Weekly Forex Update - Week09 : Feb.24/08 - Mar.01/08

Weekly Forex Update - Week09 : Feb.24/08 - Mar.01/08

ForexMetrics Currency Index (FMCI)

Last week FMCI was stable and consistent above 1.2100 level. Since FMCI is stable, major currencies do not have a definite direction as yet due to uncertainty on global economic slow down. Stable FMCI indicates that major currency pairs may remain range bound, which is suitable for conservative trader. Please be advised that we do not recommend forex trading, as FMI works on its own strategy of “TradeVestment”. For our trading strategy and techniques, range bound currency pairs are most favorable.

Monitor FMCI for fundamental economic analysis and daily report, before trading.
USD

US data definitely points towards continuing slow down of economy but at a reducing rate, as impact of rate cuts starts percolating towards grass root level. Reason for slowdown is liquidity crunch impacting housing sector and the ripple effect has slowed down consumer durables and automobile sector. The basic issue that US faces today is unavailability of cheap liquidity and this cannot be solved just by cutting interest level. US economy is currently under catch 22 situation. If Interest rate drops down to 2% in next 2 quarters, it may be a boost to economic growth but, drop in interest rate is causing inflationary pressure which may even out economic growth in short run.

Federal bank has to be very vigilant in deciding interest rate and has to balance inflation and growth. Bernanke’s decision would be very critical from now onwards, as 50 bps cut, which is widely expected, may not only boost growth, but increase inflation and inflationary pressure at all levels. This may lead US economy to stagflation, which would be undesirable.

Due to political pressure, coming election and external global factors, federal bank appears to be all set to cut more interest rate, as they may not have patience to wait till impact of rate cuts percolate deep into economy, which would be atleast 2 quarters. FMI-Team views that, the balancing act to boost growth and control inflation in current situation, can be performed only by holding interest rates and gradually cutting interest rate at measured pace depending on economic global data.

USD, during recession, may not necessarily get weaker as other economies, as US still contributes to 28% of global business.

What would make USD weaker is not recession or slow economic growth, but high rate of inflation. Currently, we view USD as range bound with majors only because USD is highly dependent on economic data and interest rate decision. Any more drastic cut may lead US to stagflation and USD may change its trend from Neutral to Downward.

European Union (Euro)

Last week, European Union data was kind of soft as the central bank has viewed inflation pressure reducing in next quarter and also forecasting a slower economic growth rate, but is not concerned about recession. We totally agree with this view as these subtle comments make us believe that EU central bank will try to hold interest rate as long as it is possible based on economic data.

There is nothing wrong with this view. However, in our opinion, EU central bank should cut its interest by 25 bps, only in the event of US federal cut as a preemptive move. The reason being to keep EU growth rate stable and well above inflation rate.

We see Euro as range bound currently, but any further increase in interest rate gap between US and UK, may lead to strengthening of EURO. Not good for economy specially in global slow down.

Sell Euro on strength.

Expected EUR/USD Range : 1.4887 to 1.4502

British Pound (GBP)

UK economic growth has been diminishing and inflation is stable. Sustaining growth rate at current interest rate level is tough. Expect interest rate cuts. Delay in interest rate cut by 25 bps may cause substantial slow down in British economy. This is with the view in mind, that liquidity crunch and expensive cost of borrowing will cause a ripple effect in slowing down economic growth.

Sell Cable against USD on strength.

Expected GBP/USD Range : 1.9892 to 1.9383
Expected EUR/GBP Range : 0.7569 to 0.7393

Conclusion:

Economic data from US, UK and EU was weak last week.

Euro will stay strong against USD and Cable.

USD may consolidate and shall remain range bound.

Pound may get stronger against USD and Euro.