NEWS / Foreign Exchange

Worries about unwinding carry trades quickly fell out of favor.

Worries about unwinding carry trades quickly fell out of favor and the markets focused instead on the perceived weakening of the US economy. Whether the economy is actually that weak is a matter of debate, but the hot topic is the magnitude of the underperforming sub-prime loans. We know too little to take a strong stance, but the dollar may get hit further. However, the dollar will not collapse for as long as the US equities hold their own. Where does it all leave us? It leaves us with the ear close to the ground and with the guard up against the media hysteria about the sub-prime loan situation. Trade the dollar in short spurts and do not stay married to positions ??“ it??™s not the time for trends.

Past Week's Data and Events

United States

Last week was dominated again by talk of the flaming sub-prime loan problem in the US. This generally ignored topic raises the question: is the problem abuse among the lenders, the worsening financial condition of the borrowers, or a mix of the two?

The next question is: what does a sub-prime loan really mean? If, in addition to low income mortgage borrowers who cannot quite afford a regular mortgage we have a sizeable group of middle-class earners who tried to gobble up luxury homes well above their means, then you have a really nasty problem on your hands. Real estate is not liquid and buyers may step aside, creating an accelerated decline in home prices. This would quickly torpedo consumer confidence at many levels.

Finally, if the current sub-prime loan woes actually turn into a full-fledged crisis, will anyone be forced to step in alleviate it? Who?

Let??™s not dream we know enough about this retail level junk bond problem, so let??™s try to listen to experts for possible solutions. Gear your trade based on that.

The US economy is hardly perfect, but remains a dream-come-true for nearly everyone else. The housing situation can turn nasty, but not yet, so trade your currencies with gusto.

The dollar was hit last Tuesday by the soft data, which indicated lower buying power and consumer confidence.

Retail sales rose a less-than-forecast 0.1 percent in February from flat in January. Ex-autos, retail sales fell 0.1 percent from up 0.2 percent in January.

Business inventories rose 0.2 percent in January from flat in December, while sales contracted 0.7 percent from +1.3 percent the previous month.

The inflation data worsened last month.

PPI surged 1.3 percent in February because of higher costs for energy, cigarettes and toys, after contracting 0.6 percent in January. The core PPI rose 0.4 percent from 0.2 percent in January.

Along the same lines, CPI rose 0.4 percent in February on top of a 0.2 percent rise in January. The core CPI rose 0.2 percent from +0.3 percent, and 2.7 percent higher from a year earlier.

The preliminary University of Michigan survey the consumer sentiment fell to 88.8 in March, a six month-low, from 91.3 in the previous month. The sub-index of current consumer conditions fell to 103.6 from 106.7 and the index of consumer expectations declined to 79.3 from 81.5.

The Federal Reserve Bank of New York's economic index fell more than forecast to 1.9 in March from 24.4 in February. The gauge of new orders fell to 3.1 from 18.9, and shipments decreased to 18.5 from 27.1. The index measuring the outlook for six months from now fell to 35.2 from 38.5.

Moreover, the Fed Bank of Philadelphia's general economic index fell to 0.2 in March from 0.6 the prior month.

On the plus side, Treasury Department international capital (TIC) data showed the January net overall capital inflow at $74.6 billion from a $14.7 billion outflow in December. International investors bought a net $97.4 billion in long-term U.S. securities in January.

Also, industrial production surged 1.0 percent in February, its biggest gain in over a year, while the January reading was revised upward to -0.3 percent from -0.5 percent. A gain in December was also revised upward to +0.8 percent. However, manufacturing output was up only 0.4 percent. The capacity utilization rose to a five-month high of 82.0 percent from an upwardly revised 81.4 percent in January (from 81.2 percent).

Initial jobless claims declined by 12,000 to 318,000 in the week that ended March 10.

