The outlook for $/yen is similar to the view for the dollar versus most other major currencies, as trade from the March 17th low at 96.15 and is seen as a correction (wave 4 in the fall from the Dec high at 114.65, see numbering on daily chart below), and suggests an eventual resumption of the declines back to 96.15 and below (within wave 5). For now, would short here (currently at 99.60). However, the confidence level that this period of correcting (wave 4) is indeed “complete” is not yet extremely high, and keeps open the potential for more wide ranging and even a temporary break above the recent 101.00 high (38% retracement of wave 3) first. Despite the lack of high confidence, it still appears to be a good risk/reward trade as a close above the month long bearish trendline (currently at 100.50/60) would greatly increase the risk for more topping/new highs, and would be a sign to stop (limited risk, but would be looking to resell at higher levels). Remember, it’s not just about trying to pick market direction, but trying to get in to consistently good risk/reward trades. This includes times when the confidence level is not extremely high, but the large potential payoff more than compensates (as in this case). Nearby support is seen at 98.60 (earlier low, 50% retracement from the 96.15 low). Note only temporary weakness on the March 17th short at 97.25 before stopping just the next day above the broken base of the multi-month bear channel (then at 98.85, closed at 99.80).

Longer term, the bearish bias remains in place with further declines toward the base of the 6 year bearish channel (currently at 95.00) and eventually a retest of the Apr 1995 low at 79.80 still in place. Note too that the downside pattern is still quite far from “complete” (currently within wave 4 in the fall from the Dec high at 114.65, and also wave III in the fall from the Oct 2007 high at 117.90, see numbering on weekly chart/2nd chart below). For now, would maintain the longer term bearish bias but note that there will no doubt be significant, countertrend bounces (minimum 7-8 yen) along the way as this longer term downside pattern continues to unfold over the next number of months.

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Disclaimer: The opinions expressed herein are those of the author and not a recommendation to buy or sell specific securities.

Talking Points

•    Japanese Yen:     Remains below 100 as equities mixed
•    Euro:  Consolidates yesterday’s gains after some profit taking
•    Pound: Above 2.0100 on repute GBPCAD order and strong investment data
•    US Dollar: GDP, jobless claims on tap

After a wave of profit taking in early European session that was triggered by technical rather than fundamental concerns, the EURUSD recovered most of its losses and was once again trading above 1.5800 level by the North American open. It was another quiet night on the economic calendar with only German GFK Consumer confidence survey on the docket, but yesterday’s one two punch of better than expected IFO numbers out of Germany and disappointing Durable Goods number out of the US continued to resonate through the currency market tonight bolstering flows to the euro.

Much to the surprise of most analysts, the divergence of the two largest economies in the world is becoming more rather than less prominent. In contrast to the US consumer confidence data, which recorded it worst reading since the days of the Nixon administration, German consumer sentiment actually improved to 4.6 from 4.4 forecast on better economic outlook.

As we’ve noted many times before, despite the combined challenges of appreciating exchange rates and faltering demand from the US, EZ economies continue to perform well by selling to the emerging economies of Asia and Middle East. With fundamental data at their back, euro longs will not doubt try to bully the pair towards the 1.6000 figure as momentum  remains on their side.

If EURUSD does break through 1.6000, debate is likely to shift towards the idea of intervention.  The Europeans have shouldered the biggest burden of exchange rate adjustments and up to now EZ business have been quite adept at hedging their books.  However, if a break of the 1.6000 precipitates a dollar rout sparking massive volatility and panicky liquidation, the G-3 central banks may feel compelled to stem the tide.  The key to whether intervention becomes a reality will depend largely on the velocity of the move rather than its absolute value. If the EURUSD continues its slow but steady ascent, monetary authorities will most likely attempt to only jawbone the move. However, if markets become disorderly, physical intervention may well be the outcome.   

Today, the market will get a glance at the final US GDP release which is unlikely to be market moving given the backward nature of the data.  More interesting to many traders will be the weekly jobless claims numbers which are expected to remain elevated above the critical 350K level. As unemployment begins to rise, the pressure on the Fed to continue easing will only escalate which in turn will increase the interest rate differentials between the euro and the dollar providing more fuel to euro bulls.   

EURUSD 1.60 or 1.50?  Join us in EURUSD Forum

… Goldman and UBS have upped their estimates on total writedowns for the financial sector. Carry Trades and the USD look weak again.

