Vera Hawkin

There are not too many female CEOs in most industries and as far as I know Vera Hawkin is the only one in the forex industry.

Hawkin has built one of the fastest growing forex companies in recent years, as mentioned in Inc. magazine.

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· Durable Goods Increase 3.4%, Consensus Was 0.7%
· Mixed UK Data - Lower GDP, Stronger Retail Sales
· Weaker Japanese Tertiary Activity Index


EURUSD

Stronger US durable goods sent the euro tumbling against the dollar. The report was almost five times higher than the market’s forecasts, catching even the most optimistic economists by surprise (more about durable goods in USDCHF section). Meanwhile, today’s comments from ECB Issing did not shed any new light on the interest rate outlook for the Eurozone. Instead, he essentially echoed yesterday’s comments from Trichet, emphasizing the importance of a recovery in consumer spending and a rebound in confidence. Comments from both officials suggest that monetary policy is on hold for the time being, but they do not rule out the possibility of a future rate cut. The ECB has repeatedly indicated that lower rates may not help to stimulate spending. Although most economists still believe that the dollar will decline in the medium to long term, in the week ahead, the euro should remain under pressure as economic data will most likely be supportive for the dollar and negative for the euro. We start off Monday with the IFO business climate survey - this past Tuesday’s shockingly disappointing ZEW survey signals that there is significant downside risk for the IFO.

USDCHF

With today’s exceptionally strong durable goods report, it will be difficult to continue questioning the sustainability of the manufacturing sector recovery. This is particularly promising for the labor market, since the strong demand will eventually force manufacturing firms to increase hiring. The manufacturing sector has been shedding jobs since August 2000. Last month, job growth was flat in the sector, but today’s data suggests that this could be the beginning of a new uptrend. Encouragingly enough, FOMC member Moskow said that job growth is off to a good start in the first quarter and the slack in the US economy is beginning to decrease while slowing productivity gains should help to boost hiring. The most important US economic data scheduled for release next week is Friday’s advance estimate for first quarter GDP. All evidence point to above trend growth in Q1, upside risk will help to support the dollar. Meanwhile, in Switzerland, SNB Hildebrand failed to make any significant comments on monetary policy.

GBPUSD

The UK released contrasting data today - stronger retail sales, but a weaker first quarter GDP report. Retail sales increased 0.6% during the month of March, tripling estimates. The strong housing market has continued to fuel consumer spending, which will be a persistent concern for the Bank of England’s Monetary Policy Committee. If you recall, BoE officials have been worried that previous rate hikes has failed to let steam out of the housing bubble or slow consumer spending. However, as we have learned this past week, even though the BoE still fears that a sharp collapse in house price valuations could lead to a destructive consumer retrenchment, low consumer price inflation may prevent them from raising rates in May. Meanwhile, GDP slowed from 0.9% to 0.6% in the first quarter as a result of a contraction in manufacturing output. According to the statistics office, there is a high likelihood that the first estimate will be revised since the Easter Holiday delayed the collection of data from some companies.

USDJPY

Japan’s tertiary activity index declined more than expected during the month of February, giving back the previous month’s stronger gains. There are lots of important Japanese economic data scheduled for release next week including consumer confidence, retail sales, industrial production, unemployment, intervention data for the month of April and a BoJ monetary policy meeting. We continue to believe that sooner or later, Japanese fundamentals will return to the forefront, allowing the yen to return to its natural course. The monthly intervention data from the MoF will be particularly interesting, since USDJPY has appreciated significantly over the past month, The market believes that the BoJ has been mostly absent from the market therefore, if the data should indicate otherwise, we may be poised for more volatility in USDJPY. According to the latest IMM data, for the first time in four weeks, speculators are net short yen.

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Bank of Canada Rate Decision (13:00 GMT) (Current Rate: 2.25%, 25bp Rate Cut Expected)

The Bank of Canada is scheduled to announce their monetary policy decision tomorrow. According to a Bloomberg News survey, 14 out of 17 economists polled expect the central bank to lower rates from 2.25% to 2.00%. The latest GDP and employment data has been particularly daunting. Since the beginning of this year, Canada shed 19,600 jobs, surprising the market, which had expected the labor force to increase in March (instead it shrank by 13.3k). Inflation fell to 0.7% yoy in February, the lowest level since 2001. This is substantially below the central bank's 2.0% target, indicating that the economy needs another round of easing.

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EURUSD
European and London markets remained closed today for the Easter holiday. The absence of these traders has resulted in very thin trading throughout the US session. Geopolitical risk continues to weigh on the dollar as the number of US casualties in Iraq increases. Although the market has become more desensitized to the developments in Iraq and threats of terrorism, the lack of any new catalyst has propelled this concern back to the forefront. Of course, the situation has intensified with the kidnapping of Japanese and Chinese nationals - prompting their respective governments to reevaluate their participation in the region. For the Eurozone this week, the market will turn its focus to the second Q4 GDP release and inflation data. Growth should remain below trend in the fourth quarter as the region struggles to recover. While there is a risk of an upward revision in inflation for the month of March, it still remains below the ECB’s 2% target.

USDCHF
Although the market’s core focus remains on next week’s testimony by Greenspan to Congress, there is enough data due out this week to shift the market’s focus away from Iraq. The week begins with the retail sales for the month of March due out tomorrow - there is speculation that the report could be exceptionally strong with broad based gains in autos, department and chain stores sales. Tax refund checks are expected to have boosted spending, while higher gasoline prices should have increased gas station receipts. The market expects retail sales to increase 0.7%, a sharply higher number could prompt a move in the euro below 1.20. Other data scheduled for release this week should also confirm the strength of the US economic recovery. Earnings season has just begun, the firms who have released thus far have on average reported exceptionally strong earnings. M&A activity has also picked up, with March reporting the largest cross border flow in two years. Despite the market’s mixed reading into the latest payrolls report, earnings releases and M&A flow is a sign that overall economic activity is picking up and even if payrolls do not deliver the 200-300k that the market expects, the Fed will have to begin exploring an exit strategy from their accommodative monetary policy.

GBPUSD
Tomorrow, we are expecting the latest data on house prices from the Office of the Deputy Prime Minister. There is little sign that the housing market is slowing despite reports today that Tony Dye, a prominent fund manager who was criticized for forecasting that the US tech bubble would burst in late 1990s/early 2000, now predicts a sharp crash in London house prices. However, a continued acceleration in house prices does increase the risk of a rapid collapse, which is one of the primary concerns of the Bank of England. A stronger report will add to the speculation that the BoE will be looking to raise rates by 25bp in May. The most important hint into the minds of the Monetary Policy Committee will still be next week’s release of the minutes from last month’s interest rate meeting.

USDJPY
The biggest news today comes out of Japan. Another round of astounding data is released from the country - both consumer confidence in Tokyo and the current account surplus rose to record levels. Compared to the previous year, the current account increased 46%, beating analyst estimates as exports to China and other global markets continued to soar. However, Japan’s reliance on Chinese demand is a bit concerning as China’s government is taking active measures to slow growth. For the third time since last September and the second time in three weeks, the Chinese government has raised reserve requirements from 7.0% to 7.5%. Increasing reserve requirements of banks generally slows down lending activities, which will have a ripple effect throughout the economy. Slowing growth in the region will impact the sustainability of China’s demand for US and Japanese imports.

