Morning forex briefing

The USD is slightly softer to start
New York after a subdued overnight session
that kept traders
focused on developments in Thailand. After an initial flurry of buying during
the day yesterday, traders unwound long USD from flight-to-quality as the
situation in Bangkok became more clear. Analysts note that this crisis has
little chance of spreading to other areas of the region and appears largely a
local political issue. Traders are taking a “wait and see” attitude and so
they do not expect any additional USD benefit from developments. Analysts note
that the USD/JPY appears particularly vulnerable to a sell-off this morning as
this week’s action appears to be a failure at significant multi-year highs.

Additionally, the USD/CNY rate is at another record high;
the PBOC set the Yuan at 7.9258 this morning after Asia closed. Traders are
noting that Japanese banks have been sellers of USD/JPY the past several days
and exporters as well. In my view, the USD/JPY looks the most probable for a
sell-off. EURO spent the night in a very tight range as developments in Asia
kept eyes on the USD. Although the rate is off the lows, the 1.2700 handle
appears very formidable recently; traders note that cross-spreaders have a
sizable position long against Yen and Cable at this point. Rumors of a
corrective sell-off persist but EURO seems quite capable of holding the
1.2630/50 area in recent trade.

Cable is higher this morning after the release of the BOE
MPC minutes. A unanimous vote to keep rates steady at the last MPC meeting had
little to no effect of GBP; analysts are still looking for a rate hike from
the BOE sometime in Q1 2007 or perhaps late in Q4 this year. In my view, the
USD has a huge potential to fall today as the FOMC meeting is likely to
inspire USD bears should the Fed keep rates on hold as well. Analysts are
expecting the Fed to keep rates steady at 5.25% today but are speculating that
the wording of the statement will be a bit more hawkish. I think any USD
strength from a hawkish statement this afternoon will be a selling
opportunity. Look for the USD to fall late in the day and make new lows for
the week during the next 24 hours. Philly Fed tomorrow will be the nail in the
coffin I think; look for the USD to post a significant low for the week by
Friday latest.

GBP/USD Daily

R3: 1.9050

R2: 1.8920

R1: 1.8880

Current Price : 1.8832

S1: 1.8790

S2: 1.8760

S3: 1.8720

Support for the GBP appears rock solid at the 50 bar MA, buy
dips for a test of the 2006 highs. Lows for the week are apparently in on
Monday suggesting a huge rally is coming to end the week. Aggressive traders
can buy the next dip to 1.8790 area with both hands; sellers are advised to
wait for the 1.8920 area as stops are likely quite large above the recent
1.8880 high. Look for highs above 1.9050 near-term.

USD/JPY Daily

R3: 118.30

R2: 117.90/118.00

R1: 117.50/60

Current Price : 117.25

S1: 116.90

S2: 116.60

S3: 116.20

Pair is failing at the highs, multi-year trend lines and
resistance levels are holding between 117.80 and 118.30 areas. Look for a
massive liquidation break as the record short Yen Futures position at the IMM
overhangs the market. Yuan situation will only create bearish enthusiasm so
watch developments in China the next week or so; the timing for Beijing to do
something is coming.

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