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Technical Commentary

· USD/CHF Breaks 50-day SMA
· USD/JPY Inside day

Technical Outlook
No real change in our USD/JPY view after yesterday’s inside day. Nearness to the 105.50 long-term fibo (61.8% fibo of the ’98 - ‘01 bull wave) and several oscillator divergences continue to favor the upside and a short squeeze on a break above moving average resistance in the 106.40 area. The 107.50 50-day SMA will need to get taken out however, to get excited about any real catchable contra-move. In such downtrends you can never really rule out one more leg lower but, the downside seems limited in the short-term as important psychological support awaits at 105.00. GBP/USD continues to lack real direction. A second close below the 10/20-day SMA and daily stochs continues to favor downside probes especially below 1.8250. Tuesday’s 1.8018 swing low remains the key short-term downside pivot with a break lower needed to trigger downside momentum and a test of the more significant 1.7824 fib level below. The upside only comes back into vogue on a sustained break above the 1/23 high at 1.8526. USD/CHF broke above the 50-day SMA yesterday before running into stiff resistance at the 50-day EMA, 40-pips above. While this price action is definitely bullish, the pair is far from being in the clear, as a break above the 1/19 1.2730 high is required to clear remaining overhead supply. Another clear failure off the 50-day EMA could obviously spark a sharp downside move though, the 20-day SMA support zone would need to give for the more significant support at 1.2270 to come under pressure. (For EUR/USD analysis, please refer to “Chart of the Day”)

Chart of the Day - EUR/USD
After our comment the single currency stayed faithful to its uptrend but failed short of our 1.30 target with a High at 1.2901 on 01/12. Shortly thereafter, the pair had a sharp correction to the 2334 Low, 567pts lower (slightly below our 2370/2400 area). Today the outlook is effectively neutral until key R (1.2779) or S (1.2334) are broken with conviction. 2250/2300 could be a decent entry for range players/dip buyers thanks to the lower BB and fibo price cluster (150% Fibo projection from the 99 - 01 bear wave & 38.2% Fibo from the Nov - Jan bull wave & 23.6% Fibo from the Sep - Jan bull wave). Further above, 2950/3000 will be the obvious entry for bears thanks to the 38.2% Fibo from the 76 - 85 bear wave and the upper BB. A breakout above this zone would turn the R area into S and should open the way to 3400. Slightly below, aggressive bears might try the 2700/20 level thanks to a robust Fibo confluence (61.8% Fibo from the 92 - 01 bear wave & 76.4% Fibo from the 95 - 01 bear wave). Outside these boundaries, 1850/1900 will be the key zone to watch for the bulls since it is the former breakout level now S and 23.6% Fibo from the 02 - 04 bull wave.

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EURUSD

The EURUSD continued yesterday’s slide as the market debates the meaning behind the Fed’s changes to its monetary policy statement. Today’s FOMC minutes from the December 9th monetary policy meeting provided additional insight into the Fed’s policy stance. The minutes indicate that the exclusion of the “considerable period” phrase was already in discussion back in December, but the Fed chose to retain the phrase as it “accurately conveyed the committee’s policy intentions.” Also, with low inflation, the members saw “considerable risk in taking preemptive action that could prove to be unneeded against potential inflation, with associated costs to economic performance.” The inflation landscape has not changed significantly since December, which provides little reason for the Fed to raise rates. Despite the Fed’s change in rhetoric, many economists have not shifted forward their rate hike expectations. Although yesterday’s FOMC statement is certainly a step towards an eventual rate hike, we see it more as an attempt by the Fed to get out of the rhetorical corner that they have backed themselves into. Once the dust settles, the market will realize that for the time being, the forces that weighed on the dollar throughout 2003 still exist. Meanwhile, criticism from the French government on the rapid moves in euro contributed to today’s move.

USDCHF

In an interview in Zurich, SNB President Roth expressed satisfaction with the Swiss franc’s correction against the euro throughout 2003 and frustration with dollar weakness. Although Europe is Switzerland’s primary trade partner, many industries in Switzerland are dollar dependent. According to Roth, economic growth is expected to accelerate by at least 1.5% in 2004. As suggested by yesterday’s stronger KoF leading indicators release, the Swiss economy is finally rising from its longest recession in over a decade. With regards to US data, jobless claims were pretty much in line with expectations. However, according to the employment cost index, which rose 0.7% in the fourth quarter, benefit costs rose faster than wage growth. This implies that employers are most likely offsetting higher costs of benefits (such as health insurance) by keeping wages low. Keep an eye out for tomorrow’s Q4 GDP report - any upside surprises could prompt renewed strength in USDCHF.

GBPUSD

According to the latest Gfk consumer confidence report, consumers are more optimistic about the economic outlook than they have been in over a year. This month’s data is particularly important since it is the first time in over 12 months that the index moved out of negative territory. Strong GDP growth coupled with rising confidence provides another argument for a near term rate hike by the Bank of England. Meanwhile, today’s Nationwide House price report continues to signal a steadily slowing housing market. BoE policy maker Tucker made some unsurprising, but nevertheless important comments today - he indicated that spare capacity needs to fall before the BoE can hike rates and when they do hike rates, the moves will be gradual. Furthermore, he noted that the change of the inflation target has no impact on their policy and that house-price growth should slow over the next 12 months.

USDJPY

Despite the fall in industrial production during the month of December, strong export demand helped to prompt a sharp rise in industrial output. The decline was generally expected after a series of strong growth in the past few months. Therefore the significance of this report should be discounted, as the global recovery and robust Asian demand will help to boost industrial output and production in the months ahead. The Shoko Chukin small business confidence index fell to 48.7 from 49.1 in December. Meanwhile, BoJ officials opted for verbal intervention today, reiterating their dissatisfaction with rapid movements in the yen and warning that they are ready to act if necessary. This prompted uninteresting trading in USDJPY, which range traded throughout the US session. Tomorrow’s MoF intervention data has the power to prompt a larger move in USDJPY.

