Last year it seemed that Japan’s sun was finally rising again. The Yen, seen throughout the world as a safe haven for investors, was one of the most stable and best performing currencies. The optimism with the election of the new government, and in November, Bank of Japan’s 10 trillion yen financial stimulus took the Yen to a 14-year high of 84.82 to the dollar. The political shift signified a positive picture for currency markets because new Finance Minister Hiroshida Fujii was a strong advocate for letting markets decide. This fuelled a rally for the Yen.

WILL POLITICAL CLOUDS DIM THE YEN?
Beginning of 2010, the Japanese government accepted an ailing Fujii’s resignation. Fujii, maintained the principle that government would not intervene to curb the yen’s strength and there need be no fear of export protection. His resignation prompted a jolt in the forex markets and the Yen stopped its rally sending the dollar/yen exchange rate to 92.4.

The appointment of Naoto Kan as new Finance Minister got the response of another drop against the dollar to 93.6. Kan (with less hawkish views than Fujii) vocally and controversially expressed his preference for a weaker Yen as well as intervention. His aim with a weak Yen is to make domestic exports more competitive in the world market. A rebuke by Prime Minister Hatoyama for this statement made Kan back-track his call. However, the currency dropped against the dollar to a four-month low of 93.78. Here is much for us to figure out. We can see undercurrents of a dispute among government officials over currency policy. Then definitely, the export sector is a lot more problematic. And clearly, as of now the government policy itself is unclear!

DEFLATION TALK

Major exporters including Honda Motors complained about the high level of the Yen as they faced poor domestic demand recovery and deflation (prices fell by 2.5% by the end of 2009). In Q4 2009, GDP grew the highest in two years. But not enough for interest rates to rise substantially above 0% or to stimulate consumer spending, which makes about 60 percent of the economy. Well, at least Japan doesn’t have the problem of heavily indebted private households like USA or UK.

Did I speak to soon? Japan’s public debt is projected by the IMF to touch 225% of GDP this year, and 250% in 2014. This is the highest among industrialized nations. In the near future, the new government’s two proposed spending plans and the Y10 trillion stimulus will undermine reigning in public debt. Government may also resort to becoming net seller of JGBs. I see the unsustainable levels as not only an immediate problem. It will expand out to a sovereign debt crisis this year, and add to the risk of a global debt crisis.

SAFETY FIRST

Most of Japan’s problems are in the long term. And pointing toward a possible ‘double-dip recession.’ Despite weak fundamentals, three points convince me of the future. The Japanese people’s savings. Continuing production and exports. And a still cheap and competitive currency.

Coming back to the Yen. Though no longer the lowest-yielding major currency, the Yen continues its safe status on risk-averse investors’ portfolios. This is despite its volatility. The currency is more interesting to see over time. In the chart below, what is prominent is the crucial level of “85” against the dollar. Even about a decade ago the Yen stopped about the 85 mark, similar to Nov 2009.

INTERVENTION YES OR NO ?

The chart is quite interesting. As the world changes all the time one cannot predict the future by looking at prior developments.
No doubt that 85 in USD/JPY means a lot now. Increasing risk reduction the coming months will lead to capital inflow into Japan. Naoto Kan’s comments make me believe there will now be more support for official intervention (last seen in 2004) in determining Yen exchange rates if the currency is set too high. According to Kan this deciding level would be appropriate when at 90 to the dollar. This is a significant political statement.

Naoto Kan will simply be tested, is he around or not with the intervention weapon. I think yes, and the Japanese Ministry of Finance has heavy ammunition. First, they have an unlimited amount of Yen to sell, it’s simply to start the printing machine. Second, they would love to have inflation so they have problems monetary expansion (the excess liquidity will most likely stay in the financial system but Bank of Japan can absorb it through money market instruments – sterilized intervention).
If Naoto Kan takes the fight he will win, so around 85 in USD/JPY it will be time to consider the long-term risk position in JPY.

The Greenback continues to be fundamental weak in several ways. This was also highlighted earlier in the week where USD had some upside momentum but EUR/USD never came lower than 1,4825. If this is the current “strong” level for the greenback, then there is a good basis for a move towards 1,5500. Especially the US housing data this week showed stronger than expected October data. The headlines are more impressive than reality due to the downwards revisions of erlier data, though still an improvement that surprise me a bit. It should have helped USD but confirms the negative momentum right now.

Very important is the rising activity among  hedge funds and other position takers. They now go short USD after the FOMC meeting signaled no rate hike in US within any foreseeable time. For some time I mentioned that the 1,4850 level seemed neutral, with low activity and fewer positions. This means that the move to the actual 1,5100 level by no way is large and the way higher is free. The carry trades (short USD against higher yielding currencies or gold) are growing and these positions have tight stop-losses, but I don’t think it will danger the current downturn for the Dollar.
No data the coming days, so it will be go by the flow.
USD/JPY is very close to 86,00 that I have been dreaming about for some time. No reason to fear intervention right know. Expect some comments from Europe, though without power.

I think the quarterly Bank of England report released Wednesday 11^th give some good hints to the market. Particularly when we bear in mind that Bank of England has been very negative. The Bank forecast growth rates of 2.1 per cent for 2010 and 4 per cent for 2011. This is suddenly much higher than the outlook of private sector economists and the Treasury’s forecast.

Bank of England still tells us not to be too excited with the wording from the governor Mr. King “Small movements in quarterly growth rates will not alter the extent of the challenges now facing the economy, such is the scale of the fall in output over the past 18 months,” he said. “We have … only just started along the road to recovery.”

