Trade Team Update

Yet again we have another day of brutal US economic and financial data, panic on Wall St., and somehow the dollar comes out smelling like a rose. While it doesn't come as a surprise it's certainly frustrating... as I indicated last night and this morning, the Dow would likely come under pressure and take a hit which would pull the euro down with it.

We did see this scenario play out today as the Dow plunged 500 points by early afternoon, dragging the euro back into the mud. Crude has remained an unstoppable mess and for good reason. Crude demand fell a staggering 6.2% in September in just the US alone. I haven't had the time to even see what kind of demand decreases there are for the other industrialized nations and emerging markets but I can't imagine the news is good.

O/N dollar LIBOR rates continued to ease albeit slightly. But we can clearly see the benefit of this slight easing because the euro has been gaining ground on the dollar after London opens and especially after the LIBOR rates are fixed and released. The euro runs into problems when Wall St. enters the game.

Overall, interest rates continue to remain at the forefront of the markets... the MBA reported the rate on 30-year fixed mortgages rose a whopping 40bps in just one week. Remember when we said rate cuts and bailouts won't fix the issues facing the housing market? Is the Fed so nieve to think that rate cuts would really help the housing market?

What the rate cuts and what the US fundamental data is doing is affecting money flows into Treasuries in a very negative way. If bond yields go up mortage rates have to go up, it simply cannot be any other way. The 10-year bond is the key Treasury to watch as it relates to mortgage rates. Money flows have sent Treasury yields soaring the past week and this is only going to serve to put added pressure on mortgage interest rates which is going to keep housing and re-fi's under pressure.

Fundamentally, we received some of the worst US retail and manufacturing data in years. It's abysmal. I forecasted a nasty retail number and it even exceeded how bad I thought it was going to be. Retail sales plunged 1.2% in September which is the worst print in over three years. For weeks I've been talking about the non-functioning consumer and today we have our first good evidence of this. The consumer will entrench further as the year drags on. Retail sales will come under more downside pressure as the job losses continue, the bills pile up, and the discretionary spending dwindles to almost nil.

I believe this is going to be an extremely rough winter in the US and likely around the world. In the early 1990's I think the US had some sort of a recession. My dad a decent job in the financial industry back then. He lost his job when the company downsized and eventually went out of business. I seem to recall him saying he lost his job due to the recession.

I was still fairly young and nieve and I didn't understand anything about recessions and economics in those days. I remember my dad lost his job right before school let out for the summer. By winter things were really bad at home financially. The next few years we were flatout poor. Times were tough for our family and many families in our community. I remember during the worst winter we were so poor we couldn't afford to heat our house in the evenings and it got so cold in my room that the frost was on the inside of the window.

I see these types of situations playing out this winter for many families. The sheer number of unemployed people, coupled with high consumer staple prices, families taking substantial investment losses, and mounting debt obligations makes for a recipe of hardships for millions of families who are already on the edge, just barely scraping each day.

I'm not trying to hit anybody with the doom and gloom stuff but this is what I see likely happening over the next few months. What this means for us as traders is more volatility, more ill-liquidity in the markets, more price swings, more government interventions... all the good stuff we've been dealing with since July...

The worst has not been seen or felt yet.

Tomorrow:

Once again we get some extremely key fundamentals tomorrow... CPI, TIC, Industrial Production, Philly Fed, and Crude Inventories. Fundamentals are clearly taking a backseat to the other market correlated variables like equities and commodities but this data is important nonetheless because at some point it will matter and the dollar will be punished for this madness.

Today's Eurozone inflation data printed as expected but next month could certainly print to the downside. There is certainly cause for concern with the Eurozone inflation data. The ECB has clearly swtiched gears to a more balanced growth/inflation stance in light of the financial crisis. That policy shift has served to put the euro under a considerable amount of pressure.

Should US CPI print below forecast this could put an added dose of downside pressure on the euro. Typically, weak inflation data would be bad for the dollar but the markets are treating the fundamentals in a different kind of way while we're operating under this chaotic conditions.

The TIC data may not be as USD- as some are expecting. Don't forget this data is two months behind and as the financial crisis was kicking into high gear we saw heavy money flows pour into Treasuries. What we don't know is how much of that was foreign. A decent print on the TIC data shouldn't negate the fact that the US debt situation is on shaky ground.

With the $1 trillion+ of newly printed money flooded into the money supply and with the clear recessionary affects being seen in the economy, what would motivate foreign investors to buy US debt? I cannot see or understand how US debt would be attractive right now. And this presents a problem because the US will need more foreign buyers of US debt than ever before. The US deficit is skyrocketing. At this point it's not even sustainable. This is all just a terribly USD- situation but only the markets can decide when to punish the dollar for this.

I'm fully expecting the fundamental "battle of worsts" between the euro and dollar to rage on as we close out 2008.

EUR/USD:

The euro remains at the mercy of the market correlated variables -- equities, commodities, and money-market interest rates. Any idea of "dollar strength" is purely a myth. The fundamentals of the USD are in their worst shape since 2001 and will only get worse. But as I've explained a dozen or more times, the dollar has to remain supported under these types of recessionary conditions.

As of the writing of this commentary I see that the 1.3508 downside key level has put up a considerable fight in the midst of all the pressure on the euro. It's possible we see a clean break of this level during the Asian session. But it's been tested for hours on end now and is miracuously holding steady.

On Sunday I talked about downside testing for the euro and I'm still not rulling out another test of the 1.3320-1.3280 levels before the week comes to a close. If crude continues to plunge along with the Dow it's quite probable those levels will be tested. I gave some downside levels on Tuesday for crude of $75-$72 and I'm not ruling out a possible break of the $70 level as long as these conditions persist.

Gold seems to be stuck in some sort of state of confusion. I really don't have much to say about gold because it's behaving strange and I just don't care to deal with it right now, there are other factors moving these markets and they have zero to do with gold.

I can list several reasons the euro should find support and move up but at this point I believe the euro's health will remain largely dependant upon LIBOR, equities, and how money-flows are moving through the markets.

As far as trading goes the clear and safest game plan is just to wait for a euro rise and then to grab a short. I've tried buying the euro and it just doesn't work right now. It's much easier path to profits by sticking with the short game plan, take quick hits on the market and then getting out with your profits.

I cannot even begin to stress the value and dependability of the EUR/USD 30-minute price patterns. Even in the thick of the worst financial crisis since the 1930s the old euro price patterns continue to pay out time and time and time again. To be honest, the only time a trade has gone against me this week is when I've ignored the 30-minute price action data thinking I could sneak out a quick 20 or 50 pips. I highly encourage all traders who are taking risks in this market to stick to the proven and tested 30-minute EUR/USD price patterns.

The 1.3508 downside key level is critical and continues to hold as of right now (1546 EST). Be smart with your trades and be vigilent with your risk and money management.