Green light Still On for the Euro, But Be Careful of What You Buy (page 2 of 2)

Now that we have fundamentals and technicals also signaling a potential bottom, the case is even stronger. Canada's trade surplus fell to the lowest level since December 1998, as a strong currency increases imports and hurts exports. The government is also becoming increasingly worried about the strength of the loonie with Prime Minister Harper expressing concern over the rapid rise in the Canadian dollar while Quebec's Prime Minister called for a special meeting to discuss the currency. Technically, we have unveiled an interesting 9 week trading anomaly that calls for in sharp rally in USDCAD in the very near future. Leading indicators, new motor vehicle sales and manufacturing shipments are due for release next week and we expect all of them to be bearish for the Canadian dollar. As for the Australian and New Zealand dollars, they are both sharply lower. AUDJPY dropped 500 points today. Risk aversion should continue to drive price action next week since New Zealand retail sales is the only piece of potentially market moving data from these two countries.

British Pound Hit By Sharp Rise in Trade Deficit

Even though the British pound hit a new 26 year high today, it collapsed sharply on the back of much weaker than expected trade numbers and overall liquidation out of high yielders. We warned yesterday that given the lack of strong UK data to back the recent rise, any sign of weakness would lead to a sharper slide in the GBP/USD than the EUR/USD which was exactly what happened today. Next week the British pound will continue to be in play with inflation, labor market and retail sales numbers on the calendar. Inflation is expected to be strong and the labor market is expected to hold steady, but retail sales could suffer.

Meltdown in Carry Trades Could Last

Rising risk aversion has led to broad based weakness in carry trades. The market is growing more concerned about the financial sector with the latest speculation being focused on Mizuho Financial Group in Japan who could be delaying their brokerage merger because of sub-prime losses. The spread between Junk rated corporate bonds and US Treasuries rose beyond its August high when risk aversion was already very severe. Given that the Dow closed at its session lows, we expect follow through weakness in the Yen crosses at the open of Tokyo trading on Sunday. GDP, CGPI and the Current account are due for release, which we expect to be yen positive.