Week of March 30, 2008

Highlights:

1. The Commodity Trend Is Your Friend.
2. Is Anybody Home?
   
3. Singing The Blues or Show Tunes?
4. What's On Tap For Next Week?

The Commodity Trend Is Your Friend

Last week we saw massive reversals in the two hot commodity markets, gold and oil, as the leverage hedge fund community unloaded massive long positions to book profits as global risk aversion increased. Spot gold put in a $1032/oz high before shedding over $125/oz into the end of the week. NYMEX crude put in a similar 'slide' from $111.80/bbl down to $98.65/bbl. Now because the commodity markets are a natural hedge against the falling value of the USD, rapidly falling commodity prices sent the dollar shorts running for cover sending the USD higher against the G-7. At the start of this week, many traders were expecting this theme to carry into this week. But it's amazing how quickly the old adage 'the trend is your friend' is forgotten by the markets. Starting Sunday night we were in mostly a holding pattern until the underlying themes began to reassert themselves.


Is Anybody Home?


Monday morning saw an unexpected 2.9% increase in February's Existing Home Sales numbers after 6 consecutive monthly declines. The markets took it to heart as the S&P broke the 14-day 1342 resistance level to print the intra-week high on opening trading session. But Tuesday morning's Case Shiller Index brought the bottom-fishing real estate bulls back to earth by printing a 10.7% Year over year decline; the biggest decline on record. The very next day February's New Home Sale saw 578k New Home Sales sold, just below the 590 expected with a 588k prior for January. The most interesting part of this report was the inventory of unsold homes is the highest since 1981. After Monday's 1359 high in the S&P, it was a steady stair step lower for the rest of the week. The bloated inventory of unsold homes combined with depressed consumer confidence is very likely to sustain this economic downturn for sometime to come.



Singing The Blues or Show Tunes?



Speaking of Consumer Confidence, Tuesday morning's reading of 64.5 handily missed the surveyed expectations of 73.5 with a prior reading of 76.4. 64.5 is the lowest reading of Consumer Confidence since March of 2004. To further confirm that the US consumer has the blues, today's University of Michigan Confidence report printed the lowest reading in over 8 years! The reading was expected to come in at 70.00 with a prior reading of 70.5, but also missed the mark by a half point at 69.5.

While the US consumer is signing the blues, we found out that for the 3rd month in a row the Euro Zone business owner is singing show tunes. If you recall last February's IFO reading of 104.1 that beat the expectations of 102.9, you might remember EURUSD breaking free from significant 1.4950 resistance to trade 1.5000 for the first time ever in the product's history. On Wednesday we got the March IFO Business Climate index that again beat the 103.5 survey with a 104.8 reading. And again, EURSUD caught a huge bid to approach the 1.5905 March 17th highs, but failed at 1.5858


The major theme of the week is that while the Fed is focused on easing monetary policy and preventing further effects of the credit crisis in the financial markets, the ECB is more focused on pricing stability and inflation concerns. On Wednesday Jean Claude Trichet noted fundamentals are "sound" while the labor markets remains strong. EURUSD will do well against the low yielders such as the USD and CHF on higher risk appetite, but faces downside risk from hedge funds de-leveraging out of commodities should global markets shown further signs of slowing as a result of the US sub-prime meltdown.

Once we hit the mid-point of last week, we began to see that the outlook for the global economy is still positive as the underlying themes I mentioned in the first paragraph began to take hold. Gold and Oil slid into Monday's session as a result of carry over from weakness seen last week, but quickly regained footing at the 50% retracement in oil after clearing stops blew $100/bbl and the 61.8% retracement in spot Gold. Crude dealt to a weekly high of $108.22/bbl today as Gold set in a $954/oz on Thursday. In response to firming commodity prices Australian and Canadian Dollars were both strong against the USD and will look for this theme to continue into next week.

Risk aversion has been driving the Yen higher as those who have borrowed cheap Yen to fund speculative positions in global markets area closing those positions. But now, there might be actual value seekers flowing into Tokyo after Thursday's CPI showed inflationary pressures most likely as a result of increasing energy costs for the highly oil-dependant nation. Lastly, Japan's fiscal year is coming to a close as local investors repatriate Yen back home to close outstanding positions.



What's On Tap For Next Week?


Looking ahead to Sunday night, we have Japanese Industrial Production for February expected to come in at -2.0% M/M and 2.9% Y/Y. On 3/31 we'll get the Euro-Zone Consumer Confidence reading expected to come in at -12 with a prior reading of -12. Then Monday morning in Canada look for the GDP surveyed to come in at 0.5% with a -0.7% prior, followed by the Chicago Purchasing Manager Index at 9:45 AM EST expected to come in at 46.0 with a 44.5 reading from February. But that night in Tokyo at 7:50 PM EST is the big one. We are expecting the Tankan report that will be very telling to learn just how much the strengthening Yen, as well as higher energy costs, have affected Japanese businesses. Tuesday morning in Germany we are expecting February's Retail Sales and the Euro Zone's Unemployment Rate expected to come in at 7.1% with the a Jan reading of 7.1%. Tuesday morning in NY at 10:00 AM EST is ISM Manufacturing expected at 47.5 for March with a prior reading of 48.3. Wednesday afternoon at 5:00 PM EST we get valuable pricing data in the Euro Zone with Feb PPI expected at 0.6% M/M and 5.2% Y/Y with prior readings of 0.8% and 4.9% respectively. Back in the Euro Zone on Thursday we get Retail Sales for Feb, which sets up the big one on the first Friday of every month: the US Employment Situation numbers Non-Farm Payrolls and Unemployment Rate for March. As of now, economists are expecting us to lose 40k jobs after last month's loss of 63k jobs. Of the last 52 months there has been only one negative reading, and last month was it.

With Consumer Confidence so low in the US and Euro Zone growth and inflationary pressures ever present with strongly rebounding commodity prices, we look for EURUSD to achieve 1.6000 while 1.5400 supports the market. USDJPY has a bit of its own wood to chop to break through 98.50 support and then on down to 98.00, which would bring an all but certain test of the mid-March lows of 95.50. If both EURUSD and USDJPY head towards these levels, that will most likely leave the cross, EURJPY, flopping around in the 153.00-159.00 range while the focus shifts away from carry trade/risk aversion theme, and towards the commodity/USD theme

Nominal and real exchange rates

• The nominal exchange rate e is the price in domestic currency of one unit of a foreign currency.
• The real exchange rate (RER) is defined as , where P is the domestic price level and P ^* the foreign price level. P and P ^* must have the same arbitrary value in some chosen base year. Hence in the base year, RER = e.

