Contributed By: DailyFx

 FUNDYS

Price action in the early week has been USD positive thus far, with most of the major currencies marginally extending declines against the Greenback on the back of weaker risk appetite, and ongoing concerns over Eurozone sovereign debt issues. The latest headlines have Germany pushing Ireland to accept a bail-out package and help avoid contagion to Portugal and Spain, and this will be a critical theme over the coming sessions.

Relative Performance Versus USD Monday (As of 10:10GMT)

1. AUSSIE+0.14%
2. CAD+0.10%
3. STERLING-0.03%
4. SWISSIE-0.08%
5. KIWI-0.21%
6. EURO-0.37%
7. YEN-0.39%

On the strategy side, we have gone ahead and booked 200 points profit on half of our long Eur/Aud position from 1.3725 at 1.3925. The trade has shown good follow through and we are encouraged with the prospects for additional upside over the coming days. Still, at this point, we have gone ahead and also mitigated risk after trailing our stop-loss on the remaining half of the position to break-even at 1.3725.

Elsewhere, it seems that economic data releases have failed to materially factor into price action, with a much better than expected New Zealand retail sales, solid Japanese GDP, and a better Eurozone trade balance, all taking a backseat to broader currency flows. Also out have been a weaker UK Rightmove house prices, disappointing Aussie new motor vehicle sales, and softer Swiss producer and import prices.

The US Dollar has been well bid over the past several days, with the single currency finding a renewed bid tone following the latest decision by the Fed to implement another round of QE. Market participants seem to be taking a less dovish outlook on the Fed, with the sense that the Fed is becoming very sensitive to the longer-term risks of ultra-accommodative policy and will be far less inclined to take additional easing measures from here on. Fed Lacker was out on the wires early Monday, and has contributed further to the buck’s bid tone after saying that he thought that the risks to QE2 outweighed the benefits.

While most of the setbacks in the major currencies have been marginal at this point, the Yen stands out, with the currency continuing to extend declines to fresh multi-day lows against the buck. Last week, the break back above 82.00 officially took the short-term pressure off of the downside with the trigger of a double bottom that projects additional gains towards 84.00 over the coming sessions, before considering the possibility for a bearish resumption.

Looking ahead, US retail sales (0.7% expected) and empire manufacturing (14.0 expected) are due at 13:30GMT, followed by business inventories (0.6% expected) at 15:00GMT. On the official circuit, EU Juncker speaks on the topic of European banks at 17:00GMT. US equity futures and gold prices are tracking marginally higher, while oil is better bid, up by some 0.50%.

GRAPHIC REWIND

TECHS

EUR/USD:The market has finally rolled over quite convincingly, with critical short-term support by 1.3695 now easily exceeded to suggest that a major lower top could be in the process of carving out by 1.4285. We had initially projected a test of longer-term falling resistance off of the record highs by 1.4500, but 1.4285 could very well be it, with setbacks now seen accelerating to the downside back towards 1.3000 over the coming days. Look for the latest weekly close below 1.3700 to help strengthen the bearish case. From here, any rallies should now be well capped ahead of 1.3900, where the 10-Day SMA has just crossed below the 20-Day SMA. Next major downside target doesn’t come in until 1.3335 in the form of previous resistance now turned support.

USD/JPY:There is finally some evidence of a potential base with the market carving out a short-term double bottom last Wednesday. The break back above 82.00 neckline resistance triggers the formation and potentially exposes gains towards 84.00 over the coming sessions. The 10-Day SMA has just crossed up above the 20-Day SMA, and this further strengthens the case for additional upside over the short-term. Look for any setbacks to be well supported for now ahead of 81.25, while above 82.80 accelerates.

GBP/USD:The market has come back under pressure since capping out by 1.6300, and it looks as though deeper setbacks are in the cards over the coming days, with a fresh lower top sought out by 1.6185. Look for a close back below key support at 1.5950 to force an official shift in the short-term structure and accelerate declines back towards 1.5650 over the coming sessions. Ultimately, only back above 1.6300 negates and gives reason for pause.

