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Special Report: Dollar Outlook
By Matthew Kassel

Week of Monday Feb 10, 2003
? Geo-political verses Economics
? Market positioning and risks
? Cross Rate Outlook
? Previous week cross outlook review
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Geo Political verses Economics
That was yesterday, what about tomorrow?

This week we felt that a deviation from our normal weekly USD reports is in order for a variety of reasons. It is obvious that the currency markets are moving on geo-political events and the increase in volatility in recent weeks on the back of North Korea and Iraq together have created an extreme case of bearishness in the US economy and particularly the USD. Meanwhile, the economic reports that have been released lately are painting a rather different picture. The contrast between the risks to the US economy and the USD on geo-political events and the positive releases in the economic indicators have now created what will likely be a very big tug of war. War is a topic that has escaped nobody.

You’ve read about Iraq, you’ve read about the Bush administration’s determination to use resolution 1441 to push both the UN and NATO into action. You know that Blair supports Bush and that France/Germany/Russia and China do not support military action when there still appears to be a diplomatic route. You listened to Powell, and you’ve read about North Korea endlessly. The papers are having trouble coming up with new and interesting articles on these topics, so allow me to give it a try here.

For years the USD was bought endlessly due to the loss of a competition amongst super powers, a multi year rising stock market in the US, and a budget surplus as a result of the tax receipts from those equity increases. The USD was bought on numerous M/A deals that required USD purchases. The USD was bought in front of and after the introduction of the EUR. The birth of the internet and the US role in the new high tech world also created investment and increased productivity. The role of retirement planning embedded in the US equity market created a constant demand for stocks from mutual funds and pension funds. The world was at peace and the US was the destination for international investment. This we all know, it’s now history and is known as the late 1990’s .com bubble. The bubble burst in 2000, and with it came the downfall of Enron, various telecommunication networks, countless .com companies, and the entire US equity market. After that came an increase in unemployment, a return to budget deficits, a debt crisis amongst major international companies as well as some emerging economies specifically in Latin America. This is all history as well, and has been known as the results of the bubble bursting. Irrational exuberance caught fire and is still blazing on the streets. This we all know. Then came Sept 11, and the world changed forever. This to is now history, at the same time its tomorrow as well. But this we all know, there are no surprises here.


Market Positioning and Risks

That was yesterday and today, but what about tomorrow? One of the most important principles to the foreign exchange market, is, and always will be, market positioning. In the past two years there has been a mass exodus out of USD assets, particularly the US equity market. Fixed income funds, foreign exchange funds, and global equity funds are now underweight US assets. They have sold USD for EUROS, they have sold USD’s for gold. Macro hedge funds have, for 2-3 years now, bet against the USD verse Europe. They have bought Swiss and German and UK bonds, they have shunned US corporate bonds. This has all happened already, but what about tomorrow?

For 3 years from 1995-1998 there was a similar trend in place. With the US on a one way economic rise and Japan on a one way economic demise, the USD rose from roughly 85 yen per USD up towards 150 yen per USD. This process took 3 years, with dips, corrections, yet a constant demand for USD’s. In just about a week, with the bulk of the move in a matter of hours, the USD fell from 135 to 110. Nothing had changed in the US, nothing had changed in Japan. A massive position unwind began and the market realized that one way trends in place for years can end in a dramatic fashion. The longer term fundamentals took USD/JPY over the course of another 3 years back to 135, roughly the breakdown point in 1998, just last year. I mention this now because the same complacency seems to be prevalent in the market now. Buy EUR verse the USD on dips, be short the USD, the trend is your friend. Forecasts of 1.10-1.15 for 2003 seem like 170-180 in USD/JPY in 1998. I say this with not only confidence but also with facts. The market is the same way on EUR/USD, and they’re the same way on EUR/JPY. They’re the same way on EUR verse every currency in the market. Thus far it has proven to be the right trade, just as USD/JPY did from 1995-1998. There is a big difference however. In 1998, when the USD fell dramatically, the BOJ conducted intervention from 110-120 several times, not to alter the exchange rate but to smooth out the decline. The US didn’t stand in their way they had a strong USD policy at the time. If the EUR should capitulate in the same manner who would be there to support it? Would the FED intervene? With a strong USD policy and with the USD having lost the %’s it has over the last 2 years, and also an administration that has said time and time again that the USD exchange rate should be left up to the market, I think expecting anything from the FED is extremely unlikely. Meanwhile Europe, Germany specifically, is in an awful economic situation and they’re exporters are going to begin to feel the same pain the US exporters felt in years past with an exchange rate that prices them out of international competition. Would the ECB step in to stop an excessive EUR fall? They probably would, much like the BOJ, to smooth the markets out but with little affect. The point here is that we believe the risks have changed in the past 2 months in the global foreign exchange market. The market is heavily positioned one way, all sorts of intangibles are priced into the market and are all negative for the USD.