I fully agree that the recovery (where ever we look) will take a long time. Though, I take this as a further sign of a good chance that UK will leave the crisis before the European continent. I continue to like GBP and some UK stocks.

Let’s take the last one first. We are many who have raised the US debt concern several times and it will be a long term burden for the greenback. Though the latest USD sell offs on that account seems more speculative than fundamental. On the other side of the Atlantic, in Europe, are we trying to save everything with state debt (lending plus serious large off balance sheet positions) so the debt concern will mid term swing back hitting the Euro.

The capital flows are more fundamental, as what I have seen origin from Japanese investors to a large extend. We don’t like to hear it here in Europe, but Japanese investors have growing risk appetite. They enter the risk currencies again, like NZD, AUD, some Scandies and then the Euro….. It looks like the USD is suffering, relative yes, but it’s more the EUR that is bought. That’s why I look at these flows because it feels fundamental.

The debt concern regarding US will become a true bearish factor in about 6 months. Like earlier, I continue to argue, that the preconditions the US administration uses to calculate the expected debt are way too optimistic (please read weekly’s from Q1) – it will be much worse than expected.

The short tem sentiment for USD is bearish with 1,4500 in sight, though I expect it to be a short term top with a move back to 1,4000. When I suggested the long position around 1,3300 for about 2 months ago (it was very unfortunate stopped out just below 1,3000), I suggested a turnaround at 1,4000. With the current sentiment I would of course not look for a short EUR/USD recommendation right now.

Next week I look at the US unemployment data on Friday as the very important number (exp. 9,2% and -530k). Other economic data needs to be good to help the Dollar, slightly weak numbers will hurt USD.

Target: 1,4500 followed by move to 1,4000.

EUR/GBP (0,8770) – GBP/USD (1,6100): Fair that the beaten Sterling recovers as we have signs of global stability, but since early March all financial markets have been dominated by uncritical bargain hunting. GBP has profited from this attitude because it was sold so much down. I respect the sentiment but I wouldn’t be all too bullish on Sterling.

The UK government complains about Bank of England is too pessimistic, but realistic in my view. Funny to follow that debate, but I lean more to BoE as we the economy is in unknown territory. I agree that the housing market show signs of improvement but many private households are in hopeless debt situations. The commercial property market will drop even more, so more problems are ahead.

Just a few less important economic data next week. In respect of the GBP bargain hunters, Sterling will be supported.

Targets: EUR/GBP range 0,8500 – 0,9000 GBP/USD range 1,5800 – 1,6300

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

I apologise for not having updated with comments the last 3 weeks but I had 1½ weeks holiday on 2 very nice hotel. Very unfortunate did the wifi not work. Then Easter arrivved……

The 4 entries from today are:

Currency markets – Back in the risk aversion / appetite game again

Equities – A new recovery shape has been invented – the W shape recovery.

China – The Ox is strong

Central bank rates – What can they do? Print more money…..

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 5 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 5 entries from today are:

Currency markets – Finally reacting on different factors

Equities – Another bull go, backed by the US tax payer – PPIP it’s called this time….

China – Reorganizing the car industry

Hot Topic – EUR/USD – Did Fed start a new EUR/USD trend ?

Central bank rates – They did, quantitative easing from Fed…….

Currency markets – Finally reacting on different factors

EUR/USD (1,3550): This weeks “Hot Topic” is EUR/USD but the conclusion is here.

Short term the US housing data Monday to Wednesday might help the greenback and even the personal income (exp. -0,1%) and personal spending (exp. +0,2) could support. Funny enough, I have the feeling that if the PPIP news are well received it’s also dollar supportive. It explains the entry level at 1,3300 if I should take a position. As it is too early with the big investor depression about the huge US debt, the position will not be the fundamental one. Therefore I would choose a stop loss at 1,3000 and very likely an exit at 1,4000, maybe even a turnaround at that level.

The reason is, that when reality comes back to the market, then the Euro negative factors will dominate for a period. These are the CEE problems, Euro Zone growth deteriorating and the collapse of the Euro. The sell off will be 10%, starting just after Easter.

Target: Entry level 1,3300 with stop loss 1,3000 and target 1,4000 (possible turnaround level).

  
EUR/GBP (0,9360) – GBP/USD (1,4470): Last weeks unemployment data once more confirmed that the deterioration of the UK economy continues with no end in sight. Basically the target in EUR/GBP at 0,9500 was reached but I have the feeling, at that level are many sluggish news priced in. We will reach 0,9500 again but currently is Sterling lifted by the positive sentiment in stock markets. When 0,9500 is reached again it will be the median for some time.

One important figure is released on Thursday, the February retail sales (exp. -0,2%). I think it could be better than expected and also supportive for GBP.

GBP/USD will be supported by the downwards pressure on Dollar meaning the range will be moved upwards to trade around 1,4500.

Targets: EUR/GBP  0,9500     GBP/USD range 1,4250 – 1,4750 .

EUR/JPY (131,60) – USD/JPY (97,15): The Fed move last week hit my target of 100 to 102 in USD/JPY before the financial year end at 31^st March – it won’t happen now. I expect that some year end realisation of foreign assets (from a Japanese perspective) will be executed within the next week. It leads to a cap in USD/JPY combined with the general bearish USD sentiment.

Friday is the data day in Japan with the Tokyo March CPI (exp. +0,3%) and the February retail trade (exp.    -0,6%). Particularly the retail trade will be more than interesting, I would go for an even lower number.

EUR/JPY is supported by higher risk appetite. As some in Far East say, some of the riskier currencies are favoured like the Euro. That view will probably please Mr. Trichet, but it shows how investors are seeking towards the large currencies of the different regions, like Yen in Far East. With EUR/USD trading higher but USD/JPY lower, then EUR/JPY will trade around 130,50.