USD/CHF: We contend that the market is in the process of carving a material base by 0.9460, and any setbacks should be very well supported in favor of a sustained recovery. A fresh higher low is now sought out by 0.9550 to be confirmed on a break back above 0.9975 over the coming sessions. Above 0.9975 will accelerate gains and open the next major upside extension towards 1.0200 further up.

FLOWS

A thin day so far for flows with intraday spec types bidding on dips in Aud/Usd and hedge funds paring down long positions in Eur/Usd. Buy orders from a model name and importer provide support in Usd/Cad with leverage accounts on the offer.

Contributed By: DailyFx

It was pedal-to-the-metal last week in China with a busy schedule of high-profile releases and the introduction of various new policies from the PBoC. At the top of the week government data showed that China’s trade surplus widened in October even as import growth outpaced export growth for the month. The surplus came in at $27.15 billion up from $16.9 billion in September, marking the second-largest monthly surplus this year. The monthly figures bring China’s cumulative trade surplus for the first ten months of the year to $147.77 billion, a drop if 6.7% from year-earlier levels. While the latest trade data showed declines in imports for some commodities many analysts aren’t fazed by the figures and expect to see more robust demand for resources, pointing to ongoing growth in construction and manufacturing. We don’t take such a bullish approach and see risks for commodity imports skewed to the downside after abnormally strong September imports and a slowly shifting fundamental picture of weakening Chinese appetite for raw materials. This position leaves us in line with our belief that China is in the process of engineering a successful soft landing and demand for commodities will likely level off as steady, sustainable growth prevails.

The other major release last week was in the form of consumer prices, which increased at their fastest pace in two years in October. Fueled by a spike in food prices, the consumer price index jumped 4.4%, well above the 3.6% reading in September and above economist forecasts of 4%. Food prices surged more than 10% during the month, while non-food prices increased at a more modest 1.6%. China economist Lu Ting of Bank of America Merrill Lynch epitomized feelings of analysts around the world saying that “inflation now replaces asset bubble as the top concern for policy makers, as well as investors. Beijing’s policy focus is quickly shifting to curbing inflation and containing capital flows”. It appears that Lu was right on the money as China announced new measures to curb inflows of speculative capital. The State Administration of Foreign Exchange (SAFE) said in a statement it will strictly control its financial institutions quotas for the use of short-term foreign debt. Saying it will also tighten its oversight of funds shopped home by Chinese companies operating abroad, as well as direct investments into China by foreign investors. The new measures echoed a statement made the previous Friday by PBoC Gov. Zhou Xiaochuan, who said China could use capital controls to curb speculative inflows. Zhou cautioned that China faced a difficult challenge in keeping out speculators because of its relatively high interest rates and expectation of gains in the value of the yuan. Lu said that the central bank is now expected to raise lending rates three more times before the end of 2011, in addition to increasing banks’ reserve ratio requirement by 1 to 1.5 percentage points to damp down inflationary pressures.

On the policy front, the PBoC lifted the ratio of required reserve funds for several major lenders by half a percentage point last week. The move which requires the named banks to set aside 18% of their assets as reserves will collectively drain about 180 billion yuan ($27.1 billion) of funds from circulations. While the impact on banks’ bottom lines is likely to be minimal and factors behind the move are relatively straightforward, to lock money flowing into China on the back of QE2, worries continue to linger after the move that it could be the first of more to come from the administration as Beijing works to contain inflation.

The World Bank and Moody’s were out last week with upbeat comments about China despite some investor concerns that Beijing is on the brink of enacting some draconian measures. The World Bank raised China’s economic growth forecast for 2010 to 10% from 9.5% saying the country’s economic prospects remain sound and it continues to expand at a “still healthy pace”. The World Bank added that the composition of China’s economy is shifting and a recent report from Morgan Stanley seems to support this view “our analysis indicates that China’s economic shift toward domestic consumption and away from investment is beginning and will likely prove a mega-trend through 2010, support our economist’s views that China is entering a golden age for consumption”. Meanwhile, Moody’s upgraded it rating on Chinese government bonds to Aa3 from A1 and said it would maintain its positive outlook on the nation’s debt. Moody’s cited “resilient performance” of the Chinese economy since the onset of the financial crisis, as well a exceptional growth in the nation’s external payment position as reasons for the upgrade. The rating’s agency said it was basing its views on expectations that trade and currency issues between China and the US could be “constructively managed”.

