Today's Focus

USD

Brief:

1. Asian and European markets fall with lack of supporting news injected into markets.
2. European inflation accelerated more than previously estimated in November, to the fastest pace since May 2001, preventing ECB from cutting interest rates as economic growth slows, which now ECB face a deadlock between inflation and short term economic growth.
3. Retail sales rose 1.2% in November, while wholesale prices jumped the most in 34 year, easing the need and scope for the Fed to make deeper interest rate cuts.
4. Investors are worried that recent interest rate cutting streak are fueling inflation and investors are speculating that Fed is going to pause on similar moves.
5. Most US and European capital markets dropped, led by financial shares, on concern that a coordinated attempt by central banks in North America and Europe to relieve tensions in credit markets will fail, as market isn't getting the full effect yet, with 4th quarter corporate reports are only due to be released on January.
6. Notable financial institution release is Lehman Brothers Holdings Inc, Lehman said some precautions against mortgage losses were ineffective, which stroke fear among investors that other financial institution strategy isn't doing any better..
7. Canada's dollar fell to a three month low on speculation higher than forecast US prices and retail sales will make the Fed less likely to cut its lending rate on the next meeting.

One the upside:

-There is nothing much that is basically supports better outlook for US economy (besides yesterday retail sales) and currency as we might have to wait till January when major financial institution made their statement regarding profits, credit markets and housing markets before we will see where would be US economy heading into, but in near term, today's CPI and Industrial reports is what investors are focusing at. Anything similar to yesterday's surprise retail sales figures or better than expected figures released will boost capital markets and buys time for money markets amid investors losing confidence and on concern that US is heading into recession soon.

-Absence of negative news released by corporate regarding credit markets, housing sector and retails sales.

-Forecast figures of CPI and Industrial production are better than previous month (Nov) figures released, if figures released are as expected or better than expected, both USD and capital markets is going to react strongly given recent volatility have stretched money markets movements

On the downside:

-Repeat of similar statement made by some financial institution, which we see Bank of America, Wachovia and Lehman Brothers recently giving comments regarding their outlook on corporate 4th quarter results, made investors speculating about negative impacts on US economy and currency caused by related sectors.
-Lower than estimated figures on CPI and Industrial production.
-Investors dumping USD speculating that US capital markets and economy is going to face more negative reviews.

To monitor:

-Publication or Major corporate statement regarding credit markets, investorбжs confidence, retail sales and housing.

-CPI and Industrial report which are due to be announce by 8.30AM and 9.15AM EST respectively.

-How USD reacts to CPI and other release, as major speculative movement can be snapped easily by any events referred above.

Suggested pairs for the day:

Short: GBP/USD, NZD/USD, USD/CHF, AUD/USD
Long: USD/JPY and USD/CHF
Possible main pairs are: GBP/USD, USD/CHF, NZD/USD

-If CPI figures released are much worst than expected, do the opposite for above.-
-If CPI figures released are as forecasted, get of from GBP/USD pair.
-If CPI figures released are much better than forecasted, buy according to above suggested and it's worth the risk increasing bets on those main pairs-

To consider-Short-: USD/CAD (Get in to this pair only if CPI figures are much worse than expected, if not, avoid this pair)

JPY

1. Confidence among Japan's largest manufacturers slumped more than economists forecast as stronger JPY eroded exporter's profits which are more dependent on markets abroad
2. Asian capital markets are steadier and European markets falls, erasing earlier gain early today after the cost of borrowing euros for two weeks soared to the highest since at least October 2001 as financial institutions sought funds to cover their commitments over the year end as Fed and central banks coordinate action to inject cash into banks hoping to ease willingness of Bank giving loans and lower Libor/Euribor rates isn't working.
3. US capital markets recovered from early and mid session weakness by late trading session leading Dow futures into the green zone on closing yesterday.
4. JPY reacted by only getting a little weaker on late trading session as price are heavily weighted caused by recent volatility.

On the upside: (Stronger JPY)

-Global capital markets downfall including Asian and European capital markets as investors closing position before heading towards weekends.

-Possible capital markets slump lead by US markets curbing demand for carry trades, as yesterday late session recover are likely caused by short-covering instead of buying interest.

On the downside. (Weaker JPY)

-US markets rebound on absent of negative statement released credit markets, housing sector and retails sales.
-USD strengthens against JPY leading other pairs to follow trend if CPI reports today are favorable.
-Announcement made by Fed or Central banks regarding current situation, which might caused capital markets to react like what occur on Wednesday.

To monitor:

-US capital markets Including Europeans, most likely CPI reports today can snap US and European markets current downfall trend.
-Credit, retail, hosing and consumer related news release.
-Corporate statement hinting 4th quarter results or comments on above mentioned sector.

Suggested pairs for the day:

Long: GBP/JPY - GBP/CHF, EUR/JPY, NZD/JPY, AUD/JPY, USD/JPY
Possible main pairs are: GBP/JPY, EUR/JPY, USD/JPY
To avoid: CHF/JPY

-According to 13.05 GMT Prices-

Time lapse prediction: (according to current situation)

14-16 GMT:

• USD to be weakens on investors taking profit from early session gain.
• US and European Capital markets rise, recouping from earlier losses on US CPI reports
• JPY goes weaker reflecting capital markets rise erasing earlier gains.

16 – 18 GMT:

• US capital markets strengthen further as investors confidence pours back into the markets on positive outlook.
• JPY to weaken further as US index rising further.
• USD strengthens regaining loss occurred during early trading session.

18 - 22 GMT:

• Capital markets remains strong supported by positive outlook on US economy easing fears among investors that US is likely heading into recession.
• JPY will remain or weaken a little as investors are taking profits putting pressure on prices and investors close position before trading session ends to avoid holding overnight as weekend approaches.
• USD will remain or weaken a little as investors closing position ahead of weekend.

Loh Chang Yuen,

Junior Strategist

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