Crisis around Pakistan and weak housing data drive USD down by year end 

The dollar fell against the euro and posted the biggest weekly decline versus the currency since April 2006 after a Commerce Department report showed sales of new homes fell to a 12-year low last month. U.S. housing data shows no signs of any bottom in sight. The U.S. currency decreased for a sixth day, the longest decline since October, on bets a slowing economy will encourage the Federal Reserve to cut borrowing costs next month.

The dollar also weakened as riots erupted in Pakistan, considered an ally in the U.S. war on terrorism, a day after the slaying of former Prime Minister Benazir Bhutto.

Fed Rate Outlook

Interest-rate futures on the Chicago Board of Trade indicate 90 percent odds that the Fed will reduce its benchmark interest rate a quarter-percentage point at its Jan. 30 meeting, compared with a 76 percent chance yesterday.

The dollar's share of global foreign-exchange reserves fell to the lowest level since records began in 1999, as international demand for U.S. assets slumped after the subprime- mortgage market collapsed.

Well, 2007 has certainly proved that the USD's dominance, which has been eroding for a few years, has reached a new low. 

International investors have reduced their holdings of U.S. stocks and bonds since the August credit collapse hammered the values of corporate bonds and securities tied to subprime mortgages. The losses spurred by rising U.S. mortgage defaults caused banks and securities firms worldwide to write off more than $80 billion.

Foreigners were net sellers of long-term U.S. financial assets in the third quarter, U.S. Treasury figures show. Monthly sales averaged $11.8 billion in the period, compared with average net purchases of $64 billion in the previous five years.

In August, when the credit rout sparked concern that banks would curtail lending, leading to a slump in spending that would send the U.S. into recession, foreigners sold a net $40.7 billion of American stocks.

The dollar diversification story is likely to stay alive through the course of 2008. It's not something that's going to happen overnight. It's a long-term negative for the dollar.

For traders, although it may sound strange, it does not really matter which way the greenback tends to go next year as long as it moves, we are in business. So keep trading in perspective, always.

Have a wonderful, happy and prosperous new trading year in 2008!

EURUSD

RESISTANCE:1.4910

SUPPORT:1.4550

SENTIMENT: Bullish

RESISTANCE:114.30

SUPPORT:11050

SENTIMENT:mixed to bearish

GBPUSD

RESISTANCE:2.0165

SUPPORT:1.9770

SENTIMENT:mixed to bearish

USDCHF

RESISTANCE:1.1670

SUPPORT:1.1170

SENTIMENT:mixed

USDCAD

RESISTANCE:1.0000

SUPPORT:0.9650

SENTIMENT:mixed

AUDUSD

RESISTANCE:0.8925

SUPPORT:0.8540

SENTIMENT:mixed to bearish

GBPJPY

RESISTANCE:229.10

SUPPORT:221.95

SENTIMENT:mixed

EURJPY

RESISTANCE:167.70

SUPPORT:164.20

SENTIMENT:mixed

Battle of the Bears and Bulls GBP and EUR versus USD

What a ferocious battle between longs and shorts it was from late Thursday evening, overnight and into the New York session in the morning on Dec 21st. The EUR/USD and the GBP/USD oscillated wildly back and forth for the 24 hours leading up to the market close on Friday. In fact at time of writing I observed a 90 pip gain and loss in less than 24 hours on the GBP/USD. What this is all about fundamentally is simply that news is bad out of both the Euro Region/Great Britain and also out of the US. So the annalists are not looking at good economic news of one country over another but rather from which country is the news not as bad. This puts us in an interesting place technically. The USD had gaining very well over the last few weeks and in particular the last 10 days. The question going into the holidays is whether this trend will continue or is there a turn in the currency markets in Santa’s bag?

Let’s look at the technical indicators and the overall sentiment versus the USD.

• The Canadian Dollar is back below par and seems to be doing it’s best to stay below the very important $1.00 psychological level. Are we on our way to a double bottom?
• The COT reports (Commitment of Traders) has the EUR/USD as ‘ready for a turn’ to Bullish.
• We are at lower trend-lines on both the EUR/USD and GBP/USD and a turn is due
• And the Cary Trade seems to have been given some new life on Friday
• However one important factor not yet in line is that the GBP/USD COT report has yet to move from Bearish to Bullish

None of these factors alone or even together indicate the moment a turn in trader sentiment happens, however they should been seen as at least signaling that further Dollar strength  limited for the short term.