USDCAD
The Bank of Canada is scheduled to announce their monetary policy decision tomorrow. According to a Bloomberg News survey, 14 out of 17 economists polled expect the central bank to lower rates from 2.25% to 2.0%. The latest GDP and employment data has been particularly daunting, while inflation remains significantly below target. Today’s sharp move upwards in USDCAD is reflective of position adjustments in the IMM, as speculators increased their CAD long positions to a whopping 41,865 last week, which is the largest level since March 2003.

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Technical Outlook
A break above the 10-day SMA and the previous day’s bullish engulfing like pattern gives EUR/USD a slight short-term bullish bias. The true test of bullish conviction, however, will come in the 1.2200/50 area as it marks a convergence of the 20-day SMA/50-day EMA and 23.6% fibo of the recent down move. Sustained break above required to undo bearish implications of last week’s price action and set up a re-test of the range highs. A clear failure to break the confluence could see another selloff but only a break below 1.1980 re-instills the downside initiative. Even then, downside follow through could be limited as the 200-day SMA (1.1900) and 50% fibo from the Sep - Feb bull wave (1.1850) await 100-points below. An inside day from USD/JPY as the pair consolidates above the 10-day SMA. Intermediate-term bias remains lower but multiple closes above the 105.00 successfully relieves short-term downside pressure. Break below 104.90 required to spark renewed downside momentum. We see some scope for another upside squeeze but any upside looks limited to the 107.40 100-day SMA. No follow through from Cable yesterday as the pair ran into stiff resistance at the 50-day SMA. Next few sessions will be critical in determining if the 1.7900 neckline will come under assault. Short-term bias is neutral as the pair is wedged between the 50-day SMA on the upside and the 50-day EMA on the downside. Clear break above/below need to signal the next playable directional move. Recent progression of higher highs slightly favors the upside and a test of the 1.8550 fib zone. USD/CHF confirmed Monday’s outside day like reversal with a break below the 1.2820 10-day SMA. Strong support is expected all throughout the 1.2760/00 zone as it marks a confluence of various important moving averages and fib levels. Break below needed to prolong downside momentum.

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Technical Outlook
Bullish engulfing like pattern on the EUR/USD daily just above the 200-day EMA relieves some short-term downside pressure. Clear break below yesterday’s 1.1980 low and 1.1950 200-day EMA now required to negate bullish implications of the reversal pattern and re-instill fading downside initiative. Even if this is to occur, downside follow through could be limited as the 200-day SMA (1.1900) and 50% fibo from the Sep - Feb bull wave (1.1850) await 100-points below. We see some scope for a potential earlier than expected EUR/USD up move but resistance at the 10-day SMA would need to give for this to become more of a viable scenario. Until then, the path of least resistance is still lower. A sharp move in USD/JPY yesterday as weak hand shorts were squeezed out of the market. The resulting tail reversal off the medium-term significant 50-day EMA now favors a resumption of the long-term downtrend. Break below yesterday’s 104.90 low required to confirm. Another close above 105.00 would change the picture but only a clear break above the 107.40 100-day SMA turns the outlook bullish. A strong showing from GBP/USD yesterday as aggressive shorts were forced to cover on the move back through the 50-day EMA. Shaven head swing low on the daily favors more upside and a test of the high-end of the recent range. A break of the 1.8550 50-day SMA is our key short-term pivot. Head & Shoulders pattern remains a medium-term overhang but not a real concern (for now) as we are still over 4-big figures from the potential neckline. Progression of higher lows over the past month puts into question the validity of the pattern but a break above the 1.8600 handle with follow through is required to completely negate the pattern’s implications. USD/CHF’s failure just shy of the 200-day SMA sets up a potential double top on the daily. While it is far too early to turn bearish, the potential ominous reversal pattern does make us doubt the strength of the recent uptrend. Immediate support is expected around the 10-day SMA, with only a break below setting up more downside. Breach of long-term resistance at the 1.3100 200-day SMA now required to re-instill upside momentum.

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Euro - Where are We Headed Next?

Published Date: April 5, 2004

With the euro tumbling close to 7% from its all-time highs in the past 7 weeks, it is once again time to publish another article in our Euro - Where Can It Go? series. The tables have turned and the market is becoming increasingly bullish on both the US economy and the US dollar. The euro is now flirting with the 1.20 level, which leads us to question whether we will see 1.15 before 1.25 or the reverse. There are two primary reasons to explain the euro’s recent move. First, the US has finally delivered what the market has been anxiously waiting for, which is evidence that the labor market is finally turning up. On the other hand, the Eurozone’s largest economies have been struggling to grow after rising from recessionary conditions last year, spurring widespread speculation that the ECB will be easing monetary policy over the next few months.

ECB signals the possibility of a rate cut

Unlike the Fed, the ECB prefers to prepare the market for any intended changes in monetary policy and uses its words to steer their currency. As a “say it as it is” central banker, ECB President Trichet’s comments has a history of moving markets. If you recall, it was his warning that the ECB is “not indifferent” to the brutal moves in the euro back in January that sent the pair tumbling 600 pips in under a week. His more recent warnings that should consumption fail to pick up, the ECB could change monetary policy, has intensified speculation about a rate hike. Although the ECB left interest rates unchanged at 2% on April 1st and Trichet’s comments at the accompanying press conference were more hawkish than the market had anticipated, an interesting change in the statement as well as diverging comments from Trichet this weekend suggests that the ECB’s next move will be a reduction in rates.

In the statement from the April 1st monetary policy meeting, the ECB changed their wording from the “current monetary policy stance is appropriate” to the current monetary policy stance “remains in line with the maintenance of price stability.” The most notable change in the wording is the elimination of the word “appropriate.” In the past, the removal of the word “appropriate” usually corresponds with a change in rates over the next two monetary policy meetings. Trichet tried to undermine the significance of this change by going out of his way in the Q&A session to say that the change in wording does not signal a change in monetary policy, but we think that more likely he was trying to inject some two-way risk into the market. Some however may argue that he was trying to appease the other members of the monetary policy committee. The latter reason although a bit preposterous since Trichet has a history of having extremely adept political skills as a result of spending years dueling with French politicians over interest rates and growth, did find some support from the media. The market is currently fixated on an article published in the UK Telegraph that said that Trichet wanted to reduce interest rates at the last monetary policy meeting, but faced strong resistance and was eventually overruled by Germany’s Issing and Holland’s Wellink, both of whom did not want the ECB to appear that it was cutting rates because of political pressure. Regardless of whether the article has any validity, there are 2 things that are true - Trichet is softening his stance on keeping rates unchanged, while the latest string of economic data from the Eurozone, particularly industrial production and service sector PMI reports indicate that the economic rebound in the region has been extraordinarily weak. With CPI at 1.6%, which is less than the ECB’s target rate of approximately 2%, the central bank has ample flexibility to loosen monetary policy.

