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Research. Analysis. Commentary. Currency Currents Professional

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Overview Tuesday 23 November 2010

North Korea fires artillery shells at South Korean island before the Fed talks about dropping the QE2 bomb. The markets are already shaking ...

Spanish-German 10-year Spread: all-time highs.

Positions: Short EURUSD (see testing KEY support level daily in Chart Library) and short AUDUSD

Key News

Economic recovery in a divergent euro zone accelerated this month as a strong resurgence

in private sector growth in Germany and France offset persistent stagnation in periphery

members, surveys showed on Tuesday.(Reuters)

South Africa's economy grew by a lower-than-expected 2.6 percent in the third quarter of

2010, highlighting the fragility of its recovery and leaving the door open for another

interest rate cut. (Reuters)

[From 22 Nov] Thailand's economy slipped into a technical recession in the third quarter,

reinforcing signs of an Asia-wide slowdown as export growth cools, manufacturing ebbs

and the impact of massive government stimulus spending fades. (Reuters)

Economic Data (Reuters)

Market Briefs

N.Korea fires on S.Korean Island, draws U.S condemnation Rts

Irish PM, would call for elections in the New Year after budget vote Dec 7 - Rts

Canada Flaherty: Must Deal with Ireland Situation Quickly, Not Let it Fester

Flaherty: Encouraging EU to Deal with Portugal Debt Woes on a Timely Basis

Portugal Next as EMUs Infernal Keeps Ticking – AEP – UK Telegraph

German Q3 GDP confirmed at 0.7% q/q, 3.9% y/y, (2.3%/4.3% prev)

German flash Nov composite PMI 58.8 vs 56.6 Oct,, 56.00 exp

E.Zone flash Nov composite PMI 55.4 vs 53.8 Oct, 53.6 exp

Norway Q3 non-oil GDP +0.9% q/q, GDP -1.6% q/q

ECB's Tumpel-Gugerell calls for bold economic governance reform Rts

ECB, more to be done to restructure state banks Rts

IMF, Greece broadly on track on fiscal plan, 3rd tranche secured Rts

E.Zone peripheral spreads widen again on Ireland.

Currency Currents Professional 2


Looking Ahead – Economic Data

13:30 U.S GDP (pQ3) (mkt +2.4%, prev +2.0%)

15:00 U.S Existing Home Sales (Oct) (mkt 4.490 mln, prev 4.530 mln)

15:00 U.S Richmond Fed Nov manuf/service indices.

12:00 CAN CPI (Oct) (mkt 2.2%, prev1.9%)

13:30 CAN Retail Sales (Sept) (mkt +0.7%, +0.5% prev)

Looking Ahead – Events, Other Releases

15:15 Fed outright Tsy TIPS purchase (07/15/12 - 02/15/40) ($1-2 bln)

19:00 FOMC minutes (November 3rd meet)

Quotable

http://www.ft.com/cms/s/0/85b62490-f66e-11df-846a-00144feab49a.html#ixzz167Akz3nh

“The question of “how this ends” is therefore obvious and urgent – but also fiendishly difficult

to answer. It is like watching a three-dimensional game of chess – in which the financial,

economic and political levels all interact with each other.

“My current best guess is that the single currency will indeed eventually break up – and that the

euro’s executioner will be Germany, the most powerful country and economy inside the

European Union.”

Gideon Rachman, writing in The Financial Times

Commentary & Analysis Artillery Fire Setting the Stage for an Economic Bombshell from the Fed?

North Korea fired missiles into South Korea today.

The markets are a bit shaken up – the Korean won is down more than 3%; the US dollar is the

recipient of some safe-haven flow; the S&P 500 futures are down about 1% at writing.

http://www.ft.com/cms/s/0/85b62490-f66e-11df-846a-00144feab49a.html#ixzz167Akz3nh



Last week we mentioned that the risk-bid for the US dollar – a sustained move higher for the

buck based on a dramatic shift in consensus sentiment – was very much in play considering the

Ireland & Co. fiasco, plus the outlook for China to really tighten down on its major growth

drivers in an effort to stem overheating.