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Technical Outlook
Very volatile intraday price action in EUR/USD as the pair undergoes clear range contraction on the daily. Our outlook remains effectively neutral until either the 1.2360/75 50-day SMA/EMA lower Bollinger convergence is taken out on the downside or the 1.2779 1/23 high on the upside. Intraday risk is skewed lower following yesterday’s dark cloud cover close back below the 10 & 20-day SMAs. USD/JPY continues to consolidate above long-term fib support in the 105.50 area. Proximity to such a significant long-term support and several oscillator divergences favor some sort of upside squeeze, though the 107.50 50-day SMA needs to get broken to get excited about any real catchable contra-moves. We cannot rule out one more leg lower on a clear break below fib support but the downside seems limited in the short-term as important psychological support awaits at 105.00. Range contraction is the name of the game in GBP/USD. Expect wild intra-day swings that really go nowhere until more important barriers are breached. Yesterday’s close back below the 10 & 20-day SMAs negates much of the previous day’s bullish price action and biases the downside, if only slightly. Tuesday’s 1.8018 swing low remains our key short-term downside pivot with a break lower required to expose the more significant 1.7824 support below. Upside only comes back into vogue on a sustained break above the 1.8526 1/23 high. USD/CHF also continues to lack direction. Irregular moves intraday have made for a very difficult trading environment and as such we prefer the sidelines until more important technical levels are breached. Our key upside level to watch remains the 50-day SMA/EMA upper Bollinger convergence zone with a break/close higher required to confirm the start of a viable contra-move. Downside remains less favorable following yesterday’s sharp bounce off the 20-day SMA and a break of yesterday’s 1.2475 low is now required to expose a re-test of the more significant 1.2270 area.

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· USDCAD breaks trendline resistance

Today’s 200-pip move in USDCAD prompted the pair to break above multiple important resistance levels. The first level of resistance was 1.3170, which was where the 100-day SMA and key 1-year trendline resistance converged. The second level that was broken was 1.3200, which corresponds with channel resistance. Key trendlines were broken in both the daily and weekly charts. The near term bottom at 1.2690/1.2700 remains intact, suggesting short-term upside potential. A close below the 10/50 day SMA cross would be needed to negate our upside bias.


· Risk of More Easing by Bank of Canada

On January 20, 2004, the Bank of Canada reduced its benchmark interest by 25bp to 2.50%. This is the third cut that the Bank of Canada has made since last year and sets them apart from the neutral to hiking biases of most of the other major central banks. In a statement by the BoC, they expressed concern that the rapid rise in the currency is hurting exporters, while encouraging consumer demand for imports. Since 2003, the Canadian dollar has appreciated over 20% against the US dollar. Given that the US is Canada’s largest trade partner, the fall in exports is a primary concern. Between September to October of last year, Canada’s trade surplus declined by 28%. Furthermore, despite the strength of the labor market, “recent indicators of domestic demand have been somewhat weaker than projected.” As a result, the BoC has chosen to curb the appreciation of the CAD and stimulate consumer spending by reducing rates. With core and total inflation trends expected below the target 2% level for this year and next, the Bank has ample room to lower rates without sparking inflationary fears.


· FOMC Statements Becoming Increasingly Optimistic

On January 28, 2004, in a universally expected move the Federal Reserve left interest rates unchanged at 1.00%. The FOMC managed to surprise the markets however in its accompanying statement, removing the phrase “considerable period” from its description of how long monetary policy will remain easy. In its place, the Committee asserted that “it can be patient in removing its policy accommodation.” The elimination of this phrase highlights the Fed’s increasingly optimistic outlook. As a result, expectations of tightening have been abruptly moved up, with markets now expecting a rate hike as early as June. In their last statement (December 9th), the Fed painted a much more positive picture of the economy, noting that output is growing "briskly. Additionally, the Committee observed that the labor market has "modestly" improved. Accordingly, the Committee shifted its policy bias slightly in December, nothing that the risk of deflation has lessened and is "almost equal" to the risk of inflation.

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· Fed omits “considerable period” line from statement
· RBNZ raises rate by 25bp to 5.25%
· Japan intervenes without success


EURUSD
The EURUSD plunged over 150 pips following the Fed’s omission of the line “considerable period” from today’s FOMC statement. The only change made to the statement aside from the omission is the Fed’s acknowledgement of subdued hiring conditions. Although the statement is certainly positive for the dollar and prompts speculation of an earlier than expected rate hike, we caution the market from being overly optimistic. Inflation still remains low, there is excess slack in the economy, and the government will most likely continue to favor a weaker dollar ahead of the November elections. This means that for the time being or at least until the second half, the Fed should continue to opt for a more accommodative monetary policy by keeping rates at 1%. As suggested by Fed Chairman Alan Greenspan back in October, the Fed realized that they backed themselves into a rhetorical corner when they added the “considerable period” line to their August statement. If you recall, in the minutes from the September 16th monetary policy meeting, the Fed admitted that it is not prudent to ”commit itself to a particular policy stance over some pre-established, extended time frame. The course of policy would be determined by the evaluation of the outlook, not the passage of time.'' Therefore it is inevitable that the Fed would want to get itself out of the trap that they have stepped themselves into - and today, they have done so.

USDCHF
Although the FOMC decision was today’s biggest event risk for the USD, a few other releases also moved the USD earlier this morning. A weaker than expected US durable goods report set USDCHF back 50 pips and prompted a similar knee-jerk reaction in the EURUSD. Durable goods orders for the month of December were flat, while orders in the month of November were revised upwards from -3.1% to
-2.3%. The weaker durable goods report puts to question whether we will see sustained increases in business investment. New home sales increased by 1.06m, slightly below expectations, but there was also an upward revision to November’s data. Tomorrow, we are expecting the minutes from the December 9th FOMC meeting which should provide for some interesting reading, as well as the weekly jobless claims report.