The US delivers the strong data that the market has been anxiously awaiting

After months of waiting for the labor market to catch up with the growth in the rest of the economy, the US has finally delivered what the market has been waiting for. Although it is only one-month worth of data and the underlying components do not paint an equally optimistic picture, euphoria has captured the markets as it starts to convince itself that we no longer have a jobless recovery. As we have mentioned in one of our previous articles, until we see more evidence of a strong pickup in job creation, the economy and the US dollar will have a difficult time springing out of its restrained state. The data for March IS evidence that a pickup in job creation is happening - but whether it is strong or not still remains questionable. Since payrolls turned positive in September, the average monthly gain in payrolls is 108k. At this stage in the recovery in the 1990s, payrolls were averaging 220k per month. Furthermore, including the latest data, 1.89mln jobs have still been lost since President Bush took office. Nevertheless, the outlook for the labor market is positive, especially given the recent tick-up in durable goods orders, industrial production and the ISM manufacturing and service sector reports. The health of the manufacturing sector is particularly important since the industry has experienced 43 consecutive months of job losses (in March, the sector did not lose jobs, but it also did not add any as well). The strength of the March data will help to boost the dollar, but what will determine whether we will see 1.15 before 1.25 in the euro is the Federal Reserve and their monetary policy bias.

But it all depends on the Fed ……

Now that we have the jobs, we need the rates. What will turn the recent moves in the dollar into a full-fledged reversal are hints by the Federal Reserve that they are shifting their monetary policy stance from a neutral bias to a tightening bias. What we are worried about is that the market may have overdone interest rate expectations. According to the Eurodollar interest rate futures, the market is pricing in almost a 100% probability of a 25bp rate hike at the August 10th monetary policy meeting. Although the latest data could prompt the Fed to move forward the inevitable tightening cycle, they have repeatedly reiterated their intentions to be “patient.” With inflationary pressures still inconsequential, the Fed has the flexibility of waiting for growth in both the economy and the labor market to accelerate to the point where they will need to take a proactive measure to slow down the expansion by raising rates. With the economic recovery still fragile, it is unlikely that the Fed will want to raise rates too early in fear of putting the recovery at risk.

What this means is that until we see more positive comments from the Federal Reserve, the dollar could potentially recoup some of its extensive losses, resulting in more range trading. There are a few major events to keep an eye on in the weeks ahead. Positive developments will clear the way for a test of 1.15, unchanged and neutral developments could result in more range trading and retracement of recent losses, towards 1.25:

1) April 21st - Greenspan is testifying before the Joint Economic Committee (expected to be a mini “Humphrey Hawkins)
2) May 4th - FOMC rate decision (focus on statement)
3) May 7th - April non-farm payrolls (still looking for more jobs data)

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DailyFX Special Report: It All Depends On Jobs …..

Published Date: March 26, 2004

Given that the dollar has rallied 6% against the euro in the past 5 weeks, it is inevitable that the market would begin to talk about a dollar reversal. However, the talk remains restrained and cautious, as the market is still not completely convinced that fundamentals have shifted enough to warrant a broad based shift in trend. So what are we waiting for?

With 8.2% and 4.1% GDP growth in the third and fourth quarter respectively, there are no doubts that the economic recovery is underway. However, a quick survey of the market will lead many to think otherwise. The dollar is weak, the Dow has tumbled since the beginning of the year, while the outlook for hiring is still discouraging. If the economy is truly booming, the labor market would be healthy, equities would be rallying and foreigners would be pouring money into the US asset markets, helping to boost the value of the dollar. Unfortunately this is not the case. The current state of the US economy and the dollar is best described as a coiled spring - kept retracted as it looks for its next catalyst. The economic spring is kept coiled by one factor - the labor market. Until we see more evidence of a strong pickup in job creation, the economy and the US dollar will have a difficult time springing out of its restrained state. The health of the labor market and its future prospect are heatedly debated in the press. This makes jobs the number one factor that can change perception. If payrolls suddenly take off, this could rattle the markets, sending equities higher, bond yields soaring and the dollar rallying. Whether or not you believe that this will happen depends upon which side of the table you are sitting on - that is if you are a labor market bear or bull. Here are where the bears and bulls stand - take your pick:

· Labor Market Bears - With over 2 million jobs lost since Bush took office, if the labor market does not rebound, the economic recovery will be threatened.

· Labor Market Bulls - The payrolls data is distorting, the economic recovery is being led by the spending habits of the 94.4% employed so once productivity declines, corporations will be forced to hire.


Labor market bears - With 8.2 million people out of work as of February, it is not surprising that most Americans are very disappointed about the current state of the labor market. Nearly a fourth of these workers have also been out of work for six months or longer, indicating rising discontent. The papers have been littered with articles on the labor market - most of which reflect the views of labor market bears. Sentiment has worsened further following the release of the latest non-farm payrolls report for the month February, which indicated that only a dismal 21,000 jobs were added onto corporate payrolls last month. Although the unemployment rate declined to 5.6%, the plunge was not a result of an increase in the number of employed individuals, but rather reflects 392,000 people exiting the labor force. Since March of 2001, labor market participation has declined 1.2%. It is estimated that in order to get the share of people employed back to the level seen at the trough of the recession, (also factoring population growth) the economy would need to add 260,000 jobs per month for the next twelve months. Furthermore, unprecedented stimulus from the government has kept joblessness artificially low. This includes a significant amount of government spending, especially on defense and homeland security. The February labor market report is clear evidence of this artificial stimulus, as all of the jobs added onto payrolls were government and not private sector jobs. At this rate, payroll growth is clearly going to fall short of that target. So far, the manufacturing sector has been the worst hit, as February marked the 43rd consecutive month of manufacturing job losses. Labor market bears find that generous fiscal stimulus cannot continue forever. Once fiscal stimulus slows, the labor markets and the economy may take a hit. This is particularly concerning since the difficulty of finding jobs will eventually force consumers to cut back spending and increase savings, which they believe would ultimately threaten the sustainability of the US economic recovery.

Labor market bulls - Not everyone believes in the dismal jobs picture painted by the press - including Fed Chairman Alan Greenspan and US Treasury Secretary John Snow. Despite the weak payrolls growth in February, Greenspan has not wavered from his forecast that a significant pickup in hiring is expected to occur in the very near future. Many labor market bears wonder where this growth will come from and according to Greenspan, a slowdown in productivity will eventually prompt firms to increase hiring. Some even believe that the overcapacity left over from the bubble years of the 1990s has sheltered the economy and many businesses from what would have otherwise been a more painful downturn. In the 90s, unrealistic amounts of venture capital investments, junk bond financing and proceeds from IPOs have left US companies with excessive amounts money for plants, equipment and people. Typically the economy would have worked off the overcapacity in a shorter period of time, but these excess proceeds have kept many laggards in business. Also, with interest rates at such low levels, corporations have found it more attractive to increase capital investment over hiring - once this peaks, firms will be forced to hire. Although recent surveys of the manufacturing sector suggest that firms expect to increase hiring over the next few months, businesses have been reluctant to hire until they are completely confident in the recovery. Firms will want to delay hiring until they are sure that they will not have to conduct layoffs shortly thereafter. Therefore these firms instead have opted to hire temporary workers and/or independent contractors. This is actually the second most popular argument of labor market bulls, particularly that of John Snow. He is frequently quoted as criticizing the payrolls data for failing to account for the significant increase in number of self-employed individuals and independent contractors. According to the Labor Department, nonfarm self-employment as measured by the household survey has risen 7.3% since the recession ended in November 2001. This equates to an increase of approximately 644,000. The lower tax rate of the self-employed allows them to retain a larger portion of their earnings. However, one of the major pitfalls of the household survey is its relatively smaller sample size. Also, labor market bulls attest that consumer spending will continue at its rapid pace, since the 94.4% of individuals who are working are prospering. The latest data from the Fed indicates that household net worth soared to a record high of $44.4trillion. Labor market bulls argue that the wealth of those employed will continue to fuel consumer spending and the economic recovery, giving corporations the confidence to increase hiring.