Now add geopolitical conflict to the list. Typically this fear seeps into broad market concerns,

just as it appears to be doing so far today; and the US dollar still possesses a modicum of safe-

haven merit.

Dollar Index Daily: Chart resistance 7960-7978…working higher out of the downtrend channel.

Today’s US preliminary Q3 GDP report came out and it’s a tick better than expected; although

corporate profits grew at a very disappointing 1% versus expectations for 3.6%. The latter

seems to have had a kneejerk impact on stock futures.



What might have a broader impact, though, are the Federal Reserve minutes from their early-

November meeting where they officially introduced QE2. The minutes are to be released this

afternoon. Expectations are for a downgrade of the US economy by the Fed, according to a well

publicized story in the Financial Times yesterday.

And if that outlook catches the market off-guard, two potential scenarios could unfold:

1) The US dollar falls because of the deteriorating US growth differential among its major competitors, specifically Eurozone, UK, Japan, as the US economy stumbles along; but, given the growth prospects elsewhere that might be tough to achieve. Granted, Germany still posted good numbers. But it is clearly a two-track economy in the eurozone—Germany and all the rest. The latest Irish wrinkle cannot be good for growth; today’s positive report from the eurozone must be seen as “very” rearview mirror stuff.

We continue to prefer watching the yield differential between the eurozone and the US. It

has blazed a clear positive correlation path so far, i.e. falling US yield differential equal

falling dollar and vice versa. Now we are in vice versa territory with US yield differential

rising since the “official” QE2 launch.



2) The US dollar catches additional safe-haven money flow, to a greater degree than right now.

The specter of a double-dip in the US isn’t good for anyone. Europe needs China to buy all the

German stuff; while China needs the US to buy all that Chinese stuff. Was the surprise technical

recession reported for the third quarter in Thailand telling us something about China? Hmmm...

Thailand GDP (Malaysia similar trend as reported yesterday): This is a surprise given the

liquidity flushing into the region.

6-mo US-Euro Yield Spread

US Dollar Index



It is always interesting how sentiment can seemingly change on a dime. The stock market still

appears a bit complacent about all this stuff. Hmmm ...

Volatility Index Daily: New intermediate-term low on Friday (going back to April)…not much

different yesterday.



Hmmm … April? April? What happened in April? Oh yeah, that’s when stocks got crushed!

VIX (black) vs. S&P 500 (red) Index Daily: When VIX swerved to a new low in April, Mr. Market

pulled out the Joker card—slam!



And of course, we have been watching this very tight correlation ...

S&P 500 Index (red – top) vs. US $ Index (green-bottom):



And if today doesn’t provide enough fire power, tomorrow the US reports all kinds of economic

data ahead of the Thanksgiving holiday – weekly mortgage market data, consumption, PCE,

durable goods, jobless claims, personal income, consumer sentiment surveys, house prices and

new home sales .

Stay tuned.

Chart Library



Spanish-German 10-year Spread, daily: All-time high ...



EURUSD Daily: Closing in on a key support area test, and a test of the uptrend channel; prior

chart support at 1.3444. Traders who have multiple positions may want to consider this an

area to take some profit. If EURUSD makes it through, next key support at 1.3359-1.3333…

Trade Summary Open Positions

Long Entry Stop Last Profit Profit Percent

Entry Date Alert # Symbol (Short) Price Loss Price PIPs Target Returns

MAJORS

11/22/2010 365 EURUSD Short 1.3686 1.3775 1.3492 194 1.3350 1.4%

ECZ0 Short 1.3685 1.3774 1.3492 193 1.3349 1.4%

11/22/2010 366 AUDUSD Short 0.985 0.995 0.9792 58 0.9550 0.6%

ADZ0 Short 0.9824 0.9924 0.9771 53 0.9524 0.5%

Regards, Jack & JR

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