Colt FX newsletter Monday June 16^th 2008

Forex Review June 9^th to 13^th  
Calendar and Outlook, June 16^th to 20^th
Notes from the carry trade
Forex Club Platinum Accounts

Forex Review June 9^th to 13^th
What a difference a week makes…!
A week is a long time on the currency market and it’s hard to believe that only a week ago we saw the dollar fall on dismal US job numbers. This last week saw the dollar enjoy its biggest rise against the euro in three years. The dollar gained 3% against the yen and Sterling also fell significantly against the greenback.

The euro (chart 1) came in for a lot of downside pressure as the Fed and the US Treasury continued their concerted effort to talk up the dollar. US Treasury secretary Henry Paulson got things off to a fine start when he would not rule out market intervention to support the dollar on CNBC on Monday.
The next day Ben Bernanke carried on in the same vein by suggesting that the US economy seems to be turning the corner, implying that this would give room to raise interest rates and continued to voice his inflation concerns. The market saw this as a sign that the Fed could be raising rates by the end of the year with some commentators suggesting that the tightening could start much earlier.
Wednesday saw the ECB at pains to clarify its future plans for interest rates when Jurgen Stark, ECB executive board member, dampened speculation that a series of ECB intended to implement a series of rate increases. The release of better than expected US retail sales on Thursday suggested that although the US economy was still sluggish, it isn’t as bad as many thought. French Finance minister, Christine Lagarde, fuelled rumors in the run up to the G8 meeting in Osaka when she told reporters that the ECB might reconsider its plans to raise rates next month after the meeting, reflecting some tension in the European camp. Lagarde continued to boost the dollar on Friday when she expressed her satisfaction at the rising dollar.
More European divisions transpired as the week ended with the Irish electorate rejecting the EU treaty of Lisbon and bringing further pressure to bear on the euro. The ‘No’ vote has thrown the EU into turmoil and certainly undermines the bloc’s global ambitions.
However, it’s not all good news for the United States. US Investment bank Lehman Brothers announced losses in the three month period up to May 31 of almost $3B and fuelled fears of another punishing bout with the credit crisis. Lehman will be releasing its official quarterly figures on Monday. And spare a thought for the ordinary American as Friday also saw US consumer sentiment fall to its lowest level since May 1980.

Sterling (chart 2) opened the week on a positive note as higher than expected producer price (PPI) numbers saw the pound test 1.98. However, it was all downhill from then on as the Fed’s pro-dollar rhetoric kicked in. The pound slide paused on Wednesday as oil prices rose back up to $138 a barrel, only to resume falling as crude prices returned to around $132 on Thursday. The pound rallied at the end of the week on those depressing US Consumer confidence numbers and closed the week at 1.9474.

Chart 3 Important calendar events

Look for signs that the US economy has turned the corner (or not) on Monday with Empire State Business Conditions and Thursday’s Philadelphia Manufacturing Index. These numbers are particularly significant because they pre-date US-wide manufacturing reports. Further US insights can be gleaned from Tuesday’s Housing Starts and Thursday’s Unemployment claims are Monday’s TIC numbers provide a guide to currency flows into and out of the US and Tuesday’s Producer Price Index will shed light on the all-important inflation situation.
UK inflation will be gauged in the Consumer Price Index (CPI) on Tuesday and Thursday’s Retail Sales will tell us something about UK economic activity. Wednesday’s Monetary Policy Committee (MPC) meeting minutes will show the voting behind its decision to hold interest rates on June 5^th. Wednesday evening will find the Governor of the Bank of England talking to bankers and merchants in London’s Mansion House dinner.
The week starts and finishes with European inflation numbers. Tuesday’s ZEW surveys investor sentiment in Germany and the euro-zone as a whole. The week closes with ECB President, Jean Claude Trichet speaking in Belgium.

EUR / CHF
EUR/CHF fell for the fourth straight week. The week’s low of 1.6024 was reached on Thursday. If the pair drops to 1.5930, we intend to go long (target within 1.611 - 1.612).
EUR / JPY
The Euro saw significant gains against the yen last week and reached a high of 167.1, the highest since November 2007.
EUR / GBP
The sell-off ot the euro against the dollar also saw EUR/GBP fall. By the end of the week, it had hit a low of 0.787 some 170 pips lower that the week’s high. Our target stands at 0.763, a significant correction level.
GBP / JPY
Our flagship makes solid income as long as the British pound interest rates stay firm. The week saw sell-offs of euro, Swiss franc and yen and GBP/JPY rose in consequence. Our short term target of 210.7 was triggered. Mid-term target is 216.7, the mid-point of the recent downtrend. 200.3 would be a good level to load a long position.
GBP / CHF
Volatility on this pair fell last week. We continue to look to a medium term appreciation to 2.111 - 2.117. Only a refinancing rate hike by ECB could cause a further decline in the GBP/CHF rate.
USD / JPY
The pair rose to 108.4. Our medium term target is 109.7. We raise the level for loading a long to 103.3.
AUD / JPY
The strengthening of the aussie against the yen decelerated last week and the pair flip-flopped in a 100-102 range. We intend to load a long is price falls to 96.3.