Outsourcing represents only a small portion of the jobs lost - it is NOT the problem

One of the media’s favorite scapegoat for job losses is outsourcing. It seems so much easier for the government to blame their lack of ability to create jobs on the attractiveness of cheap labor abroad. However, outsourced jobs represent a very small portion of the jobs lost. Forrester Research predicts that the U.S. will lose a total of 3.3 million service jobs to outsourcing between 2000 and 2015. This equates to approximately 220,000 jobs lost per year. This number pales in comparison to the 1.15 million workers who lost their jobs in 1999, which if you recall, was actually a relatively healthy year. The Senate has supported the media’s shift of blame by voting 70 to 26 to stop granting Federal contracts to companies that outsource offshore. Despite the manufacturing sector and government’s attempts to blame the loss of jobs on outsourcing, it is the NOT the problem. Outsourcing has been going on for centuries and represents only a very small portion of the jobs lost. Furthermore, the benefits of outsourcing outweigh the costs. If it weren’t for the economic downturn, US corporations would still be talking about how outsourcing has increased profitability. One of the biggest proponents of this belief is Fed Chairman Alan Greenspan. According to a McKinsey report, it is estimated that every $1 of costs that the United States moves offshore brings in a net benefit of $1.12 to $1.14. The low cost of producing abroad allows firms to increase their competitive advantages by reallocating its resources (money and people) to more productive tasks, which will ultimately be beneficial for the US economy.

What could tip the scales?

One of the most pressing threats to the labor market is an indirect one. In recent weeks, the market has been obsessed with the fact that the Bank of Japan may be shifting their currency policy - that is, significantly reducing or even halting currency intervention. This is a significant threat to the US economy because the Japanese government has traditionally recycled the dollars that they have purchased for intervention into US fixed income assets. The aggressiveness and persistence of their intervention has made them one of the largest holders of US Treasuries. Demand from Asian central banks such as the Bank of Japan has anchored yields, providing the US economy with some much-needed additional stimulus. If the BoJ truly shifts their currency policy and stops intervening or even decides to sell their treasury holdings, this could potentially send the bond markets tumbling, yields soaring and the dollar plummeting. The higher yields would raise borrowing costs, cramping the finances of corporations, forcing them to restrain spending and delay hiring - none of which would help to reverse the dollar’s decline or accelerate the economic recovery.

The leading argument for the BoJ‘s shift in currency policy is pressure from the US government. Aside from artificially inflating the value of the dollar, US pressure may also come from the government’s concern that foreign central bank intervention may be resulting in the development of an asset market bubble in the US debt market. With the Fed publicly announcing their intentions to artificially keep short rates low, many hedge funds, institutional investors, speculators and commercial banks have rushed into leveraged bond trades. In fact, a recent Merrill Lynch survey found that a record 73% of investors say that bond prices are overvalued. Therefore if the BoJ capitulates their bond holdings, this could pose a significant threat to the labor market, the US economic recovery and the US dollar.

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Daily FX Fundamentals 03-23-04

· Europe reports strong capital outflows
· Bank of England member Large says he voted for a rate hike 5 out of the last 6 months
· Japan tertiary activity index at highest level since 1993

EURUSD

The latest Eurozone current account data for the month of January provides us with some insight as to why the euro has had such a difficult time rallying in the past few months. According to the release, investors withdrew almost double the amount of money from the region in January as compared to December. Over the same period, international investors have increased their holdings of dollar denominated assets by the fastest pace ever. These developments correspond with the euro’s 550-pip slide against the dollar during the month of January. Meanwhile, not all economic data released today was discouraging. In fact, for once in a long time, we had some encouraging data from the Eurozone - French consumer spending and Italian retail sales both surprised on the upside. Trading remains fairly quiet ahead of tomorrow’s US durable goods report. The market expects a strong number, which implies that the dollar will probably have a more significant reaction on the back of a weaker number rather than a stronger number.

USDCHF

The safe haven Swiss franc extended its rally against the dollar and euro as terrorism fears loom. There is now fear that the Hamas group may consider taking their anger out on US interests. This should be a temporary factor impacting the markets until we receive more important information on the economy such as tomorrow’s durable goods orders report or next week’s non-farm payrolls report. The February durable goods report is expected to shed some light on capital spending - after an unexpected drop in January, a surge in defense spending should help to boost the overall number. In his speech in New Orleans today, FOMC member Stern failed to comment on the economy or monetary policy, choosing instead to stick to his scripted speech. However, the FOMC officials scheduled to speak tomorrow will not be able to avoid this subject as one of the topics of discussion will be the economic outlook and monetary policy.

GBPUSD

The latest news out of the UK continues to increase the chances of an April or May rate hike. Bank of England MPC member Large is the latest government official to express his concern about the level of consumer debt and the possibility of a “sharp demand slowdown.” Large told the market that the high level of consumer indebtedness has been the primary reason why he voted for a rate hike, five out of the last six months. The comments from senior Treasury official Jonathan Cunliffe also boosted expectations for a rate hike. Aside from consumer spending, the development of a housing market bubble has been one of the UK government’s primary concerns. Cunliffe told the House of Commons’ Treasury Committee that the Bank of England has the “instrument that’s most capable of addressing the housing market.” The Treasury and the Bank of England is hoping that a rate hike will help to gradually slow the rate of house price acceleration and prevent a full-fledged uncontrollable collapse.

USDJPY

The Japanese economic engine continues to chug along, as Japan’s tertiary activity index rose to its highest levels since 1993. The services industries grew by its fastest pace in close to four years, fueled by increasing equity prices, rising consumer confidence, lower unemployment, and stronger consumer spending. The comments from Japanese government officials continue to be monitored closely by the market - Bank of Japan Governor Fukui was on the wires Tuesday warning that, “if disorderly exchange rate moves become strong, it could hurt the emerging economic recovery.” However he also added that, "fewer and fewer companies see a stronger yen as having a straightforwardly negative impact, as they did in the recent past." With the recent volatility in the yen, Japanese corporations have been employing increasingly sophisticated hedging techniques, which may explain Fukui’s lack of concern.