Have a Happy Holiday,

Pierre Charlebois

The dollar advanced the most against the euro since August 2004 after the biggest increase in consumer inflation in two years prompted traders to pare expectations for interest-rate reductions. The dollar was helped this week by a coordinated plan led by the Fed to alleviate the credit crunch and the U.S. central bank's third cut in interest rates this year to avert a recession in the world's largest economy.

TECHNICAL OUTLOOK – DAILY CHARTS

EURUSD
Resistance:1.4750
Support:1.3990
Sentiment:BEARISH

GBPUSD
Resistance:2.0450
Support:2.0000
Sentiment:To Bearish

USDJPY
Resistance:114.90
Support:110.50
Sentiment:Bullish

USDCHF
Resistance:1.1735
Support:1.1160
Sentiment:Bullish

USDCAD
Resistance:1.0340
Support:0.9975
Sentiment:Still Bullish

AUDUSD
Resistance:0.8900
Support:0.8335
Sentiment:BEARISH

GBPJPY
Resistance:233.70
Support:224.80
Sentiment:Mildly Bullish

The dollar gained against 14 of the 16 most-actively traded currencies as futures show the probability of a Federal Reserve rate cut in January declined from 100 percent.

U.S. consumer prices increased 0.8 percent last month after a 0.3 percent gain in October. The median forecast in a Bloomberg News survey was 0.6 percent. Producer prices rose the fastest in 34 years last month, data showed yesterday.

Dollar versus EUR and GBP
I was reading an article on Bloomberg this morning after the payroll data and although the news item took a positive slant, I think the most important factor mentioned was “The (US) economy is slowing down in the forth quarter but not so rapidly that you’re going to have a big down-draft in consumer spending”. So is it saying; things are bad, just not really bad? I think Kathy Lien’s article on Daily FX posted just shortly after the announcement is closer to the mark in regards to how currency traders are seeing the news. She had written an article the previous day about how a very strong number would be needed to bolster the fragile current Dollar recovery. So although the numbers were better than expected they don’t seem to be enough to give the Dollar what it needs for an accelerated recovery.

What’s next?
All focus now shifts to next week’s FOMC interest rate decision. There has been talk of as much as a ½ point reduction however with reasonable Employment data a ¼ is now just as possible. So the thing to watch going into the announcement is what the street will be expecting. If sentiment is for ¼ point and this is what we get then we may not see much reaction and a slight strengthening of the Dollar may occur. However on the other hand if the street expects a ¼ point and we get ½ then we will likely see resumption of the strong upward trend and a return to the 1.50 area on the EUR. The key here is to try and stay attuned to what the expectation is. The GBP/USD is at a precarious point on the up-trend line so keep an eye on an attempt at that level. (See chart)

The Carry-Trade watch
So far we are still in limbo waiting to see if the critical levels are going to be revisited. At this time it looks like more correction to the upside is due before any new attempts at the lower levels. Let’s a keep a vigil here.

The CAD back at a Buck even
The CAD made a great run back to parity coming within 5 Pips of par again friday morning. I think another visit to the other side for a short while is in the making. The Canadian Government has been jawboning (making positioning statements without action) but has yet to take any real action towards reducing the value of its currency. As long as traders continue to view the USD as soft and resources remain strong (Oil , Gold Etc), we should expect continued play at the “Par” level. 

Have a great week in trading,

Pierre Charlebois

TECHNICAL OUTLOOK – DAILY CHARTS

EURUSD
Resistance:1.4785
Support:1.4490
Sentiment:Mixed

GBPUSD
Resistance:2.505
Support:2.0140
Sentiment:Mixed To Bearish

USDJPY
Resistance:112.90
Support:109.50
Sentiment:Bullish

USDCHF
Resistance:1.1460
Support:1.1160
Sentiment:Mildly Bullish

USDCAD
Resistance:1.0340
Support:0.9835
Sentiment:Still Bullish

AUDUSD
Resistance:0.8925
Support:0.9655
Sentiment:Mildly Bullish

GBPJPY
Resistance:231.10
Support:222.40
Sentiment:Mildly Bullish