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Forex Market Update

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rn Monday, Oct 12, 2009, 13:45 GMTrn

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The meltdown of the three FX stooges: USD, JPY and GBP, continues, as equities notch new highs.

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rn Banking Holiday in Canada and United States today - though US equity markets will be open.

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MAJOR HEADLINES – PREVIOUS SESSION

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  • New Zealand Sep. QV House Prices fell -1.1% YoY vs. -2.8% in Aug.rn
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  • Germany Sep. Wholesale Price Index fell -0.2% MoM vs. +0.3% expectedrn
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  • Sweden Sep. AMV Unemployment Rate out at 5.3% vs. 5.4% expected and 5.5% in Aug.
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THEMES TO WATCH – UPCOMING SESSION

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(All times GMT) rn

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  • US National Economic Council's Summers to Speak (1615) rn
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  • US Treasury's Krueger to Speak (1715) rn
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  • New Zealand Retail Sales (2145) rn
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  • UK Sep. BRC Retail Sales Monitor (2301) rn
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  • UK Sep. RICS House Price Balance (2301) rn
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  • Australia Sep. NAB Business Conditions (0030)
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rn Market Comments:

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The USD meltdown continued this week after a brief respite on Fridayrnafter Bernanke threw out a snippet of rhetoric suggesting that rate.rnWith equities jumping higher again in the Asian and European sessionsrntoday, the greenback and its low yielding fellow travelers, the poundrnsterling and Japanese Yen, didn't stand a chance, and all threernweakened again versus the high flying Loonie especially, whichrncontinues to find support from the shockingly strong  Canadianrnemployment report from Friday.  Crude oil tacking on to recent gainsrnfueled further gains for the currency, and likely also helped NOK notchrnnew highs vs. the Euro in Asia before backing off in the Europeanrnsession today.

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Today is one of those odd "half holidays" in the US in which banks -rnand therefore the treasury market - are closed for the day, whilernequity markets will be open for business.

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Reserve accumulating central banks are the primus motor of the movesrnin currencies here, as US and UK policies are seeing major banks shunrnthe fiscally hopeless and low yielding currencies and diversifyingrnespecially into Euros, and the Yen to a lesser extent. A Bloombergrnarticle this morning cites Barclay's Capital tally of the latestrnquarter's accumulation of FX reserves at over $400 billion. Barclay'srnalso estimates that 63% of new reserves are being funneled into Eurosrnand Yen. This was for the quarter ending in June, and there isrncertainly no sign of a change of behavior since then, in fact, therntrend only seems to have strengthened. If the Chinese economy is doingrnso well, we ask again, then why have they not signaled that it is timernto allow the renminbi to begin appreciating again? And while Europe hasrnbegun to complain about the unfair strengthening of its currency, whyrnhave the complaints not been more belligerent?

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With the current persistent trends very clear and powerful, we haverna look at coincident indicators and any event risks on the horizon thatrnmight provide a pivot point in the action. On the former, the strengthrnin the Aussie, to take an example, is outpacing differentials inrninterest rates and is beginning to feel overdone, particularly as thernlast leg of Aussie appreciation has shown an acceleration in an alreadyrnvery well established trend. Usually, such aggravated action cannot bernsustained for long, so we might expect sideways consolidation atrnminimum soon. Speculative positioning suggests that long Aussiernpositions have been crowded for some time, as well. In the case of CAD,rnthe recent data surprise triggered moves in interest rates that fullyrnjustify the latest strengthening. And the over-riding theme of highrnrisk appetite feeding the weaker USD will continue as long as equityrnmarkets are rallying.

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As for upcoming event risks, the most interesting items on therncalendar this week are Wednesday's US Advance Retail Sales and US FOMCrnminutes. The former is very important for measuring the strength of endrndemand, as our outlook suggests that end demand will not bounce backrnenough to provide a strong recovery due to private balance sheetrndeleveraging and weak wage growth. The FOMC minutes could berninteresting due to the continued signs of a divided Fed, so we'll lookrnfor signs of the split widening or the hawks' impatience growing.rnThursday's jobless claims number will be important for showing whetherrnthe trend toward fewer jobless claims continues now that we havernentered the seasonally most important part of the year for employment.rn(Still interesting that more claims were filed last week than for thernsame week last year, just to show how much further we need to go to getrnreal improvement rather than "less badness"). Then on Thursday we havernthe first two of the regional US manufacturing surveys.

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rn Chart: GBPUSD
rn GBPUSD managed to stave off newrnlows today below 1.5800 as GBP, USD and JPY fight for lowest spot onrnthe currency totem pole. Today's low and the 1.6110 area are the twornkey trigger areas for GBPUSD's next larger move now.

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More analysis: Saxo Bank Market News & Analysis

Risk Warnings:

Saxo Bank A/S shall not be responsible for any loss arising from anyrninvestment based on any recommendation, forecast or other informationrnhereinrncontained. The contents of this publication should not be construed asrnan express or implied promise, guarantee or implication by Saxo Bankrnthat clientsrnwill profit from the strategies herein or that losses in connectionrntherewith can or will be limited. Trades in accordance with thernrecommendations in anrnanalysis, especially leveraged investments such as foreign exchangerntrading and investment in derivatives, can be very speculative and mayrnresult in losses asrnwell as profits, in particular if the conditions mentioned in thernanalysis do not occur as anticipated.

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