Be aware there is an important announcement by the US Treasury at 10.30 am ET – this is unexpected and could result in significant moves across all markets.

I will soon be posting about the 3 most powerful women in the world – in case you are wondering they are all in China – and they have the potential to make or break the dollar in the coming months.   Between them they control $1.3 trillion US dollars!!!  More later.

Yesterday’ sudden rally in the euro and the pound took the market by surprise as the dollar was expected to continue to strengthen. However, normal service has been resumed today with cable falling heavily in the light of slowing house prices, lower mortgage approvals and a sense of perplexity at the BOE of what to do next. Under normal circumstances the market would expect higher interest rates to counter the rise in both consumer and producer prices. However, with a slowing economy, the threat of recession and having signalled the need for rate cuts the Bank’s hands are well and truly tied.

The carry trades pairs too made significant gains. These gains are much more easily explained as the Dow had a good day gaining over 300 points. There is a strong positive correlation between rising stock markets and the carry trade pairs, as the appetite for risk returns. Wall Street too may be anticipating a further interest rate cut from the Fed in December. However, data due for release today, including Gross Domestic Product (GDP) may prevent this from happening as the forecast is for an upward revision to the 3.9% figure given earlier. A rising trend in GDP is always viewed favourably by foreign investors and can have a large impact on the demand for the nation’s currency. This is what we could expect to happen under more benign market conditions. However, it is not so clear cut and any impact this figure could have on the dollar will be mitigated by the figures for new home sales due up an hour an half later.

Japan too is reporting inflation figures and housing starts tomorrow.

In conclusion expect a roller coaster ride. These price swings are simply symptomatic of continuing uncertainty across all markets and the only thing we can be sure of is that this volatility will continue for the remainder of this year.

Despite there being a number of economic indicators reported yesterday the major pairs traded within a very narrow range and they appeared to have saved the big moves for this morning.

The falls appear to be a delayed reaction to yesterday as well further news from both eurozone and Switzerland.  One of the reasons for the delay in the fall of the euro could be attributed to the  fact that the market has been awaiting eurozone M3 money supply figure which was released earlier.

This is an interesting indicator which measures the value of all currency and liquid cash assets held by the public.   A rising trend can have a  positive effect on the nation’s currency and this morning’s number of 12.3% against the previous 11.3% and a forecast of 11.4%, should have resulted in a rise in the euro.  The theory is that rising currency levels spur growth and have an inflationary effect,  thereby leading to higher interest rates.   However, the opposite view also holds inasmuch that an increased supply of money could  trigger an equal drop in demand, leading to a lower currency valuation.  

My reason for focusing on this singular indicator is to illustrate the point that in trading ( whether currency, stocks, shares, commodities etc ) you cannot make decisions based on one piece of news, or a single set of figures. Trading is about looking at the bigger picture and fitting the smaller pieces together to make up the jigsaw.  The picture may be blurred around the edges, and some of the pieces may not fit very well, but at the centre there should be a relatively well defined image. The data out this morning illustrates the point that you cannot rely on one figure – clearly there are other factors at work in determining the overall direction for the Euro.

Following strong retail sales on Black Friday we may see some  dollar strength returning.   Further evidence of this will be any slowing in German trade figures which are out tomorrow.  In addition we have US consumer confidence data and US house price index which may also  throw further light on the sub prime debacle.   Euro dollar has continued to consolidate a shade under 1.49 but we could see dramatic moves tomorrow.   I would therefore continue to trade this pair as a straddle.  A glance at the latest COT report shows non commercial (speculators) still determined to long the euro while commercials are beginning to build short euro positions.  For another view of the euro; against the yen it is showing a positive sell and any break below 158 could even  lead to a run to 155 or even 154.   This is also more evidence of carry trade unwinding.

Friday’s huge doji on cable simply confirmed the indecision swirling around this pair.  Given its position in the charts it is impossible to forecast accurately what will happen next.  My personal view is that the pound will continue to fall in the short term.  As there is no significant data in the UK until Thursday when house price and mortgage lending figures will simply confirm that there has been a slowdown, i would not trade this pair until then.

Speeches from both Blanchflower and Sentence tomorrow may have some impact on cable but as it is no secret that the BOE plans to cut interest rates the only question is whether it will be as early as December.  Of far more interest is the political background in the UK.   Prime Minister Brown just cannot seem to stop skidding on banana skins  – the latest being sleaze surrounding donations to the Labour Party.

Holidays make for thin markets. Add a good dose of volatility, light the touch paper and stand well back.

Euro dollar touched 1.4963 before forming a substantial upthrust. However, as it does not sit right at the top of the daily chart we may yet see another attempt at 1.5. Weekly and monthly charts do show this as a possibility. However, given the news this morning that Airbus is now facing massive job losses and its chief executive admitting that the company’s business is no longer “viable”. Dramatic words which will have been noted by President Sarkozy. Has the time now come for a dramatic intervention.

Money continues to flow into the eurozone – so much so that purchase of bonds was temporarily suspended earlier this week . Iran, Nigeria, Asia and oil producers all appear to have abandoned the greenback. In my humble opinion, whilst i accept that these flows have been prompted by the sub prime fiasco, the current buyers of euros seem to have lost sight of the fact that eurozone itself is in fact heading towards a substantial slowdown, if not recession. Investors should also remember that before conferring reserve currency or safe haven status on the euro the currency is not backed by any central treasury or government. Europe is like a large quarrelsome family. More worrying is that Belgium has not had a government for over 100 and threatened with fragmentation – hardly a sign of stability and deeply ironic as the EU is headquartered in Brussels.

