Special Report: Dollar Outlook
Masafumi Takada-CCM FX Spot market analyst


Week of Monday May 12, 2003
Data for the WEEK
Cross Rate Outlook

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Data and Events for the Week
Monday May 12

UK: Apr PPI, Mar Trade

Tuesday May 13

JP: Mar Machinery orders
US: Mar Trade, BTM-UBS
Wednesday May 14

JP: Mar Trade, Current A/C, Tky Dept Sales
UK: Apr Unemployment
US: Apr Retail Sales


Thursday May 15

GER: Q1 GDP
EMU: Q1 GDP
US: Apr PPI, Apr IP, Apr Capacity Utilization
Friday May 16

JP: Q1 GDP, Mar IP
EMU: Apr CPI
US: Apr CPI, Housing Starts, Real Earnings







EUR/USD

Last week the ECB kept rates on hold as expected, the euro has again soared in value to fresh multi year highs within 0.5% of its introduction level and soaring higher across the board. Comments by the ECB Duisenberg who gave a message of not being too concerned about the strength of the currency provided more ammunition for euro bulls. EUR-USD has again traded as high as 1.1530 on Friday. Proximity of the weekend and more recent warnings from EU Solbes - the recent rise of the euro was a "special concern" - could provide the trigger for a bout of profit taking. What is for sure however will be the increasing discomfort felt by European exporters" who have not fully hedged themselves against such rapid moves in the euro. Given the backdrop of bearish sentiment towards the dollar in general, exporters may have to endure many more months of squeezed margins.

Early Week - Position entry, long around 1.1370-1.1410 or short near 1.1530-40 with tight s/l, turn long on the break of 1.1550-60, prefer to play from long side.

Middle Week – Expect the Euro’s rally to continue towards its introduction level high at 1.1720ish, there we should see some profit taking offers but the Euro could probably overshoot 1-2% above its all-time high towards 1.20 before stabilizing.

End of Week – Strengthening of the US Stock market could not support the dollar recently, and the appetite to the Euro should continue, however, we would prefer to go long Euro crosses especially EurJpy and EurChf rather than straight Eur with the Euro nearing or above its all-time high while US (mainly stock market) doing ok.



USD/JPY

Once again, USD-JPY was well supported at 116.00 area last week amid speculation that the MoF/BoJ might have intervened in the market near 116.00 low on Wed and 117.00 last Friday. MoF Shiokawa & Mizoguchi declined to comment on whether they were indeed in the market, thus keeping traders guessing and jittery about selling lows. In the meantime EUR-JPY broke the 135 key psychological level, and ongoing bullish sentiment of Euro among all the major crosses should encourage Euryen bulls as well. Talk suggests more JPY selling related to foreign bond investments next week, which will likely help support USD-JPY. That said, it is still early days to judge that USD-JPY has hit its bottom, and we could well see a fierce battle between USD bears and Japanese authorities over the major 115.50 lows, the break of 116.00 should trigger some massive stops.



GBPUSD
Cable recovered firmly after a shakeout of GBP-JPY longs last, but the Sterling itself still has difficult time moving above this year’s high despite this superb rally in the Euro. Cable is back over 1.60 after the MPC left UK rates unchanged, but still unchanged year-to-date as sterling continues to be treated like a proxy to the weak dollar. Wednesday`s BoE inflation report should signal whether there is still any scope for further easing in this cycle, depending on whether inflation risks or risks of further economic weakness are emphasized. The ECB has more scope to ease than the Old Lady, with EUR strength wiping out the inflationary impact of previous cuts, yet EUR-GBP looks set to continue moving in lock step with EUR-USD.

Early week: Look to go long near 1.6000-10 with tight stop below 1.5990 or 1.5965 (61.8 of 1.5905 to 1.6095).

Mid Week: Ongoing bearish sentiment on the Usd should keep supporting Cable as well, we prefer to stay long cable target 1.6160-1.6200.

End Week: Talk of large 1.60 option expiry towards the end of week. If that’s the case, Cable could consolidate around 1.60 for the most part of the week, then move sharply after option expires. Watch out for the price action around 10AM NYT on Thursday and Friday.

USDCHF

Just like the other Usd pairs, $chf continues to look and trade heavy towards its 5-year low. With not many economic indicators coming out of Switzerland this week, the pair should follow the Euro with EuroChf should be the one to play if there was any rally in the Chf. Despite the risk of SNB defending further decline of $Chf, losses into 1.3040 the 16-October-1998 bottom are not ruled out.

Early week: look to go short around 1.3180-1.3200, last Friday afternoon’s rally means market covered shorts for the weekend, thus there should be fresh selling interest at the beginning of the week.

Mid week: Stay short. The break below 1.3075 could accelerate its trip to south.
We look to go long the EurChf cross in the meantime as the market largely reduced longs last week from 1.5180 down to low 1.50 last week.

End Week - $chf could be testing its lowest level below 1.30 since 1998 with the Usd looking so helpless despite the recovery on US asset market. We would highly likely to hear SNB’s attempt to support the dollar if the Swissy continued to strengthen too much, but we look to go short against any decent size rally in $Chf. The break above 1.3500 would negate our bearish view.





GOOD LUCK & A GREAT WEEK AHEAD!