Targets: EUR/JPY range 128,00 – 133,00  USD/JPY 93,00 

Hot Topic – EUR/USD – Did Fed start a new EUR/USD trend ?

EUR/USD (1,2975): Last week I was waiting for the next hurricane, but it was a big surprise for me that Fed should be behind it. I have long argued that the market long term will judge the US debt very negative sending the greenback lower. Last week we got a feeling for it as the dollar index had the steepest weekly drop in 24 years. My problem is that it was a surprise and conflicts with my short term view on EUR/USD.

A Fed purchase of T-bonds as quantitative easing was the next step in Mr. Bernankes “helicopter speech”, where the global financial community showed “thumps down” by selling the greenback. The lower yield on US assets of course also drags down the Dollar. For those who might not recall the whole speech, I will just mention the 4^th and final step. It is that Fed buys foreign bonds like for example German bunds. As Fed only has very limited currency reserves they would need to sell their own currency to buy EUR. I had difficulties to imagine that Fed would announce to buy T-bonds at the current interest rate level, but the 4^th step is beyond my wildest imagination.

With the current general relief in several markets and the higher risk appetite the CEE concerns are down played right now. It also means that the downwards pressure on EUR from this concern has faded out. The prior recommended downwards play through FX options wont materialise right now, and the option premium is very unfortunately lost. Due to the Fed surprise, the EUR/USD sentiment has changed to “buy on dips”, but due to the surprise I have difficulties to fine tune it. I would say, that a dip is 1,3300, but as I trying to get a feeling again, it can be that the market is more bid than I expect – i.e. other participants are bid at higher levels than 1,3300.

The CEE related problems will return, when reality returns to the market. But other underlying forces are out there working as well. Should Fed one day decide to use the 4^th step as mentioned above, then EUR/USD will go straight up in 2,0000. It would as a side effect cause the explosion of the common Euro Zone currency within less than a month – it will work as an external chock that can’t be absorbed.

But the Euro will suffer from other internal factors that currently seem to be forgotten because the financial markets are in the happy mood. Friday, the German CDU politician Mr. Otto Bernhardt really gave us some colour with his wonderful comments. I think he gave some statements that he might did regret afterwards. Based on his position as Member of the Parliament and CDU’s speaker of fiscal policy, I would judge that he has some insight in internal reports and the work on EU level.

Mr. Bernhardt said that, ECB holds a rescue fund that can be activated within 24 hours to bail out Euro-in members, ECB later denied it (the help would come in form of loans Mr. Bernhardt said). He also believes that it is more likely that the rescue fund will be utilised than not. I that context he mentioned Ireland and Greece as the most possible to borrow from the fund (i.e. go bankrupt) – later denied by the whole European community. Mr. Bernhardt later tried to adjust his comments, by underlining that a Euro-in country can’t go bust because the Euro would collapse. That point is fair enough, but the detailed information he gave didn’t come from pure fantasy.

Monday China suggested to use a globally common reserve currency, the SDR. It’s another sign that they would like to diversify but it would be easier if the world agreed on that (many countries let their currency reserves reflect their respective trade weighted indices, so the idea might not fit all countries). Anyway the SDR basket is 44% USD, 11% JPY, 11% GBP and 44% EUR, meaning a significant need for Euro’s if the Chinese plan came together.

The risk is not a global agreement but that China starts to reduce USD holdings and to increase EUR holdings, they have advised to do so for about 1½ years ago.

As a counterweight we have European growth dropping like a stone. Just today I saw one changing the 2009 German GDP growth forecast to possibly -7% (yes, minus seven….). Then it doesn’t help that the German GDP will grow with 0,2% in 2010 – it’s below the statistical error…….

Ok, so what is the conclusion on all this and the according strategy?

Short term the US housing data Monday to Wednesday might help the greenback and even the personal income (exp. -0,1%) and personal spending (exp. +0,2) could support. Funny enough, I have the feeling that if the PPIP news are well received it’s also dollar supportive. It explains the entry level at 1,3300 if I should take a position. As it is too early with the big investor depression about the huge US debt, the position will not be the fundamental one. Therefore I would choose a stop loss at 1,3000 and very likely an exit at 1,4000, maybe even a turnaround at that level.

The reason is, that when reality comes back to the market then the Euro negative factors will dominate for a period. These are the CEE problems, Euro Zone growth deteriorating and the collapse of the Euro. The sell off will be 10%, starting just after Easter.

Target: Entry level 1,3300 with stop loss 1,3000 and target 1,4000 (possible turnaround level).

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Feels like waiting for the next hurricane.

Equities – The bulls are having a party

China – Still joining the bull party

Central bank rates – One cut more from ECB in April and we are there.

Currency markets – Feels like waiting for the next hurricane.

EUR/USD (1,2975): Trading around 1,3000 is slightly above the current range and also a sign that my bearish view on stock markets suffers short term. It is still all about equities so it’s hard to come up with anything new regarding FX compared to the comments from the last weeks. I will keep the FX views fairly short for the same reason.

I have the long term view that the greenback will be hurt from the growing US debt and investor uncertainty. Short term, on the other hand Europe has the well known and serious credit exposure in CEE. The markets act as had the risks disappeared – sorry but they haven’t. Like in the prior weeks I go for a possible downwards move in EUR/USD linked to CEE, but use FX options as the right fundamental move is higher.