GBPUSD
After skirting two politically disastrous events, Prime Minister Tony Blair is most likely taking a much-needed breather. According to the Hutton report, Prime Minister Tony Blair did not “sex up” the dossier on Iraq’s weapons capabilities. With the passing of these major events, we can now turn our focus back to UK fundamentals. Tomorrow, we are expecting the EU/Gfk consumer confidence report - the firmness of the labor market should help spark recoveries in confidence. Friday’s consumer credit report is particularly important, given the already elevated nature of consumer borrowing.

USDJPY
Today we saw another unsuccessful bout of intervention by the Bank of Japan. To the surprise of many, the Bank of Japan chose to intervene ahead of next week’s G7 finance ministers meeting. The Japanese government is suspected of buying as much as $5 billion in an attempt to remind the market of their presence. What this suggests is that unlike the September G7 meeting, where the focus was on pressuring Asian nations to share an equal burden of the USD depreciation, the Japanese believe that the limelight will shift from Asia onto the US at the upcoming meeting. The Japanese government has already signaled their intentions to criticize the US on their large deficits, indicating that next week will be focused on the failure of the US to take any proactive measures to curb the dollar’s sharp declines. Meanwhile, there was a very interesting comment last night by Japanese Finance Minister Tanigaki - he hinted that the MoF may be considering changing the composition of their reserves, which is currently primarily held in US Treasuries. When pressed for more information, Tanigaki mentioned increasing gold as a reserve asset. Japan currently holds 766 tonnes of gold in reserves, which pales in comparison to 8,134 tonnes held by the US and 3,400 tonnes held by Germany. However, we caution about jumping the gun and buying gold or selling dollars on the back of his comment, as Tanigaki also noted that the Ministry is fully aware of their ability to move the gold market, therefore if they do increase reserves, it would carefully and gradually.

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Technical Outlook
A bullish outside day in EUR/USD off short-term trendline support clouds the pair’s technical picture and turns our outlook neutral until more important barriers are breached. Intraday, risk remains skewed to the upside following yesterday’s bullish price action, especially if the pair can muster a move above the 1.2655 “shaven head” high. Unfortunately, from a medium-term point of view, one day is not indicative of a legitimate reversal, and as such, we will need to see the 1.2779 swing high taken out to negate the potential 1-2-3 reversal and get excited about the prospects of a continuation of the still intact long-term uptrend. For bears, a break back below 1.2440 is required to negate yesterday’s engulfing pattern and re-instill downside momentum. USD/JPY finally broke the lower Bollinger support in the 105.75 area to test our medium-term target at the 105.50 long-term fib zone. A reaction at the 105.50 area in the coming sessions will be key in determining if the pair really is set to make another leg lower or if a much anticipated contra-move is coming. Daily oscillators tend to slightly favor the upside as both RSI and stochastics show divergences in oversold territory. A break above 106.70 is required however to initiate any sort of a meaningful squeeze. A daily close below fib support exposes the 105.00 psychological area. Similar story in Cable as in EUR/USD. The piercing line pattern on the daily through the 10 & 20 day SMA resistance zone muddies the bearish 1-2-3 reversal scenario and opens the door to a resumption of a broader uptrend on a break above the 1/23 1.8526 high. The 1-2-3 pattern has yet to be negated however and as such we have to allow for the possibility that yesterday was merely a shakeout of weak hand shorts. For the time being, we prefer the sidelines with 1.8526 as our key upside trigger and 1.8000 as our downside one. USD/CHF’s bearish engulfing failure just shy of the 50-day SMA does not bode well for bulls. A break of yesterday’s 1.2480 low exposes a re-test of the key 1.2270 area. A breach there is required to confirm a resumption of the downtrend. For now, bulls remain on the defensive unless they can muster a move above the 50-day SMA

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· Disappointing US consumer confidence numbers
· Blair wins legislative vote on college tuition
· German IFO index soars to 3 year highs


EURUSD

The USD lost its edge today following disappointing US consumer confidence numbers. Although the overall index rose to 96.8 from 91.3 in December, the market had expected the index to rally to 98.5. The biggest gains were seen in the expectations component, while the disappointment came in the current assessment of the labor market. Unexpected gains in the German IFO index (business confidence survey) provided a further boost for the euro. The index soared to 3-year highs, marking the ninth consecutive rise in business sentiment. This suggests that that the businesses have not been significantly affected by the recent gains in the euro. Meanwhile, comments from ECB board member Tumpel-Gugerell added additional fuel to the rally as she clarified the ECB’s stance by saying that a rate cut “is not an issue at the moment.” She added that although “the euro’s appreciation has a dampening effect,” they are “confident that positive forces will predominate.”

USDCHF

The Fed is scheduled to announce their monetary policy decision tomorrow afternoon. As we have previously mentioned, they are expected to leave rates unchanged at 1%. As a result, the market will be fixated on whether the Fed decides to keep the line “considerable period” in the FOMC statement. The consensus is that the line will remain, as the Fed intends to maintain an accommodative policy in light of the excess capacity in the economy. Also look out for any adjustments to their assessment of the economy. In their previous statement, the Fed indicated that the labor market was improving modestly, which contrasts to “stabilizing” nature described in the October statement. Their assessment of deflation will likely remain unchanged, as they view the risk of deflation being “almost equal” to the risk of inflation. Meanwhile politically, John Kerry retains the lead in the Democratic primaries ahead of tonight’s New Hampshire votes.