The RER is only a theoretical ideal. In practice, there are many foreign currencies and price level values to take into consideration. Correspondingly, the model calculations become increasingly more complex. Furthermore, the model is based on purchasing Power Parity (PPP), which implies a constant RER. The empirical determination of a constant RER value could never be realised, due to limitations on data collection. PPP would imply that the RER is the rate at which an organization can trade goods and services of one economy (e.g. country) for those of another. For example, if the price of a good increases 10% in the UK, and the Japanese currency simultaneously appreciates 10% against the UK currency, then the price of the good remains constant for someone in Japan. The people in the UK, however, would still have to deal with the 10% increase in domestic prices. It is also worth mentioning that government-enacted tariffs can affect the actual rate of exchange, helping to reduce price pressures. PPP appears to hold only in the long term (3–5 years) when prices eventually correct towards parity.

More recent approaches in modelling the RER employ a set of macroeconomic variables, such as relative productivity and the real interest rate differential.

Free or pegged

If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world. A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (RMB) was pegged to the United States Dollars at RMB 8.2768 to $1. China was not the only country to do this; from the end of World War II until 1966, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system.

Quotations

An exchange rate quotation is given by stating the number of units of “term currency” or “price currency” that can be bought in term of 1 unit currency (also called base currency). For example, in a quotation that says the EURUSD exchange rate is 1.3 (1.3 USD per EUR), the term currency is USD and the base currency is EUR.

There is a market convention that determines which is the base currency and which is the term currency. In most parts of the world, the order is: EUR-GBP-AUD-NZD-USD-***( where *** is any other currency).

Thus if you are doing a conversion from EUR into AUD,EUR is the base currency, AUD is the term currency and the exchange rate tells you how many Australian dollars you would pay or receive for 1 euro. Cyprus and Malta which were quoted as the base to the USD and *** were recently removed from this list when they joined the euro. In some areas of Europe and in the non-professional market in the UK, EUR and GBP are reversed so that GBP is quoted as the base currency to the euro. In order to determine which is the base currency where both currencies are not listed (i.e. both are ***), market convention is to use the base currency which gives an exchange rate greater than 1.000. This avoids rounding issues and exchange rates being quoted to more than 4 decimal places. There are some exceptions to this rule e.g. the Japanese often quote their currency as the base to other currencies.

Quotes using a country's home currency as the price currency (e.g., EUR 1.00 = $1.45 in the US) are known as direct quotation or price quotation (from that country's perspective) and are used by most countries.

Quotes using a country's home currency as the unit currency (e.g., £0.4762 = $1.00 in the US) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and the eurozone.

· direct quotation: 1 foreign currency unit = x home currency units

· indirect quotation: 1 home currency unit = x foreign currency units

Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating or becoming more valuable) then the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rate number increases and the home currency is depreciating.

When looking at a currency pair such as EURUSD, the first component (EUR in this case) will be called the base currency. The second is called the term currency. For example : EURUSD = 1.33866, means EUR is the base and USD the term, so 1 EUR = 1.33866 USD.

Currency pairs are often incorrectly quoted with a "/" (forward slash). In fact if the slash is inserted, the order of the currencies should be reversed. This gives the exchange rate. e.g. if EUR1 is worth USD1.35, euro is the base currency and dollar is the term currency so the exchange rate is stated EURUSD or USD/EUR. To get the exchange rate divide the USD amount by the euro amount e.g. 1.35/1.00 = 1.35

Market convention from the early 1980s to 2006 was that most currency pairs were quoted to 4 decimal places for spot transactions and up to 6 decimal places for forward outrights or swaps. (The fourth decimal place is usually referred to as a "pip.") An exception to this was exchange rates with a value of less than 1.000 which were usually quoted to 5 or 6 decimal places. Although there is no fixed rule, exchange rates with a value greater than around 20 were usually quoted to 3 decimal places and currencies with a value greater than 80 were quoted to 2 decimal places. Currencies over 5000 were usually quoted with no decimal places (e.g. the former Turkish Lira). e.g. (GBPOMR : 0.765432 - EURUSD : 1.3386 - GBPBEF : 58.234 - EURJPY : 165.29). In other words, quotes are given with 5 digits. Where rates are below 1, quotes frequently include 5 decimal places.

In 2006 Barclays Capital broke with convention by offering spot exchange rates with 5 or 6 decimal places. The contraction of spreads (the difference between the bid and offer rates) arguably necessitated finer pricing and gave the banks the ability to try and win transaction on multibank trading platforms where all banks may otherwise have been quoting the same price. A number of other banks have now followed this.

Exchange rate

In finance, the exchange rates(also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 123 Japanese yen (JPY, ¥) to the United States dollars (USD, $) means that JPY 123 is worth the same as USD 1. The foreign exchange market is one of the largest market in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day .

The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

Why Forex?

Why opt for Forex trading?

With more than $1.5 trillion USD being traded daily, the foreign exchange market has managed to become the world's largest financial market, over the last three decades. With the large minimum deal sizes and rigid financial requirements, the Forex market, till recently, was not explored by the common trader or individual investor. But now the average investors can also engage in Forex trading. Some of the advantages of Forex trading are as follows:

24 hours trading

Forex gives its traders a 24 hour trading opportunity. Being a Forex trader, you can trade 24 hours a day from Sunday 5:00 pm (ET) to Friday 4:30 pm. This gives traders an opportunity to trade according to their convenience, going by their own schedule and also a chance to react instantly to any breaking news of the markets.

High levels of liquidity

Also, acting as a huge attraction is the high liquidity. With almost 90% of all the currency transactions consisting of 7 major currency pairs, helps these currencies display price stability, smooth trends, narrow spreads and high levels of liquidity. This liquidity mainly comes from the banks which offer cash flow to companies, investors and market players.

No commission

With “free of commission” trading, Forex trade lets you keep 100% of your trading profits. This makes Forex trading even more attractive as a business opportunity, especially for those who want to deal on a regular basis.

Steady trading prospects

The market is constantly moving and since Forex trading involves buying and selling of currencies, so traders can easily operate in a rising or falling market. This is because, there are always trading prospects, whether a currency is rising or deteriorating in relation to another currency. So there is always profit potential in the Forex market, whether it’s a rising one or a falling one.

Along with these major advantages, the Forex market also has some other merits such as, Forex trading gives its traders, an opportunity to bigger profits as returns on their invested money. Also, since the market is open 24 hours a day, 5.5 days a week, it gives the investors can make their deals anytime they want to.

With such superior speed of the market, and fine liquidity, even the largest of transactions are conducted within a few seconds.

Forex Basics

What is Forex?

The largest financial market in the world, Foreign Exchange market, Forex or FX market, all the terms are used to describe the business of trading of the world's various currencies, with more than $2 trillion changing hands every day. Being an international foreign exchange market, Forex is a market where money is sold and bought freely. FOREX was launched in the 1970s, to become the biggest liquid financial market today, dealing in more than hundred times the daily trading on the New York Stock Exchange.

