Dollar and Yen continue to strongly perform in current risk aversion environment

The Dollar dropped against the Yen on Wednesday as investors reduced risky assets after comments by US Treasury Secretary Henry Paulson heightened concerns about the economy and sparked a global sell-off in equities. Paulson said he was backing away from buying troubled mortgage assets using the government’s $700 billion bailout fund. “This is not the most effective way to use TARP funds,” he told a news conference, referring to the Troubled Asset Relief Program. Overall, rising risk aversion, a generally weaker tone in equities and global recession fears will likely continue to benefit the Dollar cash assets, analysts said. BoE Governor Mervyn King also bolstered expectations of further aggressive interest rate cuts. He said the bank was prepared to cut rates even more after a stunning 150bp cut last week. A quarterly BoE report predicted the UK economy will shrink sharply next year and inflation may fall below 1%.

[B]News and Events:
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The Dollar dropped against the Yen on Wednesday as investors reduced risky assets after comments by US Treasury Secretary Henry Paulson heightened concerns about the economy and sparked a global sell-off in equities. Cable (GbpUsd) plunged to its lowest in more than 6 years and Sterling hit a record low against the Euro after the Bank of England warned the British economy will shrink sharply next year. BoE Governor Mervyn King also bolstered expectations of further aggressive interest rate cuts. He said the bank was prepared to cut rates even more after a stunning 150bp cut last week. A quarterly BoE report predicted the UK economy will shrink sharply next year and inflation may fall below 1%.

Dow Jones Index extended losses at -4.73% after Paulson said he was backing away from buying troubled mortgage assets using the government’s $700 billion bailout fund. “This is not the most effective way to use TARP funds,” he told a news conference, referring to the Troubled Asset Relief Program. Paulson’s comments compounded worries about the global economy, which is facing tough times in the worst financial crisis in decades.

Yesterday, UsdJpy was down 2.55% at 94.81, after falling as low as 94.47, the lowest since October 28th. EurJpy dropped 3.62% at 118.11 and GbpJpy lost 5.65% at 141.18 after having hit 140.28 low. GbpUsd dropped 3.22% at 1.4887 reversing from intraday 1.5483 high. EurGbp rose 2.85% at 0.8367 after posting 0.8410 11-years high. EurUsd fell 0.43% to 1.2458. UsdChf was unchanged at 1.1873.

Overall, rising risk aversion, a generally weaker tone in equities and global recession fears will likely continue to benefit the Dollar cash assets, analysts said.

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Today’s Key Issues (time in GMT):[/B]

07:00 EUR Q3 German GDP -0.2% vs -0.5% (qoq)
07:00 EUR Q3 German GDP 1.6% vs 3.1% (yoy)
07:45 EUR October French CPI (EU norm) final -0.2% vs 0% (mom)
07:45 EUR October French CPI (EU norm) final 2.9% vs 3.3% (yoy)
08:15 CHF October Producer/Import Price -0.5% vs -0.5% (mom)
08:15 CHF October Producer/Import Price 2.9% vs 3.7% (yoy)
08:30 SEK Unemployment 6% vs 5.9%
10:00 CHF November ZEW Investor sentiment -85 vs -91.1
13:00 EUR ECB�s Weber, Papademos and Tumpel-Gugerell speak at ECB Conference
13:30 USD weekly Initial claims 484k vs 481k
13:30 USD September International trade -$57b vs -$59.14b
13:30 CAD September Exports C$42.7b vs C$43.11b
13:30 CAD September Exports C$37.65b vs C$37.3b
13:30 CAD September Trade balance C$4.95b vs C$5.8b
17:00 USD Fed�s Plosser speaks on the economy, Philadelphia
17:55 USD President Bush comments on financial markets
19:00 CAD Federal budget -$101.5b vs -$56.84b
19:00 USD Fed�s Stern speaks at Winona University, Minnesota

[B]The Risk Today: [/B]

[B]EurUsd:[/B] Market dropped as low as 1.2330 on October 28th and sharply rebounded to 1.3298 high Thursday last week. This shows actual trading range 1.2330 � 1.3298. On the downside, renewed weakness will open the way down to trendline support 1.2208. Next long-term support holds 1.1640 November 2005 low. Further support holds 1.0739 September 2003 low. On the upside, only a return over 1.4000 (former trendline support) and 1.5000 will release actual pressure and may put key resistance 1.6000 into focus. Resistance holds 1.4002 former trendline support. Initial resistance holds 1.3769 14th October high.

[B]GbpUsd:[/B] Market dropped as low as 1.4833 yesterday in current 3-month downtrend. It also posted 1.6673 high last week. Previous trading range 1.5265 � 1.6673 has been now broke down. Strong supports hold 1.4560 trendline and 1.3682 March 2001 low. On the upside, strong resistance holds 1.6673 last weeks high ahead of 1.7144 (38.2% retracement of 2.0158 � 1.5265 3-month drop). Further resistance holds 1.7744 (50% retracement).

[B]UsdJpy:[/B] Market has been holding slightly below 99.80 September-October trendline resistance in the latest weeks and drop to 94.47 yesterday. Initial resistance holds 99.48 Monday high. On the upside, only a recovery over 103 upper trendline and 105 pivot point will put focus again on 108 and 110.67 15th August high. Strong resistance holds 100 pivot point. Staying in the current downtrend might open the way down to 79.70 April 1995 low. Strong resistance holds 90.91 24th October low.

[B]UsdChf:[/B] Market hit 1.1947 new 1-year high this morning. Further strength may open the way over 1.2153 trendline resistance. Next resistance holds 1.2463. On the downside, renewed weakness below 1.1203 30th October low would undermine the current uptrend and reverse through 1.0692 22nd September low and down to 1.0500 and 1.0375. Such a move may look for 1.0013 15th July low in front of 0.9637 17th March low.

[B]Resistance and Support:

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By[B] Jean-Claude Braha [/B]- ACM Advanced Currency Markets, Geneva, Switzerland