In that respect, I have just a small note on the new federal economic plan made by the new US government. When people want to sell something to you, then always read what is printed in small. The budgets are based on the assumption that the US economy only will shrink with 1,2% this year and that the average growth the following 4 years will be 4%. I don’t believe in that condition, and the risk is that investors start to have the same unpleasant thinking. The Chinese officials probably also noticed what was printed in small (please see the China comments).

Given the currently more positive equity market than expected I adjust the range from 1,2450 / 1,2950 to 1,2650 /  1,3150. Though, I don’t expect that a new trend has started.  

Target: Range 1,2650 – 1,3150.

  
EUR/GBP (0,9250) – GBP/USD (1,4050): I simply stay with the bearish view on Sterling. Many bad news are priced in as usual, though there is still downside room for GBP. It was remarkable that GBP only very temporary got support from the equity rally during last week. It confirms how offered Sterling is. The unemployment figures on Wednesday are important (exp. 6,5%).

Targets: EUR/GBP  0,9500     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (127,40) – USD/JPY (98,20): Moving closer towards year end also means sideways to higher USD/JPY in my world, as it would be suitable for accounting reasons. No good news out of Japan which should argue for a fundamental sell off in JPY but I don’t think that trend has started yet. The Bank of Japan report on Wednesday certainly is worth to watch. They can’t tell any good stories, but more about how bad they think it is (they can give the report a bias, but that was mainly a problem during the prior governors period of service).

Targets: EUR/JPY range 125,00 – 130,00  USD/JPY 100,00 followed by 102.

Below you will find my weekly view on the very challenging financial markets.

The week has been extremly busy and then I caused some technical problems – all in all it gave some days delay with I apologise for. Probably also causing some text problems this week, not always so easy J

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

Currency markets – Escaping everything.

Non major currencies

This week I start with a thought in general regarding a couple of non major currencies. The very significant

drop in some currencies like Swedish Crowns or Polish Zlothy now leads to growing sign of goods arbitrage.

It now pays of for private household to spend time and transportation costs to shop in these countries. If you

remember back when the ERM blew up in the 90’s and the Italian Lira dropped like a stone, we had the same

picture with private households importing everything from Italy.

Currencies like SEK and PLN might be able to drop another 10%, but it starts to seem excessive. Should it

be excessive, then the only two short term ways to compensate will be high inflation or a counter reaction in

the market. The high inflation within short term is hard to imagine – don’t worry, long term it will come.

EUR/USD (1,2750): Given the very large swings in other asset classes the very tight range in EUR/USD is

pretty amazing. The problem is of course where to escape to. Had the Chinese Yuan been free floating, then

we all had flocked into Yuan. It would much faster smoothen out the global trade frictions with a quicker

relief in USA and Europe. That one doesn’t work and with non Japanese investors leaving Japanese stocks,

the Euro and the greenback are the only 2 opportunities left.

The Dollar index reached a new high last week but EUR/USD stayed within the range. It shows some

firmness for Euro as well and for sure confirms one thing. Had EUR been offered, then EUR/USD would

have been much lower due to the current USD strength.

Lately the USD strength has been discussed. Partly it is caused by the same picture like last autumn as hedge

funds needs Dollars to repay investors in the ongoing asset reduction process. Also the USD funding need

from banks is growing, resulting in demand for the greenback as well.

Long term I still see the American enormous debt supply as a very negative factor for Dollars. As mentioned

last week, the CEE crisis is a risk for Euro mid term. These days it’s fairly quiet regarding the crisis in CEE,

but it is my concern that it will return very forceful. As suggested last week, this includes the risk for a short

term sell off in EUR/USD. The best way to participate is through options with short maturity, as bear

position is against the coming fundamental trend in EUR/USD (we have ideas on stock).

I only watch one number this week, the US retail sales on Thursday (exp. -0,5%). I could easily be slightly

better than expected.

I keep the range.

Target: Range 1,2450 – 1,2950.

 
EUR/GBP (0,9210) – GBP/USD (1,3750): Reached the 0,9000 target in EUR/GBP again and the very low

end of the range for GBP/USD.

It’s nothing new when I say, that everything in UK just looks sluggish and it is very impressive that all

economic numbers still comes out worse than expected. It confirms the ongoing “more soft than expected”

situation.

Some talk among fixed income people that UK will limit the gilt offerings. It’s to force investors to buy EUR

papers instead in the attempt to do everything to force Sterling lower. Living the famous “helicopter speech”

from Mr. Bernanke in full (more explanation if you wish ).

I keep the second target at 0,9500 in EUR/GBP and lower the GBP/USD range in to 1,3500 – 1,4000.

Targets: EUR/GBP 0,9000 followed by 0,9500 GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (124,75) – USD/JPY (99,60): EUR/JPY in the very upper end of the range and USD/JPY moving

towards the first target at 100,00.

As mentioned above are non Japanese investors leaving Japanese stocks since some time. The JPY sell off is

more than justified by the fundamental data as they are nothing less than horrible. And, by the way, there is

no improvement in sight. I argue that he capital flows are behind the move (i.e. it’s not a new long term

fundamental based trend that has started) and warmly welcomed by the Japanese government plus

corporations.

I still go for USD/JPY levels above 100,00 at the Japanese financial year end this month (window dressing).

The EUR/JPY range is moved from 1,2000 – 1,2500 to 1,2375 – 1,2875. I keep the USD/JPY target.

Targets: EUR/JPY range 120,00 – 125,00 USD/JPY 100,00 followed by 102.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

Currency markets – The Greenback is the key again

EUR/USD (1,2600): Today (Monday) the Dollar index reached it’s 3 years high. It corresponds extreme well with the trading pattern during the large equity sell off in October/November last year. Partly flight to quality and some hot money from China find their way to the greenback, but as the stock markets are setting new lows, investors are also forced to exit hedge funds. Hedge funds primarily are USD based so they need USD cash to pay out.

