Divyang Shah (Global Strategist) FX Summary. FX market liquidity remains thin leaving the potential for exaggerated moves. The break of 12,000 on Nikkei should help to promote an eventual test and break of 126 on USD/JPY. FX market liquidity remains thin leaving the potential for exaggerated moves. There is a general expectation that Greenspan will focus on a positive economic outlook and leaving the door open for further easing if needed. The 275bps Fed easing has managed to help maintain a positive outlook for corporate earnings despite the lack of earnings visibility. Intel's results after the bell were positive but still showed little sign of a bottom. This is not a market to get bearish on the dollar especially with fund managers remaining positive on US equity markets relative to European stocks.
EUR/USD likely to remain in a 0.83-0.87 trading range but our bias remains towards a break to the downside. ECB has not done enough to support Eurozone growth and the weaker global environment continues to weigh on German growth despite the weak EUR. There continues to be concern over the strong dollar and this has been fanned by an article in a Japanese paper (Nihon Keizai) that is suggesting that the US is sending subtle signals of a pending policy shift. These signals must be really weak because Under Secretary Taylor continues to highlight the strong-dollar policy. G8 meeting is likely to see strong dollar restated but also continued pressure on Europe to help support global growth. ECB is not expected to cut rates this week despite Eurozone inflation having peaked. The lack of US earnings visibility coupled with a lower level of risk tolerance is weighing on the tech heavy Nikkei (now below 12,000).
The broader TOPIX index has also fallen below 1,200 and is leading to concerns over the banking sector ahead of mark-to-market accounting. Coupled with a downgrading of the Japanese lifers this is helping to maintain a bearish backdrop on JPY. CHF price action may be suggesting that positive market sentiment is being used to offload risky positions. FED: Promoting further easing Providing monetary stimulus is as much about cutting short-term interest rates as it is about playing with market psychology and expectations. The latter is likely to be an important ingredient in Fed Chairman Greenspan's speech this week and is likely to be aimed at (1) bringing down yields at the long-end and (2) pricing out the aggressive market tightening that has been priced in for next year. Expectations and psychology are potent tools available for central bankers to move beyond just adjusting the short-term interest rate. Given that growth expectations are important in maintaining a positive backdrop for the financial markets Greenspan might have to rely on (1) repeating that inflation remains under control helped by a negative global environment and a strong dollar and (2) highlighting that the economic recovery means growth at a more sustainable pace. The first should help to promote easing via the long-end while the second should help to price out some of the tightening priced in by the market for 2002.