Chinese yuan continues to appreciate. Is it time?

CNYUSD:
092906%20cny%20weekly.pdf

Could it be the Chinese like Treasury Secretary Paulson's approach? If Mr. Paulson is able to rein in US Senators that wish to hike tariffs and he is able to convince the Chinese that “yes” it is in their best interest to let the yuan appreciate considerably precisely because it will stimulate the domestic economy, maybe we see a big move.

The argument to convince the Chinese it's time to move on the currency is a simple one and it’s twofold:


1) An increase in the value of the yuan will automatically increase the global purchasing power of Chinese citizens and reduce raw materials import prices for Chinese-based manufacturers.
2) The US consumer is slowing, so export growth is likely to slow for China, cranking up the domestic side therefore can balance export decline.

Note: So far this move in the yuan hasn't helped the yen. It is worth watching closely because the yen is trading as if the Japanese economy is heading into recession--a surprise is definitely in the offing--yen sentiment is dismal, evidenced by the large and growing short interest in yen futures traded on CME.

Stopped-out Issue #140 euro

We were stopped out of our euro position #140 yesterday, unfortunately we placed the stop just a bit too tight--in hindsight, we should have given it a bit more room to breathe.

The euro appears to have room to work lower…as we said initially, we are still targeting the 12620-level near-term.

EURUSD 90-min setup for Issue #140

Qualitative--euro poor reaction to the news...

Technical--playing the trend break in the 90-min time-frame looking for a test of recent lows near 12630...

We did get the break, but not the acceleration lower...oscillators negative near-term and on a daily basis...

EURUSD 90-min:
092806%20eur%2090-min.pdf

Recommendation Issue #140

Black Swan Letter
Recommendation Issue: 140
Currency: Euro
28-Sep-06 11:20 a.m./GMT 10:26 a.m. EST/GMT 14:26

Forex:
Sell EURUSD @ 12680 STP / SL/ 12710 / PT1/ 12650 / PT2/ 12560

Futures:
Sell EU Dec '06 12732 STP / SL/ 12762 / PT1/ 12702 / PT2/ 12612

STP – Stop order entry
MKT - Market order entry
LMT - Limit order entry
SL – Stop-loss point
PT1 – Profit target #1
PT2 – Profit target #2

Risk Disclosure: There is substantial risk involved in trading in the forex or futures market on a highly leveraged basis. No trader who is unfamiliar, either himself or together with his financial advisers, with such risks should consider trading in the forex or futures markets. Neither Black Swan Capital LLC nor Jack Crooks accept liability for any losses that may directly or indirectly result from any advice or opinion or information provided in this service, whether negligent or otherwise.

US Monetary Base is turning over...

Something to keep in mind for the intermediate-term...

US Money Base:
092806%20BSL%20Monetary%20Base.pdf

Morning Comments

It’s yet another mixed bag today…good news from Germany, and US GDP lower than expected…yet the dollar is little changed (pound the exception)

• Euro flat on “supposed” good news from Germany
• Pound getting whacked, only excuse we can find is a change in expectations the Bank of England will not be hiking rates. It could be one of those “after the fact” views.
• Yen weak again today…Abe not instilling confidence in the currency thus far
• Canadian dollar keeps on chugging, despite reports showing lower materials prices in Canada…maybe the BOC is out of play. But again, good price action relative to the news. (CADJPY testing its high this morning)
• Aussie seems to be consolidating this morning. Watching the 90-min Aussie chart for a trade setup

CADJPY testing highs...

Canadian dollar keeps on chugging. Despite concerns about commodities, CAD is strong again this morning. And on the flip side, yen weakness continues. The CADJPY pair is testing its old high this morning.

Is the yen carry trade back in play?

Yen weakness on PM Abe's selection and new finance ministers view the yen isn't undervalued?

CADJPY Daily:
092606%20cadjpy.pdf

Morning Comments and Scenarios

We have a couple of different scenarios in our head, one suggested today in Currency Currents:

#1: Dollar strength on Fed vigilance and ECB passiveness:

1) The ECB decides to play wait and see because energy prices have subsided and their latest inflation number is well within the target range.
2) The Fed makes it clear they will not be cutting, in fact the Fed-speak minion take to the podiums across America to pronounce their inflation vigilance.