FOREX is a perfect market to invest in, as it is free from any external control and free competition. Mostly, all Forex trading are tentative and unlike the stock market trading, the Forex market is not conducted by a central exchange, but on the “interbank” market, which is thought of as an OTC (over the counter) market. The trading takes place between the two dealers, either over the telephone or through Internet, all over the world. The major trading centers are the ones at Sydney, London, Frankfurt, Tokyo and New York, making Forex a 24-hour market.

Forex Trading requires the employing fundamental as well as technical analyses. These analysis help a trader to foresee and determine the development in the price trends of currencies, based on which, he attempts to predict market changes and make profits. Fundamental analysis can be said to use techniques to analyze the value of a state’s currency with the help of its economic indicators, quality markets and political events and associations. Political stability also influences the exchange rate at Forex. Its not just that Forex trading is intutive, rather it's technical.

While Technical analysis engages the study of patterns of price trends and movements, making it easier for the trader to predict the path of the future developments in the Forex market. The primary data for a technical analysis are values, be it the highest or the lowest values, the price of opening and closing in a definite period of time, and the amount of transactions taking place. Any factor, be it economic, political or psychological, having little or some influence on the value or the price, has already been measured by the market to be included in the price.

Daily Report

Dollar Up Modestly - Is This The Week of the Rebound?

Talking Points

• Japanese Yen: hovers near 100 as equities stabilize
• Euro: Drops below 154.00 on Swissie sell-off
• Swiss Franc: sells of sharply on news of UBS offering
• Pound: marks time around 1.9800
• US Dollar: Existing Homes on tap

Another very quiet night in the currency market as Easter holidays continue in Europe leaving both UK and EZ calendars essentially empty. The dollar however, received a modest boost against the Swiss franc on announcement that UBS is gearing for a major rights offering, only several months after securing a massive capital injection from Sovereign Wealth funds. After so much focus on the problems in US capital markets in the past several weeks, the currency traders may be turning its attention to Europe as they take a more skeptical view of the European financial sector.

The UBS announcement along with the news that CSFB will register its first quarterly loss in 5 years, dented the franc’s reputation as a safe haven currency and the decline in the Swissie dragged EURUSD along with it below 1.5400 figure. Overall however, as we noted last week, “The market appears at a standstill as EURUSD consolidates its gain in the 1.5300-1.5500 area and traders wait for the next theme to develop.”

With US financial markets pacified for the time being, the currency market will cast its eye on European data, the most important of which will be the IFO survey on Thursday. Any serious weakness in the report is likely to push the EURUSD lower on concerns that the ECB may have to finally relent and consider a rate cut in H1 of this year.

The US calendar today carries only Existing Homes Sales data. The markets expect yet another decline to 4.85MM units from 4.89MM the month prior. However, the greenback may benefit from low expectations, and is unlikely to react negatively to the data unless the number shows massive deterioration in demand.

With markets at full force tomorrow, the true tone of trade should become more evident by then. With EURUSD having run out of stream at 1.5900 early last week, near term momentum has shifted to dollar bulls. They will however, need further negative surprises out of the Eurozone in order push the pair to 1.5000 level of support. Otherwise, assuming there are no additional exogenous shocks, the currency market may simply meander aimlessly for the rest of the week in very narrow trading range.

Week of March 23, 2008

Highlights:

• The Buck bounces, but outlook remains uncertain.
• Is the credit crunch over?
• Japanese gloom deepens, JPY is vulnerable.
• Key data and events to watch next week.

The Buck bounces, but outlook remains uncertain

It was an eventful week to put it mildly: the fifth largest US investment house effectively vanished overnight; the Fed cut rates another 3/4%; US stocks fell to new lows but then recovered sharply; commodities fell back to earth in the largest weekly decline since 1956; and even the lowly USD managed a solid bounce. For the USD, the recovery looks to be mostly based on profit-taking on short dollar positions after the FOMC cut rates by 75 bps, in a classic 'sell the rumor, buy the fact' reaction. The Fed statement also suggested that additional rate cuts are unlikely to be as aggressive, leading to an overall reduction, at least for now, in expectations of how low US rates will ultimately fall. The USD was also supported by the chicken-and-egg relationship with commodities-as the USD strengthened, commodities came under profit-taking pressure as hedges for a weaker USD were taken off. Finally, the USD also gained support as the US slowdown increasingly looks set to drag down other major economies in the months ahead, a re-coupling I have been expecting for a while now.

In short, the USD rebound looks to have been mostly driven by short-term market positioning adjustments and assorted inter-market relationships after a likely excessive decline, rather than any sudden improvement in the fundamental US outlook. That conclusion makes the USD recovery highly suspect, but at the same time there are significant technical indications that the USD rebound may have some more room to go. Keep in mind that US data next week focuses on housing (existing home sales, new home sales) and personal spending (durable goods and personal spending), neither of which are expected to be USD positives any time soon. Turning back to the technicals, The EUR/USD drop through 1.5600 broke below trendline support that guided EUR/USD higher since the break over 1.5000. Daily and weekly candlestick charts also show 'shooting star' patterns representing the sharp rejection from just below key psychological/round number resistance at 1.6000. Momentum studies have all crossed over to the downside from overbought territory, validating the price reversal lower. On Ichimoku charts, EUR/USD has fallen below the fastest line (Tenkan/conversion line), last at 1.5593, which should now act as resistance, and opens up potential for a move to the rising Kijun/base line, last at 1.5257. EUR/USD weakness below there opens up potential all the way back to the cloud down at the 1.4630/50 level. But let's not get ahead of ourselves just yet. For next week, I'm content to expect EUR/USD to be toppish in the 1.5550-5600 area and bottom-ish in the 1.5200/50 area, and I prefer to sell EUR/USD on strength until 1.5700 is surpassed. Traders will need to closely monitor commodity market developments next week to gauge the extent of the USD-upside. Further sharp declines in metals and oil could provoke a larger than anticipated recovery in the USD.

Is the credit crunch over?

The short answer is: No, not by a long shot. But, is the worst likely past? There, the answer is a cautiously optimistic 'yes' and that shift may hold the keys to a larger improvement in the USD outlook. It's clear to me that a large part of the USD's decline in recent weeks was due to fears of a systemic failure in the US financial sector. Various bullets were dodged along the way-bond insurers maintained their ratings, banks raised sufficient capital-but the outlook now is rapidly improving. US investment banks reported better than expected 1Q earnings this past week, suggesting that key firms have managed to get a handle on toxic debt and restructure holdings. The Fed has introduced multiple programs to increase financial market liquidity, with the latest initiative, the Term Securities Lending Facility (TSLF), set to debut on March 27th. The decision by the Fed to allow financial firms to post mortgage-backed securities as collateral is a key step to getting financial markets back in working order. Also, OFHEO (Office of Federal Housing Enterprise Oversight) this past week reduced the reserve margins that Fannie Mae and Freddie Mac are required to hold, freeing up $200 bio that can be used to purchase mortgage-backed securities, further lightening the load of banks down the road. The sooner the financial sector begins lending again internally, the sooner Main Street consumers and firms are likely to see an easing of credit conditions. We are by no means there yet, but it appears that the lending gears may finally be unstuck, which is the first step to ending the credit crunch.