As mentioned the last couple of weeks, one would expect the Central- and Eastern European crisis to hit the Euro. That is still a risk (or opportunity) and this risk might even grow during the next 2 weeks. Though, had the Euro been trading in an offered environment, then EUR/USD would have dropped to 1,1500 by  now.

The CEE crisis will grow further, that’s why I see an increasing downside risk in EUR/USD, but it more feels like a “knee-jerk” reaction if it comes. It will all be about to find an option structure that could fit the expectations (we have them in stock). If I believed in new lower levels for good I would recommend to go short in a cash position.

ECB’s 50 basis point rate cut on Thursday is priced in the market, but could lead to some EUR selling from Far East, but not significant in the short term.

The Beige Book from US on Wednesday I watch, I keep an eye on the US ADP employment change on Wednesday (exp. -620k) as a hint about the figure of the week on Friday. The US February labour market data will be serious exciting (exp. 7,9% / -625k). Regarding the nonfarm payrolls we have a $2 bet among the colleagues every month. Last month I put my $2 at -700k, I do the same this time…..

I lower the range to 124,50 – 129,50 for the week.

Target: Range 1,2450 – 1,2950.

  
EUR/GBP (0,8955) – GBP/USD (1,4050): I simply continue to see serious and very big problems for UK. It is difficult to say the economic depression is priced in because we don’t how deep it will be. As a consequence it might be that the FX market reacts on economic numbers or maybe not. Finally I see EUR/GBP towards 0,9500 and GBP/USD trading towards the downside of the target range. All based on the fundamental economic contractive development.

I keep the targets.

Targets: EUR/GBP 0,9000 followed by 0,9500     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (122,40) – USD/JPY (97,60): To be honest I missed the current uptrend particularly in USD/JPY. I thought the ongoing bearish stock market would be enough to support Yen until coming closer to the Japanese financial year end. On the contrary do investors simply leave Japanese investments, also in line with the hedge fund activity described under the EUR/USD comments.

The extreme sluggish economic data from Japan basically argues for a much lower JPY, but from what I see is it more capital movements than new short JPY positions.

It seems to continue for some time so 100 in USD/JPY is the new target most likely followed by 102. EUR/JPY will trade in a range around 122,50.

Targets: EUR/JPY range 120,00 – 125,00  USD/JPY 100,00 followed by 102.

Currency markets – Event risks are rising

EUR/USD (1,2800): The very serious risks are now getting more clear for market participants. The discussion about the survival of the Euro that I touched briefly last week will grow. But the discussion itself will not lead to the Euro blow up, that will economic realities take care of later on.

2 event-like situations will soon take very much attention, they are working in opposite directions so it’s important to judge the timing. The implications of the Central and Eastern European severe economic downturn, and their totally foreign debt overloaded private sectors becomes reality this year.

The other risk I have mentioned a couple of times, is the appetite for US Treasuries, or more correct the missing appetite for those papers one day. No doubt that Fed will be forced to intervene soon, that action alone will hurt the greenback. This could happen within a couple of months. The long term effect comes when investors don’t reinvest in US Treasuries.

Near term, including this week, the Central and Eastern European worry will pressure the Euro, though not start a new trend. I lower this weeks range to 1,2550 – 1,3050 from 1,2750 – 1,3250. Some numbers during the week, where Philly Fed on Thursday (exp. -25,0) might move the Dollar a bit.

Not to scare anyone, but our friends were on different wires saying the following:

Mr. Trichet said “We have to prepare for exceptional situations, I would not exclude anything or pre commit to anything”.

Mr. Bean from Bank of England said “Global economy in sharp, synchronized downturn”.

Mr. Almunia form the EU Commission said “Economic situation is difficult, countries starting to suffer social tension”.

As mentioned, it is not to scare, but more underline the humble view that serious risk management and clear views on the market based on insight and experience is needed – fairly difficult, but possible to be honest.

We can’t hide from risk, but be well prepared to handle it.

Target: Range 1,2750 – 1,3250.

  
EUR/GBP (0,8955) – GBP/USD (1,4310): Very brief on Sterling. EUR/GBP jumped to 0,9000 last week after Mr. Kings speech. I didn’t thought that the report would have that impact on the market to be honest.

I keep the targets as the report from Bank of England just shows how bad it is in UK – lower Sterling.

Targets: EUR/GBP 0,9000 followed by 0,9500     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (117,40) – USD/JPY (91,60): Also fairly short on Yen as capital flows still decide everything regardless of how bad fundamental economic data we get. The Q4 GDP number from Monday morning showed how difficult the situation is (worse than expected). More will come out this week where the Bank of Japan policy meeting Thursday is the most important. Same rate of course but they always comment afterwards.

I keep the targets as I expect equities to remain under pressure.

Targets: EUR/JPY range 114,00 – 120,00  USD/JPY 88,00. Expect intervention.

Currency markets – Getting more interesting again.

EUR/USD (1,3040): EUR/USD stayed fine within the range last week and I suggest another week with range trading in EUR/USD, though slightly upwards adjusted. Regardless of range trading this week, then the currency market is getting more interesting.

Capital flows still dominate the swings, but with big fundamental happenings like the US unemployment data last Friday and growing concern about the Euro’s survival new trends will start (when the markets decides which is the biggest risk – mid term it’s still the upside in EUR/USD that I bet on).

The survival of the Euro I will save for a “Hot Topic” comment when time is right. In the meantime, in this weeks edition of The Economist a good article about the future of the Euro is published. They conclude that there is no alternative to the common unit – currently they are right, but I am not sure that the “man in the street” in some Euro countries will agree much longer.