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Technical Outlook
The consolidation in EUR/USD continues. Basing action around the 100-day SMA within a still intact LT uptrend continues to favor an eventual break to the upside, but price action needs to confirm before positioning becomes warranted. The 50-day EMA remains our key short-term pivot, with a clear break above required to inspire more short-covering and a new leg higher. Allow for more range contraction until then. Only a break of the 1.2160 3/11 low re-instills the downside bias. USD/JPY remains weak. Attempts to rally off fib support in the 106.60 area(78.6% retracement of the recent upmove) have not gained traction as sellers continue to aggressively re-emerge around the 50-day SMA. A clear lack of any real meaningful support until the 105.27 multi-year low keeps the path of least resistance down, despite some clearly oversold readings on the daily oscillators. Below the 107.60 50-day SMA we continue to favor the downside and an eventual re-test of the 105.27 multi-year low. Minor ST support seen around 106.30/00, with a break lower required to put 105.50 under assault. USD/CHF trade remains choppy to say the least. A failure to overtake resistance at the 100-day EMA prompted another aggressive move lower, with both the 50-day EMA and 50% fib retracement ( of the Feb upmove) giving way. The 50-day SMA now becomes our major inflection point with a close below required to signal a true resumption of the LT downtrend. Failure to breach could see the development of a new range between 1.2800-1.2500

Weekly Technicals

Technical Outlook
Some disappointing lack of follow through from EUR/USD on Friday as resistance at the 50-day EMA continues to successfully cap upside attempts. The subsequent close back below the short-term break out point nullifies the positive implications of the triangle expansion and turns us ST neutral until either the 50-day EMA is clearly overtaken or chart support in the 1.2160 area gives way. The basing action around the 100-day SMA within a still intact LT uptrend tends to favor an eventual break to the upside, but price action will need to confirm before positioning becomes warranted. An inside day from GBP/USD on Friday as trade was confined to a mere 120-pip range between the 20-day SMA and 50-day EMA. Despite the lackluster trade, Thursday’s close above the 50-day EMA continues to favor further upside and an eventual test of more meaningful resistance in the 1.8430-1.8500 area. Obviously the 1.8370/1.8430 20-day SMA/38.2% fibo of the recent correction remains key resistance, and a break above will be required to inspire further gains. Zero downside follow through from USD/CHF as solid demand emerged around the 50-day SMA. Below the 100-day SMA we continue to favor the downside, though such a sharp rally following a textbook technical pattern break is concerning to say the least. Some possibility exists for a false pattern break out, but ST fib resistance at 1.2860 will need to be re-taken for this to become more of a legitimate concern. Bears remain in control (if only slightly), with a break below the 50-day EMA required to re-instill the downside initiative

English Pound Riding High

Daily FX - Can the British Pound Continue to Rally?

Published Date: February 19, 2004

The British pound is currently trading at 11-year highs against the US dollar. Although the GBPUSD is probably overvalued, the bullish bias of the pound both fundamentally and technically favors further gains in the pair over the near term. Ironically enough, the last time the pound was trading at these levels was in 1992, right before George Soros became known as the “man who broke the Bank of England.” Between March and August of 1992, the GBPUSD rallied from a low of 1.6975 to a high of 2.00. In September of 1992, George Soros leveraged the entire $1 billion value of his fund to take a $10 billion position against the pound. Other traders followed suit, causing the GBPUSD to slide over 900 pips or close to 5% in 24 hours. This forced the Bank of England to abandon the Exchange Rate Mechanism (ERM) while at the same time allowing Soros to make between $1-$2 billion in profits for his fund that day. Of course, Soros does not have the capability to move the market like he did in 1992 but nevertheless we find this bit of history rather interesting.

What is fueling the rally in the pound?

Vodafone Withdraws Bid for AT&T Wireless

The pound’s most recent surge through 1.90 can be partially attributed to the withdrawal of UK based Vodafone’s bid for US based AT&T Wireless. M&A flows are very important in the FX market. Cingular eventually won the deal, which was valued at approximately $41billion. The GBP was rallied following this announcement as the market readjusted their positions. Apparently a lot of people pre-hedged what they thought would be Vodafone’s requirement for dollars. The break above 1.90 occurred minutes before Vodafone confirmed the withdrawal of their bid.

Strong UK Fundamentals - Hiking bias

Strong UK fundamentals and a hiking bias by the central bank has led to strong gains for the GBP. In their latest inflation report, the Bank of England raised their GDP growth forecasts from 2.8% in 2004 to 3.6% in the first half of the year and then an easing to 3.25% for the remainder of the year. According to the latest releases, the UK economy grew by 0.9% q/q and 2.5% yoy in the last quarter of 2003. This is the fastest pace of growth in close to four years. The UK unemployment rate also fell to a 29 year low of 2.9% in January, as the number of people claiming unemployment benefits fell by 13,400, doubling expectations. In the latest BoE Inflation Report, BoE Governor Mervyn King went as far as saying that the sterling is still below the average level registered in 2000-2003, which suggests that the GBP has not yet reached a level that the BoE considers excessive. With a strong domestic economy and an ongoing global recovery, expectations are for the Committee to continue tightening monetary policy this year. The latest inflation report confirms this belief by pointing to rising inflationary pressures. BoE Governor Mervyn King warned that there are already signs of “higher inflation to come,” and that additional “news” would not be required to necessitate another rate hike. The market is already pricing in another rate hike by June 2004 - with the market still fixated on earning yield, the GBP should continue benefit.

US Dollar 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 latest 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.

Can the rally be sustained?

Technical Outlook

The intermediate-term view in the GBPUSD remains healthy above trendline support in the 1.8500 area. A sustained break below the 1.8820 10-day SMA/23.6 fibo (of Jan - Feb bull wave) is needed to confirm the key reversal day and open the way for a more aggressive decline to the 1.8580 former breakout level. A close above the 1.9000 handle clears the way for a test of the 1.9140. While the pair is clearly overbought on most oscillators, momentum remains strong after yesterday’s positive re-cross on the daily stochastics. Above the 1.9000-curved trendline support our bias is to the upside, with break below required to set in any sort of playable weakness.

Short- Term Fundamentals Favor Gains

As long as the dollar downtrend remains intact and sterling fundamentals continue to improve, the outlook for the GBP remains favorable. As we have mentioned before, the market expects another rate hike and the latest retail sales report for the month of January provides further confirmation. With the acceleration in consumer spending, the Bank of England may need to raise rates faster than “gradually.” As long as the Federal Reserve and ECB maintains accommodative monetary policies, the GBP should benefit. However, as soon as either central banks, but more importantly the Federal Reserve gives any hints that they are considering raising rates, the GBP’s medium term uptrend will come under attack. One of the primary reasons why the currencies such as the GBP, AUD and NZD are soaring is because they are the only central banks that have shifted from easing to tightening. Therefore there are three things we need to keep an eye on and that is - US and European monetary policies and dollar weakness. Both come hand in hand, as respite for the dollar will come when the US adopts a tightening bias.