Restoring financial market conditions to normal is a process that will likely still take many weeks and months, and the next few weeks are particularly sensitive. The end of the calendar quarter at the end of March is the nearest hurdle and European money markets seized up this past week as liquidity remained strained over that period, prompting the ECB and the BOE to inject billions more in liquidity operations. Much of the demand was for USD borrowing, which also likely contributed to better USD spot performance, as borrowers would fund in other currencies, sell them and buy USD's to satisfy USD obligations. I am also aware of the minefield of surprises markets have been exposed to over the last few months and the risk remains that additional unknowns will surface. But I think it's time to begin shaking off the paralysis of doom that has dogged the market since last year.

In terms of the overall market environment, I think we are on the verge of a significant improvement in risk appetites. For currencies, that means a return to buying the JPY-crosses (EUR/JPY, AUD/JPY and NZD/JPY) and otherwise focusing on higher yielding currencies. The short-term risk is that the USD rebound obscures or delays a recovery in the JPY-crosses. The way to work around that is to focus on buying USD/JPY on further weakness ahead of 95.00 or on a breakout to the upside.

Japanese gloom deepens, JPY is vulnerable

The USD staged a significant recovery against all major currencies with the exception of the JPY, which remained buoyant as risky trades were taken off in a relatively illiquid, pre-holiday market. The economic outlook in Japan, however, has deteriorated rapidly in recent weeks, with the latest monthly Tankan readings falling further. The US slowdown will eventually affect other major economies, and Japan is among the most vulnerable in relative terms to weaker US demand. Domestically, the Japanese government is facing an embarrassing episode where the opposition party has rejected the government's two nominations to replace retired BOJ Gov. Fukui. The Bank of Japan is currently headed by acting Gov. Shirakawa, this at a time when global financial markets remain in disarray. The MOF is unlikely to tolerate additional JPY-appreciation at this juncture, which would further de-stabilize domestic stock and bond markets. In addition, JPY-repatriation flows, where Japanese asset managers sell foreign-denominated assets and buy JPY for financial year end (March 31) window dressing, have likely come to an end. In the Week Ahead of Feb. 24, when USD/JPY was around 107, I headlined a section "JPY-repatriation has begun" and suggested the JPY would be bought through the third week of March. That window has now passed and it's time to start looking at selling the JPY on remaining strength toward 95-97, or on a break higher in USD/JPY over roughly the 100.50 area. Please see the Weekly Strategy for further discussion of this.

Key data and events to watch next week

Last week I cautioned that liquidity conditions would worsen toward the end of the week due to the Easter Holidays and price action was pretty jumpy from Wednesday onwards. Monday of next week will remain exceptionally thin and overall liquidity for the week will remain sub-par as UK and European markets remain short-staffed. Traders should expect further erratic price behavior next week and should adjust their trading strategies accordingly.

US data begins on Monday with Feb. existing home sales as the sole release of note. Tuesday sees the Jan. S&P/CaseShiller home price index, March consumer confidence, March Richmond Fed manufacturing index and the OFHEO Jan. house price index. Wednesday sees Feb. durable goods orders and Feb. new home sales. Thursday will see the final 4Q GDP estimate along weekly jobless claims and continuing claims. Friday finishes up with Feb. personal income & spending, Feb. core-PCE inflation, and final March Univ. of Michigan consumer sentiment. Multiple Fed speakers are on tap-please see the Economic Calendar for exact times.

Eurozone data begins on Wednesday with March French business confidence and March German IFO business climate. Thursday sees the April German GfK consumer sentiment survey. Friday sees Feb. German import prices, March French consumer confidence, and preliminary March German CPI.

UK data begins at midnight GMT on Monday with the release of the March Rightmove house price index. The next data is on Thursday which sees final 4Q total business investment, BBA home loan data for Feb. and the March CBI distributive trades report, a private measure of retail sales. Friday sees March Nationwide Building Society house prices and the final 4Q GDP estimate.

Japanese data begins on Monday morning in Tokyo with the release of 1Q BSI Large All Industry index. Wednesday sees the Feb. merchandise trade balance and Feb. corporate service prices. Thursday afternoon sees March small business confidence. Friday's data schedule is heavy with Feb. jobless data, Feb. household spending, March Tokyo CPI, Feb. national CPI, Feb. large retailers sales and Feb. retail trade.

2008 Forex Market Predictions

What does 2008 hold for forex traders like you?
See what FOREX.com's trading team thinks.

2008 has opened with several bangs: unexpected rate cuts, a volatile stock market, recession concerns, and a Presidential race that's truly up for grabs. What does it all mean for forex traders? Straight-shooting, unfiltered, and direct from the FOREX.com trading desk, we wanted to share our top 10 market predictions for 2008 with you.

These predictions shouldn't be a substitute for your own research -- but we do hope they'll give you informed food for thought about your forex strategy this year.

• In 2008, the Yen will be king. The year opens with an unwinding of the Japanese Yen Carry Trade due to broad-based risk aversion. Global investors have been borrowing Yen cheaply for years to invest in global markets, which has only added fuel to the speculative fire. We predict spiraling high-risk markets (equities and commodities) force investors to close their positions and repurchase Yen in 2008, pushing the currency higher across the board.
  
  By mid-year, we predict it will take only 140 JPY to purchase a Euro, nearly 20% off the peak levels. Consequently, the rise of the Yen versus the U.S. Greenback may set the currency pair back to its 2005 lows at 101.70.
• The US Federal Reserve may continue to cut interest rates aggressively during the first half of 2008 in reaction to the credit crisis, housing pressure and political pressure. We see US Fed Funds trading at 3%, and then reversing direction during the second half of 2008 as inflation pressures mount and must be addressed. Fed funds could trade at 4.25% in 4Q08.
  
  Meanwhile, we expect the European Central Bank (ECB) will continue to favor an increase on interest rates well into the latter stages of the second quarter. During the summer of 2008 we see this trend reversing dramatically and the dollar regaining some of its previous status as the world's reserve currency.
  
  By year end 2008 we predict the Euro will be trading below US$1.20.
• We see the global credit crisis growing and spilling over from mortgages into credit cards, auto loans, and student loans. The US economy is forced into a recession with the Fed rate cuts providing ineffective in stimulating the overstretched U.S. consumer.
  
