD/JPY because it will be going up as long as the stock market goes down and I see about 2,000 more points for it to run.

I mentioned a few things I thought would happen in the coming session in my commentary but to pick one thing it is that AUD/USD is going to at least $.8850 this evening and probably breaking through to hit $.89 if the retail sales come out good. If you are really cautious you could ride it up to the .8850 level before the news and get out then just in case it surprises to the downside.