Forex Trading News

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With the EURUSD approaching its all time highs around 1.29, there has been a lot of speculation as to whether the European Central Bank (ECB) would actually intervene to sell euros against the dollar. The strength of the euro has sparked harsh rhetoric by European exporters who consistently cite dollar weakness as one of the primary reasons for their shortfalls in profitability. Comments from Eurozone officials indicate their distinct discomfort with the “brutal moves” in the euro. The influential head of the German IFO institute Hans-Werner Sinn called for the ECB to intervene in the foreign exchange markets to curb the euro’s rise. Sinn told a German newspaper that “the guardians of the currency could durably lower the (euro's) rate by 10 percent by selling 30 billion euros." However whether or not the ECB will intervene overtly still remains a question.

Previous ECB intervention

Since the launch of the euro on January 1, 1999, the ECB has only intervened four times, all in late 2000. The EURUSD took a downward spiral in the months following the launch of the euro, prompting the ECB to take action in concern “about the national and worldwide effects of the euro’s exchange rate, including its consequences for price stability” (ECB press release 11/03/00). The weakness of the euro has aggravated inflation by increasing import prices. However, the ECB was also struggling to prevent the market from losing confidence in their new “project” (currency). Although the ECB did not release details on the magnitude of their intervention, the Federal Reserve reported having purchased 1.5 billion euros against in the dollar on behalf of the ECB. All bouts of intervention caught the market by surprise. Unfortunately, the success of the ECB’s intervention was short-lived as the euro’s rise from 0.83 to 0.96 reversed course in 2001, prompting the pair to fall back to 0.84 in July 2001. The euro did not resume its rally until post 9-11, at which time falling confidence in the dollar and bleak outlook for the US economy dictated direction for the pair.

Will the ECB intervene again?

However, despite criticism from the corporate sector, the ECB will prefer to use threats and interest rate cuts rather than overt intervention to stem the euro’s rise. ECB Trichet’s warning about the “brutal moves” in the euro prompted the EURUSD to slide from 1.29 to 1.2425. We suspect the ECB’s comfort level with the euro is between 1.25 and 1.28. Although a stronger currency hurts exports and squeezes growth, as long as inflation remains under control, the ECB has the added flexibility of postponing overt intervention. Consumer price inflation in January was 2%, which is right in line with the ECB’s limit. For the previous 5 months, CPI has been above the bank’s 2% limit. A strong euro should put downward pressure on inflation, but the effects have been muted thus far. Furthermore, for intervention to be effective, the market would need to be overextended in some way. IMM positioning in the euro indicates that longs are not at extreme levels. Even though the EURUSD has risen 19% since last year, it is only 8% higher than the level that it was launched at in 1999. A rise in the euro is like tightening monetary policy, so we believe that the ECB is more likely to reduce interest rates before intervening overtly. Inflation is expected to fall below the ECB’s limit if the euro continues to appreciate. However, selling euros in the foreign exchange market would send a significant message to the market, which the ECB may fear undermines the market’s confidence in the euro. Furthermore, ECB intervention without US support would be much less effective. Japan has already expressed consent to helping the ECB intervene if necessary, but the US’ current comfort and satisfaction with the weaker dollar makes it unlikely that they would readily consent to buying dollars for the ECB.

Does Intervention Work? What are the Currency Implications?

The effectiveness of intervention also remains in question, as there has never been a consensus on the effectiveness of sterilized intervention, due to the discrepancies between the methodologies used in empirical studies of intervention. However, according to a report by Fatum and Hutchinson (ECB Foreign Exchange Intervention and the Euro: Institutional Framework, News and Intervention), there is evidence that intervention in the euro affects the exchange rate in the short term. Their findings are generally consistent with a similar pieces published by previous authors in 1993 and 1994. The report quantifies the effect of rumors and firm reports of ECB intervention on the value of the euro. Although the report is based upon intervention in support of the euro, which has been the only type of intervention to date, we will highlight it for benchmarking purposes. The findings indicate that rumors of ECB intervention are associated with an immediate 0.24% move in the euro (approx 30 pips), while firm reports of ECB intervention are associated with an immediate 0.66% move in the euro (approx 85 pips). Overt intervention by the ECB would signal that the euro is no longer a one-way bet, which should prompt a larger short-term move in the trading sessions following the intervention as speculators adjust their positioning. Therefore although the ECB is not likely to intervene below 1.30, if they do, it would certainly have a significant short-term impact on the EURUSD.

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EURUSD

The EURUSD took off immediately following the release of Greenspan’s monetary policy report to Congress. In an unusual move, Greenspan talked extensively today about currencies in both his testimony and in the Q&A session. If you recall, at the last Humphrey-Hawkins testimony in July, Greenspan skirted any questioning about the dollar, saying that it was not within his realm of authority to comment on exchange rates. However, today, not only did he comment on currencies, but he went as far as saying that the dollar decline has been “gradual” and has had “no material adverse side effects (that) have been visible in U.S. capital markets.” Furthermore, he said that the weaker dollar is helping to reduce the current account deficit. Greenspan’s comments were less hawkish than the market expected, as he reminded the market that current monetary policy is appropriate and that “with inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation.” Last week’s comments from the Fed’s Bernanke led the market to believe that Greenspan would also be making some positive comments on the outlook for inflation, however, instead, the testimony chose to focus on the continual downward pressures on inflation. His comments effectively eliminate any possibility of a summer rate hike, which forced the market to adjust its expectations accordingly.

USDCHF

On the outlook for the US economy, Greenspan did not disappoint. He said that the economy has made “impressive gains” and that the “picture has brightened” significantly since his last testimony in July 2003. However, with regards to the labor market, he noted that the “progress in creating jobs has been limited.” With the economy losing 2.286 million jobs since President George W. Bush took office in January of 2001, Greenspan faced aggressive questioning with regards to his timing of a widespread recovery in the labor market. In December, the Bush Administration forecasts adding 2.6 million jobs this year and in response to questioning, Greenspan said that the forecast is “probably feasible.” He expects productivity growth to slow, which should help job growth. To date, “stunning” productivity gains has kept job growth limited. When questioned about Asian central bank holdings of foreign treasuries, Greenspan said that foreign selling of treasuries is not a major problem and that the market has “misplaced” concerns. He indicated that Asian central banks typically own treasuries with short dated maturities, which tend to have smaller-scale fluctuations. Greenspan will be repeating his testimony to Senate tomorrow - therefore it will once again be important to keep an eye on the Q&A session.

GBPUSD

The GBP soared as the Bank of England’s latest inflation report pointed to rising inflationary pressures. BoE Governor Mervyn King warned that there are already signs of “higher inflation to come,” and that additional “news” would not be required to necessitate another rate hike. His economic outlook was very optimistic, as the bank forecasted GDP growth to hit 3.6% in the first half of the year and then ease to 3.25% for the remainder of the year. This is an upward revision to the Bank’s November forecast for 2.8% GDP growth for 2004. Further bolstering the GBP was January’s strong unemployment report. The UK unemployment rate fell to a 29 year low of 2.9%, as the number of people claiming unemployment benefits fell by 13,400, which was double market expectations. Today’s data pretty much solidifies another round of tightening this year.

