TODAY’S BIGGEST PERCENTAGE MOVERS

NZD/JPY ( -144 pips or -2.58%)

AUD/JPY ( -160 pips or -2.43%)

NZD/USD ( -140 pips or -2.47%)

THE STORIES IN THE CURRENCY MARKET

    * USD: A “Need for Urgency” May Not Be Enough to Organize a Global Recessionary Fight
    * EUR: The Euro-Zone Has Officially Reached Recessionary Territory
    * GBP: How Long Will the UK be Able to Fight the Recessionary Assault?
    * CAD: Crude Oil Falls 6.6% This Week
    * AUD: Traders Hope RBA Minutes Shed Light on Future Cuts
    * NZD: The Kiwi Has Fallen 7.1% Against the Yen in Only Five Days
    * JPY: Will Japan Be the Next to Suffer a Technical Recession

EXPECTATIONS FOR UPCOMING FED MEETINGS

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

A “NEED FOR URGENCY” MAY NOT BE ENOUGH TO ORGANIZE A GLOBAL RECESSIONARY FIGHT

An amazingly volatile Dow trading session has seen prices open down 200 points, rally 150 points, only to end the day down 3.80%. The whipsaws have only added to the uncertainty and fear expressed by many investors, pushing up the dollar and yen against its high-yielding counterparts. Traders have much to be disgusted with awful Retail Sales report and news that Freddie Mac, the insurance company the US government was forced to bail out only a few months ago, is asking for an additional $13.8B after reporting a record quarterly loss.

Weaker Consumer Spending Could Drive More Bankruptcies

Retail Sales plunged this month as purchases declined by 2.8%. On a historical basis the report is the biggest drop since the Commerce Department started keeping these figures in 1992. This is also the longest string of monthly retail sales declines since its inception. The report holds particular importance as it can serve as a bell-weather for growth and the health of the employment situation. Since our economy is so heavily dependent on consumer spending, the weak report proves that we are a long way from a potential turnaround. The specifics of the report show that among all purchases, automobile sales suffered the worse with a decline of 5.5%. However, weakness was broadly displaced as consumers demand less furniture, electronics, and clothing. We would be hard-pressed to find any uplifting indication presented in this release, but luckily restaurants and grocery stores did maintain some demand. It has been seen that consumers will shift their spending away from durable goods and into real nondurable essential purchases.

Retailers have suffered greatly over the past few months and we expect their troubles to deepen. So far, 14 national chains have filed for bankruptcy protection with Circuit City the latest victim. They were a 59-year old company that had been struggling even before the credit crisis. Their decision to file for bankruptcy protection will result in the closing of 155 stores and a cut of 20% of Circuit City’s 43,000 employees. With consumer spending almost completely dried up, many companies fear that this holiday shopping season will be particularly weak. The season, which traditionally brought struggling retailers from red to black within days, has been predicted to be a huge disappointment to struggling companies. The biggest problem we are facing is that many retailers are destined to follow a similar path. With consumers keeping the wallets sealed shut, companies such as Best Buy, Claire’s Stores, Borders, and Dillards (just to name a few) have been aggressively cutting earnings estimates as stock prices plummet. In the coming months, the US economy should be prepared for more layoffs and even weaker retail sales.

Will there be Fireworks at the G20 Meeting?

The two-day G20 economic summit is under way in Washington. The groups of representatives from twenty of the largest industrialized countries are discussing their plans to prevent an extended recession and policies to implement after the crisis has ended. Many have surmised that, because President Bush would soon leave the Presidency, this would be a lame session in which no important policy measures will be announced. This very well may be true, but the drama has already begun with various disagreements as to how and which policies should be implemented. The most striking contrast is what will be done once the crisis subsides. Many European officials are set on increased government oversight and regulation. UK Prime Minister Gordon Brown has devised a measure that would establish a panel of regulators responsible for “supervising” thirty of the world’s largest banks. Clearly, economic initiatives have been shifted to a global perspective. On the opposite side to arguments made by European and British officials, President Bush upholds the notion that too much government intervention is bad for markets. The president stated that, “our aim should not be more government, it should be smarter government”. However, it seems as though the world is getting ahead of itself. It is clear that we have many hard and trying months ahead. To prevent the current crisis from turning into a recession, Prime Minister Brown has taken a vocal stand in announcing that there is a “need for urgency”. He has told reporters that his plans will be focused on cutting taxes. It appears that the meeting is far from decreeing an organized global effort toward fighting the crisis. In the end, this will only draw out the length and magnitude of the impending global slowdown.

Will the Upcoming Week Manage to Swing Sentiment?

At this point, it seems that the US economy is in dire need of some decent report to renew consumer confidence and spending. Hopefully, we will get it next week. Monday we will receive the Empire Manufacturing Index, likely to show that manufacturing activity in New York State has come to a standstill. Tuesday we will receive the Producer Price Index along with Net TIC Flows, which measures and outflow of capital into US denominated securities. On Wednesday we will be met with the Consumer Price Index, Housing Starts, and FOMC Minutes. FOMC Minutes will hopefully give some insight into how aggressively the Fed plans to cut in the future. To end the week, we expect the Philly Fed Survey on Thursday.

