Forex Analysis & Today's Strategy USDCHF 14 July 08

USD tumbled on Friday on mortgage lender woes, but the worst signs of panic are fading as Treasury/Fed are out trying to shore up confidence. EUR/USD rushing to 1.5971 level before USD reverses after Paulson comments… Overnight News Bullets § GE Wholesale Price Index, Jun, MoM/YoY out at 0.9%/8.9% as exp. Prior 1.4%/8.1% § CA Unemployment Rate, Jun, out at 6.2% vs 6.1% exp. Prior 6.1% § CA Net Change in Employment, Jun, out at -5.0K vs 8.0K exp. Prior 8.4K § US Trade Balance, May, out at -$59.8B vs -62.5B exp. Prior -$60.5B § US U. of Michigan Confidence, Jul, out at 56.6 vs 55.5 exp. Prior 56.4 § US Monthly Budget Statement, Jun, out at $50.7B vs $34.0B exp. Prior $27.5B § NZ Retail Sales, May, MoM out at -1.2% vs -0.1% exp. Prior 1.2% § NZ Retail Sales Ex-Auto, May, MoM out at 0.7% vs 0.5% exp. Prior -0.3% § NZ Non Resident Bond Holdings, Jun, out at 77.5% vs 77.3% prior O/N Data Heat map: EU US JP UK SZ AU CA NZ NO SE FR + - Calendar Today's Highlights: Time (GMT) Region Release Consensus 08:30 UK PPI Input MoM/YoY (Jun) 2.6%/29.0% 08:30 UK PPI Output MoM/YoY (Jun) 1.2%/9.9% 08:30 UK PPI Output Core MoM/YoY (Jun) 0.8%/6.5% 09:00 E-Z Euro-Zone Ind. Production MoM/YoY (Jun) -2.3%/0.3% 22:45 NZ Food Prices (Jun) 0.3% 22:45 NZ Consumer Prices QoQ/YoY (2Q) 1.4%/3.8% This and Next Week’s Highlights: Date Region Release Jul 15 JN BOJ Target Rate Jul 15 UK RPI, CPI Jul 15 GE ZEW Survey Jul 15 E-Z ZEW Survey Jul 15 US PPI, Advance Retail Sales, Empire Manufacturing, Business Inventories, ABC Consumer Confidence Jul 15 CA Bank of Canada Rate Jul 16 GE A string of CPI Figures Jul 16 UK Claimant count Rate, Jobless Claims Change, ILO Unemployment Rate Jul 16 E-Z A string of CPI Figures Jul 16 US MBA Mortgage Apps, A string of CPI Figures, What's going on? § Moving in unison, Treasury and Federal Reserve have taken steps to make the implicit guarantee Fannie Mae and Freddie Mac enjoy as GSEs one of an explicit nature: While Fed has authorized the companies to borrow directly from itself, Paulson of Treasury Dept. has asked Congress for authority to buy unlimited stakes in and lend to these firms. § High crude prices and slump in transportation rates has pushed the Asian airlines and shipping companies lower, causing the Asian equities to break a 4-day winning streak. § Having seen the lows of 1.5971 against euro, USD has firmed on Paulson’s announcement of funding plans for Freddie Mac and Fannie Mae. While an advance towards all-time highs at 1.6018 is again within sight, 1.5850 is acting as immediate support level. FX EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN - (+) (+) FX Trading Strategies Pair Supp. Resis. Comments USDCHF 1.0000 1.0250 USD-Pairs have reversed in the Asian session, but the market is still very low on liquidity and another run for USD-weakness and risk aversion is very likely. We sell the break of 1.0111 offer, targeting 1.0040, stop bid at 1.0140. MAJOR HEADLINES – PREVIOUS SESSION § New Zealand Retail Sales out at -1.2% vs. -0.1% expected and ex Autos at +0.7% vs. +0.5% expected § New Zealand Non-resident Bond Holdings for June out at 77.5% vs. 77.3% in May THEMES TO WATCH – UPCOMING SESSION Key Risk Events (All times in GMT) § UK Jun. PPI Input/Output (0830) § EuroZone May Industrial Production (0900) § New Zealand Q2 Consumer Prices (2245) § UK Jun. BRC Retail Sales Monitor (2301) § UK Jun. RICS House Price Balance (2301) § Australia RBA Meeting Minutes (0130) § Japan BoJ Target Rate (no time given) § Japan BoJ Monthly Report (0600) Market Comments The mortgage lenders Fannie Mae and Freddie Mac were in the spotlight again on Friday as their shares traded as much as 50% lower on fears of their imminent demise, only to rally strongly into the close. Freddie Mac, in fact, rallied 100% from the day's lows. US Treasuries took an enormous beating from highs on the week as the market apparently decided that armageddon would come another day. The curious aspect of the reaction in the currency market was that the late day relief in risk aversion didn't spill-over to the greenback, which, after tumbling on the mortgage lender meltdown, only took back limited territory. Now overnight, we get the announcement by Treasury Secretary Paulson that he is seeking funding for Fannie and Freddie, a lifting of the ceiling on their credit lines, and authorization to purchase their shares. As well, the Fed will allow the two institutions to borrow directly from the New York Fed. US equity futures were up sharply in the Asian session as this underlines the way-too-big-to-even-suggest-that-they-can-fail view of the GSE's and their latest woes. On the technical side, EURUSD broke through a couple of key resistance levels, with "final" resistance still ahead at the pair's all time high just above 1.6000. We tried to draw a technical line in the sand at 1.5900 last week, but we're still more than hesitant about jumping on the bearish USD bandwagon. That's because on the fundamental side, any further EURUSD upside seems to be facing strong headwinds at the moment. First, the interest rate differentials on Friday moved sharply in the USD's favor as it appears clear that the worst of the mortgage-lender fears have been averted for now - the interventionist spirit of the Fed and Treasury on the mortgage lenders is eminently clear. As well, the comeback in equities seems to support risk appetite, which seems to be correlated with the general USD outlook of late. Finally, the huge InBev acquisition of one of the US' premier brands should remind us of that old abstract notion called relative valuation - the USD is simply very cheap and US assets are looking awfully "tasty" around the world. M&A flows will undoubtedly continue to favor the USD for some time at anywhere near its current valuation. In other news this morning, many are citing an article in which Bill Gross of PIMCO prefers the USD over the Euro. Key for the USD outlook in any case will be tomorrow's testimony from Bernanke. It is the semi-annual, so-called Humphrey Hawkins testimony and is the Fed's premier platform to make its intentions and outlook known. It is more than interesting that the timing of this testimony coincides with the critical Fannie/Freddie developments and the USD trading near its all-time low in places. Bernanke has plenty to talk about and is in the hot seat with pressure coming from all sides. On the negative side for the USD, we note the heavy USD selling from many Asian central banks (non-China) who are trying to prop up their currencies, and the renewed rally in oil is also a troublesome development. The other potential USD negative is that the USD has not responded much to all of the USD positive news as we enter the new week! Chart: GBPUSD Elsewhere, watch the reaction to the UK PPI data to see to what degree the market still cares about the BOE and when it cuts/raises rates. GBPUSD saw an enormous short squeeze on Friday. The pair bounced off the 200-day moving average once again and could be headed lower if it works back below the 1.9800 handle and the USD is finding support in other pairs.

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