Yen * Just a Hair Shy of 2… … Year High

US Dollar – In Thursday's FXCM SSI report and Daily Fundamentals, we
said that even though the dollar gave back some of its gains over the
past 2 days, range trading should remain the predominant theme for the
EUR/USD since there will not be any meaningful catalyst until next week.
Today's price action validates the razor sharp accuracy of the SSI as
well as the strength and resilience of the dollar's recent move
higher. From the looks of it, dollar bulls have no plans on giving up
anytime soon. When the EUR/USD was trading above 1.20 yesterday and set
to move higher, the SSI had prompted us to call for an exhaustion of the
rally around the 1.2050 level as well as another test of the 1.1900
level. Today, we did break above the 1.2050 level but the rally was
short-lived and prices quickly began to descend lower with an eventual
move down to a low of 1.1929 in the US trading session. At this point
it is clear that EUR/USD bears have grabbed control of the pair and will
probably go for another test of the 1.1900 level especially since we
truly have lower lows and lower highs at this point and a glaringly
obvious head and shoulders pattern on the weekly chart. Although we
have a lot of Eurozone data on Monday as well as US consumer confidence,
we do not have any potentially market-moving data for the dollar until
Thursday. Monday's German IFO could be worth watching, but the
improvement is expected to be nominal, which means that it is not
expected to lend much support for the dollar. Unlike this past week,
there will not be any Fed officials on the wire speaking about the
economy or monetary policy because they will be in the obligatory
“quiet period” before the November 1st FOMC meeting. Also, there
will not be any significant inflation data to inject the dollar with
another dose of positive momentum. Therefore, although a test of 1.1900
is very likely, a sustained break may be less so. Once again we may
have to pretend to be meteorologists and watch how destructive Wilma
will be and then see how oil prices respond. Today, oil prices broke
below the $60 a barrel level this morning before reversing higher.

Euro – The Euro gained swiftly this morning against the dollar, peaking
early at 1.2077, on speculation that the European Central Bank could
raise interest rates sooner than originally expected after inflationary
warnings from a number of ECB officials and economists. The strength
did not hold however and the EURUSD pair reversed all of its earlier
losses in the late afternoon. There were a few announcements from
individual Euro-zone countries today, but none with enough positive
strength to fight the late dollar rally. France released its consumer
spending figures for September, falling less than expected. Spending
fell by 0.6%, the first fall in four months, after expanding 1.5% in
August. This drop is another sign that growth is slowing in France
where the economy barely grew in the second quarter. In order to spur
growth and spending, the Prime Minister proposed tax cuts and new
spending of over EUR9 billion in the next two years, but companies and
consumers alike remain cautious. Also, Italy posted gains in retail
sales during the month of August, with sales up 0.6%, 0.5% more than
expected, from July when they contracted by 0.3%. Sweeping expectations
of 0.6% annual growth, sales grew 2.4% from August 2004. These
increases are much needed after a period of contracting consumer
spending and increasing costs due to rising energy prices, however,
especially small Italian retailers realize they will need much more than
this and are looking for government or central bank catalysts to foster
household spending and company investments, helping to regain the
competitiveness in the Italian market.

British Pound – The pound slid today on a combination of poor growth
data as well as broad dollar strength. As expected, GDP in the third
quarter grew by only 0.4%, after gaining 0.5% last quarter, putting the
annual rate at 1.6%. These low figures place the economy on track to
post its slowest annual expansion in 13 years. Industrial production,
accounting for about one fifth of the economy, shrank 0.6% after being
dragged down by a 6.8% decrease in mining and quarry output amid
maintenance work and the shut down of the nation's largest oil field
after a fire. Also, a 37% increase of oil prices over this year has put
the breaks on the UK's economy, which has outpaced economies of
countries in the Euro-zone since they began sharing a currency in 1999.
Even with this deceleration, which marks the beginning of the end of the
longest expansion in the UK in 2 centuries – lasting 12 years, the
British economy will still outpace the growth of the Euro-zone.
Predictions for the fourth quarter are slightly more optimistic,
luckily. With oil prices as high as they are, companies have a high
incentives to finish up work and begin production as quickly as
possible. This will kick up industry production, the biggest drag on
the GDP for the third quarter. Hopes are high that this holds true as
the Bank of England is currently hawkish and lowering rates to stimulate
growth anytime soon may catalyze the already higher-than-desirable
inflation rate.

Japanese Yen – The dollar continued to push higher against the Japanese
Yen as the currency pair ended the week just a hair shy of Wednesday's
2 year high. Persistent strength in the currency pair is undeniable
especially in the face of surprisingly healthy data. Higher wages in
Japan are boosting consumer spending, which in turn is boosting earnings
and business investments putting the economy in a fantastic expanding
position steadily pulling itself out of the seven-year deflationary
slump. The tertiary activity index, which measures spending in the
service sector, rose 1.7% in August, versus a predicted 0.9% expansion,
to hit a record at 107.5. The all industry activity index rose 1.1% in
the same month, beating a predicted 0.8% gain. This expansion in the
service industry, which makes up 60% of Japan's output, may push
economic growth for this year (ending in March) to 2.4%, the fourth
straight year of expansion. Yet USD/JPY traders have chosen for the
time being to continue to only focus on the currency pair's growing
carry advantage rather than Japanese fundamentals. This mentality,
though sound for the time being may catch up eventually with Yen
traders.

Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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