The market is calling for a significantly higher EUR/USD exchange rate.
The market is positioned for this move, last week the CFTC showed the highest net short USD positions verse the EUR.
The market has priced in a war with Iraq.
The market has reacted to North Korea.
The market is operating with the price of crude at near 35 USD a barrel.
Terrorism is on the minds of everyone, everywhere. Chemical/Biological/Nuclear disasters inside the US at this point wouldn’t be that much of a shock to anyone. This stands at the opposite side of the spectrum from Sept 11, 2001.

One of the fundamental differences between the United States and Europe is the ability of the US to move swiftly, to react quickly on both the corporate and government level. Laws were passed in the US quickly after the Enron fall out. Restrictions on retirement funds changed, the market responded with quick and violent layoffs to bring costs down. Tax cuts and federal stimulus were quickly put into place. Interest rates were cut to 40 year lows keeping the housing market robust and retail sales from falling with the equity markets. The US policy markers have acted, whether or not their actions were entirely appropriate is not the point. The point is they acted, acted quickly, and are capable of acting quickly again. Meanwhile Europe, whose economies and asset markets are no better at this point, have much more significant fundamental flaws embedded in their ability to stimulate their economies with restrictive Euro zone policies. Their unemployment rate in some countries is nearly double that of the US economy. Has technology, its place in the future of the world changed? Is the US still the center for this research and investment? Is Microsoft a good buy for the long term? It would be difficult to argue that the US economy is going to be outperformed by any G-7 country this year or next year. If the whole world sold the US asset market, sold US Corporate debt, and sold the USD, what then is the next trend? A return, perhaps more gradually, to buying US stocks 30-80% cheaper? Buying the USD verse Europe at 15-30% cheaper? A currency has a hard time appreciating when the whole market owns it. A currency can have massive moves when the whole market is the same way, and right now, the market is the same way on EUR/USD.

This is not to say that this event is going to take place today, tomorrow, or next week, or next month.With a war on the horizon there won’t be much demand for USD’s. Or will there be? What has the USD done in the past in the weeks or months in front of a military conflict? What has the USD done in the environment of an actual military conflict?

The market has priced in a war with Iraq both in the foreign exchange market, in the US asset market, in the price of gold and in the price of oil. Should this war happen, the USD will likely fall further, gold will likely rise further, US asset prices will likely fall further. This we all know, this we all believe.

What happens if there isn’t a war? What happens if the strength of the US military and the methods they use in such a war equate to a quick conclusion or even some mutated conclusion that we haven’t considered?

With war being the single most important driver of the foreign exchange markets, and that war being believed by the market to be inevitable, what would be the consequences for the market if this war didn’t happen? Where is the real risk? In my experience, in the foreign exchange market, everyone can’t be right. I once heard a leader of the European EMU project say that Japan is not going to implode because nobody owns Japan except the Japanese. Without an international exodus, a global meltdown in a currency is highly unlikely. That economist was right. With all the doom and gloom talk for the YEN and Japan from 1995 to 2001, USD/JPY really did very little. Japan has a debt/GDP ratio of 130-140%. The US has a debt/GDP ratio of 4-6%. Who now owns the US besides Americans? Doom and gloom has happened, that was yesterday, what about tomorrow?

The USD may appreciate against the EUR in the coming week on a mere correction and better US economic data than Europe, Iraq allowing spy planes ect…but in the bigger picture, should the USD fall towards 1.10-1.12 in the coming weeks in front of a war with Iraq, where is the true risk?

When it comes to politics and foreign exchange, there are two truths that seem to come back time and time again. History repeats itself, and we learn nothing from it. That is the risk.