As a trader i would now be looking to sell any euro assets and either buy back into the US dollar because despite Iran and Venezuela’s deep pathalogical hatred of anything American, or look at the yen which has been strenghening all week. If the yen continues to strengthen the Japanese are not averse to a spot (sorry for the pun) of intervention and could end up buying back into the dollar.

All the markets are starting to look like one gigantic poker table – everyone playing their cards close and trying to interpret the “tells”! Bluff and counterbluff – we shall see.
My recommendations for those of you who cannot bear to stay out of the market are as follows: a further sell on dollar yen – i believe it is running down to 105, which is first significant support level and there is even a chance it could fall to 102 area. So, go short with tight stops.

Continue to sell the pound against the dollar but again aim for small shorts with tight stops. As the market is quite slow use the 5 min charts and be aware of possible support at the 2.04 level.

A glance at the dollar index does show continued dollar weakness – however, be aware that the index has a high euro weight and may be lagging current events.

As always good luck and have a great weekend and please keep your comments coming in – I love to hear from you all.

To my US readers may i wish you all a very happy Thanksgiving. I hope you are all enjoying a wonderful meal with family and friends. Like Christmas i am sure Thanksgiving can be both stressful and joyful but as my daughter keeps reminding me: you can choose your friends, but not your family!

Tomorrow is Black Friday and it wasnt until recently that i understood what it meant and its significance to the US economy and the dollar. Briefly, the name comes from an accounting term and is the day when retailers turn a profit, or enter the black. I presume that before this date, they have been operating in the red (ie losing money). How true this is i do not know. What i do know is that it is one of best barometers of consumer spending and retailer profitability and therefore a good indicator of dollar health.

Today has obviously been a very quiet day with the US closed. The most significant event occuring in the markets has been a major sell in commodities. This led to an article in the Times online to question whether the commodity supercycle had come to an end. The sell off was also mirrored in a sell off in the Aussie dollar but consolidation in the loonie.

I think the writer has somewhat overstated the case. It’s hardly surprising commodity prices have fallen given the fall in the stock markets in Asia. A much more likely scenario would be profit taking and a pause to allow volatility to settle before re-entering the market. Options and future contracts (from the COT report – commitment of traders report) confirm that in fact the commercials (ie professional money) is still very bullish in this market. I propose to start writing detailed posts on the COT report as it is a useful indicator for currency sentiment. However, the data is not easy to interpret and is sometimes used as a contrarian indicator.

Once the results of Black Friday are known the effects on the dollar will be extremely interesting and taken with the price volatility in markets and commodities we may be able to establish whether we reaching a pivitol turning point or its a sign of even lower prices.

Tomorrow sees release of UK GDP figures – the chart is very lacklustre and reflects the fact that the forecast figure is as per previous – i.e 0.8% and the BOE has already signalled future rate cuts the figure would have to be wildly out to have a dramatic effect.

My personal view is that the pound will continue to weaken. However, we shall see.

My strongest recommendation is still a sell on the dollar yen.

If you’re not sure about the euro dollar – personally i think a sell at 1.50 would be a good idea – but want to trade and take advantage of current volatility consider going short on the dollar yen. There is no sign of a bottom in the daily, weekly or monthly charts. Anything below 109 with a stop at 110 (first support level) view to the pair eventually falling as far as 105. Just watch the charts.

If the euro dollar were a share what would be the best way to trade it? This is a question i asked myself this morning as there was further overnight consolidation in this pair. It was while i was still pondering that the euro had a mild breakout touching almost 1.48 – it seems determined to reach 1.50. Higher than expected German PPI figures could be the explanation.

The pound too was dragged higher by better than expected CBI export orders but not by as much as i would have expected. Aside from the usual credit crunch concerns and sub prime woes i do believe it is the continuing sorry saga of Northern Rock which is starting to taint the UK’s reputation as a world financial powerhouse. Unlike the three muskateers – all for one and one for all – the UK government, the BOE and the FSA have behaved more like The Three Stooges (the American vaudeville and comedy act characterized by slapstick comedy) in this debacle.

Mervyn King blethers on about “moral hazard” while the goverment cheerfully hands over yet more taxpayers’ money – approx £40b and rising (£1300 for every taxpayer in UK – about $2600 dollars) while the FSA sits on its hands because it doesnt have a clue why the situation has arisen in the first place! The whole of the UK’s defence budget is only £33b. Why would anyone want to invest in cable with this level of political incompetence and fiscal mismanagement.

To return to the euro dollar – the answer is, of course, a straddle – an excellent option strategy which is used when you are unsure of which direction the underlying asset will go. It is typically used when prices have been consolidating into a flag or pennant formation and the only question is which way will it go.

This week is Thanksgiving when markets are traditionally quiet and the focus is on the American consumer. However, given the current financial landscape nothing can be taken for granted.

The OPEC summit ended in division with Iran and Venezuela wanting payment for their oil in anything other than the US dollar. This discussion was “accidently” broadcast to journalists. Despite recent rumours no one, so far, has excerised the “nuclear option” of massive dollar sales. Indeed the most interesting aspect of the meeting was the extent to which oil producing countries are looking at alternative forms of energy and climate change.

They could do worse than start to invest some of their petro dollars in companies researching into this technology.

The smaller Gulf States such as Dubai and Qatar are already looking beyond the oil bonanza and are focusing on financial serices and tourism. The need for fresh water will be much more important so again investing in these technologies will be of paramount importance.

Translated to the currency market today is very quiet despite speeches from Trichet and Paulson. It is only later this week (starting tomorrow) when we have FMOC and BOE minutes as well data across the pairs that we could see some significant moves.

My own opinion is that all the markets seem “tired” – sub prime, credit crunch, weak dollar, high oil prices – there are only so many ways to say the same thing! So maybe a slowdown or even recession would be welcome if only to start writing about something else!