  The Bank of England is pushed to cut rates aggressively as a slump in housing prices and over stretched consumer forces their hand. We may see rates dropping to 4.00% and cable (GBP/USD) falling back to 1.7000.
• Contrarian public sentiment barometers suggest that the crowded short-USD trade will soon come to an end. Magazine articles, advertising and pop culture decrying the weak U.S. dollar is proven wrong in 2008. Supermodel Gisele Bündchen has been rumored to request payment in "only Euros please". Music mogul Jay-Z flaunted a fist full of Euros in a video. Lastly, McDonalds placed a dollar menu commercial where a group of office workers' attitudes are changed about the USD based on a double cheeseburger. We feel the US dollar may have an explosive year against all of the majors.
• Heading into the Beijing Olympics, we expect the Yuan will finally be revalued as a signal by the PboC (The People's Bank of China) that China respects the wishes of fellow financial superpowers. The Olympics are an enormous success for the developing nation, as a revered culture showcases itself and its recent economic revolution.
  
  After the Games close, however, we predict the PBoC will turn reluctant again to dampen its exporting power and will remain large buyers of U.S. Treasuries.
• We anticipate sovereign wealth funds will continue their buying binge, especially in the financial services sector. However, we see xenophobes sounding the bell against them, drawing unnerving parallels to pre-bust Japan in the 1980s. Ironically, we predict the capitalist ideas of the funds will prove a stabilizing force in the world, buying distressed assets and giving a boost to the U.S. Dollar.
  
  When the dust settles, we predict these funds' purchases will turn out to be ideal for world markets: the foreign funds own from bargain prices while the institutions utilize the liquidity and leverage the political relationships to make profitable inroads into growing nations.
• Google or Gold? We see the race to $1000 being won by Gold. As "stagflation" becomes the economic catch-phrase of 2008, we see investors flocking back to the precious metal. Reluctant to own Dollars or Euros, global central banks may quietly purchase Gold as the "World's 3rd Currency".
• In the midst of a recession in developed nations and the environmental "Green Movement", we predict crude oil will temporarily declines to $80/barrel. Unfortunately, we don't expect to see any relief for the ordinary consumer in 2008. Oil-refining capacity will probably tighten and crack spreads may rise, keeping gasoline prices at lofty levels.
  
  To the delight of Bank of Canada Governor David Dodge, USD/CAD may increase 10% by summer—but the move will be short-lived. In the second half of '08, we believe Middle East tensions will heighten as the Democratic Party's nominee will struggle against looking "inexperienced" in foreign affairs. We predict crude futures trading back over $100/barrel, confirming the long-term trend higher.
• We foresee Barack Obama becoming the first African-American President of the United States. As a result, the U.S. Dollar retains its euphoric glide higher into year-end, but as uncertainty surrounds this "leader of change" and the Democratic platform of raising taxes on both corporations and individuals, we imagine this stifling US growth prospects. This double whammy may raise the red flag on U.S. equities and the U.S. Greenback into 2009.
• In 1999, tech stocks were red-hot. In 2002, real estate took over. In 2006, commodities were king. We expect the currency market will hit mainstream in 2008. In the growing theme of globalization, where the internet and mobile devices have made the world a much smaller place, interest in the assets of other nations continue to soar. Already the world's largest market in dollar volume, currency trading may double as "Main Street" meets "Wall Street" and the individual investor could become an integral part of the FX world.

The opinions the FOREX.com Forecasts for 2008 are not trade recommendations. In addition, GAIN Capital has not taken trading positions based on the views in the FOREX.com Forecasts for 2008.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Week of March 2, 2008

Highlights

• Dollar hammered by weak US data; breaks down out of range.
• How high can the EUR go?
• Multiple central banks rate decisions next week.
• Key data and events for next week.

Dollar hammered by weak US data; breaks down out of range.

After trading in a broad consolidation range for just over three months, the greenback plunged to new all time lows against the EUR, breaking above the key psychological/ technical 1.5000 level. Follow-through buying has been abrupt and this is the result of the relative suddenness of the break-a lot of speculative buyers were caught off guard-and the amount of option interest at/above 1.50 generating EUR/USD buying demand. The immediate catalyst on Tuesday was a string of worse-than-forecast US data reports (higher PPI, lower home price, and sharply weaker consumer confidence), but the move really got going after Fed Vice Chair Kohn suggested that the US housing slump had more room to go and that financial market stabilization would be more prolonged. In short, Kohn suggested that the much hoped-for recovery in the second half of 2008 was likely to be postponed. That prospect of light at the end of the tunnel had been helping to support the USD despite overwhelming expectations that the US economy was softening and US rates were headed lower. Once that light went out, the buck went with it. The USD decline, however, has not been evenly distributed against other major currencies and this gives cause to pause in getting universally bearish on the USD at this point. One currency with arguably the brightest prospects among the majors, AUD, with high interest rates, expectations for additional rate hikes and strong growth, both domestically and regionally, has so far managed only minor new highs beyond the 0.9400 high seen last fall. That is most likely due to the relatively high level of long-positioning and wariness over central bank intervention. GBP and CAD also stand out as being well below their earlier highs against the USD. To be sure, the USD is currently suffering through a deluge of weak data, which is likely to get worse before it gets better, but it's important to note that this move is largely concentrated in the EUR. More importantly, the notion that the major economies have de-coupled from the US has yet to bear fruit. The most that can be said is that there is a time lag, but the ongoing slowdown in the US will eventually affect other major industrialized economies. The most vulnerable currencies outside of the USD remain CAD, due to its close trade relationship with the US, and GBP, due to high household debt levels, weakening housing market, and expected rate cuts ahead. I would now add EUR to that list, given its recent sharp appreciation and the expectation that Eurozone growth reports will eventually turn softer in coming weeks and months. In the short-run, though, traders should reckon with further upside potential for the EUR as speculative players who missed the boat pile into the breakout on pullbacks and new highs.

How high can EUR can go?