2 data highlights this week are the US Jan retail sales on Thursday (exp. -0,4%) and the Euro Zone GDP for 4^th quarter (exp. -1,8% q/q). Further I follow the testimony from Mr. Bernanke Tuesday and also the US 10 year Treasury auction – actually pretty important.

I adjust the range from 1,2650 / 1,3250 to 1,2750 / 1,3350. 

Target: Range 1,2750 – 1,3250.

  
EUR/GBP (0,8760) – GBP/USD (1,4910): I am still totally wrong on GBP, which at least fits with the false view on equities last week as well.

No doubt that Sterling profits from growing risk appetite. As mentioned in the comments on the stock market are the markets in a current bull mood that also supports GBP.

Not much on economic data this week, so the Sterling swings will more be a function of capital flows i.e. mainly changes in risk appetite and stock markets.

I still go for the upside in EUR/GBP but need to lower the current target to 0,9000. GBP/USD I expect to trade around the current 1,4900 level.

Targets: EUR/GBP 0,9000 followed by 0,9500     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (119,40) – USD/JPY (91,40): Enough reasons to sell JPY during the last 5 – 6 trading days, so the good question is what the key driver is.

The Japanese equity market didn’t really perform like rest of the world and European based plus some Mid East investors actually sold JPY. Looks like a portfolio shift. Then we had the usual growing risk appetite leading to a JPY sell off.

The fundamentals were truly bad, confirmed Monday morning by the Machinery orders for December. In addition to all this a larger purchase from a single account went through Friday/Monday, but a one off.

The fundamentals will send JPY lower at a certain time, but not yet. I still argue that capital flows are the JPY driver right now. Being bearish equities makes me argue for a renewed test of the downside in EUR/JPY and USD/JPY.

Targets: EUR/JPY range 114,00 – 120,00  USD/JPY 88,00. Expect intervention.

Currency markets – A bagful of mixed sweets this week.

EUR/USD (1,2810): Heavy stuff weights on Euro. Some Euro Zone countries fundamentals deteriorate pretty fast now. It apparently leads to speculation among Far East market participants about an ECB rate cut in mid February, though that would be against the guidance from Mr. Trichet, so I doubt that one.

Equities has changed the sentiment again which already sent EUR/JPY somewhat lower, taking EUR/USD down as well. This pressure will continue during the week.

Last week I thought 1,3450 would be the top but it turned out to be 1,3350. This week it feels that the top and range will be even lower trading at 1,2650 – 1,3250. Long term the Greenback will come under renewed pressure due to an oversupply of US debt and Dollars, but that’s another story.

I see the US labour market data on Friday (exp.-500 / 7,5%) as the true heavyweight numbers this week. Until then, especially the stock markets once more will dominate EUR/USD and EUR/JPY.

Target: Range 1,2650 – 1,3250.

  
EUR/GBP (0,9035) – GBP/USD (1,4180): Sterling I got totally wrong as GBP went much stronger by end of last week.

Some global UK based corporations was bought pretty well plus the financial stock rally also supported the capital flow into UK.

Furthermore caused some serious model adjustments buy back of GBP. I expect both factors to reverse into sterling selling again.

Some UK PMI numbers will be released during the week but the true number to watch is the Dec. industrial production on Friday (exp. -7,9% y/y). The expectations are very low, but they could come out even worse…

The Bank of England rate cut down to 1,00% on Thursday is priced in the market.

I argue that EUR/GBP will jump back up in the 0,9300 – 0,9700 range, where GBP/USD will trade in the low end of the 1,3750 – 1,4250 range.

Targets: EUR/GBP range 0,9300 – 0,9700 followed by 1,0000     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (115,25) – USD/JPY (89,90): ok, it’s all about equities as we have seen so many times before.

The fundamental data from Japan is incredibly weak, with rumours of a double digit negative GDP growth in Q4. It would of course have sent any currency lower if it hasn’t been for the equity linked flows.

It’s hard to say anything else. On Friday, the leading economic index for Dec is worth to keep an eye on (exp. 79,0) but not a true market mover.

It’s too early to consider a long term short bet in JPY as the above factors still are working in the other direction.

EUR/JPY is now trading in the very low end of last weeks expected range, so with the above outlook I will lower the range from 115,00 – 121,00 to 112,00 – 118,00. USD/JPY I leave unchanged.

Targets: EUR/JPY range 112,00 – 118,00  USD/JPY 88,00. Expect intervention.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Capital flows are gaining in importance again……

Equities – Is the earning season also a hurricane season ?

China – the credit growth in December a true credit growth ?

Central bank rates – Still pointing lower……….

Currency markets – Capital flows are gaining in importance again……

EUR/USD (1,3140): With the currency market being dominated by capital flows, and in particular swings in stock markets, then my fundamental USD bearish view suffers again.

When I am right on the stock markets (down) then EUR/JPY and EUR/CHF also follows lower and the greenback is bid (I am watching the hedge funds again, it all feels like September to November last year).

With only a few fundamental data out this week its better to read the stock market comments to get a clue. They are as usual bearish so it forces me to lower the 1,3250 / 1,3750 trading range for EUR/USD down to 1,3000 / 1,3500. Due to the very steep economic downturn in US and the following public debt bubble I remain long term bearish regarding the Dollar.

The few economic data this week are the US NAHB Housing Market Index on Wednesday (exp 9) and the Euro Zone Jan Service PMI on Friday (exp 41,7). Not true market movers, so the corporate earning reports are very much in focus.

Target: Range 1,3000 – 1,3500.

