1 Dock Street
Stamford, CT 06902
www.farostrading.com
www.twitter.com/FarosTradingLLC
FAROS TRADING | FX MORNING UPDATE
Market Summary – 08/18/2010
Good Morning.
For some time we have been negative on the USD,
negative due to our understanding of the causality of
China's flexible exchange rate program and the necessity
of their reserves diversification program; a program that
was further highlighted last night, as it was reported that
China more than doubled their South Korean debt
holdings in the first half of 2010. Ding Zhijie, a former
advisor to China's sovereign wealth fund stated China
should allocate some reserves to "financial assets in major
Asian economies."
While we are confident in our assessment of the direction
of the USD for the next 12 months, we are
also cognizant that the road may be choppy, and there are
two specific events on the time horizon that we think
could upset the analysis and create a demand for USD in
the short run. Specifically we are looking at the current
anxiety in the US equity space and the possibility of an
Israeli strike on Iran's Bushehr nuclear reactor.
The EUR/USD has been moving very closely with the US
equity market as of late, and we note
the preponderance of economic data and sages who are
calling for a market correction of anywhere from 5 to 20%
in the near term. While we believe this to be
an unlikely event given the exceedingly low level of
interest rates, and the ability of listed corporations to get
funding, we have to identify the fact that a correction in
equities of this magnitude would set back our USD view
for an undefined period.
Following months of Israeli and US troop build-ups in the
Middle-East, former US Ambassador to the UN John
Bolton warned yesterday that Israel has to strike Iran's
Bushehr nuclear reactor by Saturday if they want to avoid
a significant radiation leak in the attack. Apparently it is
on Saturday the Russia is scheduled to load fuel into the
reactor. Iran's Foreign Minister recently stated,
"According to international law, installations which have
real fuel cannot be attacked because of the humanitarian
consequences." Gulf States have increased their rhetoric
regarding their thoughts on Iran having nuclear fuel in the
region with some speculating that Iran's neighbors may
have given Israel the blessing to go in.
The US is staying out of the discussions, however we note
this past week's joint US/Israeli war exercises were the
largest ever, and the USS Truman carrier was recently
reassigned to Dubai. Perhaps there is nothing here, and
indeed few are talking about it, however we believe the
risk is there nonetheless. In polling our coverage we note
most believe the initial moves in the FX markets would be
selling of EUR/USD, selling of USD/CHF, buying of USD/ILS
and buying of USD/TRY. Gold and Oil would probably also
rally. The moves would be rapid and then would likely
snap back. We note neither USD/TRY (1.4975) nor
USD/ILS (3.7770) are showing any signs that an Israeli
attack on Iranian soil is imminent. However we note the
risk is there.
In overnight markets, USD/Asia continued to drop from
last weeks highs, following through from the USD
weakness against the EUR in NY, and on the back of the
Chinese South Korean bond investment headlines. Our
Asian Central Bank view remains unchanged: They are
resigned to further local currency strength and are only
intervening to slow their strength and make sure they
1 Dock Street
Stamford, CT 06902
www.farostrading.com
www.twitter.com/FarosTradingLLC

FAROS TRADING | FX MORNING UPDATE

remain competitive versus their peers. As Thailand's Saskatchewan grows.

Central Bank stated last night, the Baht is still in line with
peers, and they will act on volatility.
In the UK, the BOE minutes showed Andrew Sentance
wanted to raise rates 25bps, while the board decided
against stepping up quantitative easing. Given the
minutes were less dovish than expected, GBP/USD
bounced nicely off its lows, dragging the EUR/USD with it.
USD/CAD continues to trade lower as speculation over an
unsolicited 38 Bio USD takeover of Potash Corp. of
We like a lower USD against the components of the SDR:
Namely EUR, GBP and JPY, and we look for a lower
USD/Index. EUR/CNY is still 15% below where it was in
December, providing a boost to Germany and France's
GDP. We believe EUR/CNY can revisit these levels;
translating into a move higher of 15-20% in EUR/USD
over the next 12 months. However low delta protection
may be warranted given the event horizon.

© Copyright 2010, Faros Trading, LLC. All rights reserved. This message is intended solely for the individual(s) named, and may contain confidential or privileged information of
Faros Trading, LLC. Any unauthorized review, dissemination, distribution or copying is strictly prohibited. If you have received this message in error, please notify the sender
immediately and permanently delete both the message and any attachments. We do not waive confidentiality by mistransmission. This communication is not investment advice,
an offer, or solicitation of any offer to buy or sell any security, investment or other product.