GBPUSD

Much to the content of Blair’s party, the “top-up” fees on college tuition were approved by a very narrow 316-311 vote. After much heated negotiations, Nick Brown, a leading rebel switched sides to back the prime minister hours before the end of the negotiations. His decision prompted other rebels to follow suit. The actual implications of the “top-up” fees does not directly affect the markets, but if the “top-up” fees were not approved, it would have certainly dealt a significant blow to Blair’s popularity and possibility prompt a confidence vote. With one major event risk out of the way, the next stumbling block for the Prime Minister is tomorrow’s release of the Hutton Inquiry report. This report will include details on an independent investigation into the suicide of weapons inspector David Kelly. The government is suspected of embellishing the dossier on Iraq’s weapons of mass destruction, against the will of intelligence officials ahead of the Iraq war. Blair’s approval ratings have fallen significantly as a result of UK participation in the Iraq war, therefore should the dossier prove that the government exaggerated the claims, we expect Blair’s approval ratings to decline even further.

USDJPY

USDJPY tanked today following comments from Japanese Finance Minister Tanigaki, suggesting that Japan may allow the yen to appreciate ahead of next week’s G7 meeting. His comments also implied that Japan’s intervention activities are aimed at averting “speculative market moves and excessive moves of foreign exchange rates” and is not aimed at maintaining “specific levels of the yen” or guiding “the currency cheaper.” Given that the market had already anticipated the BoJ’s absence this week, today’s comments from Tanigaki provided an additional reason to sell USDJPY. For the remainder of this week, we are expecting Japanese retail trade, industrial production, Tokyo CPI and unemployment. Should we receive further confirmation on the underlying strength of the Japanese economy, there will be a risk of a test of the 105 level in USDJPY.

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Canadian Dollar Bank Forecasts


Bearish dollar sentiment coupled with steadily increasing commodity prices helped contribute to a 17.5% appreciation in the Canadian dollar versus the greenback in 2003. Strong domestic demand and rising inflation prompted the Bank to tighten monetary policy in the second quarter, leading real GDP to shrink 0.3% annually over the period. A rising CAD along with some one-time shocks to the economy led to a 50-basis point easing by year’s end. At an annual rate real GDP grew a modest 1.1% in Q3, weaker than projected by the central bank. As accommodative policy gains traction, fourth quarter GDP gains are expected in the 4% range.



Into 2004 consensus estimates project further CAD strength as the weak dollar story unfolds and the Canadian economy improves. Risks to the forecast include the sustainability of the global recovery, the path of commodity prices, and relative shifts in US and Canadian monetary policies.




Current Economic Conditions


Economy poised for a rebound

A series of shocks to the Canadian economy put downward pressure on prices and led to a decrease in economic activity in Q2 and Q3. An isolated case of mad cow disease in May triggered an international ban on Canadian beef, while an August blackout in Ontario reduced economic output in the region. Goods price weakness brought on by a falling dollar and declines in service prices led by a SARS outbreak dampened inflationary pressures. In addition to a sharp Q3 inventory correction, these incidents contributed to two quarters of disappointing growth.



With these shocks behind it however, the Canadian economy is expected to rebound and grow at an above potential rate in Q4, driven in part by a US-led global recovery. Signs of an economic reversal emerged in November when the unemployment rate fell unexpectedly by 0.4%, and employment gains surged by more than 60,000 for the month. These gains were followed up by equally strong improvements in December and January. Coupled with an ending of the Q3 inventory correction phase, renewed vigor in the labor market points to a sustained economic recovery through Q4 and beyond.


Canadian dollar has surged against the greenback
The effect of a stronger Canadian dollar has surfaced in the form of weak export growth and diminished economic activity. As a result, this reduction in growth has contributed to a downwardly revised GDP outlook and a larger output gap than previously forecast. In addition, the strong currency has put downward pressure on inflation, with both core and total measures registering below the Bank of Canada’s 2% target. Given the excess supply in the economy, inflation is likely to remain muted going forward.



On balance, the negative trade balance effects of an appreciating Canadian dollar have more than offset the economic gains brought about by the global economic recovery. In response to these developments, the central bank reduced overnight rates to 2.50% in January in an effort to fuel domestic demand and to counter downward inflation pressures, returning price growth on the path toward a 2% target.




Economic Outlook


Global economic expansion expected to continue into 2004

Like many of the other major currency pairs, USDCAD will be driven in large part by the performance of the US economy. While US growth is expected to register above potential in 2004 and 2005, growing current account and fiscal deficits bring the sustainability of the expansion into question. Mounting expectations for the dollar to correct further in order to adjust its external imbalances will likely drive the greenback lower versus the Canadian dollar medium-term.



Alongside a recovering Europe and an accelerating Asia, economic growth in Canada will derive primarily from an expansion in domestic demand, supported by an accommodative monetary policy. Rising business investment and a robust labor market should lead to rising personal incomes and in turn contribute to increased household spending. The Bank of Canada forecasts real GDP to grow by 2.75% in 2004, rising to 3.75% in 2005. While the excess supply in the economy may not be pared back substantially in 2004, the Bank projects a significant narrowing of the output gap in 2005.



Surging Canadian dollar a threat to growth
Growing worldwide aggregate demand along with increasing commodity prices has translated into a sharply higher Canadian dollar. A strengthening currency however threatens to offset the benefits of global growth, putting downward pressure on export demand in 2004. Given the negative effect on net exports, a Canadian economy backed by a surging currency will likely need to shift its focus on growth away from trade and towards stimulating domestic demand, helped along by rate cuts.



An additional effect of a stronger CAD has been downward pressure on inflation. Into 2004, prices should remain tame, held in check by sizeable slack in the goods and labor markets. The Bank of Canada projects core inflation to dip below 1.5% in 2004. As the output gap disappears towards the second half of 2005, core inflation will likely rise steadily towards the 2% target level.





What Will Drive The USDCAD Trend in 2004?


General USD selling pressures will play a significant role in driving USDCAD lower in 2004. As implicit official US acceptance of a weaker dollar continues, the majors will continue to rally against the dollar. Yet, the bulk of dollar depreciation has likely already taken place, so while on a trade-weighted basis the dollar has further to fall, it should not fall by much. A tightening cycle in the US, possibly occurring near the end of 2004 could signal a reversal in the dollar and a lower USDCAD. Until these interest rate expectations change however, the trend in USDCAD will be lower for the year, as reflected in average bank forecasts.


