NEWS / Foreign Exchange

Markets still positioned for USD weakness

It might seem somewhat paradoxical that we have been calling a lower USD for several weeks now, although our Proprietary Index of Weekly Economic Indicators is going for new highs. The explanation is mostly what in our opinion seems like an overly bearish technical picture in the FX market and the lack of a positive follow-through on good news for the US economy.

The Fed continuously speak about a currently strong economy, and the market is getting the message: There will be no rate cuts in the near future, but the message is also that the housing market remains a major concern with the National Association of Realtors now expecting the first negative YoY change in US house prices since The Great Depression. This might be an important symbolic event and somewhat at odds with the otherwise strongly performing US economy.

The USD might be high-yielding and core inflation might stay high, but the hopes and expectations in the Federal Reserve that inflation is likely to moderate with growth due to the negative spill-over effect from the housing market are likely to materialize in reality.

Last week??™s release of the US Unemployment Rate for March came out surprisingly low at 4.4%, but the weekly released Continuing Jobless Claims shows a worrying increase in the beginning of this year, that is not fitting the picture in the monthly report.

This week, we saw a lot of talk about the number of Americans that expect a recession within the next year. With the continued focus on the Sub-prime Mortgage market and the hawkish Trichet after the ECB rate decision (unchanged at 3.75% as expected). The Euro-Zone economy is picking up steam slowly but surely and it is clear, why Bunds are underperforming their US equivalents and why Trichet continues to call rates ???still accommodative???.

(The last point in the index is not fully updated, but it remains clear that the index will be strong, once the missing data is incorporated) The strong pick-up in the otherwise uninspiring European economy might also be the explanation for the fact that the broad European stock markets have been outperforming the US broad stock markets by more than 15 percent since the beginning of 2006. Stock pickers see more juice in Europe with the exposure after the succession of the Eastern European countries and the enhanced division of labor.

Commodities

We just bought the May-2007 Orange Juice Future (OJK7) at 169.2 with a stop at 159. Target left open.

The Mean-Reversion Model for Futures gives a signal to buy and suggests a holding period of 5 trading days (i.e. until the 20th of April). We are seeing several predictions of a severe weather season with 17 named storms about to hit the US South-East Coast. With the market already very jittery with last year's devastations in mind, we could easily see a big move to the upside.  Orange Juice users have been said to stand aside to get lower prices, but this drop could catapult new buying. Especially with rumours about the Florida citrus crop to come out at the lowest level in 20 years.