Overnight News Bullets

• GE IFO - Business Climate (MAR) out at 104.8 vs. 103.5 expected vs. 104.1 prior.
• GE IFO - Current Assessment (MAR) out at 111.5 vs. 109.5 expected vs. 110.3 prior.
• GE IFO - Expectations (MAR) out at 98.4 vs. 97.8 expected vs. 98.2 prior.
• EC E-Z Current Account (JAN) out at -10.6B vs. -10.3B prior.
• EC Industrial Orders MoM/YoY out at 2.0%/7.3% vs. 0.2%/3.3% expected vs. -3.6%/2.1% prior.
• US Mortgage Applications (MAR) out at 48.1% vs. -2.9% prior.
• US Durable Goods Orders (FEB) out at -1.7% vs. 0.7% expected vs. -5.3% prior.
• US Durable Goods Orders Ex. Transp. (FEB) out at -2.6% vs. -0.3% expected vs. -1.6% prior.
• US New Home Sales (FEB) out at 590K vs. 578K expected vs. 588K prior.
• US New Home Sales MoM (FEB) out at -1.8% vs. -1.7% expected vs. -2.8% prior.
• US DOE U.S. Crude Oil Inventories (MAR) out at 88K vs. 1800K expected vs. 133K prior.
• NZ Trade Balance (FEB) out at 258.0K vs. 140.0K expected vs. -320.0K prior.
• NZ Current Account Balance (4Q) out at -3.410B vs. -3.500B expected vs. -5.174K prior.
• NZ Account Deficit-GDP Ratio (4Q) out at -7.9% vs. -8.0% expected vs. -8.3% prior.
• JN Foreign Buying Japan Bonds (MAR) out at JPY-2346.7B vs. JPY853.0B prior.

Markets

• FX: The USD is weakening again. EURUSD soon about to take out the prior high at 1.5904.
• Fixed Income: Treasuries and JGB’s being picked up, but Bunds still weakening. All in uptrends, though.
• Equities: All regions weak, but down less than a percent.
• Commodities: All higher on USD weakness and lower than expected Crude Oil inventories.

O/N Data Heat map:

Calendar

Today’s Highlights:

This and Next Week’s Highlights:

What’s going on?

• New estimates for total writedowns among the financials yesterday. Both Goldman and UBS upping their estimates. This makes us change our call for short-term consolidation.
• In stead, it looks like we will have a round of ‘more of the same’ or consolidation in FX and stock markets. The USD and Carry Trades look quite weak and we think the JPY and CHF should continue to outperform, even if FX markets are just consolidating.
• Buy Bunds, they have some catching up to do vs. Treasuries and JGB’s. Use a stop below 116 and target 118.
• Precious metals might see some more buying interest after the sell-off last week. Especially if the USD continues lower.

FX

Counting on continued JPY strength

FX Trading Strategies

Equities

Financials Remain the Laggard In Class! - We Sell Commerzbank

• We expect the European markets to drop -0.5% in the opening. The banks will be in the focus again… The leading US banks lost ground yesterday evening after the closing in Europe because of further speculations of write downs in the first quarter. We stress that in the last weeks and still believe that the worst is not over yet. For the upcoming earnings season we recommend to stay short in banks. If you prefer single company than short UBS and for a spread trade make in relative against Deutsche Postbank. Another interesting story comes out of India, were steel producer reported a drop in earnings on the increasing raw material cost. We expect that this could happen in 2008 as well to European steal producer, after there forward buying contracts for iron ore runs out. It is too early to make the call to short them now, but keep an eye on the biggest producer Arcelormittal, ThyssenKrupp and Salzgitter.
• Trading Strategy: (Sell Commerzbank (CBKG:xetr): The German Commerzbank has rallied lately solely on an upgrade from Credit Suisse, we believe this move is overdone and the technical indicators are still in place for a renewed slide downwards. We recommend selling between 18.80-19.00. Keep a stop at 19.60 and target 16.80 initially.

Equity Trading Strategies

Futures

Gold: Technically Bullish, we Buy on dips.

• Buy Gold (gcm8) @ $943-948 Stop below $934, target $970.00.

Equity Index Levels

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New Zealand’s exports surged by a whopping 30% in the year to February and 20.5% from a month ago, narrowing the trade gap to the lowest reading in nearly 3 years. New Zealand’s overall deficit now stands at just NZ$4.41 billion ($3.5 billion). The dairy component contributed most significantly to the stellar outcome, jumping 72% in the year to February. The island nation’s newly established oil export sector also contributed, with an impressive 82% increase in exports of petroleum products since a year ago. Booming commodity prices have swelled Kiwi export revenues, as primary products make up some 70% of all exported goods. Imports expanded 16.1% in annualized terms, out-pacing expectations of 11%. The RBNZ is no doubt counting on exports to keep economic growth as domestic spending eases under pressure from record-high interest rates. While the bank has routinely stated borrowing costs will remain at current levels, a rising pace in import numbers would suggest domestic consumption and investment has not felt the yoke of monetary tightening as yet. The RBNZ is set to announce policy again on April 23rd.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

• Federal Reserve Needs to Continue to Cut Interest Rates
• Bank of England Still Expected to Cut Interest Rates

Euro Breaks 1.58, Is the Next Stop 1.60?