Contributed By: DailyFx

Price action in the early week has been USD positive thus far, with most of the major currencies marginally extending declines against the Greenback on the back of weaker risk appetite, and ongoing concerns over Eurozone sovereign debt issues. The latest headlines have Germany pushing Ireland to accept a bail-out package and help avoid contagion to Portugal and Spain, and this will be a critical theme over the coming sessions.

Elsewhere, it seems that economic data releases have failed to materially factor into price action, with a much better than expected New Zealand retail sales and solid Japanese GDP, taking a backseat to broader currency flows. Also out in Asia have been weaker UK Rightmove house prices and deterioration in Aussie new motor vehicle sales data.

The US Dollar has been well bid over the past several days, with the single currency finding a renewed bid tone following the latest decision by the Fed to implement another round of QE. Market participants seem to be taking a less dovish outlook on the Fed, with the sense that the Fed is becoming very sensitive to the longer-term risks of ultra-accommodative policy and will be far less inclined to take additional easing measures from here on. Fed Lacker was out on the wires early Monday, and has contributed further to the buck’s bid tone after saying that he thought that the risks to QE2 outweighed the benefits.

While most of the setbacks in the major currencies have been marginal at this point, the Yen stands out, with the currency continuing to extend declines to fresh multi-day lows against the buck. Last week, the break back above 82.00 officially took the short-term pressure off of the downside with the trigger of a double bottom that projects additional gains towards 84.00 over the coming sessions, before considering the possibility for a bearish resumption.

Looking ahead, Swiss producer and import prices are due out at 7:15GMT, followed by the Eurozone government debt/GDP ratio, and trade balance at 10:00GMT. On the official circuit, there a re a number of ECB officials slated to speak, including; Contancio and Nowotny at 7:45GMT, Tumpel-Gugerell at 8:05GMT, and Costa at 9:00GMT. US equity futures and commodities prices trade flat and will be looking to make more of a noise in European trade.

Contributed By: DailyFx

Contributed By: DailyFx

USD Dollar (USD) – Friday saw the Dollar slightly weaken against most of the majors to bring an abrupt halt to the entire week’s gains in Forex trading. The consumer sentiment data came out better than expected at 69.3 vs. an estimated 69.00. The G20 meetings created discord within the markets as the rift between United States and China regarding currency rates seemed to widen, no solid agreement was reached through the summit and traders were left with “indicative guidelines" to be discussed in the new year. The NASDAQ and the Dow Jones declined   by -1.46% and -0.80%, respectively. Friday saw commodities plummet, as Oil and gold each fell by nearly 3% while copper, wheat, silver and sugar fell even farther. Crude lost -2.9% closing at $84.88 a barrel, while Gold (XAU) lost -2.7%, closing at $1365.50 an ounce. Today retail sales data will be released and is expected at 0.7 vs. 0.6 previously. NY Empire State Manufacturing Index is also to be released and is expected at 11.70 vs. 15.70 prior.

Euro (EUR) – Friday saw the Euro rebound from a six week low (of 1.3573) against the dollar after finance ministers in the euro zone issued a joint statement regarding the EU’s debt situation. German Prelim GDP came out at 0.7% vs. 0.8% and did not affect the market. Although the pair is still below the moving average the trend seems slightly bullish. Overall, EUR/USD traded with a low of 1.3681 and with a high of 1.3711. No major economic data is expected today.

EUR/USD – Last: 1.3672

British Pound (GBP) – Although the Pound dropped on Friday, slightly below 1.6000 levels against the dollar, the day ended with little change and the Pound strengthening slightly against the dollar. Europe’s poor Fiscal strength also influenced the GBP, as investors’ fears of the region’s exposure to Irish debt, caused them to flee to safer currencies. The GBP/USD is still extremely oversold and confirms a slightly bearish trend. The pair has a strong daily resistance at the 1.6170 levels which will be tough to break. Overall, GBP/USD traded with a low of 1.6115 and with a high of 1.6152. Today, no major economic data is expected.