In the very short-term, over the next couple of weeks, I think EUR/USD has the potential to see to the 1.5250-5300 area before most of the laggard buying interest is satisfied and medium-term selling interest begins to be felt. Fibonacci projections also point to the 1.5300/05 level as a likely point of technical resistance. Beyond the 1.5300 level, market attention is focused on the 1.5500 level as the next major 'round number' objective. The move higher in EUR/USD has been swift and persistent, to put it mildly. As I mentioned earlier, a lot of major speculative players missed the initial break-out move and have been forced to 'go to the market' as pullbacks have been minimal. This has seen fresh buying come in as new highs are made, a pattern which also reflects option books becoming shorter as EUR/USD advances, bringing in still more fresh buying. EUR/USD's upside will remain in play while prices hold above the 1.4950/70 prior high/breakout level and it would take a drop below the 1.4890 level to indicate a failure and reversal. The fundamental underpinnings of the move higher in EUR/USD are somewhat suspect given that much of the weak US data was previously thought to have been priced into the USD. But the decisive factor appears to be the unexpected outperformance of Eurozone data coinciding with a deterioration in US data during the last two weeks. Also, over the last several months, there has been a distinct tendency for the USD to weaken more in the second half of the month, due to the prevalence of US housing data clustering in the latter half, and that has certainly been the case this time around. There are multiple data risks to the USD in the week ahead, most notably the ISM manufacturing and services PMI's, the Beige Book, and Feb. NFP. But data risks exist for other currencies as well, most notably in GBP and CAD. I would also caution that if the US economy is weakening as much as feared, other major industrialized economies will be affected, with timing and degree the only questions. Keep in mind that European stocks remain mired in negative territory of between -12/14% YTD in contrast to US stocks, which are only down around -7% YTD. This suggests not getting too carried away with the current wave of USD weakness and instead looking for opportunities to sell other currencies likely to experience downturns in the near future. In terms of EUR strength, the sharp break higher this week risks bringing a response from Eurozone finance and central bank officials. Eurozone finance ministers will gather for a regular monthly meeting beginning Monday evening European-time. On Thursday the ECB will hold an interest rate setting meeting followed by ECB President Trichet's press conference. Eurozone finance ministers' views on EUR strength are still quite divided, with some (Belgium's Reynders and Luxembourg's Juncker) suggesting EUR strength is becoming a concern, while others (Netherland's Wellink) suggesting the EUR above 1.45 has not been the problem they expected. With opinion divided, a concerted effort to stem EUR strength seems unlikely, but not out of the question. Last fall, when EUR/USD looked poised to move over 1.5000, market surveys of investors indicated a heightened expectation of intervention if EUR/USD approached 1.55, with the risks increasing sharply above that level. At the minimum, look for Eurozone finance ministers to complain about 'excessive volatility' in exchange rates and the speed of the recent EUR increase.

Multiple central bank rate decisions next week

Except for the US and Switzerland, every other major central bank is holding a rate setting meeting next week. Below are my outlooks for the outcomes in order of the announcements. Australia-RBA decision is scheduled for Tuesday afternoon local Canberra time/early morning European time on Tuesday. Markets are nearly unanimous in expectations of a 1/4% rate hike to 7.25% and I agree. RBA rhetoric has been extremely hawkish and incoming data has been solid if not robust. The RBA statement following the decision is also likely to retain a hawkish slant and warn of additional rate hikes, but slower global growth is likely to obviate the need for that. The risk is clearly that the RBA delays, triggering profit-taking selling of AUD. Look for AUD to remains well supported into the decision and after if the statement is hawkish as expected. Canada-BOC is expected to cut rates, but the market is split between 1/4% and 1/2%. Given the alarm bells ringing at the Fed and the implications for the Canadian economy and with core inflation restrained at 1.4% YoY, I think new Gov. Carney is going to err on the side of providing more accommodation rather than less, so I expect the BOC to cut rates 50 bps to 3.50%. I look for CAD to weaken in the run-up to the decision on Tuesday morning, but primarily against non-USD currencies. New Zealand-RBNZ decision is out on Wednesday afternoon NY time/early morning Wellington. The market expects no change to the 8.25% benchmark rate and given recent declines in business sentiment, I'd have to agree. The risk for Kiwi is that Gov. Bollard then indicates that calmed inflation pressures may permit lower rates in 2Q, leading to a dip in NZD. UK-BOE will announce its decision early Thursday morning NY time. The market expectation is for a steady 5.25% rate, but I think ongoing credit market concerns and recent signs of slowing private consumption will push a slim majority of the MPC to cut rates 25 bps to 5.00%. I'm out on a limb with this one since most BOE speakers have gone out of their way to rein in expectations of lower rates in light of the threats from inflation. But inflation dropped sharply in Feb. and faltering growth is the far greater risk to the UK outlook. If the cut does materialize, GBP should get hit pretty hard, especially on the crosses. Eurozone-the ECB also announces on Thursday morning NY time and I expect no change to the ECB's 4.00% refi rate. Recent indicators suggest Eurozone growth is holding up reasonably well, though many forecasts have recently been reduced. Most importantly, ECB Pres. Trichet will again bang the inflation drum, threatening to raise rates to forestall inflation and keeping EUR supported. On the EUR itself, he will undoubtedly be pressed on the ECB's view of EUR strength, and I expect him to decry 'brutal moves' and vent on 'excessive volatility in exchange rates'. It seems unlikely that he will indicate any willingness to intervene to stem the EUR's rise, absent US Treasury support, but should he give such an indication, it's a sign that the rest of the governing council is concerned about EUR strength and the EUR will likely have made a key top. Japan-BOJ decision is due out on Friday afternoon Tokyo time and no change is expected. Japanese growth is stagnant, deflationary pressures persist, and the BOJ has no room to effectively lower rates. This one is a non-event and the JPY will continue to react to risk aversion and market volatility.

More US housing and other key data next week

US data is heavy again next week beginning with the Feb. ISM-manufacturing index, which is expected to slip below the 50 expansion/contraction line again, and Jan. construction spending. Tuesday sees only weekly ABC consumer confidence, which held steady at -37 this past week. Wednesday sees the Feb. ADP employment report, final 4Q non-farm productivity and unit labor costs, and then the key Feb. ISM service sector index and the Fed's Beige Book for the upcoming March 18 FOMC meeting. Thursday sees weekly jobless claims, Jan. pending home sales, and Feb. ICSC chain store sales. Friday sees the Feb. NFP employment report, currently expected to show an increase of 40K and a tick higher in the unemployment rate to 5.0% from 4.9%. Fed speakers are legion: Monday: Plosser and Kroszner; Tuesday: Bernanke, Mishkin and Fisher; Thursday: Pianalto and Rosengren; Friday: Poole, Hoenig, Fisher, Yellen, Mishkin and Kohn. Eurozone data begins with Feb. manufacturing PMI's and Eurozone Feb. CPI estimate. Tuesday sees Jan. Eurozone PPI and second revisions to 4Q GDP. Wednesday sees Feb. Eurozone service sector PMI's and Jan. Eurozone retail sales. Thursday sees Jan. German factory orders and the ECB rate decision. Friday sees Jan. German industrial production and Jan. OECD leading indicators. UK data begins on Monday with the Feb. manufacturing PMI. Tuesdays sees the Feb. construction PMI. Wednesday sees Feb. Nationwide Building Society consumer confidence, Feb. PMI for the service sector, and the Feb. BRC shop price index, a measure of retail price inflation. Thursday sees the BOE rate decision.