There was no reaction to news that the U.S. current account deficit improved to $195.8 billion in the fourth quarter of 2006 from $229.4 billion in the third quarter. For the year, the current account deficit rose to $856.7 billion from $791.5 billion in 2005.

The Eurozone

The euro/dollar struggled higher for most of the past week but surged on Friday to challenge the top of its uptrend.

The benefited only briefly from the strong German data on Tuesday.

The ZEW index of investor and analyst expectations for German economic growth rose to 5.8 in March from 2.9 in February. That's the highest reading since July. The sub-index measuring current conditions fell to 69.2 from 70.9.

The Eurozone industrial production contracted 0.2 percent in January but the December report was revised upward to 1.2 percent.

In other news, Italy??™s industrial production contracted 1.4 percent in January to give up most of its 2 percent expansion a month earlier.

The French CPI rose 0.2 percent in February after declining 0.3 percent in January.

The Eurozone CPI increased 0.3 percent in February and 1.8 percent from a year earlier.

Elsewhere, the Eurozone labor costs rose a higher-than-expected 2.4 percent in the fourth quarter.

Japan

Dollar/yen encountered choppy to lower trading last week, as the market vacillated between the risk of carry trades and the attraction of higher yields abroad.

The economic data was generally positive.

Japan's economy expanded 1.3 percent in the fourth quarter on a quarterly basis, compared with 0.6 percent growth in the U.S. and 0.9 percent in the euro region. It was revised upward to 5.5 percent on a yearly basis from the initial 4.8 percent estimate.

The current account surplus in January widened 50 percent to 1.19 trillion yen from a year earlier as exports surged 18.2 percent, from 1,777 billion in December.

Consumer confidence rose to 48.6 in February from 48.4 in January.

The final industrial production came in at ??“1.7 percent in January, down from the original ??“1.5 percent.

The tertiary sector index of service industry activity rose a more than expected 1.6 percent in January. That??™s quite positive for the yen, particularly going into the end of the fiscal year at the end of the month.

The UK

Sterling/dollar encountered choppy and sideways trading, and this was the exception among the other strong European currencies.

The strong PPI report, which inferred the BoE will tighten rates again in the first half of the year, helped the pound only in early trading on Monday. Input prices rose 1.3 percent in February, nearly twice the expectations.

The trade deficit shrunk to 6.2 billion pounds in January, the lowest since October 2005. That month the pound was at a 14-year high. There goes the simplistic argument that a weak currency boost exports, while a strong one kills them??¦

Unemployment fell by 3,800 to 922,200 in February, the lowest since January 2006, after dropping a revised 13,300 in January. The jobless rate was unchanged at 5.5 percent (International Labor Organization method) and this compares to 4.6 percent in the U.S., 4.1 percent in Japan and 7.4 percent in the Eurozone.

Canada

Dollar/Canada consolidated in a fairly tight range last week.

Canadian production capacity fell to 82.5 percent in the fourth quarter, as manufacturers reduced output, from a revised 83.4 percent in the third quarter. That was the lowest since 1996's fourth quarter.

Factory shipments collapsed 2.1 percent in January, seven times more than expected, because automakers and oil refiners stopped production for maintenance.

Switzerland

Dollar/Swiss lost its footing and fell to a three-month low last week.

The Swiss franc made a big rally on Thursday after the Swiss National Bank med the market expectations and raised interest rates by 25 basis points. This increased its target band for the three-month LIBOR rate to 1.75-2.75 percent and aims for the mid-point of 2.25 percent. The SNB raised its 2007 inflation forecast to 0.5 percent from 0.4 percent previously.

Australia

The Aussie/dollar rallied sharply last week, as the strong local economy suggests a rate hike, and this rekindled interest in carry trades. The pair has been testing the uptrend highs and strong close on the week suggests further gains this week.

Australian consumer confidence rose 3.7 percent to 115.5 in March.

Local employment rose 22,000 in February after dropping a revised 4,800 in January. The jobless rate climbed to 4.6 percent from a 31-year-low 4.5 percent as more people sought work.

