NEWS / Foreign Exchange

Market Directions Sunday, October 28, 2007

• The Euro??™s cautious approach to history

There was essentially no new information produced on either side of the Atlantic this past week. The few statistics released in the US and the EMU did nothing to dampen the Euro??™s rise. If traders could not quite bring themselves to vault the Euro into the unknown on their own they did nothing to disguise their desire to do so.

Forex is a conservative market. Amid nearly universal expectation for a 0.25% cut in the Fed Funds rate next Thursday, the Euro broke new ground against the Dollar just twice this week, Monday and Friday. There were no breakouts, no stop loss induced buying and, except for the more than 200 point fall on Monday at the London open, no breathtaking volatility.

It was only last Friday, the 19th, that interest rate futures traders became certain that the Fed would drop the Funds target rate to 4.5% at the FOMC meeting on October 31st. Their conviction was supplied by the large fall in the American equities that day. The day before, on Thursday, the futures had priced the chance of a 25 basis point cut at less than 50%.

Last Friday, as the US equities sank the high in the Euro was 1.4317; the top on Monday was 1.4347, and the final peak at the end of the week was 1.4392. For a market embarked on a new relationship between the Euro and the Dollar it was an oddly muted beginning. Violent moves in forex are usually the result of stop loss orders placed to close existing positions. It much less common for large stops to have gathered for initiating new positions; completely new trading levels are very rare indeed.

Despite the apparent reluctance to test for buy stops in the Euro above 1.4400, the New York Friday close at 1.4391 insures that if they exist, Sidney and Auckland will find them on Monday morning. It will be a nervous weekend for Asian bank traders.

The Week in Review October 22 ??“ October 26

United States

Very little substantive information was released about the US economy during the week and what was available was uniformly bad; though only the weak Durable Goods numbers could have been considered at all unexpected. At -1.7% against the forecast for a gain of 1.8% and accompanied by a -0.4% revision to the August result, they added to the Dollar??™s woes despite their well known month to month volatility. New Home Sales shrank marginally from August, as the price discounting by home builders may be nearing market clearing levels. But Existing Homes Sales continued their prolonged slide into September dropping another 8.0% over the month. Neither statistic provided any new insight to the state of the US housing market.

The 134.78 point addition to the Dow average on Friday, closing at 13,806.70, was more indicative of market confidence that the Fed will be forced to act on rates, than a judgment that the US economy is headed towards stronger growth and low inflation into 2008.

Eurozone

ECB governing board members remained publicly unsympathetic to the political and economic difficulties attendant on the Euro??™s record gains against the Dollar. Nicholas Garganas, head of the Greek Central Bank, and not one of the most hawkish of the governors said, ??? I would characterize FX movements as normal so far???. A comment which makes sense if one checks volatility but not levels. Alex Weber, one of the ECB??™s long time anti-inflation stalwarts and head of the Bundesbank, commented that, ???We interrupted the tightening cycle only because of the financial market turbulence???. His view was pointedly to the past; he did not offer any speculation of future ECB policy. But Mr. Weber has rarely given countenance to economic concerns, his remark did not provoke any reaction from Euro traders.

Industrial Orders improved considerably less than expected in August, rising only 0.3% and 5.1% for the year, against expectations of +0.9% and +6.2%. But as July??™s results were revised higher by 1.4% to -2.6%, and both June and May were shifted down, the net trading effect was zero. Flash Manufacturing PMI at 51.5, 1.5 points below the median forecast, was offset by the services number which was almost the same amount above expectations. Both numbers will be revised twice more.