Week of March 16, 2008-03-16

Highlights:

· USD weakness becoming extreme, no end in sight.
· Intervention prospects are low, but increasing.
· Fed rate decision on Tuesday; market desperate for relief.

USD weakness becoming extreme, no end in sight.

The USD's plunge accelerated further this week, with EUR/USD vaulting over 1.55 to nearly 1.57 and USD/JPY dropping under 100 for the first time since 1995. Gold prices traded through the $1000/oz. level and the Swiss franc hit parity with the USD for the first time in history. USD sentiment remains overwhelmingly bearish and there is a growing sense the dollar risks falling into a death spiral without official action (market intervention to buy USD) to stem its slide. A number of analysts are now on 'intervention watch.' While I agree that the USD's decline has become extreme and the risks of intervention have risen, I have yet to see any indication from G7 officials that they are gearing up for intervention.

Intervention prospects are low, but increasing.

The primary stumbling block remains US reluctance to interfere with market-driven price adjustments. European finance officials appear hesitant to take action unilaterally, with Eurozone group of finance ministers head Juncker this week indicating that intervention was not even discussed at the recent meeting. Japan is, of course, badly troubled by the weakness of USD/JPY, but the JPY remains relatively cheap compared to other currencies, so the case for unilateral Japanese intervention is also limited. Intervention works best when it is supported by monetary policy and economic fundamentals-it's easier to prop up a weak currency if that currency's interest rates are moving higher and growth is positive. In the current USD situation, those two conditions are clearly not met currently, and don't seem likely to be met for several months ahead at least, which also contributes to the reluctance of the US Treasury to support action. About the only element in favor of intervention at the moment would be 'surprise', catching the market off-guard, though that is beginning to fade. For traders looking to pick a bottom for the USD, I would not count on intervention materializing anytime soon. Intervention does become more likely if the death spiral scenario materializes, meaning 2-4% declines on successive trading days. In that event, however, long-USD positions are likely to be forced out before intervention would ever materialize. Traders are likely better advised to keep selling USD-rallies and taking profit as new lows are made. Bear in mind that many USD-pairs are in uncharted territory, keeping fresh USD selling somewhat ambivalent, which the specter of intervention also increases. As such, short-term volatility is likely to remain high, which should give patient traders opportunities to sell USD at better levels. Liquidity conditions will thin out as we head into the Easter Holiday at the end of next week, and that will likely also increase short-term volatility. As well, pay close attention to any shift in rhetoric from G3 (US, Eurozone, and Japan) finance officials suggesting intervention is being discussed.

Fed rate decision on Tuesday; market desperate for relief.

The FOMC will meet on Tuesday next week and the market is in complete panic-mode, with Fed Fund futures having priced in a roughly 50/50 likelihood of either a 75 bp or 100 bp rate cut. It seems that no matter how much the Fed cuts, it won't be enough to satisfy the market. Much of the hysteria developed on Friday as news broke of a NY Fed orchestrated bail-out of a key US brokerage. Prior to Friday, Fed Fund futures had not priced in any prospect of a 100 bp rate cut. When thinking of the Fed's decision, it's important to keep the troubled brokerage's plight in perspective as it was uniquely positioned to feel the pain of the mortgage-backed securities meltdown. This suggests other financial institutions are not necessarily in the same boat and that fears of a systemic collapse in banks is not warranted. That said, major banks and brokerages are reporting 1Q earnings next week and there will undoubtedly be additional write downs of impaired debt and likely quarterly losses at some firms. But the horizon clears up significantly after the 1Q results are out of the way. Turning back to the Fed, the near-tem US economic outlook has clearly weakened, with retail sales falling in February the latest evidence of consumers' retreat. The Fed has provided significant easing so far and looks to offer more as a short-term insurance, but the sixth-month outlook is largely a done deal at this point regardless of what the Fed does on Tuesday. My own expectation is that the Fed will deliver relatively less of a rate cut than markets are clamoring for, leaving room to maneuver in the event the downturn becomes more pronounced or prolonged. From a policy standpoint, the Fed is pursuing rate cuts to improve credit availability, but those efforts are stymied by the on-going credit squeeze. The Term Securities Lending Facility (TSLF) announced this week is intended to unblock the credit log-jam, but it won't come into effect until the end of March. Before the Fed begins slashing rates further, I think they will want to see how the TSLF works. I look for a 50-75 bps rate cut from the Fed on Tuesday; prior to today I would have squarely expected only 50 bps.

Key events to watch for next week

Remember that the Easter Holiday is approaching and it's a big holiday time for Europeans and Americans, so look for liquidity to thin out toward the end of next week and remain below normal in the following week. US data kicks off on Monday with the 4Q current account deficit, March NY Fed Empire Manufacturing Index, TIC data, industrial production and capacity utilization and the March NAHB Housing Market Index. Tuesday's highlight will be the FOMC rate decision in the afternoon, but the morning sees Feb. PPI, housing starts and building permits. Only weekly mortgage application data is out on Wednesday. Thursday sees Weekly jobless claims, the March Philadelphia Fed index, and Feb. leading indicators. No data is slated for Good Friday. Eurozone data is relatively light next week. On Monday we'll see 4Q Eurozone employment; Tuesday sees the release of a new growth forecast from the RWI institute in Germany; Wednesday sees Jan. Eurozone trade balance and construction output; Thursday sees Feb. German producer prices, preliminary March manufacturing PMI's for Germany, France and the Eurozone; Friday sees Feb. French consumer spending and Jan. Italian retail sales. UK data begins on Tuesday with Feb. CPI/RPI. Wednesday will see the BOE MPC minutes released, along with Feb. employment data and the CBI March industrial trends report. Thursday sees Feb. retail sales, Feb. money supply and public sector borrowing requirements. Japanese data begins on Monday morning in Tokyo with the Jan. Tertiary Industry Index followed in the afternoon by the final January leading economic index. Tuesday afternoon sees Feb. nationwide department store sales. Wednesday morning sees the January All Industry Activity index and the government's monthly economic assessment. Friday afternoon sees Feb. convenience store sales.