Foreign Exchange Cross Rate
Outlook for Week of 02/10/03

EUR/USD

EUR/USD finally broke down through 1.0800 in an convincing manner after Friday’s employment data which was better than expected. The rise which came shortly after was a result of the market being a bit to bearish on EUR a bit to quickly and there was some position adjustments made all day from 9 am to the NY close. In the end, Monday showed the way that EUR is in correction mode at this point and a move below 1.0690 should come quickly this week with 1.0610 in sight on the week. The market will sell rallies from 1.0770-1.0800 putting a lid on EUR for the week. This however can be easily breached with a piece of news so nimble trading is advised. Look for EUR to make a healthy move lower on Wed/Thurs after Greenspan’s semi annual testimony.

Early week- Sell EUR at 1.0755-75 targeting 1.0675

Mid week - Cover shorts, re-instate on rallies late Tues/Wed

End of week – Look for EUR to trade heavy towards 1.0610

USD/JPY

USD/JPY has already risen from 117.50 up to 121.00. But as EUR gets hit further this week look for EUR/JPY to trade very heavy putting a lid on USD/JPY rallies in front of 122.00. North Korea poses a threat to Japan and while missle testing is in the news the Yen will suffer mildly with a general USD corrective rally. We are much less bullish on USD/JPY then we are the USD verse EUR due entirely to the expected pressure on EUR/JPY.

Early week - look for rallies to 121.50-65 to be met with seasonal Japanese offers putting a lid on USD/JPY early in the week pushing EUR/JPY down towards 129.50.

Midweek -look for EUR/JPY to trade heavy on rallies towards 129.70 pushing USD/JPY down towards support at 120.50, buy into this dip for 121.50.

End of week – USD will likely finish the week on the stronger side somewhere between 121.40-121.60 it is here that we think that Japanese seasonal selling will kick in heavily and put a lid on USD/JPY and help push EUR/JPY below 129.00


Have a great week trading and good luck!


Previous week FX Cross rate Outlook Review 02-03-03


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

EUR/USD
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 should we 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

USD/JPY
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


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.

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Clearview Capital Management (CCM) offers professional portfolio management services specifically through trading in the 24-hour spot foreign exchange market for large institutional clients as well as individual investors with a very high degree of customer service. This has allowed us to reap the benefits of a high yielding investment tool which is not only resistant to but is designed to profit from the fluctuations in global economic cycles and the changing relations between nations. By utilizing experienced traders of CCM, clients are not only able to participate in a market that has been the sole domain of profits for major financial institutions and central banks, but also to reap the benefits of proper diversification and positioning in the global market place.
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Special Report: Dollar Outlook
By Matthew Kasse




Week of Monday Feb 24, 2003

Headlines and Week Focus
Data for the Week
Cross Rate Outlook
Previous week cross outlook review


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Headlines and Focus for the Week
US/Britain are expected to present a new UN resolution authorizing the use of force to enforce resolution 1441
GDP comparisons this week with UK/German/US GDP figures out this week
Weapons inspector Hans Blix makes final progress report to UN.
Look for BOJ activity, or rumors of activity by Tue/Wed as USD falls under pressure in front of the expected US/Britain resolution proposal
Data and Events for the Week
Mon Feb 24

Eurozone December current account
US Treasury Budget


Thes Feb 25

French January housing starts
French January consumer price index
French January harmonized CPI
German February Ifo sentiment survey
Eurozone December retail sales
German January import prices
US February consumer confidence
US January existing home sales
Web Feb 26

UK fourth quarter GDP
German Q4 GDP
German January retail sales
Greenspan Speaks


Thur Feb 27

German March Gfk consumer sentiment survey
French January PPI
French February compsoite business climate
French February general business outlook
Eurozone January M3
US January durable goods orders
US Jobless Claims
US January new homes sales
Greenspan Speaks again
Fri Feb 28

Eurozone February flash HICP
US Consumer Sentiment
US Fourth quarter preliminary GDP
US February University of Michigan sentiment index
February Chicago purchasing manager index
Weapons inspector Hans Blix makes final progress report to UN


Foreign Exchange Cross Rate Outlook for Week of 02/24/03

EUR/USD

Last week we expected the EUR to trade in a range and it did, with a final end of week push up above 1.0825 before easing off on mostly thin volume and quick price action. The USD ended the week towards the weaker side as expected and started early Asia on Monday stronger. We don’t anticipate this to be a week trend but rather a base finding mission. Overall on the week we can now begin to see further EUR strength as the correction from above 1.0900 has taken place from Feb 4th to now. Buy into EUR dips overall looking for rallies back towards the mid 1.08’s, but don’t rule out a push towards 1.0900 or higher on some quick price action. EUR/JPY has eased off its high a few hundred points and that should allow the EUR to begin trading back up towards 1.0850-1.0900. We are bullish on the week for the EUR/USD rate.