This Week's Data and Events

United States

The US economic calendar opens on Tuesday with the release of the Housing starts and permits report for February.

Wednesday will see the FOMC rate decision for January, but the fed will leave its rates unchanged at 5.25 percent.

Thursday will see the release of the Leading Indicators report for February and Friday will witness the Existing Home sales report for February.

Bottom line, focus on the two reports on housing ??“ they hold the key to the economy.

The Eurozone

The Eurozone economic agenda is light this week.

It will start on Tuesday with the release of the German Producer Prices report for February.

The Italian Consumer Confidence Index report for March will be seen on Wednesday.

The French Consumer spending report for February is due on Friday.

None of these factors are market movers.

Japan

Japan??™s economic agenda is light this week.

It consists of the Merchandise Trade Balance report for February on Wednesday, and of the All Industry Activity report for January on Thursday.

The UK

The UK economic calendar will open on Monday with the release of the Rightmove house price survey for March. It should be positive for the pound.

The CPI report for February is due on Tuesday.

Wednesday will see the release of the CBI Industrial trend - total orders report for March.

On Thursday, all eyes will be on the Retail sales report for February.

Canada

Canada??™s economic agenda will begin on Tuesday with the release of the CPI report for February.

The Leading Indicators and the Retail Sales reports for February and January, respectively, are due on Wednesday. These reports have the ability to be market movers.

Overview

Euro/dollar

Last week's range: 1.3107 ??“ 1.3338 (Up)
Previous range: 1.3071 ??“ 1.3212 (Down)

Euro/dollar hit the fork in the road and surged to an over three-month high on Friday after pushing higher throughout last week. It should challenge the high for the uptrend and try to break higher this week.

Initial resistance is at 1.3370. Above this trend high, the pair has strong resistance at 1.3435 and 1.3475. Very distant resistance is at 1.3585.

Immediate support comes at 1.3250. Below 1.3225, support follows at 1.3200 and a close below 1.3160 would signal a further dip to 1.3070. Next support is pegged at 1.2995. Below 1.2920 there are two pivotal lows at 1.2882 and 1.2868.

NEAR-TERM:Mixed with upside risk
MEDIUM-TERM:Mixed
LONG-TERM: Bullish

Dollar/yen

Last week's range: 115.74 ??“ 118.48 (Down)
Previous range: 115.14 ??“ 118.32 (Up)

In a nutshell, dollar/yen gave up its little gains made a week earlier but held above the ???magic??? Gann level at 115.50. Once again, overcoming fears of carry trade unwinding wasn??™t an easy feat and the pair is approaching the end of the Japanese fiscal year at the end of the month. The lack of directional confidence landed the dollar/yen into a triangle ??“ and the tip is getting close. Expect attempts to break either way, but the downside is favored.

The key level at least early in the week is at 116.85, from a 50-point pivot which targets 116.35 and 117.35.

Below the Gann level at 116.00 there is another important 50-point pivot which targets 115.00 and 116.00.

Above 117.10, resistance comes at 117.50. Strong resistance follows at 118.25 from a 50-point pivot that targets 117.75 and 118.75. Above 119.00, distant resistance is at 119.65 from another 50-point pivot that targets 119.15 and 120.15.

NEAR-TERM: Mixed with downside risk
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Sterling/dollar

Last week's range: 1.9210 ??“ 1.9503 (Up)
Previous range: 1.9185 ??“ 1.9452 (Down)

Sterling/dollar recovered 38.2% of the losses made between January 26 and March 9, but it was a choppy and painful trip. It ended the week off both the high and the low, so we are pretty much back to square one.

Initial and strong support is seen at 1.9375. Below 1.9340 there is support at 1.9300. Support then follows between 1.9260 and 1.9250. A break below this area would suggest the pair would then shoot for the intermediate pivot low at 1.9185. The next level of support lies at 1.9105 and close below this important level would likely trigger an aggressive slide to 1.9050, which is the 61.8% Fibonacci retracement level of the uptrend between October and January.