Week of March 9, 2008

Highlights: Friday's price action may signal a short-term bottom for the USD. Oil prices and US slowdown will apill over into slower global growth. Fed increases lending to banks, but credit markets still jammed. Commentary Brian Dolan, Chief Currency Strategist Friday's price action may signal a short-term bottom for the USD The USD continued to decline for most of the week, buffeted by weakness in the ADP national employment report and a downbeat Beige Book, with a hawkish ECB thrown on top for good measure. Friday's NFP report vindicated the weakness seen in the ADP report, for a change, and offers further evidence that the US economy is contracting at the moment. But the price reaction of the USD after the jobs report was significant and may signal a short-term bottom for the greenback. It's next to impossible to construct a fundamental argument over why the USD should recover, which leaves market technicals and positioning as the only potential source of a recovery. After the weak February NFP report (-63K jobs lost; unemployment rate fell from 4.9% to 4.8% on frustrated job seekers dropping out of the labor pool), the USD's initial reaction was a quick drop, but the weakness did not last long. The USD had been heavily sold earlier in the week in anticipation of just such a weak NFP report, and once it materialized, profit-taking buying of USD emerged. The resulting pattern, most clearly seen on candlestick charts, is a major rejection from just below the key 1.5500 level. Similar patterns, 'hammers' after a decline and 'shooting stars' after a rally, are evident in other major USD-pairs and on the USD index. It's also the first 'down' candle since EUR/USD broke above the 1.5000 level two weeks ago. As well, reports of significant option barrier interest at the 1.5500 area appear highly plausible and suggest a near-term top. As I wrote last week, a lot of funds and other speculative players missed out on the initial move higher in EUR/USD and subsequently scrambled to get long from levels mostly north of 1.5150/5200. As a result, my sense is that the conviction to hold long EUR, short USD positions is relatively weak at the moment and increases the likelihood of a short-term shake-out in favor of the USD. But let me stress again that the USD is borderline catatonic at this point, so I would favor buying EUR/USD pullbacks into the 1.4950-1.5050 area, with an exit plan on further weakness below 1.4880. Oil prices and US slowdown will spill over into slower global growth As the USD has weakened more substantially in recent weeks, oil prices surged over $100 and are currently trading around $105/bbl. A large amount of the strength in oil prices is attributed to the ever-weakening greenback. The USD is weakening because the US economy is slowing and very likely contracting at this point. Weaker US demand is translating into slower global growth expectations, though concrete evidence of this is only appearing with a lag. Higher oil prices are another force for consumers the world over to contend with and sustained oil prices over $90/bbl remain a significant headwind to a recovery in personal consumption. The US outlook has already been marked significantly lower, and while further weakness has to be anticipated, the degree of discounting for the USD is far greater than most other currencies. If, as I suspect, we are looking at a more protracted US downturn based on housing markets imploding, a situation which does not lend itself to a quick turnaround, then we need to reckon with greater spillover effects into other major economies. By far, the erosion of global growth outlooks is the dominant theme likely to drive major currencies for the rest of 2008 and into 2009. For most of January, incoming data suggested that US weakness was indeed affecting other major economies, as Japanese exports fell and Eurozone growth forecasts were downgraded, for example. In February, current Eurozone data stopped deteriorating and stabilized even as US indicators fell more markedly. I believe that divergence is primarily responsible for the current bout of USD weakness. It also suggests that current USD weakness and EUR strength will be affected if incoming data provides fresh evidence of slowing growth elsewhere. Traders will need to remain especially alert to signs of softening growth in the UK, Eurozone and Japan. The divergence between weak US data and better-than-expected reports from others is unlikely to persist much longer. Next week sees important Eurozone sentiment indicators, including the Sentix Investor Confidence index (Monday) and the March ZEW survey of investors and analysts for Germany and the Eurozone (Tuesday). Fed increases lending to banks, but credit markets still jammed On Friday, the NY Fed announced plans to increase the size of the Term Auction Facility (TAF) from $60 bio to $100, a vehicle to provide additional cash to banks in exchange for certain bonds as collateral, to effectively get banks back in the business of lending. The NY Fed also announced plans for a new repo facility to prove an additional $100 bio to the banking sector. These moves were precipitated by a deterioration in credit market conditions over the past few weeks that saw lending spreads widen out to levels beyond those seen in the August 2007 turmoil. In short, credit market conditions were getting worse, not better, despite Fed easing and massive write-downs. Banks remain unwilling to lend as they continue to sit on assets whose value continues to fall in line with the housing market. As home prices fall and delinquencies and foreclosures rise in a vicious cycle, banks securitized assets also continue to fall in value, reducing capital available for new lending. While the Fed's move is a valid attempt to improve lending conditions, banks balance sheets are simply not up to the task. Perhaps the Fed's plans can stop the bleeding, but we're a long way still from the patient getting off the table. The severely reduced availability of credit is beginning to be felt by credit-worthy borrowers, both among individuals and businesses, and this is adding fresh weight to an already struggling economy. Banks are essentially biding time, refraining from fresh lending, while they recapitalize by borrowing cheaply from the Fed and lending to only the most credit-worthy of clients under existing loan obligations. Additional Fed easing can speed up that process of bank recapitalization by further reducing banks' cost of funds, but it does not suggest that banks will pass it through to the economy by lowering borrowing rates or increasing credit availability. While the credit markets remain off-line, stock markets will remain under pressure, which will also keep carry trades (long JPY-crosses like EUR/JPY and AUD/JPY) a sell on rallies. Key data and events to watch for next week US data is relatively light in the first half of the week, beginning with Jan. wholesale inventories on Monday. Tuesday sees the Jan. trade deficit (forecast -$59.6 bio; prior -$58.5 bio) and the March IBD/TIPP economic optimism index (forecast 41.5; prior 44.5). Thursday sees Feb. import prices and business inventories, but the keys will be Feb. advance retail sales and weekly jobless claims. Friday sees Feb. CPI (core ex-F&E forecast at 0.2% MoM; prior 0.3% MoM) and the preliminary March Univ. of Michigan consumer sentiment index (forecast 70.1; prior 70.8). There are no Fed speakers scheduled to speak on the economy or interest rates, though Fed Chair Bernanke will speak on home ownership on Friday. Eurozone data begins on Monday with Jan. German trade and current account balances, Jan. German imports and exports, Jan. French industrial production and the March Eurozone Sentix Investor confidence index. Tuesday sees German Feb. wholesale prices and March ZEW investor sentiment index for both Germany and the Eurozone. Wednesday sees Feb. French CPI and Jan. Eurozone industrial production. Thursday sees only final 4Q French employment and French Jan. current account reports. Friday sees Feb. German and Eurozone CPI and Feb. Bank of France business sentiment. Japanese data begins Monday morning in Tokyo with Jan. machine orders and Feb. bank lending data, followed by the Feb. Economy Watchers survey in the afternoon. Wednesday morning sees final 4Q GDP, Feb. domestic corporate goods price index and the Jan. trade and current account balances along with Feb consumer confidence later in the afternoon. Thursday afternoon sees final Jan. industrial production and capacity utilization. UK data begins on Monday with Feb. PPI and Jan. industrial and manufacturing production. Tuesday at midnight GMT sees the release of the Feb. BRC retail sales monitor, the RICS house price balance and the NIESR GDP estimate. Tuesday sees Jan. DCLG house prices and the Jan. leading indicator index. Wednesday sees the Jan. UK trade balance and the budget statement by Chancellor Darling.