USDJPY

The Bank of Japan is suspected of intervening in USDJPY as the pair ticked down to a low of 105.17 during Greenspan’s testimony. In line with Greenspan’s abundance of comments on currencies today, he also touched on the topic of the JPY during the Q&A session. Greenspan noted that the JPY would rise if the Ministry of Finance abandoned their intervention activities for a short time, however gains in the JPY should only be temporary. Keep an eye on tonight’s current account data - the global economic recovery should provide continual upward pressure on the current account balance, which means that we wouldn’t be surprised to see the current account rise to a record on a seasonally adjusted basis.

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EURUSD

The EURUSD took off immediately following the release of Greenspan’s monetary policy report to Congress. In an unusual move, Greenspan talked extensively today about currencies in both his testimony and in the Q&A session. If you recall, at the last Humphrey-Hawkins testimony in July, Greenspan skirted any questioning about the dollar, saying that it was not within his realm of authority to comment on exchange rates. However, today, not only did he comment on currencies, but he went as far as saying that the dollar decline has been “gradual” and has had “no material adverse side effects (that) have been visible in U.S. capital markets.” Furthermore, he said that the weaker dollar is helping to reduce the current account deficit. Greenspan’s comments were less hawkish than the market expected, as he reminded the market that current monetary policy is appropriate and that “with inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation.” Last week’s comments from the Fed’s Bernanke led the market to believe that Greenspan would also be making some positive comments on the outlook for inflation, however, instead, the testimony chose to focus on the continual downward pressures on inflation. His comments effectively eliminate any possibility of a summer rate hike, which forced the market to adjust its expectations accordingly.

USDCHF

On the outlook for the US economy, Greenspan did not disappoint. He said that the economy has made “impressive gains” and that the “picture has brightened” significantly since his last testimony in July 2003. However, with regards to the labor market, he noted that the “progress in creating jobs has been limited.” With the economy losing 2.286 million jobs since President George W. Bush took office in January of 2001, Greenspan faced aggressive questioning with regards to his timing of a widespread recovery in the labor market. In December, the Bush Administration forecasts adding 2.6 million jobs this year and in response to questioning, Greenspan said that the forecast is “probably feasible.” He expects productivity growth to slow, which should help job growth. To date, “stunning” productivity gains has kept job growth limited. When questioned about Asian central bank holdings of foreign treasuries, Greenspan said that foreign selling of treasuries is not a major problem and that the market has “misplaced” concerns. He indicated that Asian central banks typically own treasuries with short dated maturities, which tend to have smaller-scale fluctuations. Greenspan will be repeating his testimony to Senate tomorrow - therefore it will once again be important to keep an eye on the Q&A session.

GBPUSD

The GBP soared as the Bank of England’s latest inflation report pointed to rising inflationary pressures. BoE Governor Mervyn King warned that there are already signs of “higher inflation to come,” and that additional “news” would not be required to necessitate another rate hike. His economic outlook was very optimistic, as the bank forecasted GDP growth to hit 3.6% in the first half of the year and then ease to 3.25% for the remainder of the year. This is an upward revision to the Bank’s November forecast for 2.8% GDP growth for 2004. Further bolstering the GBP was January’s strong unemployment report. The UK unemployment rate fell to a 29 year low of 2.9%, as the number of people claiming unemployment benefits fell by 13,400, which was double market expectations. Today’s data pretty much solidifies another round of tightening this year.

USDJPY

The Bank of Japan is suspected of intervening in USDJPY as the pair ticked down to a low of 105.17 during Greenspan’s testimony. In line with Greenspan’s abundance of comments on currencies today, he also touched on the topic of the JPY during the Q&A session. Greenspan noted that the JPY would rise if the Ministry of Finance abandoned their intervention activities for a short time, however gains in the JPY should only be temporary. Keep an eye on tonight’s current account data - the global economic recovery should provide continual upward pressure on the current account balance, which means that we wouldn’t be surprised to see the current account rise to a record on a seasonally adjusted basis.

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EURUSD

The highly anticipated G7 meeting failed to provide any support for the dollar. To Europe’s content, the statement released by the G7 portrayed their concern about the rapid acceleration in the euro. The statement was aimed at calming the markets and clarifying the Dubai communiqué. The European’s hand in crafting the statement was seen in the addition of the sentence “excess volatility and disorderly movements in exchange rates are undesirable for economic growth.” These are the same words that European officials have been repeating since the euro broke above 1.25 and reflect the G7’s concession to acknowledging the abrupt weakness of the dollar. The lack of supporting comments for the dollar has cleared the way for a possible retest of the previous high at 1.2905. Looking ahead, there is an Ecofin council meeting of European finance ministers scheduled for tomorrow. Rumors are filtering through the market today suggesting that rate cuts and intervention will be discussed at tomorrow’s meeting. Austria’s Grasser tried to deny these claims, saying that these are topics that should be addressed by the ECB.

USDCHF

The US’ hand in crafting the G7 statement is also quite evident, as the statement retained the “flexibility” message and does nothing to suggest that the G7 wants to reverse the dollar’s decline. The lack of any restraint for the dollar indicates that the other G7 member countries understand that the dollar correction needs to continue in order to adjust the US external imbalance. The big event risk this week is Greenspan’s semi-annual Humphrey-Hawkins testimony on the economy. His words and responses to the Q&A session has the means to dictate the direction of the dollar in the weeks ahead. Greenspan is expected to express optimism about the prospects for the economy and job creation, but also caution that inflation remains low, therefore the Federal Reserve has the ability to postpone rate hikes. However, should Greenspan echo Bernanke’s recent comments on deflation (that risks have subsided substantially), the dollar may find moderate support. Onto Switzerland, the unemployment rate remained unchanged in January although the actual number of unemployed individuals fell for the third consecutive month.

GBPUSD

The GBPUSD soared to fresh 11-year highs despite generally weaker economic data. Industrial production unexpectedly slipped -0.1% m/m and -0.8% y/y during the month of December. Manufacturing output also fell for the second month on the back of weaker European demand. The pace of the gains in UK property values are also slowing, as the latest house price data from the Office for the Deputy Prime Minister (ODPM) indicate that the yoy rise in house prices has declined from 9.7% to 8.3%. The latest release reflects the satisfactory effects of the Bank of England’s first rate hike in November. If you recall, the Bank of England raised rates by another 25bp last week. However, improvements in the BRC retail sales index did help to offset some of the weaker data. Looking ahead, we are keeping a close eye on Wednesday’s unemployment and inflation report.

USDJPY

USDJPY remained essentially unchanged following the G7 meeting. Japanese government officials were very vocal in defense of their intervention activities both during the meeting and in private discussions with US Treasury Secretary Snow. Although the second new sentence in the G7 statement (“that lack such flexibility”) is aimed at Asia, Japanese Finance Minister Tanigaki repeatedly tried to clarify that the G7 message was not targeted at Japan. He said the Japanese yen has fluctuated just as much as the EUR has since September, therefore “Japan is NOT one of the countries that are lacking flexibility and that was understood at this G7 meeting.” He also added that, “every G7 country agreed that Japan’s currency regime is flexible.” Tanigaki is effectively telling the market that Japan intends to continue intervening in the yen.