Early Week - Buy Euro in front of 1.0700 for a move back towards 1.0800
Middle Week - Look for 30-50 point EUR dips to buy into for 1.0850-1.0900
End of Week – USD to end the week trading nervously, GDP figures and UN issues will dominate creating volatile moves square longs into rallies ahead of the weekend

USD/JPY

This is going to be an interesting week for USD/JPY. While the EURO is likely to gain verse the YEN on the weak, the USD is likely to lose ground but maybe not so much early in the week as EUR/JPY finds its base this week for a return trip towards 129.25-130.00. While that may be a wide range to expect a EUR/JPY rally, the BOJ is on guard and will likely be quietly buying USD’s supporting their exporting corporations as further seasonal repatriation continues. We are therefore bullish on EUR/JPY but slightly bearish on USD/JPY for the week. We do however expect 117.25-30 to hold, creating a 117.40-119.25 range with most of the trading for the week taking place between 117.80 and 118.95. Sell into USD/JPY rallies with a trail stop methodology. However be long EUR/JPY into dips expecting the BOJ to hold up USD/JPY on the week, and for a return to the uptrend in EUR/USD.

Early Week – Sell into USD strength towards 118.95 for midweek 117.90
Mid Week – As the USD weakens, look for BOJ rhetoric to pick up and see the USD supported ahead of 117.50. Market should be rangy from here and ranges tighter but still favor selling USD rallies in front of 119.30.

End of week – Look for the USD to finish the week on the weaker side towards 117.90 with stops building under 117.30 building into next week as well as an increase in chatter of EUR/JPY offers near 129.75-130.00.



Have a great week trading and good luck!
Previous week FX Cross rate Outlook Review 02-17-03

Foreign Exchange Cross Rate Outlook for Week of 02/17/03
EUR/USD

EUR/USD made a very substantial stop loss run in Asia ahead of the US holiday, trading down towards the 1.0710 support levels. The market suggested that the protests around the world against a US lead invasion of Iraq along with the UN’s wish to pursue the inspection route will put the War on hold for now. We at CCM do not believe this to be the case, and, in fact, believe that the War is just a few weeks away during the ‘no moon’ phase in Iraq where the night skies will be the darkest all year. In any event, for this week we anticipate the EUR to stay within a tighter range of 1.0650-1.0810. We do however believe that buying EUR in front of 1.0700 is worth the trade for a move back towards Friday’s closing levels. We believe that a lot of stops were taken out in Asia on Monday and that the news last week and the comments made over the weekend by US officials suggest the War is going ahead as planned. None of this is USD bullish.

Early Week - Buy Euro in front of 1.0700 for a move back towards the Friday NY close
Middle Week - Look for a rangy market, don’t be afraid to sell/buy 50 pt rallies/dips
End of Week – USD to end the week on the weaker side, buy into dips for 1.0810



USD/JPY

USD/JPY last week held up very well and this week we look for that to reverse seeing the USD trade back into the 119’s overall. Last week we anticipated a deeper decline in EUR/JPY and we got it on Monday of this week. We still think EUR/JPY can fall further, but this week we see that being more motivated by USD/JPY. Also there is talk of Japanese interest to convert recent coupon payments on Treasuries into Yen. This coupled with seasonal Yen buying from Japan Inc. will weigh on USD/JPY and EUR/JPY all week. We see any USD rise capped ahead of exporter orders up at 120.95-121.25. We don’t however think that we even see a rally above 121 this week and advise selling into USD strength towards 120.75-95 for a move to 119.25 later in the week. Data out of Japan has been a bit better than expected and we think that this should add further to Yen bullish indicators on the week.

Early Week – Sell into USD strength towards 120.75 for midweek 119.25-50

Mid Week – As the USD weakens, look for BOJ rhetoric to pick up and see the USD supported ahead of 119.00. Market should be rangy from here and ranges tighter

End of week – Look for the USD to finish the week on the weaker side towards 119.25 with stops building under 118.90 into next week which you can expect to be taken out either on Friday this week or Monday next week





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.