The Day Ahead In Forex

February 7, 2005
Dave Floyd

Fridayâ€™s action, despite a weaker than expected payroll number,
has strengthened our conviction that the dollar is in the midst of a meaningful
counter-trend rally.Â Despite being knocked around in recent sessions, it has
remained resilient.Â With rates on the rise in the US, the economy on firm
footing, fiscal prudence being mentioned by the current administration and for
the technically inclined, a nice break-out heading into the weekend as 84.10 was
taken out closing just shy of the next key level, 84.51.Â

While the moves in EUR and CHF
have been some of the most responsive to the dollarâ€™s rise, we had opted to go
with pairs that were simply not going to have an inverse correlation, but rather
ones that have an inverse correlation but also have some macro developments
behind them that further bolster reasons to be short versus the dollar.Â AUD,
NZD, GBP, CAD, EUR/CAD and EUR/CHF fit this viewpoint.Â While these pairs have
benefited in the last week, it was less of a reaction than seen in EUR and CHF.Â
We have open positions in all but GBP, CAD and AUD but are close to establishing
them.

Nonetheless, further gains in
these pairs, perhaps even picking up the slack, seems likely as macro
developments mature.Â The one pair we see as remaining range-bound is USD/JPY.Â
Mant traders are positioned short USD/JPY in the hopes the China will revalue at
this weekends G7.Â This seems unlikely from two points:

PBoC officials have all but said this will not happen
presently

Japanâ€™s exports to China continue to drop off
dramatically, hence the BoJ will not allow for further impediments to the
export market by a stronger yen.

China will most likely wait
until traders and money mangers are ignoring its currency peg before introducing
a surprise revaluation.Â The result is a trading range between 102-106 for the
time being.

GBP/USD:
Â

Contraction of rate
differentials and soft housing will undermine the GBP/USD in the months to
come.Â Mortgages in arrears rose for the first time since 1998, and any further
weakness in housing will drag the pound lower.Â

Commodity-Based
Currencies (NZD, AUD & CAD)

Here too, we see macro
conditions putting pressure on these versus the dollar.Â With global growth
decelerating, a turn in commodity prices will be one bi-product.Â Technically,
the NZD/USD is at levels that it has not been able to breach on two separate
occasions since 1985, and with the rates hikes from 2004 still filtering down,
economic growth is poised to slow.

Reports last night however
indicate that the Reserve Bank of Australia (RBA) are still concerned about
inflation and as such are leaving the door open to further rate hikes.Â So,
despite dollar strength post-G7, AUD/USD remains strong.Â Nonetheless, if new
highs are not taken out on this news, we will be seeking short entries, as
longer-term we still feel lower levels are more likely.Â

The Day Ahead

Dollar bulls will be looking to
see if the dollar can follow through on recent gains after being disappointed
for the last two weeks.Â It appears that this time the technical picture is
better.Â Below is our forecast for the next several hours as well as some key
levels.