This would change the dynamic in favor the dollar.

#2: Fed cut scenario in play—the dollar drifts lower on the rebalance theme:

1) The US economy is decelerating faster than expected. And though the consumer may not crater, he will be impacted significantly from the decline in housing wealth.
2) In order to keep Mr. Consumer in the game, the Fed hints at a pending cut, or hints that inflation isn’t a big concern any longer in this environment. Bonds and stocks continue to rise on the expectation of lower rates. This is just what the Fed wants as it counters the impact of falling wealth on the housing front.
3) But, lest we not get into a deflationary situation, the Fed is find with the dollar drifting lower, increasing import prices AND forcing more consumer savings as support for the deficits—a bit of the global rebalancing thing. (China is in this mix as a revaluation of the yuan would be a big part of the global rebalancing thing. And the yuan revaluation is sold to the Chinese as the best thing for them NOW—as the US consumer will be importing less, thus it’s time to starting focusing more on the domestic economy. A rising yuan in fact increases the purchasing power of all Chinese citizens—a nice catalyst for the consumer sector.


We lean toward scenario #2, the dollar grinds lower. But if US data continues to positively surprise scenario #2 may have trouble playing out.

And of course, we could remain stuck somewhere within the two scenarios, which means more ranging and short-term trading with tighter stops and close profit targets.

We get a look at US durable goods orders today, and more on housing—Aug New Home sales. Maybe we see some activity off of that.

For now we are flat—and looking for a catalyst for direction.

Major Banks expecting the dollar to trade lower...

NEW YORK (Dow Jones)--The dollar is expected to trend lower against the euro and yen throughout this year and well into the next amid signs the U.S. economy is growing at a slower pace and U.S. interest rates have peaked. A Dow Jones Newswires survey of 14 major foreign exchange institutions sees the greenback ending this year down against the euro and losing even more ground against the yen.

The median estimate of the institutions in the survey sees the euro ending the year at $1.30, ending the first quarter of 2007 at $1.32, but then recovering back to end the third quarter at $1.30. The median estimate of the banks forecasts expects the dollar to trade at Y111 by year's end, slip to Y107.1 at the end of first quarter 2007 and then hold at that level to the end of September.

9-26-06

C$ seen unlikely to elude commodity-linked fall

TORONTO, Sept 26 (Reuters) - The commodity-linked Canadian dollar has dodged the bullet of lower resource prices in recent weeks, but its luck is unlikely to hold, and it faces a fall over the next few months, economists said on Tuesday.

Sharp drops in prices for resources such as oil and gold normally would send the Canadian dollar into a tailspin, but this time around it has been handed a reprieve by a weaker U.S. dollar and by merger and acquisition currency flows.

Full story...

------------
CAD is bucking the trend once again today...US$ is higher against the rest of the pack--CAD is the exception.

Comments from Japan's New Prime Minister

PRIME MINISTER SHINZO ABE (Reuters)

"There are some people saying that the government should take a break on structural reform or we should change course. But I'd rather accelerate and enhance structural reform.

"Restoring the state's finances is also my administration's mission. We will implement a growth strategy under the slogan of 'no fiscal reform without growth' while cutting wasteful spending.

"We will move forward in order to achieve our goal of shifting the primary balance into surplus in the fiscal year starting in April 2011. As for the budget for next fiscal year, I will keep new government bond issuance below the amount issued in the current fiscal year (ending next March 31)."

Japanese yen futures daily...

Still plenty of open interest in Dec '06 yen...and likely most is short...

JY Dec '06 Futures:
092606%20jy%20futures%20daily.pdf

EURJPY Rolling Over?

Yen still firm on China currency talk...have we seen a top in EURJPY?

EURJPY Daily:
092606%20eurjpy%20daily.pdf

Stopped out of Issue #139 euro

We were stopped out of euro, Isssue #139 this morning. The euro backed up on Ifo news--which came in about on expectation.

Position: Flat

German Ifo due tomorrow...could be euro moving...