Aside from US-specific issues, the Canadian dollar should also be driven by the path of commodity prices. Over 2003, CAD moved in lock-step with non-energy commodity prices. Coupled with inflationary fears brought on by continued easy monetary policy in the US, continued demand for base metals from emerging Asia has the potential to drive commodity prices immediately higher in 2004. China’s apparent insatiable demand for minerals, metals and grains could be a significant source of additional CAD gains.



The risk to a lower USDCAD in 2004 rests squarely on the Canadian economy. Should domestic demand fail to react to previously enacted interest rate cuts, a continuation of the Canadian easing cycle could place upward pressure on the currency pair. GDP growth, or lack thereof, into 2004 will provide a key data point regarding future interest rate moves by the Bank of Canada.

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Technical Outlook
EUR/USD’s break and close below 1.2565 confirms Friday’s outside day reversal and sets into motion the broader 1-2-3 reversal scenario outlined yesterday. Our next target is the 1.2440 short-term trendline, with a break lower required to prolong downside momentum and put focus on the 1.2334/50 1/19 low/50-day SMA/ lower Bollinger convergence. Below 1.2334 confirms the 1-2-3 pattern and paves the way for an aggressive sell-off down to the 1.2150 fib support zone. A break back above the 20-day SMA is required to negate bearish implications of recent price action and reinforce the uptrend. USD/JPY continues to hold above the Lower Bollinger support zone. The inside day highlights a real lack of conviction in the marketplace. Failure to break 105.75 is obviously frustrating and sets up good potential for a double bottom squeeze if the pair can muster a breach of the 20-day SMA. On the downside, a sustained break of 105.75 sets up a test of the 105.50 long-term fibo. A drop in Cable below the 20-day SMA darkens the technical outlook and favors a downside re-test of the 1.7824 level in coming sessions. Reaction at 1.7824 is key as a break below triggers the daily 1-2-3 reversal and exposes the pair to a steep downside correction. Little hope for bulls below 1.8200 with a break above needed to alleviate downside pressures. USD/CHF remains buoyant. Outside day was confirmed yesterday with a daily close above the 10-day SMA. As in the rest of Europe, we see good scope for a 1-2-3 reversal on a break above the 1/19 1.2730 high. Formidable resistance however awaits the pair in the 1.2620/50 area as it marks a convergence of the upper Bollinger/50-day EMA/SMA. A failure to break above this resistance zone sparked last week’s sharp down move and as such we will watch intently to see if buyers can push through on this go around. We maintain an upside bias as long as the pair holds above moving average support at 1.2400.

Chart of the Day - AUD/JPY
On 12/31 AUDJPY had a low at 79.24 and then rallied to the 01/09 High at 83.77, 453pts higher. Today the outlook is still slightly bullish, but the messy price action from the past weeks and failure to test the swing high give some credence the bearish arguement. A consolidation is to be expected between the key 84/84.50 and 79.30/80 areas (both areas are keys to the upside or downside). 84/84.50 is the MT Trend R and High BB and will attract the contra-trend bearish crowd while 79.30/80 is a strong Fibo confluence (50% Fibo from the Sep - Jan bull wave & 23.6% Fibo from the 02 - 04 bull wave) and will attract dip buyers. Within the range few decent entries are available but aggressive bulls might try to exploit the 81.00/40 zone thanks to a clear Fibo confluence (50% Fibo from the Dec - Jan bull wave & 23.6% Fibo from the Sep - Jan bull wave).

Euro falls back

Euro Forex Trading



EURUSD


EURUSD continued its downward trend begun during the London morning when the pair came off from a 10-day high of 1.2778. The move accelerated into the US session as EURUSD traded steadily lower to break the 1.2600 level. Sparking this move was a mid-morning release of a Reuters story citing an unnamed European diplomat who suggested that, in a post-G7 statement next week, Euro area Finance Ministers will confirm that ECB monetary policy could ease if there are “external shocks” to the economy. This hint of a significant change in the central bank’s stance sent the dollar sharply higher against the Euro, Sterling and Swiss franc. Curiously the Reuters story comes a day after comments by the ECB’s Wellink that rate cuts would be unable to stem the underlying uptrend in EUR/USD. In Euro-area data released today, German construction orders fell for the first month in three, down 7.5% year-over-year, while November retail sales in Italy were flat. With policymaker comments continuing to drive EUR/USD near-term, next week the market will focus on two speeches by the ECB’s Trichet. Also on tap are important releases of German business climate, French manufacturing, and Eurozone economic sentiment.



USDCHF



USDCHF traded steadily higher during the US session on the back of EURUSD and GBPUSD selling. The pair began the US morning just below 1.2300 and rallied over a hundred pips to 1.2425 by the end of the day. The Reuters story suggesting an ECB monetary ease to counter EUR strength proved to be the catalyst for the USDCHF move higher, overshadowing a potential dollar negative story involving the resignation of US weapons inspector David Kay. In a phone interview today Kay confessed that he does not believe that any stockpiles of chemical and biological weapons exist in Iraq. A speech by the SNB’s Roth next week will likely confirm the central bank’s commitment to a low interest rate environment and a weaker CHF. The release of the December KOF leading indicator on Wednesday should reinforce the notion of a strengthening Swiss economy.



GBPUSD



Strong readings in Q4 GDP and retail sales all but ensure that the Bank of England will move to tighten monetary policy when it meets next month. GDP grew 0.9% at an annual rate, its fastest pace in four years, led by service companies. Retail sales likewise exhibited above expectation growth, rising by 0.9% month-over-month in December. Like USDCHF and EURUSD, news of a potential ECB rate cut in the offing sent cable abruptly lower as it traded down more than two big figures to close at the 1.8260 level. Defending the government’s financial position, Chief Economic Treasury Advisor Ed Balls asserted that finances are not overstretched, even in light of record budget deficits. Next week, political risk could weigh on GBP as the Hutton report detailing the results of the investigation into David Kelly’s death is released, and a key vote in Parliament on a proposal to raise university fees takes place.