GBP/USD - Last:  1.6105

Japanese Yen (JPY) – Friday saw the yen continue to gain against the dollar and little change was seen last night as investors adopted a cautious stance after uncertainty from the G20 summit. During last night’s session prelim GDP q/q came out better than expected at 0.9% vs. 0.6%, but despite this, the pair remained unchanged.  The pair formed a tight triangle toward the end of the week on the daily chart and remained well above the moving average. Overall, USD/JPY traded with a low of 82.35 and with a high of 82.53. No economic data is expected today.

USD/JPY-Last: 82.73

Canadian dollar (CAD) – The Canadian Dollar weakened significantly against the US dollar as crude prices decreased by almost 3%. Chinas claim to increase borrowing costs, and the speculations of Irish debt reduced demand for assets related to economic growth and added to the negative momentum. The strengthened commodities support a strong Canadian dollar. The USD/CAD is very choppy on the daily chart, but the trend still seems to be positive for the pair as long as it trades above parity. Overall, USD/CAD traded with a low of 1.0099 and with a high of 1.0128. No economic data is expected today.

USD/CAD - Last: 1.01176

USD Dollar (USD) – The Dollar gained versus the major currencies on a choppy and volatile session as Banks were closed in observance of holiday and illiquidity characterized the markets. The Stock Markets in U.S closed negative with Dow Jones lose -0.65% and the NASDAQ falling by -0.90%. Crude Oil touched its highest level at 88.59 but reversed at the Asian session and back to trade near the 86.5$ a barrel. Gold (XAU) also reversed and fell below the 1400 approaching to test the 1380$ an ounce. Today, The Michigan Consumer Sentiment Index is expected at 69 vs. 67.7 previously.

Euro (EUR) – The Euro was crushed for another day of Forex trading versus the dollar approaching the 1.36 area continuing its sixth day of decline on concern that some European countries will have difficulty paying their debt hence investors demand more safety currency. Trading below the 1.38 resistance level holds the pair under pressure for farther decline. Overall, EUR/USD traded with a low of 1.3601 and with a high of 1.3820. Today, The German GDP is expected at 0.8% vs. 2.2% previously. The GDP is expected at 0.5% vs. 1% previously. The Industrial Production is expected at 0.5% vs. 1.1% previously.

EUR/USD – Last:  1.3613

British Pound (GBP) – The Pound traded almost unchanged versus the dollar in a tight range still holding firmly although dollar gained against most of the currencies. The Nationwide Consumer Confidence came out 52 worse than expected 55. Breaking the 1.61 support area might push the pair lower to 1.6 zones. Overall, GBP/USD traded with a low of 1.6079 and with a high of 1.6177. No major economic data is expected today.

GBP/USD - Last: 1.6085

Japanese Yen (JPY) – The Dollar traded in a tight range against the Yen still holding firmly above the 82 levels. Breaching the 82.8 resistance level might push the pair to higher levels. Overall, USD/JPY traded with a low of 82.03 and with a high of 82.59. No economic data is expected today.

USD/JPY-Last: 82.35

Canadian dollar (CAD) – The U.S. Dollar gained against Canada's dollar as risk aversion ruled the markets today on a choppy and volatile session as Banks were closed in observance of holiday and illiquidity characterized the markets. The momentum remains positive for the pair as long as it trades above the parity. Overall, USD/CAD traded with a low of 0.9976 and with a high of 1.0077. No economic data is expected today.

USD/CAD - Last: 1.0080

Contributed By: DailyFx

Forex markets will be paying close attention to the Australian employment figures that are set to be released within the next hour. Job growth in the month of October is expected to have slowed substantially from the robust rate experienced in September. The consensus is for a 20K increase, down from the 49.5K increase in the month before. But even with the slowdown, the unemployment rate is anticipated to dip to 5 percent from 5.1 percent.

All indications are that the Australian economic recovery remains on track, fueled by swift growth in the resource sector. A 5 percent unemployment rate would be a post-recovery low and the lowest since January 2009. Incidentally, the all-time low for Australian unemployment was 4 percent back in 2008.

