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EURO/USD Pair Analysis Nov. 5, 2009

|Includes:CurrencyShares Canadian Dollar Trust ETF (FXC), FXE, FXF, FXY, UDN

After all the Central Bankers have had their say, it is time to try to figure out what did they say, and what does it mean to the various pairs.  It looks like the ECB has decided to sit tight with their rate and their policies.  They did reiterate that a strong dollar is in the US best interest, and they were concerned about timing,  when they will start draining excess liquidity from the economy.  Previous complaints that the strong Euro was hindering the European recovery were not repeated.  However, Euro retail sales, released this morning, came in at -0.7% well under the anticipated +0.3%, so further grumbling about the strong Euro will be forthcoming.

A strong dollar may be in the best interest of the Europeans, but getting the current Washington group reelected is most important to them.  The strong dollar lobby does not have many votes.  Today, the US House did pass a bill which would extend the $8000 tax credit for the purchase of homes, by those who had not owned a home during the previous three years, until April 2010.  A tax credit was also offered to those home owners who have owned a house for over five years.  Unemployment benefits for those out of work for over a year were extended.  While the tax credits for home owners and buyers, may help the housing markets, they will hurt Treasury receipts, and a the huge budget deficit is bearish on the dollar.

What will tomorrow's reports reveal and how will the markets respond?  A surprise will be a number less than the current 9.8% which would probably bull the equities market and weaken the dollar.  Conventional wisdom says that a 10% or higher number would be bearish equities and the dollar.  The logic that good news is bearish the dollar and vice versa eludes me.

It looks like the US equity market  is impressed with today's employment numbers and perhaps discounting more good news for tomorrow.  The Dow is currently trading up 166 points, and the Euro about 1.4855 versus the dollar.

This week's rally from the low under 1.4650 has been impressive, and it came with a healthy expansion in the CME futures open interest yesterday.  Perhaps we will again test the 1.4750 level is we get a surprise tomorrow, but it looks like a renewed assault on the 1.50 level is coming.