USDJPY



USDJPY began the day at fresh lows of 105.74 before rallying to the 106.80 level over the day as the dollar strengthened across the board. The release of the tertiary index showed that demand for services unexpectedly fell by 2.3% in November, its first decline in four months, led by telecoms and retailing. In addition, the all-activity index, a proxy measure for GDP, fell by a more than expected 1.3% in November. Sony Chairman Idei noted at the World Economic Forum in Davos today that he expects yen strength to continue, given that dollar weakness suits the Bush Administration headed into an election year. Data on tap next week include trade, retail sales and unemployment. MoF intervention data should show a record amount of yen selling in January.

EUR/USD

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EUR/USD continues to push ahead. A close above the 61.8% fibo of the recent correction further supports the bullish technical outlook and opens the door to an eventual test of the 1.2901 all-time high. Our key upside pivot is the last remaining fibo (of the recent correction) at 1.2780, with a break higher exposing the upper Bollinger 100 pips higher. We cannot rule out some backfilling should the pair fail to break to new highs, but only a breach of the 1.2620/30 10/20-day SMA convergence, would increase risk of any sort downside momentum developing. USD/JPY’s close below the 10 and 20-day SMAs yesterday keeps the technical outlook bearish and points to more downside probes in the sessions ahead. That said, extreme caution is warranted below the 106.00 handle as the pair is susceptible to a squeeze near the 105.75 lower Bollinger/multi-year low, or should that break, the 105.50 61.8% fib retracement of the ’95 - ’98 bull wave. Our medium-term view favors an eventual break of the fib zone but the move lower is likely to be a typical “yen-like” grind. Cable’s break above the last remaining fib retracement from last weeks correction favors a re-test of the 1.8581 multi-year high. Momentum oscillators remain constructive, but need to be monitored, as they approach overbought levels once again. Obvious potential for a double top on the daily, but we will wait to see how the pair reacts before concerning ourselves too much with this scenario. USD/CHF’s break of the all-important 10/20-day SMA convergence keeps daily technicals pointing lower. The 1.2370 78.6% fibo of last week’s contra-move is the last real meaningful support before the multi-year low at 1.2135. A break lower is required today to prolong downside momentum. Some risk for backfilling following the large move of the past week but only a break back above the 1.2400 resistance zone will initiate anything meaningful.

Chart od the Day - EUR/GBP
On 01/16 EURGBP had a low at 6867 before a test of the 6954 high a couple of days ago and 87pts higher. Today, the situation barely changed and the cross is still stuck within the 6800/7100 range. We are once again sitting on the key 6900 S area. As a result, range traders will likely get involved at 6830/50 in an attempt to exploit the Lower BB and strong Fib confluence (23.6% Fibo from the Jun - Nov bear wave & 38.2% Fibo from the 95 - 00 bear wave). A break of this area, would turn the 6900 area into a solid R and bears could certainly use it on pullbacks to pick up sterling. The next target and relevant S would then be the 6800 level and the 38.2% Fibo from the 02 - 03 bull wave. Above, the 7100/7140 area still needs watching thanks to the upper BB and 61.8% Fibo from the Jun - Nov bear wave. A sustained move above would then put focus on the 7250 level (50% Fibo from the 95 - 00 bear wave and last May’s swing high).

Forex News and Financial information

Forex News and Financial information

Forex Trading Analysis

Forex Trading Analysis

Technical Outlook
EUR/USD’s close above the 10 and 20-day SMAs confirms Tuesday’s expansion range, and favors a continuation of the current up move. The lack of meaningful resistance until the 1.2860 upper Bollinger, could create more explosive gains, but given recent volatility, we feel some retrenching may be needed before moving higher. Intraday we are looking for some choppy trade with yesterday’s 1.2675 a key resistance and the 1.2620/10 10/20-day SMA convergence, a key support. From a slightly longer-term perspective the weekly bearish engulfing pattern is still worrying, though is not really a major concern unless the pair trades back down through 1.2334. A lower low on the USD/JPY daily confirms Tuesday’s shooting star failure off the 50-day EMA and favors a resumption of the down trend. Support at the 20-day SMA is holding correctly and a break lower will be required to ignite catchable downside momentum and put focus back on the 105.50 long-term fibo. We cannot rule out however, one last gasp higher if the support fails to break. Cable continues to push higher following Tuesday’s explosive reversal outside day off the 38.2% fib retracement of the Nov - Jan bull move. Wednesday’s close above the 10-day SMA further strengthens the bullish argument and opens the way for a renewed assault on the 1.8581 multi-year high. As in EUR/USD, the weekly bearish engulfing pattern remains an issue but, is no longer a real worry unless this week’s 1.7824 low somehow gives way. USD/CHF remains bearish but continues to struggle with support at the 10/20-day SMA convergence. A breach of the support zone is required to prolong downside momentum and confirm a resumption of the intermediate-term down trend. Failure to decisively break 1.2400 today could lead to short-covering but only a break back above the 1.2500 handle would negate the bearish implications of the past few days.

Chart of the Day - AUD/USD
On 12/16 Aussie made a high at 7457 before a small retracement to the 7313 Low on 12/22 (144pts lower and slightly above our 7300 level). The Aussie then resumed its rally from this level to touch the 7817 high on 01/13, 504pts higher. Today the outlook remains bullish LT but the sharp move down in the Aussie a couple of days ago to MT Trend S gives the pair a somewhat more neutral ST outlook. As a result, 7840/80 could be a good entry for contra trend traders thanks to the Swing High, MT Trend R and upper BB while 7490/7520 will be a perfect entry for ST dip buyers/range players thanks to MT Trend S and the 50 SMA. Below, more conservative bulls will watch the 7180/7210 area. The 100 SMA and 23.6% Fibo from the 02 - 03 bull wave are present at the level and could provide decent S to the Aussie. Above the swing high, 7980 (76.4% Fibo from the 89 - 01 bear wave) will be intermediate R but above 8000 nothing serious stands to stop the Aussie before the 8220/50 area.