Initial resistance is at 1.9465. Above 1.9510 the pair still has strong resistance at 1.9590. If this level somehow breaks, Cable would likely make a further rally to 1.9665, but this remains very unlikely.

NEAR-TERM:Mixed
MEDIUM-TERM:Mixed to slightly bullish
LONG-TERM:Bullish

Dollar/Swiss franc

Last week's range: 1.2028 ??“ 1.2350 (Down)
Previous range: 1.2106 ??“ 1.2352 (Up)

Dollar/Swiss franc failed to surpass stiff resistance last week from the 100-day moving average and sank to a three-month low. This pattern of one week up and one week down would suggest a recovery this week. Do not venture that way without confirmation because the daily chart shows a bearish flag, which targets initially 1.1880 and as much as 117.60 (depending where you start to measure it).

Below 1.2030, a Fibonacci retracement level I mentioned in the previous report, dollar/Swiss franc has strong support at 1.2000. Below 1.1970, there is a pivotal low at 1.1901. Distant support follows from at 1.1883.

Initial resistance comes from the breakout point at 1.2105. If this level breaks, then the dollar should recover further to 1.2145. Above 1.2215, strong resistance comes at 1.2300. Above 1.2360, there is strong resistance at 1.2400.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Mixed
LONG-TERM: Bearish

Dollar/Canada

Last week's range: 1.1678 ??“ 1.1778 (Mixed)
Previous range: 1.1702 ??“ 1.1824 (Down)

Dollar/Canada traded sideways and made little progress last week. It is approaching the tip of a triangle, but even if it breaks out, I doubt it will continue in that direction for long.

Initial support remains at 1.1700. If the 1.1665 level gives way, then the pair would challenge the further support at 1.1605. Dollar/Canada then has a distant support at 1.1566 from a pivot low.

Immediate resistance is at 1.1790. That is followed by 1.1825. The next strong resistance area remains between 1.1850 and 1.1875. Distant resistance is pegged between 1.1910 and 1.1935.

NEAR-TERM: Mixed
MEDIUM-TERM: Mixed
LONG-TERM: Mixed

Euro/yen

Last week's range: 152.64 ??“ 155.84 (Up)
Previous range: 150.73 ??“ 155.16 (Up)

Euro/yen recovered just over half of the losses made in the previous 1?? weeks. It has formed a rising channel but must close above 156.00 of this rally can continue.

If successful, the cross will challenge the resistance at 156.25. A break above this Fibonacci retracement level would signal a further rally to 157.75. Above 158.60, the cross would face a pivotal high at 159.65. Distant resistance looms at 160.25.

Initial support is seen at 154.50. Below 154.15, the cross would test 152.85 and if this level breaks, then the uptrend is in trouble. Below 151.25 the cross would face a test of the pivotal low of 150.75. Distant support lies at 148.45.

NEAR-TERM: Mixed
MEDIUM-TERM: Mixed
LONG-TERM: Bullish

Euro/sterling

Last week's range: 0.6768 ??“ 0.6867 (Up)
Previous range: 0.6775 ??“ 0.6840 (Mixed)

A sharp rally last Monday helped euro/sterling climb to a near eight-month high. Other things been equal, the overbought cross should attempt to pad its gains this week.

Above 0.6867, the cross will test the resistance at 0.6900. The channel of the upmove is in the 0.6925 area. If this gives way, the resistance at 0.6960 will be challenged. There is a pivotal high at 0.7021.

It would take a close below the trendline at 0.6806 to signal that the trendline was broken, but this is less likely. In this case, euro/sterling would target the 0.6755 area, which marked the breakout on March 2. Next level remains at 0.6725. Strong support follows at 0.6690.

NEAR-TERM: Bullish
MEDIUM-TERM: Bullish
LONG-TERM: Bearish