Dollar Outlook
By Matthew Kassel

Week of Monday Feb 3, 2003
? Headlines and Week Focus
? Data for the Week
? Cross Rate Outlook
? Previous week cross outlook review
__________________________________________________ ____

Headlines and Focus for the Week

• Tony Blair meets Chirac in an effort to win his support for action against Iraq

• Secretary of State Colin Powell`s address to the UN Security Council on Wednesday

• According to data from the CFTC IMM futures, for the week ending January 28th speculators scaled back their net dollar shorts across the board. After reaching its highest level in three years, speculators significantly reduced their net longs in yen to 25,610 contracts, compared with 33,293 contracts a week earlier

• Japan FSA and Economics Minister Heizo Takenaka stated on Sunday that he feels the Bank of Japan should step up its efforts in increasing money supply in the financial system. According to the Kyodo News, Takenaka suggested the BoJ would need several trillion yen to purchase exchange-traded funds in order to sufficiently boost money supply. He also urged the central bank to consider the purchasing of unconventional types of assets to tackle deflation.

• Golden Week in Asia, it will be thin and choppy

• Kyodo New Agency reported that Koizumi agreed inflation-targeting advocate Nobuyuki Nakahara was best choice for the next BOJ head. The report was denied and the USD backed off its highs of the day

Data and Events for the Week

Mon Feb 3 -

Eurozone January manufacturing PMI

UK January manufacturing PMI

Eurozone December PPI

Eurozone December unemployment

US January manufacturing ISM

US Treasury Q1 & Q2 financing estimates

Tues Feb 4 -

French January consumer confidence

Eurozone January flash HICP

Eurozone November retail sales

US December factor orders Wednesday

Wed Feb 5 -

Japanese December coincident index

Japanese December leading indicator

French January industrial survey

German January unemployment

Eurozone January services index

UK January services index

US January non-manufacturing ISM

Thur Feb 6 –

German December industrial orders

Bank of England interest rate announcement

ECB interest rate announcement

US Q4 productivity

Fri Feb 7 –

UK December industrial production

UK December manufacturing production

US January labor report

US December wholesale inventories

Foreign Exchange Cross Rate
Outlook for Week of 02/3/03

It has been some time since we’ve witnessed a USD losing streak like the one we’ve seen in recent weeks, but the USD finally found some breathing room on Friday last week as it double topped just above 1.0900 before trading down and through intraday support at 1.0780. The breach saw the EUR trade down to the low 1.0700’s. After topping out at 1.0780 like technical clockwork in Asia Monday, that level now proves to be resistance, at least in the short term. EUR/USD is in full correction mode and we like it down to the mid 1.06’s before a base can be seen. A war with Iraq is already fully priced in and with the market still well long EUROS the USD finally found its footing. There are going to be stops on a break of 1.0690 which will likely see a move to just in front of 1.0650. We are cautious of getting bearish below this level in front of Wed when Sec Powell speaks to the UN with perhaps the smoking gun the UN inspectors have been unable to find. A convincing piece of evidence will have a knee jerk USD sell-off but be careful. The more convincing the evidence the more likely the USD will rebound on the United States regaining the moral right in its case against Iraq. We like the USD to push the EUR down towards 1.0610 by the end of the week on a quick stop loss move. We do however like buying EUR/USD in front of 1.0580 we should get an overextended move.