German Data Due out tomorrow GMT:

9/26/2006 08:00 EU German IFO-Business Climate n/a 105.0
9/26/2006 08:00 EU German IFO-Current Assessment n/a 108.6
9/26/2006 08:00 EU German IFO-Expectations n/a 101.5

From Morgan Stanley
Germany: Would the Real Business Sentiment Please Stand Up?
9/20/06

Eventually, something has to give. Either we will see the Ifo business climate nose-diving towards the ZEW composite index or the ZEW index rebounding towards the Ifo business climate. Consensus and our own estimate for the upcoming Ifo business climate put the key indicator easing gradually to a reading of 104.2 from 105.0 before, thus remaining well above its long-term average of 95.5. This would be significantly above an estimate based on the ZEW survey, which would hint at a reading as low as 103.3. The last time such as marked discrepancy between the two surveys was observed was during the 1992/93 recession. Back then, the ZEW business expectations, which were all doom and gloom, initially rebounded towards a more robust Ifo business expectations, only for the two series to sink to new lows later on.

Recommendation Summary 25 Sep 06

092506RS.pdf

Recommendation Issue #139 euro

Based on the housing numbers today…the US growth deceleration story (faster than expected) seems to be gaining momentum…we want to position into the euro as the best way to play it…

Black Swan Letter
Recommendation Issue: 139
Currency: Euro
25-Sep-06 11:20 a.m./GMT 1:22 p.m. EST/GMT 17:22

Forex Last: 12759 Futures Last: 12813

Forex:
Buy EURUSD @ MKT / SL/ 12725 / PT1/ 12810 / PT2/ 12910

Futures:
Buy EU Dec '06 MKT / SL/ 12785 / PT1/ 12870 / PT2/ 12930

STP – Stop order entry
MKT - Market order entry
LMT - Limit order entry
SL – Stop-loss point
PT1 – Profit target #1
PT2 – Profit target #2

Risk Disclosure: There is substantial risk involved in trading in the forex or futures market on a highly leveraged basis. No trader who is unfamiliar, either himself or together with his financial advisers, with such risks should consider trading in the forex or futures markets. Neither Black Swan Capital LLC nor Jack Crooks accept liability for any losses that may directly or indirectly result from any advice or opinion or information provided in this service, whether negligent or otherwise.

Commitment of Traders 19 Sep '06

Comments:

Still "Big" short position in the yen…firepower for a rally? (90,804)

Interesting positioning Swiss vs. Euro…large short short vs. long

COT 19 Sep '06:
COT%20091906.pdf

China Reserves Approaching $1 Trillion mark...time to do something with the yuan?

Sooner or later, and we think sooner, it will be in China's best interest to free-up its currency. No better time to do so with FX reserves about to cross the $1 Trillion mark. Below is an excerpt from an interesting story in the Financail Times looking at the decsion process behind how China should manage this massive hoard.

A freeing of the Chinese currency--the yuan--would go a long way in alleviating this reserve accumulation. And it would coincide with giving a boost to China's consumer sector i.e. if China's currency rises in value, it naturally increases the purchasing power for domestic consumers. That is why we believe it may now be in the best interest of Chian to make a major currency move soon.

The trillion dollar question: China is grappling with how to deploy its foreign exchange riches
By Richard McGregor

Financial Times

Published: September 25 2006 03:00 | Last updated: September 25 2006 03:00

It operates out of a nondescript office tower in Finance Street and, shortened to its English acronym "SAFE", sounds like one of those fictitious shadowy organisations from a Sixties spoof spy show. But the Beijing-based State Administration of Foreign Exchange has a serious, real-world job - to manage China's towering stack of foreign currency holdings.

Once, this would not have mattered much outside China's borders, but the country's swelling trade surpluses and large capital inflows have given Safe an investment pot to rival global fund management giants. Within the next few weeks, China's reserves are due to top $1,000bn - a record for any country, let alone a developing nation like China.

EURUSD 60-min chart

Critical support 60-min 12728...

EURUSD 60-min:
092506%20eur%2060-min.pdf

Stopped-out at B/E per Issue #138 yen

We were stopped out of our remaining lot in $-yen per Issue #138 this morning--at breakeven entry.

Positioning: Flat!

Weekly Summary 24 Sep '06

092406%20BSL%20Weekly%20Summary.pdf