THE EURO-ZONE HAS OFFICIALLY REACHED RECESSIONARY TERRITORY

It is official; the Euro-zone has reached the technical definition of a recession. EZ GDP fell by 0.2%, its second quarterly contraction. After Germany reported that its growth had slumped -0.5%, along with a similar contraction in Italy, it is undeniable that the countries are in the midst of the first recession since the euro was established. Such information is not a surprise to anyone, the area has fundamentally been ripped apart by the spreading of a global economic crisis, but it is significant in the fact that it is the first G7 member to declare the obvious. However, France did manage to hold on to positive territory and surprisingly reported that growth had actually accelerated to 0.1%. The developments in Europe are in an extreme contradiction with statements made by economists only a few months ago, predicting that there was only a 35% chance a recession would occur by the end of 2008. It is quite likely that on December 4th, the ECB will be forced to be more aggressive in cutting down their target interest rate. The 50bp cut of earlier this month appears to have been too little, too late. EZ CPI was unchanged this month, declining by 0.2% from last month. In the midst of all this, European equity indices manage to rally by more than 1.0%. More European news in the pipelines for next week includes the Trade Balance on Monday, German Producer Prices on Tuesday, and Manufacturing and Service PMI on Friday.

HOW LONG WILL THE UK BE ABLE TO FIGHT THE RECESSIONARY ASSAULT

The pound experiences a relatively subdued trading, but sells off by late afternoon. The selloff may have been initiated by fears that the displayed Euro-zone recession will spread into the rest of the European continent. It is clear that the UK might already be in a recession, but the technical definition does elicit some level of panic. In today’s Council of Foreign Relations Meeting in New York, Prime Minister Gordon Brown announced that a planned fiscal bail-out package will be intended to produce only temporary results. He seems adamant in relying mostly on interest rate cuts and increased spending to prevent a drawn-out recession. Trading today is moving on no important economic data. However, the FTSE 100 Index manages to stage a rally more than 1.50%, in accordance with strength in many European indices. Important newsworthy events for next week include Tuesday’s Consumer Price Index, Wednesday’s BoE Minutes and CBI Industrial Trends, and Thursday’s Retail Sales. Wednesday’s BoE Minutes will likely shed some light on the possibility and, perhaps more importantly, the magnitude of future rate cuts. We are also looking for some insight into the thought process behind the surprisingly 150bp but earlier this month; specifically, we would like to know if there were any dissenters and if they toyed with cutting by more or less than the announcement showed.

THE KIWI HAS FALLEN 7.1% AGAINST THE YEN IN ONLY FIVE DAYS

The commodity currencies have broadly fallen against the dollar and yen, in continuation of a weekly retreat. On a day with the Dow down triple digits right off the bat and the recession in Europe, you would expect to see such a significant drop in the high-yielding currencies. This week has seen a tremendous flight for safety. Five days alone has procured a loss of 4.8% in AUD/JPY and an amazing fall of 7.5% in NZD/JPY. Much of the losses, in addition to risk aversion, have been in response to the utter declines in oil prices. Demand has been decimated to the point where OPEC planned production cuts have not been able to influence market movements. Many analysts predict that such action would result in a lag effect that will postpone the true effects of a cut in production for months. There have been few important economic reports today. Those that were released showed an unexpected rise in Canadian New Vehicle Sales and Manufacturing Shipments. Again, the Canadians prove that their economy is stronger than many would think. New Zealand Non-Residential Bond Holdings are up, perhaps in an effort to diversify capital investments away from a struggling economy. Next week’s most important releases include AUD Retail Sales on Monday, RBA Minutes on Tuesday, CAD Leading Indicators on Wednesday, and CAD CPI on Friday. The RBA minutes, as with the BoE statements, may shed some light on the future of RBA rate cut possibilities.

WILL JAPAN BE THE NEXT TO SUFFER FROM A TECHNICAL RECESSION?

As the Dow drops on uncertainty, so does USD/JPY. The move lower can be attributed to a number of factors, including terrible US Retail Sales and a newly revived risk adverse attitude. The low-yielding currency has seen some significant gains this week as USD/JPY retreats 1.25%. Unlike the fate of US exchanges, many international stock markets have posted significant gains, with the Nikkei 225 up more than 2.5%. Much of the international buying has been initiated on the fact that many stocks are trading at extremely low valuations. There has not been any market moving Japanese data today. Next week will have some important implications for the further strength of the yen. The most important event risk is present in late-Sunday’s Gross Domestic Product release. Although the number is predicted to be unchanged on a Q/Q basis, an unexpected drop will result in the second G7 nation to declare a technical recession. Last month’s growth figure showed the Japanese economy slowed markedly to -0.7%. In addition to an already crucial week, there will be the Tertiary Index which follows GDP, Leading Index on Tuesday, Merchandise Trade Balance on Wednesday, and the BoJ monetary policy meeting on Thursday. Apparently the week will begin and end on a bang. Even though BoJ officials would be very hesitant to drop rates further, a weak GDP may prompt some unexpected behavior.

EUR/USD: Currency in Play for Monday

The currency in play for the upcoming Monday will be EUR/USD. We are expecting Euro zone to release Trade Balance at 5:00 AM EST or 10:00 AM GMT. In addition, United States will be releasing Empire Manufacturing at 8:30 AM EST or 13:30 GMT.

With a major rebound on Thursday and relatively quiet day on Friday the price action remains in the trading range of Bollinger Bands. In addition, a clear triangle formation remained intact with established short term support and resistance in place. For the time giving, short term resistance remains at the 20 Simple Moving Average and the top of triangle formation which is at 1.2800. While, strong resistance is forming at the level of 1.3070 which is the 1st Standard Deviation of the Bollinger Bands and the 38.2% Fibonacci retracement of the 2000 to 2008 rally. For the downtrend to resume, we would need to see the EUR/USD fall back below 1.2550. With no clear direction in the markets, we will be looking at the economic data coming from both Euro zone and United States on Monday.