 
EUR/GBP (0,9090) – GBP/USD (1,4460): Despite some bought Sterling last during last week I keep the view that EUR/GBP will move back to the 0,9300 / 0,9700 range followed by 1,0000. GBP/USD is back in the 1,4300 / 1,4700 range but it should move even lower.

The new banking rescue package in UK shows how bad the situation is, the economy is so dominated of deteriorating assets and debt that remains unpaid that it seems endless.

The public debt now turns towards unknown highs as the government might be willing to enter what seems like unlimited risk to save the banking system.

I see it very bleak and remain bearish Sterling.

Targets: EUR/GBP range 0,9300 – 0,9700 followed by 1,0000     GBP/USD range 1,4300 – 1,4700 .

EUR/JPY (118,70) – USD/JPY (90,60): Like mentioned under the EUR/USD part it will be much about equities this week.

Of economic data, there is one semi important for the market this week. On Friday the Nov all industry activity index is released (exp -2,2%) but it’s for November and all November numbers around the globe were bad, so not a surprise.

Interesting was the rebound in EUR/JPY last week, but with equities coming lower, EUR/USD with downwards bias and USD/JPY to test the lows again I think the market will test the downside in EUR/JPY as well. Like above, it’s very much about stocks this week.

I keep the USD/JPY target but lower the EUR/JPY range from 117,00 / 125,00 to 115,00 / 121,00.

Targets: EUR/JPY range 115,00 – 121,00  USD/JPY 88,00. Expect intervention.

Currency markets – different currencies, different factors to watch…..

EUR/USD (1,3350): The greenback is still fundamental weak, but EUR got hammered with the sudden sentiment change regarding ECB on Thursday. A 50 basis point cut is now fully priced in EUR/USD. If ECB don’t cut or choose something else than 50 basis points I think it will be negative for EUR, regardless what ECB will choose instead of 50 basis points.

I continue to argue that the market mainly reacts to fundamentals making the Dec. US retail sales on Wednesday as very important this week (exp. -1,4% ex. autos). The Dollar will correlate positive with the number.

With the FX market following fundamentals the US Beige Book Wednesday evening is a market mover as well, and to some extend the Jan. Philly Fed on Thursday (exp. -35,0).

With the underlying weakness in Dollar I prefer the upside in EUR/USD but within a range. Though I need to adjust last weeks range from 1,3500 – 1,4000 to 1,3250 – 1,3750 followed by higher levels the coming weeks.

Target: Range 1,3250 – 1,3750.

 
EUR/GBP (0,8980) – GBP/USD (1,4855): I have since many years not heard a finance minister speak so negative about the domestic economy as in UK lately. At the same time the UK base rate was cut to a 315 year low. One at least can say its historical times…….

Sterling truly was sold down during last autumn and towards the year end, but I think it will be sold off again.

There will only be a few economic numbers released during the week, so the domestic situation and even some spill over from the stock market will dominate Sterling.

I go for a move back into the ranges suggested last week.

Targets: EUR/GBP range 0,9300 – 0,9700     GBP/USD range 1,4300 – 1,4700 .

EUR/JPY (118,90) – USD/JPY (89,10): USD is coming nicely down and I still expect Bank of Japan to intervene somewhere below the pain level at 90,00. I am surprised that EUR/JPY is so close to 118,00. It is of course due to the general sell off in EUR but we are back in serious and important correlation with the negative equity market.

I expect the equity market to be a main mover for EUR/JPY, where USD/JPY moves the Japanese equity market – leading to downwards acceleration.

The Nov. machine orders on Thursday (exp. -8,0%) are normally very import, but we all expect a bad number and the nominal number is so large that big swings doesn’t surprise.

USD/JPY will reach 88,00. EUR/JPY I would like to be long but it’s also a function of EUR in general and equity markets. A long EUR/JPY position is more difficult this week, maybe next week.

Targets: EUR/JPY range 117,00 – 125,00  USD/JPY 88,00. Expect intervention.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Fundamentals will continue to work……
Equities – 2009 will be a limbo dance – how low can you go?………

China – many hope that the year of the Ox will be better.

Central bank rates – Cutting as much as possible, and then what?

Currency markets – Fundamentals will continue to work……

EUR/USD (1,3580): EUR/USD was trading 1,3650 when I wrote the last market comments on 15^th Dec with a move to 1,4500 in between. When I started on the comments Sunday, EUR/USD was expected to be around 1,4000 and now at 1,3580. It’s easy to conclude that the illiquidity still is dominating and the main reason behind the swings since mid December. It is the case in my view. Some large tickets went through but a lack of risk takers and risk appetite caused the very high volatility.

It reminds me about the FX market for 16 – 20 years back where risk books simply closed down during December and no one were willing to take new positions despite very attractive levels. This time, banks couldn’t allow themselves to loose money by being a nice illiquidity provider.

During this week people start to return to their risk and trading books. I am convinced that there is risk appetite out there, so the only question is what risk takers will fancy? Carry trades or fundamental trades?

In case of high risk appetite position takers will enter carry trades. I unfortunately think that fundamentals very soon will overshadow everything.

During the last 2 weeks it was an endless row of bad numbers out of US, the public debt obligations will be sky high and even the new rescue package suggested by Mr. Obama is priced in.

The pressure on the greenback will continue but due to better market liquidity the swings will be more normal within a 1,3500 -1,4000 range this week.

The labour market data on Friday is a true highlight of the week (expected 6,9% and -481k). The Dollar will correlate positive to the numbers (i.e. good numbers are positive for USD and vice versa).      

Target: Range 1,3500 – 1,4000.