The Euro broke 1.58 against the US dollar today, leaving many traders wondering whether the next stop will be 1.60. Economic data out of the Eurozone continues to beat expectations while data from the US consistently falls short. As we predicted in yesterday’s Daily Fundamentals, German business confidence improved in the month of March. Once again, analysts had underestimated the resilience of German corporations even though the rise in the flash estimates for the service and manufacturing sector PMI reports should have given them a clue that business activity accelerated. In fact, German businesses have not been this confident in 7 months. Eurozone industrial new orders also increased strongly in the month of January, adding fuel to the rally in the EUR/USD. The market completely ignored the sharp deterioration in the Eurozone current account balance which was the only thing that would have been impacted by the strength of the Euro. Just from an economic data perspective, the EUR/USD has a good chance of testing 1.60. Meanwhile, the big story of the day was French President Sarkozy’s call for the UK to join forces with them to pressure the US into strengthening the dollar. That is nothing but wishful thinking considering that the US would never bow to the pressure of France or the UK at a time when they need a weak dollar to boost exports. Although Trichet noted that excessive volatility in the currency market is undesirable for growth, he also added that there is ‘no need to change framework due to market turmoil.’ In other words, inflation is still a big problem and for that reason intervention is off the table for the ECB. Earlier this month, we had said that the ECB would not consider verbal intervention until the EUR/USD broke 1.60. In 2004, the last time the central bank become extremely worried about the movements in the Euro, the currency had rallied 13 percent in 2 months. If we count 1.59 as the record high in the Euro, the currency pair has only appreciated 10 percent over the last 2 months. A 13 percent move would put the EUR/USD at 1.62.

Federal Reserve Needs to Continue to Cut Interest Rates

The Federal Reserve needs to continue to cut interest rates because the US economy is struggling to stay afloat. Durable goods plunged 1.7 percent last month with sales excluding autos dropping 2.6 percent. New home sales also fell to a 13 year low with average prices declining from $250,800 to $244,100. Unlike existing homes which were supported by the sale of foreclosures, lower prices failed to help the sale of new homes. Not only are we already seeing a decline in consumer spending, but with housing market valuations continuing to fall, consumers may feel an even bigger pinch in their pocketbooks. Fed fund futures have moved back to pricing in a fifty-fifty chance of a 25 or 50bp rate cut next month. The volatility of rate cut expectations have made them increasingly unreliable. If economic data continues to deteriorate, the Federal Reserve will naturally have to lean towards a larger rate cut. Barry Ritholtz posted a fascinating chart in his blog today about discount window borrowing courtesy of Bill King. In the past 28 years, there has been only 4 major jumps in the amount of borrowing by financial institutions at the Fed’s discount window. The first was the Continental Illinois bailout in the 1980s, the second was the Savings and Loan Crisis, the third was 9/11 and the fourth is the current credit crisis. With the Federal Reserve widening the range of acceptable collateral, banks have not been shy about tapping the discount rate window which indicates how troublesome the latest credit crisis has become. Tomorrow we have the final fourth quarter GDP numbers due for release; revisions are not expected.

Bank of England Still Expected to Cut Interest Rates

The British pound has extended its gains against the US dollar but it continues to underperform the Euro. Although there was no UK economic data released this morning, the market now believes that the Bank of England is on track to cut interest rates next month. In a testimony before legislators, King admitted that given current market conditions, the central bank is more predisposed to cutting interest rates even though they are in no hurry to follow in the footsteps of the Federal Reserve who has taken historic measures in an attempt to stabilize the credit markets. Bank of England member Sentence also reminded the markets about the difficult times ahead for the UK economy. He argues that although concerns for a recession are overstated, consumer spending should continue to weaken.

New Zealand and Canadian Dollars Pull Back, Australian Dollar Extends Gains

Compared to the beginning of the weak, the commodity currencies have taken a break as trading ranges narrow. There was no economic data released from any of the three commodity producing countries over the past 24 hours and even a sharp jump in oil prices has failed to lift the Canadian dollar. Only the New Zealand had news to report. Finance Minister Cullen continued to warn that the New Zealand economy faces serious challenges and is not immune from the global slowdown. These comments come ahead of the trade balance report which suggest that exports may have taken a hit in the month of February. Australia will also be releasing their leading indicators numbers tonight; no bit surprises are expected because even though global growth is slowing, the Australian labor market has been hot.

USDJPY Below 100

With both the US economy and Japanese economy weakening, USDJPY is back below 100. The trade surplus narrowed significantly in the month of February and we expect this trend to continue given the sharp appreciation of the Japanese Yen this month. Although this should help to reduce inflationary pressures, it will also take a big toll on the export dependent economy.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

New home sales fell less than expected to an annual rate of 590K in February. Sales over the previous three months were revised up by a collective 20K. Coupled with a better-than-expected existing homes report, this may be the best week of housing data we have seen in a while. Not a bottom yet, but perhaps a glimmer of hope.

Sales Fall - But Less Than Anticipated

• Sales fell to an annualized rate of 590K. Declines were largely concentrated in the Northeast, where sales fell 25K. Large gains were seen in the South, with the other regions largely unchanged.
• Prices jumped back up slightly, but we shouldn’t over-read the news as it reflects the mix of homes sold.

FOREX is a serious game. Play it with the pros.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Easy-Forex? Others offer promises. WE deliver.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.



Forex online. Without it, you are wasting your time (and money).
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Control your destiny.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Inventories Improve: Light at the End of the Tunnel?

• Inventories of new homes for sale continued to improve for the 11th straight month. Total homes on the market have returned to a level unseen since summer 2005.
• Completed homes in inventory came off just as quickly as total homes as builders have worked hard to reduce speculative inventory.

Wachovia Corporation
http://www.wachovia.com

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