Bob and Ted's Outlook for Week

Bob
The dollar came back from a battering last week to close on a slightly more positive note, coming off a record low Friday (1.4751) to end the week at 1.4677. It was a quiet week for economic data and September’s improvement in the US trade balance was not sufficient to spark any meaningful recovery. We saw a marked decline in equity markets last week and with risk aversion on the rise, this coming week could prove very volatile. The ECB kept rates on hold last Thursday and its President Jean Claude Trichet remained hawkish in his policy assessment, placing somewhat more emphasis on the upside risks to price stability than on the downside risks to economic growth. Markets have been unimpressed by the prospect of the Fed remaining on hold through to the end of the year and futures markets are now beginning to price in a further rate cut for the US in December. In this context the medium term outlook very much favours the euro with 1.50 a very realistic target by early December. We could see a correction however in the short-term with rises in risk aversion prompting a yen appreciation that might see a sizeable liquidation of the EUR/JPY carry, sending the euro temporarily weaker against the greenback. We also have a number of major releases this week, most notably Germany’s ZEW survey Tuesday, euro quarter 3 GDP Wednesday, US Retail Sales Wednesday and US Consumer Price Inflation Thursday. If US Retail sales are weak it should fuel speculation of a further rate cut and this will damage the dollar. Euro zone GDP is expected to be strong and the biggest downside risk to the euro is heightened market volatility which may offer short-term dollar protection. Wait for the early week correction to settle before entering long on the euro. Support should be strong at 1.45 and below this at 1.4406. Upside price targets are 1.46, 1.4650, 1.4680, 1.4710, 1.4740 and 1.48. Key support levels are at 1.4406, 1.4440, 1.45 and 1.4570.

Ted
The dollar made significant gains against all currencies except the yen, swiss franc and euro on Friday. With equity markets in a downward spiral, more funds will flow into the US bonds in the early part of the week, which could see the dollar appreciate strongly against all currencies except the yen. The current air of gloom is being led by major write-downs by financial institutions because of the ongoing subprime debacle, rather than any wider deterioration in the US economy. The credit crisis is not restricted to the US and the dollar has rather unfairly borne the brunt of the currency market reaction to date. Any assumption the Fed is simply going to keep cutting interest rates to bail out Wall Street is misguided and with key inflation numbers being released in the US this week, this data may well dispel any notion that the Fed has a lot of flexibility to work with. A robust set of US inflation numbers next Thursday for October (the month oil prices went through the sky) could see inflation become a major problem once again, which in turn will be dollar positive. A firm set of US retail sales numbers on Wednesday will also be a major boost to markets in general. The euro has largely been living a charmed life in recent weeks as traders have pushed it higher and higher, choosing to ignore the soft data from the euro area over the past month. Germany’s ZEW index on Tuesday will be an important measure of current business sentiment surrounding the value of the single currency. There is plenty of room to the downside this week, with technical indicators all showing the pair excessively overbought, and downside targets are 1.4630, 1.46, 1.4550, 1.4530, 1.45, 1.4450, 1.4410, 1.4350 and 1.43. The lifetime high at 1.4751 should hold, with support coming in below this at 1.4720 and 1.4690.

Bob B / Ted B - Nov 12