Early week - Sell EUR rallies 1.0775-1.0795 targeting 1.0650

Middle week - Square positions in front of Powell’s speech

End of week – look for EUR/USD to drop quickly on stop losses

There can be no doubt that the BOJ will be awake and watching during Golden Week in Asia this week. The market was taken a bit by surprise by the volume of USD’s that the BOJ has purchased quietly in the past few weeks. They tend to show their faces this time of year due to year end YEN repatriation issues, and this year is noted as being especially large in that department. This comes at no real shock to the market and for that reason it is very unlikely that USD/JPY will get above 121.50 on this run up. Due to an overbought EUR/JPY and a market that was looking for BOJ action, this intervention if you can call it that was a smoothing operation. What is more significant however is the rumors in Asia on Monday about a report that Koizumi agreed inflation-targeting advocate Nobuyuki Nakahara was best choice for next BOJ head. Although this was denied shortly after, the market is clearly getting the signal from the prime minister that come March, when Gov. Hayami steps down, a new BOJ regime could take power and that regime is one that is eyeing USD/JPY back towards the 1998 highs. Shiokawa once again made reference to 150 in speaking to parliament. Inflation targeting, talk of 150 by top ranking officials, and a change of command at the BOJ all set the stage for a dramatic alteration in the YEN exchange rates likely both against the USD and the EURO in the medium term. The market is watching closely on this matter and how the officials speak now and the actions that they are taking now are likely a good indicator of things to come in the spring. In the meantime however, look for 119.00 to be the base for USD/JPY all week, with challenges towards 121.00 on the cards and a stop loss run towards 121.30-50 towards the end of the week when the EUR takes a nose dive on a similar stop loss run.

Early week - you have to be long, wait for dips to 119.90 and target 121.10

Middle week - this is likely to be choppy with Powell’s speech, square positions

End of week – this is the punch in USD/JPY above 121.00, don’t forget to get small short in front of 121.50 for next week because we see the USD closing around 120.90 on the week after trading above 121 and next week we should see the USD test back towards the mid 119.00’s but we think the end of this week is the time to get set for that move

Have a great week trading and good luck!

Previous week FX Cross rate Outlook Review 01-27-03


Well we were wrong last week on this cross, very wrong. The extension of EUR above 1.0745 and then up and through 1.0800 makes this week an extremely difficult one to call with a lot of politics and economic numbers to be released. While growth in the US is still looking better than Europe, foreign investors are not buying enough US assets to offset the current account and the USD is just weakening with no apparent demand for dollars. We do believe that this move up in the EURO is technically very exhausted, and we still do not believe buying EUR/anything offers a positive risk/reward ratio.From parity to 1.0840 so quickly only means that the retracement will likely be just as quick. The market is well short USD’s and profit taking will come with momentum. What will create this momentum is very hard to foresee at this time, but nevertheless the risk lies there.

We take a sidelined approach to the EUR/USD this week as we are unwilling to sell it without momentum breaks of 1.0740 then 1.0680. Until then, buying short term dips for 30-50 pts profit has to be the way. We do however advise buying 80-100 point dips with extreme caution as the end of this EUR rally for the short term is approaching any day now.

Early week -
Stay sidelined and allow the market to point the way
Buy 1.0750-
targeting 1.0810

End of week - Sell 1.0865-85 targeting 1.0775


We believe the trading opportunities lie in this cross this week with the USD likely to be hit early in the week calling for the BOJ to back up their word to support their exporters and buy USD’s to prop it up so that Japan Inc. can sell it at higher levels for their seasonal Yen repatriation. This will create some very volatile USD/JPY ranges both in Asia as well as in early Europe. Don’t under estimate the BOJ this week, they will likely give a warning early in the week and then back it up with several yards of USD buying. For this, we are buyers of USD/JPY on the high 116 handle and will put stop loss orders above the market each day in Asia and early Europe to capitalize on potential BOJ activity. Remember the market is short USD/JPY so a hefty purchase by the BOJ could create some position scrambling. The USD is likely to top out near 119.30-119.75 and ease back towards 118.50-118.80 should it reach the mid 119’s. There will be USD sellers on 200 pt rallies, so take your profits and run.

Early week – Don’t get to bearish, watch the BOJ signals
Buy 116.75-116.95 targeting 118.50, put stops above the market each day in Asia and early Europe to add to longs, but don’t forget to take profit!

End of week – expect the market to digest BOJ activity and trade the USD/JPY off the US economic numbers release.

DISCLAIMER: Commentary and market information is provided for informational purposes only.
The information contained in this report is gathered from reputable sources and is not intended to be used as investment advice. Clearview Capital Management assumes no responsibility or liability from gains or losses incurred by the information herein contained.