 
EUR/GBP (0,9350) – GBP/USD (1,4500): Certainly a wild Christmas season for Sterling with the targets at 0,9500 and 1,4650 reached.

Attention will be on Bank of England this coming Thursday, where the market expects a rate cut of 50 basis points. They could surprise with 100 basis points, though most likely is 50 this week followed by another 50 in February.

Fundamentals continues to argue for a lower Sterling. I think EUR/GBP will trade around 0,9500 +/- 2 big figures. The same for GBP/USD trading around 1,4500.

Targets: EUR/GBP range 0,9300 – 0,9700     GBP/USD range 1,4300 – 1,4700 .

EUR/JPY (124,00) – USD/JPY (90,75): Unusual stable in JPY during Christmas and New Year.

The low around 118,00 we touched 3 times during the last 3 – 4 months seems very solid now. It will be hard to crack unless USD/JPY is sold extremely off as mentioned before Christmas.

90,00 continues to be a pain level for Bank of Japan and the Ministry of Finance. I still believe in renewed tests of that level and most likely followed by intervention by Bank of Japan if the selling pressure gets too big.

This view is based on capital flows and not fundamentals. When fundamentals get the lead regarding JPY we will explore a nice move down in JPY, but not yet.

The swings in equities will dominate the JPY movements this week.

Targets: EUR/JPY range 125,00 – 130,00  USD/JPY swings around 90,00. Expect intervention.

Currency markets – Fundamentals starts to work……

EUR/USD (1,3650): Most attention this week will be on Fed Tuesday but not in focus as the last couple of times. A rate cut of 50 basis points is priced in already with a possibility of 75 basis points, but regardless of the cut it of course doesn’t draw the same attention as this will be the last or the second last rate cut. So it might be fair that fundamentals gain in importance as the markets are always searching for new clues.

EUR/USD broke 1,3000 three trading days later than expected in the Weekly from 1^st December. The move was partly linked to developments in the stock markets but fundamentals all of a sudden did send the greenback lower.

What is the most important factor then, the smart person naturally asks? Good question, as interest rates are also back in the game. As mentioned in the last Weekly is EUR the only remaining high yielder among the major currencies. It has become even more clear after the latest comments from ECB members where they indicate a slow pace in rate cuts now.

That the stock markets are less important for the Dollar is due to less investor outflow from hedge funds. It means less need to sell equities and generate USD cash, so other forces like fundamentals and short term interest differentials have some importance again. If I should try to put a number on the importance of the 3 factors, then I would say stock markets explains 50% of the Dollar moves (down from 85%+), fundamentals are around 35% and short term interest rates 15%.

Public debt and similar obligations (like bank guarantees) I regard as a fundamental risk. This is growing and so is the concern about the rising debt – in the nearest future the exploding US Government obligation will be the biggest concern regarding public debt globally.

Two other US numbers are actually interesting during this week. Housing starts on Tuesday (expected 730k) and Philly Fed on Thursday (expected -40,0). The EUR/USD reaction will follow the numbers i.e. good numbers send EUR/USD lower and vice versa.

Some will of course watch the German IFO on Thursday (expected 84,0) but it should not move the market.

The target at 1,3000 and the next at 1,3250 was reached. Sentiment is Dollar bearish right now, so 1,3800 is the next step followed by a 1,3300 – 1,3800 range.

Target: 1,3800 followed by range 1,3300 – 1,3800.

 
EUR/GBP (0,8935) – GBP/USD (1,5300): The EUR/GBP range 0,8100 – 0,8600 surely didn’t hold as EUR is fairly bid and fundamentals plus short term interest rates dominates Sterling these days.

As usual one can’t find anything positive to say about the British economy, where the housing market still is the biggest concern. It looks like the private household debt (particularly related to real estate) will weight seriously for a long time to come.

Like mentioned above are short term rates starting to play a role again where the surprisingly large cuts from Bank of England simply sends Sterling lower. It wouldn’t be a surprise if the base rate is lowered almost to zero. GBP will very suddenly get a new life as funding currency…….

On Wednesday Bank of England releases minutes from the MPC meeting, that will be interesting reading. The fast and large rate cuts give reason to believe that the people at Bank of England are very worried about the outlook.

Sterling might be oversold short term but the reality will send GBP lower.

Targets: EUR/GBP 0,9500     GBP/USD 1,4650.

EUR/JPY (124,00) – USD/JPY (90,75): The trading pattern in Yen confirms that not only equities decides the currency market these days. The targets at 118,50 in EUR/JPY was reached for the 3^rd time and for the first time at 90,00 in USD/JPY.

118,50 will only be reached again if USD/JPY drops well below 90,00 or if equities turns towards the lows.

Equities will be sold off again but depending on where JPY is trading when it happens, levels below 118,50 could trade again, though I am not so convinced.

So far Bank of Japan stayed away from intervening in the currency market, but it will come. They of course used verbal intervention already but that was to expect. Bank of Japan will be intervening alone, which is a reason why they try to wait as long as possible.

I still think that 90,00 is the pain level.

Macro economic the picture is like usual extremely bleak. The Tankan report from Monday morning just once more confirmed it with a reading of -24 against -3 last. A number of -23 were expected, so one could argue that it was priced in the market. Maybe, but it’s very difficult to price the full effect in as the economy is dropping to a new absolute level with a new demand situation at a much lower level.

The target was reached but USD/JPY will continue to test the downside followed by intervention giving some wild swings. EUR/JPY will be wild as well due to intervention, but I argue for an underlying 119,00 – 126,00 range.

Targets: EUR/JPY range 119,00 – 126,00  USD/JPY swings around 90,00. Expect intervention.