Forex Trading

Forex Trading

Daily FX Currency Focus: USDCHF

Published Date: 1/20/04

Key Points

· USDCHF Failing the 50-Day EMA

USD/CHF continued to push higher yesterday but is now running into key resistance at the 50-day EMA. A close above the resistance will confirm a true change in trend and open the way for a new leg higher. Failure on the other hand to break the 50-day EMA, will invite shorts looking to play a resumption of the trend. In any case, the next few sessions will be pivotal. Intraday, we expect some stalling as the pair has become severely overbought in the short-term, but only a breach of the 10/20-day SMA convergence at 1.2420 would constitute a resumption of the broader bear trend.

· Long term fundamentals continue to favor USD weakness

Despite the recent positive developments in the US, long-term fundamentals continue to favor USD weakness. The strength of last week’s US data still hangs over the market as it indicates that the recent weakness in the dollar has helped to boost exports. However, the market is currently debating the reliability and sustainability of the November trade and Treasury International Capital (TIC) flow data. Those arguing that the recent slide in the EURUSD is merely a hiccup in the dollar’s longer-term downtrend are saying that the recent upturn in exports is a result of rising global growth. When growth in the US picks up, domestic demand for foreign goods are expected to accelerate, forcing the deficit to breakout of its temporary plateau and continue its previous trend. Furthermore, the 12-month average of foreign direct inflows is only enough to offset the negative flows and plug a part of the deficit, certainly not sufficient enough to cause a reversal of the deficit. For a reversal of the deficit to occur, the dollar would need to continue to depreciate.

· Monetary Policy - Both remain accommodative, but Fed likely to move first

US - On December 9, 2003, the Federal Reserve left interest rates unchanged at 1.00%. In its widely anticipated accompanying statement, the FOMC painted a much more positive picture of the economy, noting that output is growing "briskly." Additionally, the Committee observed that the labor market has "modestly" improved. As a result of this improvement, the Committee shifted its policy bias slightly, nothing that the risk of deflation has lessened and is "almost equal" to the risk of inflation. The most important language involved the Committee's intention to keep monetary policy easy for a "considerable period," a phrase unchanged from its prior two statements. The market was split over whether the statement would include this phrase--its exclusion would have possibly signaled a tightening cycle sooner rather than later. Most market observers expect rate hikes to occur in the second half of 2004, at the earliest--the latest statement confirms this view.

Switzerland - Given limited inflation pressures in 2004, the central bank’s campaign to preserve a low interest rate environment that supports economic activity shows few signs of letting up during the year. In its latest pronouncements, the SNB has made it clear that it will not threaten the recovery by prematurely moving to a tighter monetary policy. As the recovery gathers speed however, risks will tilt toward a move away from an easing bias. Continuing positive economic data and steady and positive inflation readings could prompt Swiss authorities to abandon their expansionary policy by raising short-term rates. Possible monetary tightening may arise after quarterly SNB assessments in June or September.

Forex Trading

Technical Commentary

· GBP/USD Closes below last week’s low
· USD/CHF Tests 50-day SMA

Technical Outlook
Uninspired trade in EUR/USD yesterday as liquidity remained thin due to the US Holiday. Dailies remain bearish following last week’s break of multiple key supports. However, a still intact broader uptrend, oversold stochastics and the proximity of important support in the 1.2300 area (50-day EMA/lower bollinger/38.2% fibo confluence) could inspire bullish re-positioning if the pair fails to muster a downside break. It is important to note though that only a close back above the 10-day SMA would confirm a trend resumption scenario. The 50-day SMA remains our key downside level to watch with a break lower needed to confirm a true change in the short-term trend. More weak hand short covering in USD/JPY yesterday as buyers pushed the pair up just shy of the 50-day EMA. Our core view is still very bearish and as such we will look for signs of trend resumption at the 50-day EMA though, we cannot rule out a move to the 108.50 23.6% fibo of the Sep - Jan down move. Breach of the 20-day SMA required to re-instill downside momentum and put focus back on the 105.50 long-term fibo. GBP/USD’s close below last week’s low, triggers the bearish engulfing on the weekly and favors broader pressure on the pair. Some stalling may be expected however, as the pair has become short-term oversold and nears important fib retracement support in the 1.7820/30 area. Failure to pierce support could see renewed bullish interest but only if buyers can muster a move back above the 20-day SMA. Until then, it is wait and see. USD/CHF continued to push higher yesterday but is now running into key resistance at the 50-day EMA. A close above the resistance will confirm a true change in trend and open the way for a new leg higher. Failure on the other hand to break the 50-day EMA, will invite shorts looking to play a resumption of the trend. In any case, the next few sessions will be pivotal. Intraday, we expect some stalling as the pair has become severely overbought in the short-term, but only a breach of the 10/20-day SMA convergence at 1.2420 would constitute a resumption of the broader bear trend.

Chart of the Day - EUR/CHF
On 12/23 EURCHF had a high at 5628 before a quick retracement to the 5506 level on 12/25, 122pts below. The pair then struggled with the 5600 area from 12/26 to 01/05 (highs from 5610 to 5630). The EZ currency proceeded to break the 5600 level and test 5726 yesterday after a typical breakout/retracement.. Today, the picture is much the same with the pair looking particularly strong MT. The only real hurdle is 5750/70 MT trend R, the November Swing High and upper BB convergence. Reversal players will be eying this area. If the area breaks, 5700/5750 will then become a perfect S for further upside probes. 5960/6000 is in fact the only serious R above, if we overlook the 5850 23.6% fibo from the 92 - 01 bear wave. Below, dip buyers will concentrate on 5550/80 area thanks to the lower BB, 50 SMA, 100 SMA and 50% Fibo from the Nov - Dec bear wave. They will also watch the 5420/5450, MT Trend S and the 200 SMA.

