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November 28, 2006

Fired up Euro Faces Bernanke and US Housing
by Ashraf Laidi

Euro strength takes center stage as the single currency hits new record highs against the yen at 152.96, and pushes back up to $1.3148, just below yesterday's 20-month high of 1.3162. A 5-year high in Germany's GfK consumer confidence and renewed hawkishness from ECB officials further cements the fundamental backdrop of the euro rally. An unexpected decline in Japanese retail sales allowed the dollar to accumulate fresh gains past the 116 yen level, now hitting 116.36.

Market attention shifts to a charged schedule of US economic data and events. Due at 8:30 am are October durable goods, expected to drop 5.0% after an 8.3% increase, while orders excluding transportation items seen up 0.2% after a 0.5% rise. At 10:00 am, October existing home sales expected to have slowed to 6.14 mln from 6.18 mln, while November consumer confidence seen up at 106.0 from 105.4. Richmond Fed president Plosser will speak at 11:30 am. At 12:30 pm, Fed Chairman Bernanke will speak about the economic outlook, while former Fed Chairman Greenspan will make give a private speech in New York at the same time. Chicago Fed's Moscow will speak at 4:30 pm.

Despite the inherent volatility of the durable goods orders series, the expected 5.0% decline could sustain renewed pressure on the greenback, especially if the ex-transportation item comes in below 0.2%. Fed Chairman Bernanke's speech at 12:30 will be crucial as far as to what extent will it acknowledge the slowdown in the US economy. Mr. Bernanke will surely mention the moderation in US growth, but the key question is whether he will maintain his inflation hawkishness as was the case over the past 1 year. Despite the soft core CPI reading, the Chairman is likely to maintain inflation vigilance in order to offset any excessive decline in bond yields and the dollar resulting from his address of the slowing US economy. This could be the case if the existing home sales figures come in sharply lower than expected.

An upside dollar surprise could emerge from the speech in the event that Mr. Bernanke sounds off an optimistic speech to the effect of predicting a rebound in Q4 GDP and dampening expectations of a Q1 rate cut.

Euro fires on more cylindars

EURUSD awaits the barrage of US data/events just below its 20-month highs of 1.3162. Germany's GFK consumer confidence came in at 9.4 for December, the highest level since November of 2001. Analysts explained the optimism as a result of consumers' racing for the stores ahead of next year's VAT hike.

Eurozone M3 growth rose 8.5% in the year ending in October, matching the September figure and coming below expectations. The 3-month moving average edged up to 8.4% from 8.2%.

ECB' council member Nou Wellink renewed the central bank's inflation vigilance, adding a twist of growth optimism and most of all indicating no concern with the euro's current levels. Boosting the euro's rally were also comments from Austria's finance minister shrugging the euro's recent strengthening.

In its latest report, the Paris-based OECD expects The European Central Bank to raise rates to 4.00% by end of 2008, from their current 3.25%. But the OECD also estimates that the Fed will not raise rates this year and that further rate hikes in England are not warranted. We reiterate our forecasts for a 45% probability of a Fed rate cut in January, and as much as a 75% chance of a rate hike in March.

Given the current development in Eurozone fundamentals and flood of potentially weak US data, $1.32 stands as the interim resistance, followed by 1.3235. Key resistance stands at 1.3275-80. Support starts 1.3120, backed by 1.3080 and 1.3050.

Yen dragged by consumer weakness

An unexpected 0.2% decline in Japanese retail sales for October, weighed on the yen across the board as it justified recent comments from the Bank of Japan regarding a slowing consumer demand. The currency was especially hit after senior Japanese government officials said economic conditions were not appropriate for further BoJ rate hikes. The yen declines could balance the dollar's overall trajectory, and traders may further bid up USDJPY in the event of inflation vigilance by Mr. Bernanke.

Thus, even if we see EURUSD breaking the 1.32 figure, we could still see 116.55 as the interim resistance target. Subsequent target stands at 116.81, the 50% retracement of the 118.24-115.38 move. Renewed weakness seen stabilizing at 116.00, followed by 115.70.

Ashraf Laidi
CMC Markets NA
AshrafLaidi.com

Ashraf Laidi is Chief FX Strategist at CMC Markets NA and author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Copyright © 2006-2008 Ashraf Laidi

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