Nevertheless, the Australian Dollar remains at extremely elevated levels, having accounted for these strong economic fundamentals. Any indication of a hiccup in the nation’s economy may lead to a pullback in the currency. On the other hand, an upside surprise would likely send expectations for future interest rate hikes higher, bolstering the Aussie. Indeed, last month expectations were also for a 20K increase in jobs; once the actual 49.5K figure was released, the Aussie spiked significantly higher:

AUD/USD reaction to last month’s employment figures:

Ahead of the release, AUD/USD is hovering just above parity, which acted as resistance before a recent breakout:

AUD/USD Daily Chart:

Contributed By: DailyFx

 The latest unemployment data out of Australia is very interesting to us, as it is not that often that you see Australian data disappoint, and even less often that you see the data disappoint by so much (we realize that there was some silver lining with better employment change numbers but this is not our focus here). Analysts had been looking for a 5.0% unemployment rate on Thursday, but instead, the data series produced a much higher and very concerning 5.4% print. There has been a very strong inverse correlation between the unemployment rate and Australian Dollar (see below; orange line is Aussie and white line is unemployment rate), and this latest jump in the unemployment rate could very well warn of a shift in the trend.

We have warned that we see risks for significant downside in the Australian Dollar over the coming months, with the single currency trading by record highs and looking very stretched on a cyclical basis. All of the fundamental drivers of the Aussie strength look to be approaching exhaustion and we believe that things will not be sustainable from here. RBA monetary policy has been extremely aggressive in the face of a global slowdown to produce attractive yield differentials, while booming commodity prices and a flourishing Chinese economy have also helped to propel the antipodean. However, at this point, we see the RBA starting to slow down with its tightening bias while other central banks play catch up, commodities prices rolling over sharply in favor of a much needed and sizeable corrective pullback (recent actions at the CME to up margin requirements could help fuel the pullback), and the Chinese economy cooling off as the government takes measures to curb growth and fight inflation.

With this in mind, we have gone ahead and established a fresh short Aussie position on Thursday. We have chosen to short the Aussie through the Euro instead of the Dollar as we believe it is a safer play from here and also could offer a more attractive risk/reward play. We are long Eur/Aud at 1.3725, with an open objective and stop in place by 1.3575. The cross sits at 20 year lows and by the bottom of a major range. Monthly studies are severely oversold (very rare) with the RSI by 25 and in desperate need of a healthy bounce. We contend that this latest unemployment data gives us a good excuse to enter the position, and we believe that the cross could very mount a significant rally from here.

Up to this point, the Eur/Aud cross has been somewhat inversely correlated to the Eur/Usd, particularly in periods of Eur/Usd strength. When the Euro rises, markets have taken this as a risk positive and the higher yielding Aussie then rallies even more on the favorable yield differentials. Meanwhile, when the Eur/Usd sells off, the markets have been inclined to take this as a risk negative and in turn look to liquidate the higher yielding Aussie more aggressively.

At this point however, we see the Australian Dollar at risk even in the event of more broad based USD depreciation. The basis for our argument is that with the Australian economic data finally starting to show a dent in its armor, the attractive yield differential in periods of USD weakness will no longer be as attractive, with market participants starting to price in a slowdown in the local economy. We like the idea of playing the short Aussie position through the Euro, as at this point, USD exposure seems a little more risky, and as we have argued above, this cross could very well head higher no matter what the direction of Eur/Usd.

Contributed By: DailyFx

We put Fib levels on a chart so a basic determination can be made as to the point which a currency pair is likely to retrace after a strong move.Take a look at the chart below. A bullish move is shown on the chart so the Fib line would be drawn from the bottom of the move (Swing Low) to the top of the move (Swing High)…the opposite would be true in a move to the downside.

Having done this, the three major Fib levels will be appear on the chart…38.2%, 50.0% and 61.8%. A trader will then wait to see if one of the levels holds…that is, price action stalls at that level. Should one level hold, a long position can be taken back in the direction of the original move with a stop below the lowest wick that penetrated the Fib level that held.