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FAROS TRADING | FX MORNING UPDATE

Market Summary – 08/16/2010

Good Morning.
Japan missed its GDP estimate by a long shot in early trading, as
annualized growth came in at +0.4%, well below the 2.3%
expected. This came early in the session, and on the heels of
statements from Sakakibara, who stated the yen may rise to a
record 79.75 against the dollar due to concerns over the health
of the US economy. Exporters continued to gripe about the
yen's strength and we expect that to continue, but our
understanding is all government interference in USDJPY at the
moment is political theater and the BOJ is nowhere close to
intervening. The weakness in Japan's growth moves Japan to
third place as the largest economy, with China now assuming
the second place slot.
Bloomberg wrote a story on China's interest to buy Euros over
the dollar that got some attention. Interestingly the Euro
bottomed around 1.2735 just as the US Internet site
Drudgereport published a link to the story, at which time it was
re-published in Australian and Chinese newspapers. We heard
the early sellers down to the lows were macro funds hitting
stops. The buyers were also macro funds and a few models,
joined, we were alluded to, by the PBOC.
USD/KRW jumped on the open as the EUR/USD fell, as South
Korea discussed a re-unification tax over the weekend. Western
Europe suffered on the unification with Eastern Germany and
given the costs of such a plan there is obviously some anxiety,
however we believe this is predominantly political pandering to
appease N. Korea and doubt it will amount to much in the near-
term. Exporters were offering USD/KRW at 1200 in size, and
kept a lid on KRW weakness. USD/KRW then drifted lower on
the EUR/USD strength, and then stops from the early USD
buyers. Spot closed around 1187.
The EUR/USD traded down to its support at 1.2730 and rose
smartly. In part on the China story, but otherwise supported by
the successful IPO of China's Agricultural Bank. The IPO is billed
as the largest ever, and its success saw shares in Shanghai rally
off their lows, buoying global markets and thus risk positions.
We expect further support in the EUR/USD at the 1.2730 level,
and are looking specifically at the USD/Index. The USD/Index
has traded very much in line with its spot price relative to its 50
day moving average. Indeed if we look at the optimized
moving average for model funds in this index we note the 1 day
against the 50 day is the best indicator of USD/Index direction.
We note the 50 DMA trades at 83.8438 while spot is at 82.60.
So we are about 1.7% away from that level, and the area
where we would consider side-lining our USD weakness view.
When China re-pegged to the USD in 2008, EUR/CNY was
trading at 10.78. It is currently at 8.7234. Over the past two
years Chinese goods have become 20% more expensive to
European shoppers and European goods have become 20%
cheaper to Chinese shoppers. This has certainly aided Germany
and France with their GDP numbers. Given China is under
pressure to strengthen the Yuan against the USD, we see them
looking to correct the move in EUR/CNY. Or in stripped out
terms the EUR/USD. A rally of 24% would not be out of the
question and take EUR/CNY back to the level China last left it
when they ended flexibility in 2008. This would take EUR/USD
to 1.5900, helping the US export its way into a recovery. Eight
months ago EUR/CNY was trading 19% higher, so this scale of a
move is not out of the question, it is only the pace that is under
debate.

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