Forex Recommendations and Analysis

EUR/USD swooning

Yesterday saw an extension of the rally in US equities ahead of the Thanksgiving weekend, a phenomenon we are assuming has more to do with end of the month effects and misplaced optimism by market participants rather than something to hang our hats on. It was interesting to note that the currencies largely shrugged off the move in equities, with JPY crosses virtually unchanged on the day and EUR/USD swooning to lower support before bouncing back to relatively unchanged. End of month analysis circulating out there suggests that due to the larger relative falls in US equities for the month of November, there could be a USD positive effect here at month end. In any case, it will be interesting to see how the market looks early next week in case what we’re seeing are these end of month effects rather than “real” moves.

We suspect that the EUR is an accident waiting to happen, judging from the failure in EUR/USD to hold short term support despite a horrific batch of US data yesterday and the action in EUR/GBP, which saw a significant break of short term support and confirmation of the Tuesday reversal. (Later in the day, the GBP saw a sharp move back lower as the ECB was out saying it would no longer accept certain types of syndicated loans from England and Wales as collateral, but this morning it appears the effects of this announcement have faded again).

The Friday after Thanksgiving – so called Black Friday

The Friday after Thanksgiving – so called Black Friday because it is said to be the point in the earnings year when retailer’s books move into profit for the year -  traditionally kicks off the US Christmas shopping season – a vital 4 weeks for US retailers. As we’ve discussed before, the retailers are trying to elbow one another aside simply to get customers to come through their doors and have already pre-discounted much of their merchandise ahead of the holidays, thus they may have already cannibalized some of their own sales from the Christmas shopping seasons. Year on year comparisons will be key for understanding what kind of mood the famous US consumer is in this year (remember the famous line “Don’t bet against the American consumer.”? If we were the betting kind, we’d be asking where we can place our bets…). A Canadian survey showed that Canadians planned to spend 14 percent less this year, and an American survey quoted in Marketwatch indicates that 63% of baby boomers plan to cut back on spending this Christmas. US Personal Spending for October fell at -1.0% rate MoM, the worst reading ever save for the month of the September 2001 terror attacks.

China announced a new rate cut – 108 bps

China was out announcing a massive new rate cut – 108 bps – as the desperate effort continues by the Chinese government to manufacture a soft landing for the world’s workshop when demand for its products is shriveling around the world. Economic theory states that in a slowdown, the sectors of the economy geared toward production are the most heavily impacted, and with a very imbalanced Chinese economy in the past cycle of expansion, we look at China with concern. Reports are cropping up of rioting related to lost jobs at factories. This is a situation worth watching. The pressures on the Chinese regime will mount exponentially with every percentage point decline in GDP growth below perhaps 7.0%.

CAD is experiencing turmoil related to the huge BCE takeover deal, which may be collapsing. This is a potentially very CAD bearish story, and yesterday’s energy rally may have hidden further potential for CAD weakness. Keep an eye on USD/CAD and beware the volatility.

Attention

Be aware that markets may be very thin and nervous. Many might expect that Thanksgiving would be a time for a rangebound market as many participants are absent, but the fact that this Thanksgiving weekend coincides with the month-end and its potential effects, anything can happen, especially as the market may have gotten too short on the USD here in the short term. Thanksgiving of 2006 saw a huge technical break in EUR/USD, for example.