Daily FX

Daily Fx Report

· Yomiuri newspaper reports that Japan sold JPY6trillion so far this month
· Weaker German factory orders
· All eyes on tomorrow’s Bank of Canada monetary policy meeting


EURUSD

With the US markets closed for holiday, the EURUSD traded in a relatively tight range today. The strength of last week’s US data still hangs over the market, as economists debate the reliability and sustainability of the November trade and Treasury International Capital (TIC) flow data. Although the TIC data can be volatile and it may be too early to call a trough in the deficit based upon one month of data, signs that that the deficit is beginning to shrink may enable the dollar to reverse its downtrend in the near term. Although a barrage of verbal complaints continued to flood in from the Europe, we believe the comments from Austria’s Grasser is most reflective of the ECB’s position - that is, that the EU “can live” with the current euro rate. If the euro lingers at current levels, we have probably seen the peak in verbal intervention from the ECB. Trichet’s comments has prompted a decline of 500+ pips in the EUR/USD, an over 4% decline in the euro in seven days.

USDCHF

This week, the US calendar is fairly light. The market is focused on the results of tonight’s Iowa Caucuses and tomorrow’s State of the Union Address. The Democratic candidates are neck to neck with Dean, Edwards, Kerry, and Gephardt being the leading contenders. Those arguing that the recent movements in the EURUSD are merely blips in the dollar’s longer-term downtrend are saying that the recent upturn in exports is a result of rising global growth. When growth in the US picks up, domestic demand for foreign goods are expected to accelerate, forcing the deficit to breakout of its temporary plateau and continue its previous trend.

GBPUSD

This week is an important week for the UK. The first scheduled economic release this week is December CPI - inflation is expected to moderate as pre-Christmas discounting pushes prices lower. Later on this week, we are expecting retail sales and the Q4 GDP release. The Bank of England will also be publishing the minutes from the 7/8 Jan monetary policy meeting - the BoE left rates unchanged earlier this month, but some members are expected to have voted in favor of a rate hike. The significance of this data has the potency to decouple the recent positive correlation between the EURUSD and GBPUSD. Meanwhile, EURGBP had a nice rally today, reflecting the stronger economic fundamentals in the UK.

USDJPY

USDJPY had a nice rally today following an article in the Yomiuri newspaper reporting that the Bank of Japan sold more than 6 trillion yen ($56 billion) so far this month. The BoJ is also suspected of being in the market once again last night, which would not be surprising considering that today would have provided one of the last windows of opportunity for the BoJ to intervene prior to February’s G7 finance ministers meeting. Meanwhile, fundamentally the JPY remains sound. The government upgraded its assessment of the economy in January, shifting from “recovering steadily” to “recovering.” According to Tokyo Shoko Research, business failures were also down 14.8% in 2003.

USDCAD

The Bank of Canada monetary policy meeting is one of the market’s most anticipated events this week. The market is divided on whether the central bank will actually move rates. Exports have been significantly hurt by CAD strength, but domestic demand remains firm while the labor market continues to improve. According to the latest Bloomberg survey, twelve out of nineteen economists polled expect the BoC to cut rates.

New Zealand Currency Forecast

Latest Forex News

Just came across this info regarding the NZD, worth a read.

New Zealand Bank Forecasts

The New Zealand dollar soared over 24% in 2003. Prior to Australia’s first rate hike on November 5th of last year, New Zealand benefited from having one of the highest interest rates in the industrialized world. Yet, it wasn’t just interest rates that sent the kiwi higher. A robust housing market, rapid population growth, strong domestic demand and high consumer confidence all contributed to increased demand for the kiwi. In the year ahead, the markets expect continued strength in the NZDUSD. This strength is expected to stem from dollar weakness, firm commodity prices and higher interest rates. However, we believe that there are many risks to the broad consensus view for sustained kiwi strength. A stronger than expected recovery in the US, an earlier than expected rate hike by the Fed, and the possibility of a carry trade crisis could potentially all derail the NZDUSD’s expected uptrend.

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USDJPY

The USDJPY’s 60-pip rally in 5 minutes during the US session prompted speculation of intervention by the Bank of Japan. With USDJPY dipping to its lowest levels since September 2000, it should be no surprise to see the BoJ’s hand in the market. In fact, we caution on the possibility of BoJ intervention on Monday. With the US off on holiday, the thin trading conditions may provide one of the last opportunities for the BoJ to intervene ahead of the G7 finance ministers meeting in February. If you recall, the BoJ refrained from intervening ahead of the last G7 meeting. With a large intervention “war chest” at their disposal, the government will want to make sure that the market realizes that they have no plans of backing away from selling the yen.

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EURUSD

The Euro completely collapsed today, as it tumbled over 260 pips in the past 24 hours. Heavy verbal intervention from Euroland served as the initial catalyst for the move lower. Italian Prime Minister Baldassarri was quoted saying that euro sales “could be useful.” This comes on the back of Wednesday’s similar comments from ECB Noyer. The ECB’s threats of intervention is apparently quite successful in keeping euro gains capped, however, the recent slide in the euro makes actual physical intervention unlikely. The catalyst for the additional slide in the US session was the release of the monthly Treasury International Capital (TIC) flow data. For the month of November, foreign holdings of US assets increased by $87.6bn in November, far surpassing the revised $27.8bn gain in October. This is a huge boost for the US dollar and encouraging news for the deficit. The University of Michigan consumer confidence survey was released at its highest level since November 2000. Overall, continued jawboning by Eurozone officials and a series of positive US economic releases have helped to create a near term top for the euro. Monday is a US holiday next week, so expect thin trading.

Euro - Where can it go?

Interesting article on the recent spike in the value of the Euro.
http://www.fxcmmini.com/euro-high.html