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Outcome of Boca Raton G7 Meeting

Published Date: February 9, 2004

G7 Clarifies Dubai Message - No Major Shift to Policy

In the G7 - What to Expect article that we released last week, we predicted that there would no major shift in policy at this past weekend’s G7 meeting. Taking a look at the statement released by the G7 finance ministers and central bank governors, we see that G7 officials used the most recent communiqué to clarify the message that they released in Dubai last year.

The following is the communiqué’s paragraph on FX:

“We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate. In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.”

Aside from the two new lines in bold, the statement remains identical to the one released in Dubai and effectively clarifies the Dubai message, reflecting a compromise between the US, Europe and Japan. To Europe and Japan’s content, the first line added was “excess volatility and disorderly movements in exchange rates are undesirable for economic growth.” These are the same words that European officials have been repeating since the euro broke above 1.25 and reflect the G7’s concession to acknowledging the abrupt weakness of the dollar. The second new line (that lack such flexibility) is clearly directed at Asia. Without directly naming names (in particular, China), the G7 is calling for Asian countries to bear an equal burden of the dollar’s slide. Although this line may also appear to be directed at Japan, Japanese Finance Minister Tanigaki clarified the message over the weekend, saying that the G7 message was not targeted at Japan. The Japanese yen has fluctuated just as much as the EUR has since September, therefore “Japan is NOT one of the countries that are lacking flexibility and that was understood at this G7 meeting.” He also added that, “every G7 country agreed that Japan’s currency regime is flexible.” For the US, the statement retained the “flexibility” message and does nothing to suggest that the G7 wants to reverse the dollar’s decline.

Growth

The G7 statement was also very upbeat in terms of global growth. In contrast to the Dubai statement which started with “recent data indicate that a global recovery is underway,” the Boca Raton statement said that “the global economic recovery has strengthened significantly since our meeting in Dubai and risks have diminished.” The individual press conferences given by the G7 finance ministers and central bank governors also reflected this collective optimism. However, the G7 still feels that “much more remains to be done,” which suggests that member countries will be engaging in more pro-growth policies.

Dollar Downtrend Remains Intact

Therefore in no way does this statement change the direction of the dollar or put a floor under the dollar. The G7 wants the market to focus on the pace and distribution of the dollar’s decline - making sure that currency movements do not become excessive and calling for a more pronounced correction in the dollar against the Asian currencies.

The statement also indicates that the Europeans may not be completely uncomfortable with the current direction of the dollar - instead they want time to absorb and adjust to the dollar’s slide and corresponding euro rise. As indicated by recent European and more specifically German economic data, the negative effects of the gains in the euro has been limited thus far. Therefore 1.30/1.35 is still a possibility for the Euro.

Japan also staunchly defended their intervention policy at G7, arguing that the JPY has already shouldered a major part of the dollar correction. The statement contains no limitations or harsh words for Japan - which means that the Japanese will continue to cap gains in the JPY. Therefore although we believe that the long term USDJPY downtrend should remain intact as fundamentals prevail, in the short term, we expect to see repeated attempts by the Ministry of Finance to send USDJPY higher.

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Technical Outlook
EUR/USD’s close on Friday above triangle trendline resistance at 1.2640 turns the technical picture emphatically bullish and favors an imminent resumption of the primary bull trend. Oscillators further bolster the bullish picture following Friday’s positive cross on the MACD. The 1/23 1.2779 swing becomes the next major level of resistance, with a break above required to negate the bearish implications of the weekly bearish engulfing and prolong upside momentum. An interesting trading day in USD/JPY on Friday as the pair underwent a clear short squeeze on a move through the 10 and 20-day SMAs. The failure slightly below the 50-day SMA and tail reversal close below the open on the daily however highlights a clear lack of resolve among bulls and favors an eventual test of the psychologically important 105.00 handle. Despite this overwhelmingly bearish technical picture, we still require a sustained break below 105.00 to confirm the start of another meaningful leg lower. Similar story in Cable as in EUR/USD after Friday’s close above 1.8430 trendline resistance. A break above the 1/23 1.8526 high is needed to negate the weekly bearish pattern and put focus back on the 1.8581 decade high. The pair remains vulnerable to a typical breakout-retracement scenario in the near-term but as long as support at former trendline resistance holds the outlook remains strongly in Sterling’s favor. A break below trendline support and a negative MACD cross in USD/CHF sets up a potential bear flag breakdown on the daily. Our key downside pivot remains the 1.2472 swing low, with a break below required to open the way for a renewed assault on the 1.2277 multi-year low. Allow for some corrective price action intraday, but below the 1.2400 handle bears remain firmly in control.

Chart of the Day - USD/CAD
On 01/19 USDCAD had a high at 3050 (above our 2950/2990 zone). A small retracement then occurred from the high and ended on the 2852 low on 01/20, 198 pts lower. The buck kept its momentum before breaking the 3000/3100 level on 01/23, S was found on the same area a couple of days later (low at 3037 on 01/27) before finally failing on 3440 (slightly below 3460/3500 zone), 588pts higher. Today the outlook is neutral as we remain in a healthy ST uptrend while we test major R. In fact, 3460/3500 is still a perfect entry for reversal players thanks to a robust Fibo confluence (50% Fibo from the Jul - Jan bear wave & 50% Fibo from the 03 - 04 bear wave) and the current Swing high. After a sustained break above 3500, the area will become S and 3700 will be the next target. On the bullish side, aggressive players will step up the 3150/3180 zone thanks to the 20 EMA and 38.2% Fibo from the Jan - Feb bull wave. Conservative range player types will wait for the 1.2600/40 zone to exploit the swing low and Lower BB. A breakout there would put 2400 and 2120/80 into play.

Euro USD News

Technical Outlook
EUR/USD’s failure yesterday at triangle trendline resistance favors continued range contraction. Intermediate-term outlook remains neutral within the triangle but above the 38.2% Fibo from the Nov - Jan bull wave we favor an eventual resumption of the long-term bull trend. Sustained break above 1.2650 short-term trendline required to trigger any sort of upside momentum. Intraday we favor the downside after yesterday’s inability to hold above the 20-day SMA. USD/JPY’s failure to develop downside momentum on the break of the 105.50 fib level makes the pair extremely susceptible to a short squeeze. Oscillator divergences and a positive cross on the slow stochastic further support the bull side and a potential upside run. 106.30 moving average resistance remains key, with a sustained break above required to trigger any sort of significant move higher. While the longer-term picture remains overwhelmingly bearish, we now require a break below the 105.00 handle to confirm a true resumption of the downtrend. More lackluster trade in USD/CHF as the pair remains confined to the triangle consolidation on the daily. We are still unclear whether the consolidation is a precursor to one last gasp higher or the calm before a resumption of the long-term downtrend. Below the 50-day EMA we favor the latter. Yesterday’s false break below the 20-day SMA and a hammer on the daily biases the upside intraday.