Here’s What The G20 Meeting Means…

The dollar managed a small rally overnight,
putting some pressure on the recent high-fliers like EUR, AUD and to a lesser
extent CHF. However, as mentioned in last night’s update, the USD/CAD, based on
short-term models was offering an attractive buy point around 1.1920-1.1930, and
assuming that 1.1959 was cleared there would be solid upside. That did, in fact,
play out. The move was likely further helped by comments from Canadian Transport
Minister Lapierre indicating that the strength in the Canadian dollar is
impacting exports. The move up overnight was quick and decisive and capped at
near-term resistance at 1.2030. Pullbacks towards 1.1970-1.1980 will offer
traders a chance to add to their positions or establish one if they missed the
first leg up. A similar move was seen in EUR/CAD.

With the G20 meeting this weekend, we might begin to see some squaring of
positions and overall activity levels die down a bit. With President Bush due to
speak with senior Chinese officials, you can bet that a revaluation of the
renminbi is on the agenda. It appears that many traders, especially Yen traders
are betting that not only is the BoJ not going to intervene, but that
indications from China might open the door to Japan needing to be less vigilant
about protecting the Yen from too much strength. An interesting note last night
from Goldman Sachs regarding BoJ intervention ahead of a G20 meeting:

“As for the market – its worried about one issue – will the BOJ intervene to
support the USD. Two points: 1) BOJ rarely if ever deals in size ahead of big
international meetings – with Bush at the APEC and Snow at the G20 – any
intervention from Japan now would be counter productive to pressure on China. 2)
The JPY at 103 now is still unchanged on the year and not an issue vs. EUR. So
the competitive advantage of Japanese companies isn’t a risk yet. Adding it all
together -the risk of JPY 103.45 tonight seems high.”

Senior BoJ officials were quoted:

“Honestly, I don’t think a strong yen is a major risk factor for the
economy,” said a senior BOJ official quoted by the paper. “The impact from the
recent yen strength isn’t likely to be big,” the official added.”

We are short USD/JPY from yesterday morning.

Meanwhile, retail sales in Britain came in much lower than expected. While this
may have more of a spillover effect on the EUR/GBP than GBP/USD, we remain
curious as to a short in GBP/USD. Technically, it is struggling with resistance
at 1.8600 and a break of a minor bull trend-line at 1.8515 might offer a clean
short for a test of 1.8270. The only challenge with that trade is that you are
betting on a solid dollar rebound.

Technical Notes:

EUR/USD: 1.3065 will likely prove to be a sticking point (major trend-line from
1999) with 1.3025 providing a short-term floor.

GBP/USD: sideways action seen over the next 24 hours. Recent pull-back on
intra-day chart negates bullish pattern formed yesterday. With resistance
looming, and trend-line support, corrective action is seen.

USD/CHF: last nights rally up to 1.1670 may offer short-term traders good short
entry points, although a break above 1.1700 would negative short-term bearish
view.

USD/JPY: speculation running rampant, will the Yen appreciate, will the BoJ
intervene. As mentioned above, we believe there is more downside, at least
another move towards 103.50. The 104.30 levels appears to be short-term
resistance and this would be consistent with our short-term model setting up for
another leg lower. Look for 103.70 to be a near term support level too.